2016 Annual Report
SM
Air Transport Services Group 2016 Annual Report
To Our Shareholders
In 2016, ATSG achieved its best revenue growth under
the business model we adopted in 2010, and one of the
best growth years in our history. Revenues rose 24 percent,
or $150 million, to $769 million as we substantially
expanded our 767 fleet and placed more of them with key
global companies. Revenue growth excluding fuel and
other reimbursed expenses increased 18 percent.
price of $9.73 per share. We issued warrants for nearly 9
million shares in 2016, and will issue warrants for another
3.8 million shares this year. None have been exercised to
date. But over time, Generally Accepted Accounting
Principles (GAAP) require us to reflect their value in our
financial statements and their potential issuance in our
diluted share counts.
That growth was spread across our principal business
units. It stemmed largely from groundbreaking
agreements we signed in March with our newest customer,
Amazon Fulfillment Services. Our positive outlook for
2017 and 2018 is for more growth and an even more
diversified revenue base. DHL and Amazon, our two
largest customers, accounted for 34 and 29 percent,
respectively, of our revenues in 2016.
Because of our unique positioning and key investments,
we were ready when Amazon asked us to help create its
own dedicated U.S. air express network in March 2016,
which called for twenty Boeing 767 freighters we would
lease to and operate for them. We supplied them with
fourteen of the twenty leases by the end of 2016 and
another in early January this year; we will complete
deliveries for the remaining five by July.
In 2017, we expect to add a record eleven 767
converted freighters to our in-service fleet. Together with
two Boeing 737s we will acquire, convert and lease to our
joint-venture partner in China, we expect to have seventy-
three owned aircraft in service by year-end, of which
fifty-four will be dry leased under multi-year terms.
Our Amazon agreements also included our
commitment to issue them warrants for up to 19.9 percent
of our common shares by September 2020 at an exercise
These warrant effects, which are non-cash, mask a
significant portion of our operating earnings and cash
generating strength. Consolidated net earnings from
continuing operations in 2016 were $21.1 million, or 33
cents per share diluted, which were lower than in 2015.
Those 2016 earnings, however, included a combined $16.5
million, or 25 cents per share in non-cash after-tax
reductions for revaluations and lease incentive
amortization related to the Amazon warrants. We expect
those effects to have a significant but unpredictable
impact on our GAAP earnings until the warrants expire
or are exercised, because changes in our stock price
account for a large portion of the warrant value variance.
In our earnings releases and investor presentations,
available on our website, atsginc.com, we will continue to
provide adjusted non-GAAP results that exclude the
warrant effects and other non-cash or non-recurring
items, following our GAAP financials.
Other one-time or limited-term items affected 2016
results. They included $7 million, or seven cents per share
in forfeited revenue related to a two-day walkout last
November by pilots at our ABX Air subsidiary. Premium
pay for our pilot workforce was significant in the second
half, as it took longer than planned to hire, train and place
the additional pilots that ABX Air added for the Amazon
agreements.
Air Transport Services Group 2016 Annual Report
Nearly all of that additional 2016 expense and lost
revenue was captured in our ACMI Services segment
results, which includes our airlines. That segment loss was
$32 million pretax. Most of that loss was for items we do
not expect to recur or will be substantially lower in 2017.
For example, we expect normalized crew costs after the
first quarter as we reach our pilot staffing targets. Also,
pension and other post-retirement expenses will be lower
this year. As a result, we are cautiously optimistic about a
profitable 2017 in ACMI Services.
The outlook is very bright for CAM, our aircraft leasing
subsidiary, as revenues rose $22 million to nearly $200
million, and pretax earnings rose $11 million to $69
million. CAM completed eighteen new 767 dry leases in
all last year, including aircraft returned from other lessees.
Forty-one of CAM’s fifty-two 767s were externally
dry-leased for multi-year terms at the end of 2016. Ten
767s were in ACMI service with long-time customers at
year-end, including some awaiting delivery of a 767-300
when more become available later this year.
CAM also received orders for 767s from customers
besides Amazon last year. That meant they were very
active scouting out good freighter feedstock prospects and
booking conversion slots before prices adjusted to
additional market demand. The freighter feedstock CAM
has purchased and is converting is already spoken for. We
will buy more in 2017 and expect to end the year with
fifty-two of the 767s CAM has in service under external
dry leases and six others undergoing cargo modification
for anticipated 2018 deployments.
As we expand our fleet, however, we remain prudent
investors of your capital. We will invest only in response
to specific demand from companies with strong track
records of their own. Some of this demand is from
customers that would have already leased a converted
767-300 from us if we had one available today. Amazon’s
huge appetite for 767s has filled the available conversion
slots into 2018 and made them hard to find from any
source. Due to our experience and relationships in the
midsize aircraft conversion market, however, we can still
secure high quality feedstock and conversion slots without
compromising our returns on invested capital.
The businesses we collectively refer to as Other
Activities contributed a large portion of our 2016 revenue
gain. Their revenues were up more than $100 million from
2015 to $263 million. Pretax earnings from Other
Activities increased by $8 million to $17 million for
the year.
Our aircraft maintenance business, AMES, is now
substantially larger with the addition of PEMCO World
Air Services as a division. PEMCO’s conversion resources
are focused on the 737 freighter market in China, where
narrow-body freighters are still the preferred option for
domestic air cargo networks.
PEMCO-converted aircraft make up more than 70
percent of China-based Boeing 737-300 and -400 fleets
in service. The company has redelivered over fifty
converted 737s to operators there since 2006, and received
orders for three more in February. PEMCO will also
convert two more 737s that CAM will acquire and lease
to Okay Airways, CAM’s first of that type. China-based
Okay will put them in its own fleet under customer
contract pending transfer to a new cargo airline that we
and other partners will own.
PEMCO’s heavy maintenance capabilities and hangar
space in Tampa are good complements for those at
AMES in Wilmington. They hold certificates for
maintenance of both Boeing and Airbus types, and we
expect to use their facilities to handle a sizeable share of
our own expanding heavy maintenance requirements. We
expect a significant positive contribution to our earnings
from PEMCO this year.
PEMCO World Air Services in Tampa
Air Transport Services Group 2016 Annual Report
LGSTX Services, our materials handling, sorting and
ground support business, expanded in 2016 as it added
cargo handling and refueling for Amazon in Wilmington.
In 2017, Amazon will shift its main hub to new facilities
at the Cincinnati regional airport in Kentucky, with some
corresponding impact on LGSTX. A portion of that
reduction at LGSTX will be replaced by results from
PEMCO on our Other Activities line.
Taken together, these strong businesses and initiatives
indicate a company with excellent growth potential
backed by long-term agreements with customers.
Maintaining that growth will require significant added
capital investment this year, which we currently estimate
will be about $355 million in total, and $285 million for
growth. In addition to our strong cash flow, we will draw
more from our revolving credit facility, which was
expanded in 2016 and will expand again in 2017. It will
add credit capacity and some additional flexibility, but we
expect no change in our rate structure.
Even with additional borrowings, we expect our
financial position to remain conservatively levered, with a
debt ratio below three times EBITDA throughout 2017.
Assuming a smaller fleet growth program in 2018, we
anticipate more flexibility for allocating our increasing
cash flow.
In addition to our capital spending and PEMCO
purchase, we also spent $64 million last year to repurchase
4.8 million ATSG shares, including the 3.8 million shares
purchased from an affiliate of Red Mountain Capital, our
largest shareholder, in July. The Board of Directors
increased our share repurchase authorization last May
from $50 million to $100 million, and $25 million of that
authorization remains. Our demand-driven fleet
expansion will still permit us to allocate cash at our
disposal prudently among investments, share buybacks
and debt repayment.
Our growth phase is in its early stages, and potential
lease customers are still calling us about their long-range
needs. Keep in mind that in 2016, many of the leases
CAM added were for our 767-200s. In 2017, all of the
767s we lease will be for larger 767-300s, with longer
terms and higher monthly rates. Assuming interim
extensions or replacements of expiring leases, it’s not hard
to envision continued growth with solid margins into the
next decade.
Our growth also speaks volumes about the talent and
efforts of the employees of our ATSG businesses, and the
commitment of your management team and Board of
Directors to translate their efforts into stronger returns
for you, the shareholders. Those of you who have
supported our efforts over time have been well rewarded.
Over the last one-, three- and five-year periods through
2016, our stock price increased at more than twice the
rate of the major stock-market indexes and most of our
peers, and remains on track so far in 2017.
Our task is to keep the momentum going, and execute
our plans with the highest regard for the interests of all
who invest with us.
Joseph C. Hete
President & Chief Executive Officer
Air Transport Services Group, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission file number 000-50368
________________________________________________________________
(Exact name of registrant as specified in its charter)
________________________________________________________________
Delaware
(State of Incorporation)
26-1631624
(I.R.S. Employer Identification No.)
145 Hunter Drive, Wilmington, OH 45177
(Address of principal executive offices)
937-382-5591
(Registrant’s telephone number, including area code)
________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.01 per share
(Title of class)
Name of each exchange on which registered: NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES
NO
NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES
NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES
NO
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter:
$660,069,868. As of March 7, 2017, 59,485,903 shares of the registrant’s common stock, par value $0.01, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders scheduled to be held May 5, 2017 are incorporated by reference into
Parts II and III.
FORWARD LOOKING STATEMENTS
Statements contained in this annual report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” in Item 7, that are not historical facts are considered forward-looking statements (as that term is defined in the Private
Securities Litigation Reform Act of 1995). Words such as “projects,” “believes,” “anticipates,” “will,” “estimates,” “plans,” “expects,”
“intends” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are based
on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict.
Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those
described in “Risk Factors” starting on page 11 and in “Results of Operations” starting on page 25.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
2016 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item 1.
Business
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
PART III
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
PART IV
Page
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11
19
19
20
20
21
23
24
41
43
78
78
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81
81
81
81
81
87
PART I
ITEM 1. BUSINESS
General Development of Business
Air Transport Services Group, Inc. is a holding company that provides aircraft leasing, airline operations, aircraft
maintenance and other support services to the air transportation and package delivery industries through its subsidiaries.
We offer a range of complementary services to delivery companies, freight forwarders, airlines and government
customers. We offer standalone services as well as bundled, customized solutions, scalable to our customers' needs.
(When the context requires, we may use the terms “Company” and “ATSG” in this report to refer to the business of
ATSG and its subsidiaries on a consolidated basis.) Our services are summarized below.
Aircraft leasing: We lease cargo aircraft through ATSG's leasing subsidiary, Cargo Aircraft Management, Inc.
(“CAM”). CAM services global demand for medium range and medium capacity airlift by offering Boeing 767, 757
and 737 aircraft leases. CAM is able to provide competitive lease rates by converting passenger aircraft into cargo
freighters. CAM monitors the medium passenger aircraft sale markets and acquires passenger aircraft based on projected
into-service costs and rate of return targets, then manages the modification of passenger aircraft into freighters. As a
result, the converted freighters can be deployed into regional markets more economically than larger capacity aircraft,
newly built freighters or other competing alternatives. CAM's aircraft leases are typically under multi-year agreements.
ACMI services: ATSG wholly owns two airlines, ABX Air, Inc. (“ABX”) and Air Transport International, Inc.
(“ATI”), each independently certificated by the U.S. Department of Transportation. The Company's airlines separately
offer a combination of aircraft, crews, maintenance and insurance services. These services and commonly referred to
as ACMI services or CMI services depending on the selection of services contracted. ABX operates Boeing 767 freighter
aircraft, while ATI operates Boeing 767 and Boeing 757 freighter and 757 "combi" aircraft. Combi aircraft are capable
of carrying passengers and cargo containers on the main flight deck. The airlines can conduct cargo operations
worldwide.
Support services: Customers who lease our aircraft typically need related services, such as scheduled aircraft
maintenance, aircraft line maintenance, crew training and other transportation related solutions which our subsidiaries
can provide. The support services we provide to delivery companies, freight forwarders and other airlines provide us
with a competitive advantage for diversification and incremental revenues. Our businesses and subsidiaries providing
support services are summarized below:
• ABX provides flight crew training, flight simulator rental and aircraft line maintenance services.
• Airborne Maintenance and Engineering Services, Inc. (“AMES”) is an aircraft maintenance, repair and
overhaul business. AMES provides airframe maintenance, component repairs, engineering services and
aircraft line maintenance.
Pemco World Air Services, Inc. ("Pemco") provides aircraft maintenance, modifications, and engineering
services.
•
• AMES Material Services, Inc. ("AMS") resells and brokers aircraft parts.
• LGSTX Services, Inc. (“LGSTX”) provides material handling and ground equipment maintenance and ground
equipment rentals for aircraft support; LGSTX also sells aviation fuel.
• LGSTX Distribution Services, Inc. ("LDS") operates mail and parcel sorting centers.
The business development and marketing activities of our operating subsidiaries are supported by the Company's
Airborne Global Solutions, Inc. ("AGS") subsidiary. AGS markets the various services and products offered by our
subsidiaries by bundling solutions that leverage the entire portfolio of our subsidiaries' capabilities and experience in
global cargo operations. Our bundled services are flexible and scalable to complement the customers own resources
to support operational growth. Further, AGS assists our subsidiaries in achieving their sales and marketing plans by
identifying customers' business and operational requirements while providing sales leads.
The Company is incorporated in Delaware and its headquarters is in Wilmington, Ohio. ATSG's common shares
are publicly traded on the NASDAQ Stock Market under the symbol ATSG. ATSG was formed in 2007 for the purpose
of creating a holding company structure from the reorganization of ABX, which was incorporated in 1980. Between
1980 and August 2003, ABX was an affiliate of Airborne, Inc. (“Airborne”), a former publicly traded, integrated delivery
service provider. On August 15, 2003, ABX was separated from Airborne and became an independent publicly traded
1
company, in conjunction with the acquisition of Airborne by an indirect wholly-owned subsidiary of DHL Worldwide
Express, B.V. In 2004, we established LDS to provide mail sorting services to the United States Postal Service, ("USPS").
The Company acquired CAM, ATI and Capital Cargo International Airlines, Inc. ("CCIA") on December 31, 2007.
ATI began operations in 1979 and was an affiliate of BAX Global, Inc. (“BAX/Schenker”) prior to 2006. In 2009, a
significant portion of the aircraft maintenance operations of ABX, including a hangar facility in Wilmington, were
spun-out into AMES, a wholly-owned subsidiary of the Company. Similarly, in 2010, the material handling and aviation
ground support operations of ABX were spun-out into a wholly-owned subsidiary of the Company, now known as
LGSTX. During 2013, we merged CCIA into ATI, with ATI as the surviving entity.
In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden.
West Atlantic AB, through its two airlines, Atlantic Airlines Ltd. and West Atlantic Sweden AB, operates a fleet of
approximately 45 aircraft. West Atlantic AB operates its aircraft on behalf of European regional mail carriers and
express logistics providers. The airlines operate a combined fleet of British Aerospace ATPs, Bombardier CRJ-200-
PFs, and Boeing 767 and 737 aircraft.
In 2015, the Company and DHL Network Operations (USA), Inc. and its affiliates ("DHL") amended and extended
the operating agreements under which we lease and operate aircraft for DHL. The Company has had long term contracts
with DHL since August 2003. In 2010, we entered into commercial agreements with DHL under which DHL leased
thirteen Boeing 767 freighter aircraft from CAM and ABX operates those aircraft under a separate crew, maintenance
and insurance (“CMI”) agreement. The initial term of the CMI agreement was five years, while the terms of the aircraft
leases were seven years. Effective April 1, 2015, the Company and DHL amended and restated the CMI agreement
("restated CMI agreement") extending the Boeing 767 aircraft lease terms through March 2019, reducing monthly
aircraft lease rates for the thirteen Boeing 767-200 freighter aircraft approximately 5%, and leasing two additional
Boeing 767 aircraft which were previously supporting DHL under short-term operating arrangements.
In September 2015, the Company entered into a joint venture agreement to establish an express cargo airline serving
multiple destinations within the Peoples Republic of China (including Hong Kong, Macau and Taiwan) and surrounding
countries. The airline will be based in mainland China with registered capital of 400 million RMB (US$63 million).
It will be established pending the receipt of required governmental approvals and plans to commence flight operations
in 2017. We expect to contribute approximately $15 million to the joint venture in the next twelve months. We plan
to offer the new airline aircraft leases to build its fleet.
In September 2015, we began to operate a trial air network for Amazon Fulfillment Services, Inc. (“AFS”), a
subsidiary of Amazon.com, Inc. (“Amazon”). We provided cargo handling and logistical support as the network grew
to five dedicated Boeing 767 freighter aircraft during 2015. On March 8, 2016, the Company and AFS entered into an
Air Transportation Services Agreement (the “ATSA”). The ATSA became effective April 1, 2016. Pursuant to the
ATSA, CAM will lease 20 Boeing 767 freighter aircraft to AFS, including 12 Boeing 767-200 freighter aircraft for a
term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. Under the ATSA, our airline
subsidiaries operate those aircraft for an initial term of five years while our LGSTX subsidiary provides hub and gateway
services for AFS at certain airports. As of December, 31, 2016, CAM leased 12 Boeing 767-200 freighter aircraft and
two Boeing 767-300 freighter aircraft to AFS that were operated by our airlines. The remaining six aircraft are scheduled
to enter service for AFS during 2017. CAM owns all 20 aircraft that will be leased and operated under the ATSA.
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement
and a Stockholders Agreement. The Investment Agreement calls for the Company to issue warrants in three tranches,
which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common shares measured as
further described below. The exercise price of the warrants will be $9.73 per share, which represents the closing price
of ATSG’s common shares on February 9, 2016. The first tranche of warrants, issued upon execution of the Investment
Agreement, grants Amazon a right to purchase approximately 12.81 million ATSG common shares, with the right to
purchase 7.69 million common shares vesting upon issuance and the right to purchase the remaining 5.12 million
common shares vesting as ATSG delivers additional aircraft leased under the ATSA, or as the Company achieves
specified revenue targets in connection with the ATSA. Through the second tranche of warrants, Amazon has a right
to purchase approximately 1.59 million ATSG common shares, issuable on the second anniversary of the date of the
Investment Agreement and will vest immediately upon issuance. The third tranche of warrants will be issued upon the
date that is four years and six months after the date of the Investment Agreement, and will also vest immediately upon
issuance. The third tranche of warrants will grant Amazon the right to purchase such additional number of ATSG
common shares as is necessary to bring Amazon’s ownership to 19.9% of the Company’s pre-transaction outstanding
2
common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company
following the date of the Investment Agreement, after giving effect to the issuance of the warrants. Each of the three
tranches of warrants will be exercisable in accordance with its terms through the fifth anniversary of the date of the
Investment Agreement. We anticipate making the common shares underlying the warrants available through a
combination of share repurchases and the issuance of additional shares. The Company’s stockholders approved an
amendment to the Certificate of Incorporation of the Company in May of 2016 to increase the number of authorized
common shares and to approve the exercise in full of the warrants as required under the rules of the Nasdaq Global
Select Market.
In December 2016, the Company acquired Pemco. Pemco provides aircraft maintenance, modification, and
engineering services. Pemco is based at the Tampa International Airport where it operates a two-hangar aircraft facility
of 311,500 square feet and employs approximately 370 people. Pemco is a leading provider of passenger-to-freighter
conversions for Boeing 737-300 and 737-400 aircraft, having redelivered over 50 Boeing 737 converted aircraft to
Chinese operators over ten years. We intend to operate Pemco as a division of AMES and market Pemco's aircraft
conversion capabilities and aircraft hangar operations with our other air transportation support services.
Financial Information
The Company has two reportable segments, “ACMI Services" and "CAM." Due to the similarities among the
Company's airline operations, they are aggregated into the ACMI Services segment. Our other business operations,
including aircraft maintenance, engineering and modification services; aircraft part sales; equipment leasing and
maintenance; and mail and package handling do not constitute reportable segments due to their size. Customer revenues
for 2016 are summarized below. Additional financial information about our segments and geographical revenues is
presented in Note N to the accompanying consolidated financial statements.
External revenues (in
thousands)
Subsidiaries and
businesses
CAM
ACMI
Services
Support
services
$117,642
CAM
$492,859
ABX, ATI
$158,369
ABX, AMES,
AMS, GFS,
LDS, LGSTX
DHL is our largest customer. Business with DHL totaled 34% of the Company's consolidated revenues in 2016.
As of December 31, 2016, the Company, through CAM, leased 16 Boeing 767 aircraft to DHL; 14 of which were being
operated by the Company's airlines for DHL. Additionally, the airlines operated five CAM-owned Boeing aircraft
under other operating arrangements with DHL. The U.S. Military comprised 12% of the Company's consolidated
revenues in 2016, stemming primarily from revenue generated by operating four Boeing 757 combi aircraft. Amazon
comprised 29% of the Company's consolidated revenues in 2016. As of December 31, 2016, the Company, through
CAM, leased 12 Boeing 767-200 aircraft and two Boeing 767-300 aircraft to Amazon; all of which were being operated
by the Company's airlines for Amazon. Additionally, ATI operated one CAM-owned Boeing 767-300 for Amazon.
Description of Business
CAM
CAM leases aircraft to ATSG's airlines and to external customers, including DHL and Amazon, usually under multi-
year contracts with a schedule of fixed monthly payments. Under a typical lease arrangement, the customer maintains
the aircraft in serviceable condition at its own cost. At the end of the lease term, the customer is typically required to
return the aircraft in approximately the same maintenance condition that existed at the inception of the lease, as measured
by airframe and engine time since the last scheduled maintenance event. CAM examines the credit worthiness of
potential customers, their short and long-term growth prospects, their financial condition and backing, the experience
of their management, and the impact of governmental regulation when determining the lease rate that is offered to the
customer. In addition, CAM monitors the customer’s business and financial status throughout the term of the lease.
3
As of December 31, 2016, CAM’s fleet consisted of 60 serviceable Boeing 767 and 757 cargo aircraft. A complete
list of the Company's aircraft is included in Item 2, Properties. Through CAM, we have expanded in recent years the
Company's combined fleet of Boeing 767 and 757 aircraft. CAM has managed the modification of passenger aircraft
into cargo aircraft as well as purchased previously modified cargo aircraft. Since the beginning of 2014, CAM has
deployed eight Boeing 767-300 and one Boeing 757 aircraft into its fleet.
ACMI Services
Through the Company's two airline subsidiaries, we provide airline operations to DHL, Amazon, delivery
companies, other airlines, freight forwarders and the U.S. Military. A typical operating agreement requires our airline
to supply, at a specific rate per block hour and/or per month, a combination of aircraft, crew, maintenance and insurance
("ACMI") for specified cargo operations. The customer is responsible for substantially all other aircraft operating
expenses, including fuel, landing fees, parking fees and ground and cargo handling expenses. The airlines also operate
charter agreements, including with the U.S. Military, which require the airline to provide full service, including fuel
and other operating expenses, in addition to aircraft, crew, maintenance and insurance, for a fixed, all-inclusive price.
Our airlines operate medium payload and medium wide-body aircraft freighters usually on intra-continental flights
and medium range inter-continental flights. The airlines typically operate our aircraft in the customers' regional networks
that connect to and from global cargo networks. We do not operate larger capacity, long haul inter-continental freighters
such as the Boeing 747, 777 or Airbus A380 aircraft. The freighter types we operate have lower investment and ongoing
maintenance costs and can operate cost efficiently with smaller loads on shorter routes than the larger capacity freighters.
Our airlines provide airlift to the Air Mobility Command ("AMC") through contracts awarded by the U.S.
Transportation Command ("USTC"), both of which are organized under the U.S. Military. ATI contracts with the AMC
for the operation of its unique fleet of four Boeing 757 "combi" aircraft, which are capable of simultaneously carrying
passengers and cargo containers on the main flight deck. ATI has been operating combi aircraft for the U.S. Military
since 1993. The USTC awards flights to U.S. certificated airlines through annual contracts and awarded ATI three
international routes for combi aircraft, with the current annual contract extending through September of 2017. These
routes are not based on or related to conflicts in the Middle East.
Our airlines participate in the Department of Defense ("DOD") Civil Reserve Air Fleet ("CRAF") program which
entitles our airlines to bid for military cargo charter operations. Our airlines may operate temporary "expansion"
routes for the U.S Military using the Boeing 757 combi and Boeing 767 freighter aircraft. Our participation in the
CRAF program allows the DOD to requisition specified aircraft for military use during a national defense emergency.
Approximately 8% of the Company's consolidated revenues for 2016 were derived from providing airline operations
for customers other than DHL, Amazon and the U.S. Military. These ACMI and charter operations are typically provided
to delivery companies, freight forwarders or other airlines.
Demand for air cargo services correlates closely with general economic conditions and the level of commercial
activity in a geographic area. Stronger general economic conditions and growth in a region typically increase the need
for product transportation. Historically, the cargo industry has experienced higher volumes during the fourth calendar
quarter of each year due to increased shipments during the holiday season. Generally, time-critical delivery needs,
such as just-in-time inventory management, increase the demand for air cargo delivery, while higher costs of aviation
fuel generally reduces the demand for air delivery services. When aviation fuel prices increase, shippers will consider
using ground transportation if the delivery time allows.
We have limited exposure to fluctuations in the price of aviation fuel under contracts with our customers. DHL,
like most of our ACMI customers, procures the aircraft fuel and fueling services necessary for their flights. Our charter
agreements with the U.S. Military are based on a preset pegged fuel price and include a subsequent true-up to the actual
fuel prices.
Aircraft Maintenance and Modification Services
We provide aircraft maintenance and modification services to other air carriers through our ABX, AMES and
Pemco subsidiaries. These subsidiaries have technical expertise related to aircraft modifications through a long history
in aviation. They own many Supplemental Type Certificates (“STCs”). An STC is granted by the FAA and represents
an ownership right, similar to an intellectual property right, which authorizes the alteration of an airframe, engine or
4
component. We market their capabilities by identifying aviation-related maintenance and modification opportunities
and matching them to our capabilities.
AMES operates a Federal Aviation Administration (“FAA”) certificated 145 repair station in Wilmington, Ohio,
including hangars, a component shop and engineering capabilities. AMES is AS9100 quality certified for the aerospace
industry. AMES’ marketable capabilities include the installation of avionics systems and flat panel displays for Boeing
757 and 767 aircraft. In 2014, the Company completed the construction of a new hangar facility bringing the total
hangar square footage to 310,000. The hangar provides the capability of servicing airframes as large as the Boeing
747-400 and the Boeing 777 aircraft. AMES has the capability to perform line maintenance and airframe maintenance
on McDonnell Douglas MD-80, Boeing 767, 757, 737, 777, 727 and Airbus A320 aircraft. AMES also has the capability
to refurbish airframe components, including approximately 60% of the components utilized by Boeing 767 aircraft.
Pemco operates a Federal Aviation Administration (“FAA”) certificated 145 repair station from a two hangar facility
in Tampa, Florida. Pemco has the capability to perform airframe maintenance on Boeing 767, 757, 737, McDonnell
Douglas MD-80, Airbus A320 and various regional jet model aircraft. Pemco also has the capability to perform aircraft
modification and engineering services, including passenger-to-freighter and passenger-to-combi conversions for Boeing
737-200, Boeing 737-300 and Boeing 737-400 series aircraft.
Aircraft Parts Sales and Brokerage
AMS is an Aviation Suppliers Association, ASA 100 Accredited reseller and broker of aircraft parts. AMS carries
an inventory of Boeing 767, 757, 737 and DC-9 spare parts and also maintains inventory on consignment from original
equipment manufacturers, resellers, lessors and other airlines. AMS customers include the commercial air cargo
industry, passenger airlines, aircraft manufacturers and contract maintenance companies serving the commercial
aviation industry, as well as other resellers.
Equipment and Facility Maintenance
LGSTX provides contract maintenance services for material handling equipment and aviation ground support
equipment throughout the U.S. LGSTX has a large inventory of ground support equipment, such as power units,
airstarts, deicers and pushback vehicles that it rents to airports, airlines and other customers. LGSTX is also licensed
to resell aircraft fuel.
Mail and Package Sorting
We have provided mail sorting services under contracts with the USPS since September 2004. Our subsidiary,
LDS, manages USPS mail sort centers in Indianapolis, Dallas and Memphis. Under each of these three contracts, we
are compensated at a firm price for fixed costs and an additional amount based on the volume of mail handled at each
sort center. LDS also provides labor for load transfer services to the USPS at two facilities. The contracts for the five
facilities we service have been extended from their original expiration dates in 2014, through the end of March 2017
with renewal options, at the discretion of the USPS, for periods into 2018. LDS also provides international mail
forwarding services through the John F. Kennedy International Airport and the O'Hare International Airport. LGSTX
also provides similar services to AFS at certain locations in the U.S. served by our airlines under the ATSA. AFS can
terminate these services at one or any location after giving a brief notice period.
Flight Support
ABX is FAA-certificated to offer flight crew training to customers and rent usage of its flight simulators for outside
training programs. ABX has three flight simulators in operation. ABX’s Boeing 767 and DC-9 flight simulators are
level C certified. The level C flight simulators allow ABX to qualify flight crewmembers under FAA requirements
without performing check flights in an aircraft.
The Company's subsidiary, Global Flight Source, Inc., ("GFS") provides aircraft dispatch and flight monitoring to
ABX and ATI. GFS can provide these services to U.S certificated supplemental air carriers and foreign air carriers.
5
Competitive Conditions
Our airline subsidiaries compete with other cargo airlines to place aircraft under ACMI arrangements and charter
contracts. Other cargo airlines include Amerijet International, Inc., Atlas Air Worldwide Holdings, Inc., Kalitta Air
LLC, and National Air Cargo Group, Inc. The primary competitive factors in the air cargo industry are operating costs,
fuel efficiency, geographic coverage, aircraft range, aircraft reliability and capacity. The cost of airline operations is
significantly impacted by the cost of flight crewmembers, which can vary among airlines depending on their collective
bargaining agreements. Cargo airlines also compete for cargo volumes with passenger airlines that have substantial
belly cargo capacity. The air cargo industry is capital intensive and highly competitive, especially during periods of
excess capacity of aircraft compared to cargo volumes.
The scheduled delivery industry is dominated by integrated door-to-door delivery companies including DHL, TNT
Holdings B.V., the USPS, FedEx Corporation, United Parcel Service, Inc. and AFS. Although the volume of our
business is impacted by competition among these integrated carriers, we do not usually compete directly with them.
Competition for aircraft lease placements is generally affected by aircraft type, aircraft availability and lease rates.
We target our leases to cargo airlines and delivery companies seeking medium widebody airlift. The Airbus A300-600
and A330 aircraft can provide capabilities similar to the Boeing 767 for medium widebody airlift. Competitors in the
aircraft leasing markets include GE Capital Aviation Services and Guggenheim Aviation Partners, among others.
The aircraft maintenance industry is labor intensive and typically competes based on cost, capabilities and reputation
for quality. U.S. airlines may contract for aircraft maintenance with maintenance and repair organizations ("MROs")
in other countries or geographies with a lower labor wage base, making the industry highly cost competitive. Other
aircraft MROs include AAR Corp and Hong Kong Aircraft Engineering Co.
Airline Operations
Flight Operations and Control
Each of the Company's airline operations are conducted pursuant to authority granted to them by the FAA and the
Department of Transportation ("DOT"). Airline flight operations, including aircraft dispatching, flight tracking, crew
training and crew scheduling are planned and controlled by personnel within each airline. The Company staffs aircraft
dispatching and flight tracking 24 hours per day, 7 days per week. The FAA prescribes the requirements, methods and
means by which air carrier flight operations are conducted, including but not limited to the qualifications and training
of flight crew members, the release of aircraft for flight, the tracking of flights, the time crew members can be on duty,
aircraft operating procedures, proper navigation of aircraft, compliance with air traffic control instructions and other
operational functions.
Aircraft Maintenance
Our airlines’ operations are regulated by the FAA for aircraft safety and maintenance. Each airline performs routine
inspections and airframe maintenance in accordance with applicable FAA-approved aircraft maintenance programs.
In addition, the airlines build into their maintenance programs FAA-mandated Airworthiness Directive and manufacturer
Service Bulletin compliance on all of their aircraft. The airlines’ maintenance and engineering personnel coordinate
routine and non-routine maintenance requirements. Each airline’s maintenance program includes tracking the
maintenance status of each aircraft, consulting with manufacturers and suppliers about procedures to correct
irregularities and training maintenance personnel on the requirements of its FAA-approved maintenance program. The
airlines contract with MROs, including AMES, to perform heavy maintenance on airframes and engines. Each airline
owns and maintains an inventory of spare aircraft engines, auxiliary power units, aircraft parts and consumable items.
The quantity of spare items maintained is based on the fleet size, engine type operated and the reliability history of the
item types.
Security
The Transportation Security Administration (“TSA”) requires our air carriers to comply with security protocols as
set out in each carrier’s standard all-cargo aircraft operator security plan containing extensive security practices and
procedures that must be followed. The security plan provides for the conducting of background checks on those with
access to cargo and/or aircraft, the securing of the aircraft while on the ground, the acceptance and screening of cargo
6
to be moved by air, the handling of suspicious cargo and the securing of cargo ground facilities, among other
requirements. Comprehensive internal audit and evaluation programs are actively mandated and maintained.
Customers are required to inform the airlines in writing of the nature and composition of any freight which is
classified as "Hazardous Materials" and “Dangerous Goods” by the DOT. Notwithstanding these procedures, our airline
subsidiaries could unknowingly transport contraband or undeclared hazardous materials for customers, which could
result in fines and penalties and possible damage to the aircraft.
Insurance
Our airline subsidiaries are required by the DOT to carry a minimum amount of aircraft liability insurance. Their
aircraft leases, loan agreements and ACMI agreements also require them to carry such insurance. The Company
currently maintains public liability and property damage insurance, and our airline subsidiaries currently maintain
aircraft hull and liability insurance and war risk insurance for their respective aircraft fleets in amounts consistent with
industry standards. CAM’s customers are also required to maintain similar insurance coverage.
Employees
As of December 31, 2016, the Company had approximately 3,230 full-time and part-time employees. The Company
employed approximately 450 flight crewmembers, 1,405 aircraft maintenance technicians and flight support personnel,
670 warehousing, sorting and logistics personnel, 440 employees for airport maintenance and logistics, 50 employees
for sales and marketing and 215 employees for administrative functions. In addition to full time and part time employees,
the Company typically has approximately 350 temporary employees mainly serving the USPS operations and aircraft
line maintenance operations. On December 31, 2015, the Company had approximately 2,170 full-time and part-time
employees.
Labor Agreements
The Company’s flight crewmembers are unionized employees. The table below summarizes the representation of
the Company’s flight crewmembers at December 31, 2016.
Airline
ABX
ATI
Labor Agreement Unit
International Brotherhood of Teamsters
Air Line Pilots Association
Contract
Amendable
Date
12/31/2014
5/28/2014
Percentage of
the Company’s
Employees
8.8%
5.1%
In addition, the Company has approximately 30 flight attendants that are represented by a recognized labor unit
and are beginning to negotiate a collective bargaining agreement. Under the Railway Labor Act (“RLA”), as amended,
the crewmember labor agreements do not expire, so the existing contract remains in effect throughout any negotiation
process. If required, mediation under the RLA is conducted by the National Mediation Board, which has the sole
discretion as to how long mediation can last and when it will end. In addition to direct negotiations and mediation, the
RLA includes a provision for potential arbitration of unresolved issues and a 30-day “cooling-off” period before either
party can resort to self-help, including, but not limited to, a work stoppage.
Training
The flight crewmembers are required to be licensed in accordance with Federal Aviation Regulations (“FARs”),
with specific ratings for the aircraft type to be flown, and to be medically certified as physically fit to operate aircraft.
Licenses and medical certifications are subject to recurrent requirements as set forth in the FARs, to include recurrent
training and minimum amounts of recent flying experience.
The FAA mandates initial and recurrent training for most flight, maintenance and engineering personnel. Mechanics
and quality control inspectors must also be licensed and qualified to perform maintenance on Company operated and
maintained aircraft. Our airline subsidiaries pay for all of the recurrent training required for their flight crewmembers
and provide training for their ground service and maintenance personnel. Their training programs have received all
required FAA approvals. Similarly, our flight dispatchers and flight followers receive FAA approved training on the
airlines' requirements and specific aircraft.
7
Intellectual Property
The Company owns many STCs issued by the FAA. The Company uses these STCs mainly in support of its own
fleets; however, AMES and Pemco have marketed certain STCs to other airlines.
Information Systems
We are increasingly dependent on technology to maintain regulatory compliance, improve information
communications and reduce costs in order to compete effectively. The Company has invested significant management
and financial resources in the development of information systems to facilitate flight and maintenance operations. We
utilize systems to maintain records about the maintenance status and history of each major aircraft component, as
required by FAA regulations. Using the systems, we track maintenance schedules and also control inventories and
maintenance tasks, including the work directives of personnel performing those tasks. In addition, the Company’s
flight operations systems coordinate flight schedules and crew schedules. We have developed and procured systems
to track crewmember flight and duty times, and crewmember training status.
Regulation
Our subsidiaries’ airline operations are primarily regulated by the DOT, the FAA and the TSA. Those operations
must comply with numerous economic, safety, security and environmental laws, ordinances and regulations. In addition,
they must also comply with various other federal, state, local and foreign laws and regulations.
Environment
Under current federal, state and local environmental laws, ordinances and regulations, a current or previous owner
or operator of real property may be liable for the costs of removal or clean-up of hazardous or toxic substances on,
under, or in such property. These laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to properly clean up contaminated property, may adversely affect the ability
of the owner of the property to use the property as collateral for a loan or to sell such property. Environmental laws
also may impose restrictions on the manner in which a property may be used or transferred or in which a business
located thereon may be operated and may impose remediation or compliance costs.
The U.S. Environmental Protection Agency ("EPA") is authorized to regulate aircraft emissions and has historically
implemented emissions control standards adopted by the International Civil Aviation Organization ("ICAO"). In 2015,
however, the EPA issued a proposed finding on GHG emissions from aircraft and its relationship to air pollution. The
final finding is a regulatory prerequisite to the EPA’s adoption of a new certification standard for aircraft emissions.
Our subsidiaries’ aircraft currently meet all known requirements for engine emission levels as applicable by engine
design date. Under the Clean Air Act, individual states or the EPA may adopt regulations requiring reductions in
emissions for one or more localities based on the measured air quality at such localities. These regulations may seek
to limit or restrict emissions by restricting the use of emission-producing ground service equipment or aircraft auxiliary
power units. Further, the U.S. Congress has, in the past, considered legislation that would regulate greenhouse gas
emissions, and some form of federal climate change legislation is possible in the future.
In addition, the European Commission has approved the extension of the European Union Emissions Trading
Scheme ("ETS") for greenhouse gas emissions to the airline industry. Currently, under the European Union’s ETS, all
ABX and ATI flights that are wholly within the European Union are covered by the ETS requirements, and each year
our airlines are required to submit emission allowances in an amount equal to the carbon dioxide emissions from such
flights. If the airline's flight activity during the year produced carbon emissions exceeding the number of carbon
emissions allowances that it had been awarded, the airline must acquire allowances from other airlines in the open
market. ABX and ATI operate intra-EU flights from time to time and management believes that such flights are operated
in compliance with ETS requirements.
To allow time for negotiations on a global market-based measure applying to aviation emissions, the EU's ETS
requirements were suspended for flights in 2012 to and from non-European countries. For the period 2013-2016, the
legislation has also been amended so that only emissions from flights within the European Economic Area fall under
the EU ETS.
8
Recently, ICAO adopted a new regulatory requirement mandating operators in countries that are party to the
regulation (most developed countries have signed onto the program) to offset their excess emissions above the 2020
baseline levels by purchasing qualifying carbon offset credits from greenhouse gas reduction and limitation projects
in other industries. The first two phases of the regulatory arrangement, from 2021 to 2026, will be voluntary and
countries may join or opt out of the scheme at any time. From 2027 to 2035, it will be mandatory, except for those
countries, flights and operators specifically exempt from the rule. The engines used to power the aircraft currently
operated by the Company's airlines comply with the newly proposed standard and would not require modification to
be able to continue to operate after the rule, if adopted as proposed, takes effect. Adoption of the ICAO international
standard will prevent individual countries or unions from imposing unilateral measures on international aviation, such
as the European Union’s Emissions Trading Scheme (EU ETS).
Exemptions for operators with low emissions have also been introduced. The EU made this change following
agreement by the ICAO Assembly in October 2013 to develop a global market-based mechanism addressing
international aviation emissions by 2016 and to apply it by 2020. The amended law provides for the European
Commission to report to the European Parliament and Council on the outcome of the 2016 ICAO Assembly and propose
measures as appropriate to take international developments into account with effect from 2017.
Recently, ICAO proposed for adoption greenhouse gas emissions rules applicable to aviation. If the rules are
adopted by the ICAO governing body, they would set emissions standards beginning in 2020. The mechanism to reduce
emissions is based on a reduction in the amount of fuel burned during the cruise portion of flight. The engines used
to power the aircraft currently operated by the Company's airlines comply with the newly proposed standard and would
not require modification to be able to continue to operate after the rule, if adopted as proposed, takes effect. Although
these rules, if adopted, will not apply to any of our airline subsidiaries’ existing aircraft, additional rules could be
adopted in the future that would either apply these more stringent noise and emissions standards to aircraft already in
operation or require that some portion of the fleet be converted over time to comply with these new standards.
The federal government generally regulates aircraft engine noise at its source. However, local airport operators
may, under certain circumstances, regulate airport operations based on aircraft noise considerations. The Airport Noise
and Capacity Act of 1990 provides that, in the case of Stage 3 aircraft (all of our operating aircraft satisfy Stage 3 noise
compliance requirements), an airport operator must obtain the carriers’ consent to, or the government’s approval of,
the rule prior to its adoption. We believe the operation of our airline subsidiaries’ aircraft either complies with or is
exempt from compliance with currently applicable local airport rules. However, some airport authorities have adopted
local noise regulations, and, to the extent more stringent aircraft operating regulations are adopted on a widespread
basis, our airline subsidiaries may be required to spend substantial funds, make schedule changes or take other actions
to comply with such local rules.
Department of Transportation
The DOT maintains authority over certain aspects of domestic air transportation, such as requiring a minimum level
of insurance and the requirement that a person be “fit” to hold a certificate to engage in air transportation. In addition,
the DOT continues to regulate many aspects of international aviation, including the award of international routes. The
DOT has issued ABX a Domestic All-Cargo Air Service Certificate for air cargo transportation between all points within
the U.S., the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The DOT has issued ATI certificate authority
to engage in scheduled interstate air transportation, which is currently limited to all-cargo operations. ATI's DOT
certificate authority also authorizes it to engage in interstate and foreign charter air transportation of persons, property
and mail. Additionally, the DOT has issued ABX and ATI Certificates of Public Convenience and Necessity authorizing
each of them to engage in scheduled foreign air transportation of cargo and mail between the U.S. and all current and
future U.S. open-skies partner countries, which currently consists of 120 foreign countries. ABX also holds exemption
authorities issued by the DOT to conduct scheduled all-cargo operations between the U.S. and certain foreign countries
with which the U.S. does not have an open-skies air transportation agreement.
By maintaining these certificates, the Company, through its airline subsidiaries, can conduct all-cargo charter
operations worldwide subject to the receipt of any necessary foreign government approvals. Prior to issuing such
certificates, and periodically thereafter, the DOT examines a company’s managerial competence, financial resources
and plans, compliance, disposition and citizenship in order to determine whether the carrier is fit, willing and able to
engage in the transportation services it has proposed to and does undertake.
9
The DOT has the authority to impose civil penalties, or to modify, suspend or revoke our certificates and exemption
authorities for cause, including failure to comply with federal laws or DOT regulations. A corporation holding the
above-referenced certificates and exemption authorities must qualify as a citizen of the United States, which, pursuant
to federal law, requires that (1) it be organized under the laws of the U.S. or a state, territory or possession thereof,
(2) that its president and at least two-thirds of its Board of Directors and other managing officers be U.S. citizens,
(3) that less than 25% of its voting interest be owned or controlled by non-U.S. citizens, and (4) that it not otherwise
be subject to foreign control. We believe our airline subsidiaries possess all necessary DOT-issued certificates and
authorities to conduct our current operations and each continue to qualify as a citizen of the United States.
Federal Aviation Administration
The FAA regulates aircraft safety and flight operations generally, including equipment, ground facilities,
maintenance, flight dispatch, training, communications, the carriage of hazardous materials and other matters affecting
air safety. The FAA issues operating certificates and detailed "operations specifications" to carriers that possess the
technical competence to conduct air carrier operations. In addition, the FAA issues certificates of airworthiness to each
aircraft that meets the requirements for aircraft design and maintenance. ABX and ATI believe they hold all airworthiness
and other FAA certificates and authorities required for the conduct of their business and the operation of their aircraft,
although the FAA has the power to suspend, modify or revoke such certificates for cause, or to impose civil penalties
for any failure to comply with federal laws and FAA regulations.
The FAA has the authority to issue regulations, airworthiness directives and other mandatory orders relating to,
among other things, the inspection, maintenance and modification of aircraft and the replacement of aircraft structures,
components and parts, based on industry safety findings, the age of the aircraft and other factors. For example, the FAA
has required ABX to perform inspections of its Boeing 767 aircraft to determine if certain of the aircraft structures and
components meet all aircraft certification requirements. If the FAA were to determine that the aircraft structures or
components are not adequate, it could order operators to take certain actions, including but not limited to, grounding
aircraft, reducing cargo loads, strengthening any structure or component shown to be inadequate, or making other
modifications to the aircraft. New mandatory directives could also be issued requiring the Company’s airline subsidiaries
to inspect and replace aircraft components based on their age or condition. As a routine matter, the FAA issues
airworthiness directives applicable to the aircraft operated by our airline subsidiaries, and our airlines comply, sometimes
at considerable cost, as part of their aircraft maintenance program.
In addition to the FAA practice of issuing regulations and airworthiness directives as conditions warrant, the FAA
has adopted new regulations to address issues involving aging, but still economically viable, aircraft on a more systematic
basis. FAA regulations mandate that aircraft manufacturers establish aircraft limits of validity and service action
requirements based on aircraft flight cycles and flight hours before which widespread fatigue damage might occur.
Service action requirements include inspections and modifications to preclude development of widespread fatigue
damage in specific aircraft structural areas. The Boeing Company has provided its recommendations of the limits of
validity to the FAA, and the FAA has now approved the limits for the Boeing 757 and 767 model aircraft. Consequently,
after the limit of validity is reached for a particular model aircraft, air carriers will be unable to continue to operate the
aircraft without the FAA first granting an extension of time to the operator. There can be no assurance that the FAA
would extend the deadline, if one were to be requested. For the oldest aircraft in our fleets, we estimate the limit of
validity would not be reached for at least 20 years.
The FAA requires each of the airline subsidiaries to implement a drug and alcohol testing program with respect to
all employees and, unless already subject to testing, contractor employees that engage in safety sensitive functions.
Each of the airlines complies with these regulations.
Transportation Security Administration
The TSA, an administration within the Department of Homeland Security, is responsible for the screening of
passengers, baggage and cargo and the security of aircraft and airports. Our airline subsidiaries comply with all applicable
aircraft and cargo security requirements. The TSA has adopted cargo security-related rules that have imposed additional
burdens on our airlines and our customers. Among other things, the TSA requires each airline to perform criminal
history background checks on all employees. In addition, we may be required to reimburse the TSA for the cost of
security services it may provide to the Company’s airline subsidiaries in the future.
10
International Regulations
When operating in other countries, our airlines are subject to aviation agreements between the U.S. and the respective
countries or, in the absence of such an agreement, by principles of reciprocity. International aviation agreements are
periodically subject to renegotiation, and changes in U.S. or foreign governments could result in the alteration or
termination of the agreements affecting our international operations. Commercial arrangements such as ACMI
agreements between our airlines and our customers in other countries, may require the approval of foreign governmental
authorities. Foreign authorities may limit or restrict the use of our aircraft in certain countries. Also, foreign government
authorities often require licensing and business registration before beginning operations.
Other Regulations
Various regulatory authorities have jurisdiction over significant aspects of our business, and it is possible that new
laws or regulations or changes in existing laws or regulations or the interpretations thereof could have a material adverse
effect on our operations. In addition to the above, other laws and regulations to which we are subject, and the agencies
responsible for compliance with such laws and regulations, include the following:
•
•
•
•
•
•
The labor relations of our airline subsidiaries are generally regulated under the Railway Labor Act, which
vests in the National Mediation Board certain regulatory powers with respect to disputes between airlines
and labor unions arising under collective bargaining agreements;
The Federal Communications Commission regulates our airline subsidiaries’ use of radio facilities pursuant
to the Federal Communications Act of 1934, as amended;
U.S. Customs and Border Protection inspects cargo imported from our subsidiaries’ international
operations;
Our airlines must comply with U.S. Citizenship and Immigration Services regulations regarding the
citizenship of our employees;
The Company and its subsidiaries must comply with wage, work conditions and other regulations of the
Department of Labor regarding our employees.
The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and
enforces economic and trade sanctions based on U.S. foreign policy, which may limit our business activities
in and for certain areas.
Executive Officers of the Registrant
Information about executive officers of the Company is provided in Item 10. Directors, Executive Officers and
Corporate Governance, of this report, and is incorporated in this item by reference.
Available Information
Our filings with the Securities and Exchange Commission ("SEC"), including annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, are available free of charge from
our website at www.atsginc.com as soon as reasonably practicable after filing with the SEC. The SEC maintains an
Internet site that contains reports, proxy and information statements and other information regarding Air Transport
Services Group, Inc. at www.sec.gov.
ITEM 1A. RISK FACTORS
The risks described below could adversely affect our financial condition or results of operations. The risks below
are not the only risks that the Company faces. Additional risks that are currently unknown to us or that we currently
consider immaterial or unlikely could also adversely affect the Company.
11
The economic conditions in the U.S. and throughout the globe may negatively impact the demand for the Company’s
aircraft and services.
Air cargo transportation volumes are strongly correlated to general economic conditions, including the price of
aviation fuel. An economic downturn could reduce the demand for delivery services offered by DHL, Amazon and
other delivery businesses, in particular expedited shipping services utilizing aircraft. Further, during an economic
slowdown, customers generally prefer to use ground-based or marine delivery services instead of more expensive air
delivery services. Accordingly, an economic downturn could reduce the demand for airlift and cargo aircraft leases.
Additionally, if the price of aviation fuel rises significantly, the demand for cargo aircraft and air delivery services may
decline. During periods of downward economic trends and rising fuel costs, freight forwarders and integrated delivery
businesses are more likely to defer market expansion plans. As a result, we may experience delays in the deployment
of available aircraft with customers under lease, ACMI or charter arrangements.
Our costs incurred in providing airline services could be more than the contractual revenues generated.
Each airline develops business proposals for ACMI, charter, DHL, AFS and other operating contracts by projecting
operating costs, crew productivity and maintenance expenses. Projections contain key assumptions, including
maintenance costs, flight hours, aircraft reliability, crewmember productivity and crewmember compensation and
benefits. We may overestimate revenues, the level of crewmember productivity, and/or underestimate the actual costs
of providing services when preparing business proposals. If actual costs are higher than projected or aircraft reliability
is less than expected, future operating results may be negatively impacted.
The Company’s airlines rely on flight crews that are unionized. If collective bargaining agreements increase our
costs and we cannot recover such increases, it may be necessary for us to terminate customer contracts or curtail planned
growth. If disagreements arise, airline operations could be interrupted and business could be adversely affected until
agreements are reached with the crewmembers.
The rate of aircraft deployments may impact the Company’s operating results and financial condition.
The Company's future operating results and financial condition will depend in part on our subsidiaries’ ability to
successfully deploy aircraft in customers' operations while generating a positive return on investment. Our success
will depend, in part, on our customers' ability to secure additional cargo volumes, in both U.S. and international markets.
Deploying aircraft in international markets can pose additional risks, costs and regulatory requirements which could
result in periods of delayed deployments.
The actual demand for Boeing 767 and 757 aircraft may be less than we anticipate. The actual lease rates for aircraft
available for lease may be less than we projected, or new leases may start later than we expect. Further, other airlines
and lessors may be willing to offer aircraft to the market under terms more favorable to lessees.
We may fail to meet the scheduled delivery date for aircraft required by the ATSA.
If CAM cannot meet the agreed delivery schedule for an aircraft lease, AFS may, at its discretion, cancel the aircraft
lease and all related lease payments.
Our airline operating agreements include on-time reliability requirements which can impact the Company's operating
results and financial condition.
Certain of our airline operating agreements contain monthly incentive payments for reaching specific on-time
reliability thresholds. Additionally, such airline operating agreements contain monetary penalties for aircraft reliability
below certain thresholds. As a result, our operating revenues may vary from period to period depending on the
achievement of monthly incentives or the imposition of penalties. Further, an airline could be found in default of an
agreement if it does not maintain minimum thresholds over an extended period of time. If our airlines are placed in
default due to failure to maintain reliability thresholds, the customer may elect to terminate all or part of the services
we provide under certain customer agreements after a cure period.
If ABX fails to maintain aircraft reliability above a minimum threshold under the restated CMI agreement for two
consecutive calendar months or three months in a rolling twelve month period, we would be in default of the restated
CMI agreement with DHL. In that event, DHL may elect to terminate the restated CMI agreement, unless we maintain
the minimum reliability threshold during a 60-day cure period. If DHL terminates the CMI agreement due to an ABX
event of default, we would be subject to a monetary penalty payable to DHL.
12
If our airlines fail to maintain aircraft reliability above a minimum threshold under the ATSA for either a specified
number of consecutive calendar months or a specified number of calendar months (whether or not consecutive) in a
specified trailing period, we could be held in default. In that event, AFS may elect to terminate the ATSA and pursue
those rights and remedies available to it at law or in equity.
The anticipated strategic and financial benefits of our relationship with Amazon may not be realized.
We entered into the agreements with Amazon with the expectation that the transactions would result in various
benefits including, among others, growth in revenues, improved cash flows and operating efficiencies. Achieving the
anticipated benefits from the agreements is subject to a number of challenges and uncertainties, such as the timing of
aircraft deliveries and unforeseen costs. If we are unable to achieve our objectives or if we experience delays in our
fleet expansion, the expected benefits may be only partially realized or not at all, or may take longer to realize than
expected, which could adversely impact our financial condition and results of operations.
The Company's future earnings and earnings per share, as reported under generally accepted accounting principles,
will be impacted by the stock warrants issuable to Amazon.
We expect that the warrants issuable to Amazon will increase the number of diluted shares reported. Further, the
warrants are subject to fair value measurements during the periods that they are outstanding. Accordingly, future
fluctuations in the fair value of the warrants may adversely impact the Company's reported earnings measures.
Under the provisions of airline operating and aircraft lease agreements with customers, customers may be able to
terminate the operating agreements or aircraft lease agreements, subject to early termination provisions.
Customers can typically terminate one or more of the aircraft from their related airline operating agreement for
convenience at any time during the term, subject to a 60 day notice period and paying the Company a fee. Additionally,
the lease agreements may contain provisions for terminating an aircraft lease for convenience, including a notice period
and paying a lump sum amount to the Company.
Amazon may terminate the ATSA in its entirety after providing 180 days of advance notice after the first six months
of the term and paying to the Company a significant termination fee which reduces after the second anniversary of the
ATSA.
DHL may terminate the restated CMI agreement in its entirety after providing 180 days of advance notice after
the first six months of the term and paying a significant termination fee which amortizes down during the term.
The U.S. Military may not renew our contracts or may reduce the number of routes that we operate.
Our contracts with the U.S. Military are typically for one year and are not required to be renewed. The U.S. Military
may terminate the contracts for convenience or in the event we were to fail to satisfy reliability requirements or for
other reasons. The number and frequency of routes is sensitive to changes in military priorities and U.S. defense
budgets.
Our business could be negatively impacted by adverse audit findings by the U.S. Government.
Our U.S. Military contracts are subject to audit by government agencies, including with respect to performance,
costs, internal controls and compliance with applicable laws and regulations. If an audit uncovers improprieties, we
may be subject to civil or criminal penalties, including termination of such contracts, forfeiture of profits, fines and
suspension from doing business with the U.S. Military.
Our participation in the CRAF Program could adversely restrict our commercial business in times of national emergency.
Both of our air carriers participate in the U.S. Civil Reserve Air Fleet (“CRAF”) Program, which permits the U.S.
Department of Defense to utilize participants’ aircraft during national emergencies when the need for military airlift
exceeds the capability of military aircraft.
Proposed rules from the DOT, FAA and TSA could increase the Company's operating costs and reduce customer
utilization of airfreight.
New FAA rules for Flightcrew Member Duty and Rest Requirements (FMDRR) for passenger airline operations
became effective in January 2014. The new rules apply to our operation of combi aircraft for the U.S military and
impact the required amount and timing of rest periods for pilots between work assignments and modified duty and rest
13
requirements based on the time of day, number of scheduled segments, flight types, time zones and other factors. Failure
to remain in compliance with these rules may subject us to fines or other enforcement action.
If applied to cargo carriers, the new rules would require a pilot to have the opportunity to rest for nine hours before
reporting to flight duty and place other restrictions on the number of duty hours in particular time periods. In May
2012, the FAA indicated that it would reconsider its initial decision to exclude cargo pilots from these new requirements.
On reconsideration, the FAA’s original finding was confirmed by the agency. The FAA’s determination was appealed
to the U.S. Court of Appeals. The Court denied the appeal. Also, efforts have been made to mandate the FMDRR be
applied to cargo carriers by amendment to the federal transportation statute. While not currently required for the
Company's cargo operations, if such rest requirements and restrictions were imposed on our cargo operations, these
rules could have a significant impact on the costs incurred by our airlines. The airlines would attempt to pass such
additional costs through to their customers in the form of price increases. Customers, as a result, may seek to reduce
their utilization of aircraft in favor of less expensive transportation alternatives.
The concentration of aircraft types and engines in the Company's airlines could adversely affect our operating and
financial results.
The combined aircraft fleet is concentrated in two aircraft types. If any of these aircraft types encounter technical
difficulties that resulted in significant FAA airworthiness directives or grounding, our ability to lease the aircraft would
be adversely impacted, as would our airlines' operations. The market growth in demand for the Boeing 767 and 757
aircraft types and configurations may be less than we anticipate. Customers may develop preferences for the Airbus
A300-600 and A330 aircraft or other mid-size aircraft types, instead of the Boeing 767 and 757 aircraft.
The cost of aircraft repairs and unexpected delays in the time required to complete aircraft maintenance could negatively
affect our operating results.
Our aircraft provide ACMI services throughout the world, sometimes operating in remote regions. Our aircraft
may experience maintenance events in locations that do not have the necessary repair capabilities or are difficult to
reach. As a result, we may incur additional expenses and lose billable revenues that we would have otherwise earned.
Under certain customer agreements, we are required to provide a spare aircraft while scheduled maintenance is
completed. If delays occur in the completion of aircraft maintenance, we may incur additional expense to provide
airlift capacity and forgo revenues.
Lessees of our aircraft may fail to make contractual payments or fail to maintain the aircraft as required.
Our financial results depend on our lease customers' ability to make rent payments and maintain the related aircraft.
Our customers' ability to make payments could be adversely impacted by changes to their financial liquidity,
competitiveness, economic conditions and other factors. A default of an aircraft lease by a customer could negatively
impact our operating results and cash flows and result in the repossession of aircraft.
While we often require leasing customers to pay monthly maintenance deposits, customers are normally responsible
for maintaining our aircraft during the lease term. Failure of a customer to perform required maintenance and maintain
the appropriate records during the lease term could result in higher maintenance costs, a decrease in the value of the
aircraft, a lengthy delay in or even our inability to place the aircraft in a subsequent lease, any of which could have an
adverse effect on our results of operations and financial condition.
Our operating results could be adversely impacted by negotiations regarding collective bargaining agreements with
flight crewmember representatives.
The flight crewmembers for each of the Company's airlines are unionized. ABX's crewmembers are represented
by the International Brotherhood of Teamsters ("IBT") while ATI's crewmembers are represented by the Air Line Pilots
Association ("ALPA"). The collective bargaining agreement ("CBA") between ABX and IBT and between ATI and
ALPA are both currently amendable and the respective parties are each in the process of renegotiating the terms of their
CBA. The airline and the union are each required to maintain the status quo during the renegotiation of the CBA;
neither the airline nor the union may engage in a lock-out, strike or other self-help until such time as they are released
from further negotiations by the mediator for the National Mediation Board ("NMB"), and after the conclusion of a
mandatory 30-day “cooling off” period. It is rare for mediators to declare an impasse and release the parties. Instead,
the NMB prefers to require the parties to remain in negotiations until such time as they come to an agreement. Despite
this process, it's possible for disruptions in customer service to occur from time to time, resulting in increased costs for
14
the airline and monetary penalties under certain customer agreements if monthly reliability thresholds are not achieved.
Further, if we do not maintain minimum reliability thresholds over an extended period of time, we could be found in
default of a customer agreement.
In October, 2016, the IBT, representing ABX’s crewmember employees, filed a request with the NMB to investigate
whether ABX and ATI constitute a single transportation system for the purposes of collective bargaining. If the NMB
finds that ABX and ATI are a single transportation system, then the NMB will require that the ABX and ATI crewmembers
be represented by the same union. A single transportation system determination by the NMB could give rise to complex
contractual issues, including integrating the airlines' seniority lists, and materially impact the dynamics with respect to
future CBA negotiations. Contract negotiations with the union could result in reduced flexibility for scheduling
crewmembers and higher operating costs for the airlines, making the Company's airlines less competitive than other
airlines. We believe it unlikely that the NMB will find that ABX and ATI constitute a single transportation system, but
the case-by-case analysis used by the NMB makes such predictions uncertain.
We rely on third parties to modify aircraft and provide aircraft and engine maintenance.
We rely on certain third party aircraft modification service providers and aircraft and engine maintenance service
providers that have expertise or resources that we do not have. Third party service providers may seek to impose price
increases that could negatively affect our competitiveness in the airline markets. An unexpected termination or delay
involving service providers could have a material adverse effect on our operations and financial results. A delay in an
aircraft modification could adversely impact our revenues and our ability to place the aircraft in the market. We must
manage third party service providers to meet schedules and turn-times and to control costs in order to remain competitive
to our customers.
Delta TechOps, a division of Delta Airlines, Inc., is the primary engine maintenance provider for the Company's
General Electric CF6 engines that power our fleet of Boeing 767-200 aircraft. If Delta TechOps does not complete the
refurbishment of our engines within the contractual turn-times or if we must replace Delta TechOps as the maintenance
provider for some or all of the Company's CF6 engines, our operations and financial results may be adversely impacted.
The Company's operating results could be negatively impacted by disruptions of its information technology and
communication systems.
Our businesses depend heavily on information technology and computerized systems to communicate and operate
effectively. The Company's systems and technologies, or those of third parties on which we rely, could fail or become
unreliable due
to equipment failures, software viruses, cyberattacks, natural disasters, power failures,
telecommunication outages, or other causes. Certain disruptions could prevent our airlines from flying as scheduled,
possibly for an extended period of time, which could have a negative impact on our operating results and reliability.
We continually monitor the risks of disruption, take preventative measures, develop backup plans and maintain
redundancy capabilities. The measures we use may not prevent the causes of disruptions we could experience or help
us recover failed systems quickly.
The costs of maintaining preventive maintenance measures may continue to rise. Further, the costs of recovering
or replacing a failed system could be very expensive.
The costs of our aircraft maintenance facilities could negatively impact our financial results.
We lease and operate a 310,000 square foot aircraft maintenance facility and a 100,000 square foot component repair
shop in Wilmington, Ohio. Additionally, we lease and operate a 311,500 square foot, two-hangar aircraft maintenance
complex in Tampa, Florida. Accordingly, a large portion of our MRO's operating costs are fixed. As a result, we need
to retain existing aircraft maintenance business levels to maintain a profitable operation. The actual level of revenues
may not be sufficient to cover our operating costs. Additionally, revenues from aircraft maintenance can vary among
periods due to the timing of scheduled maintenance events and the completion level of work during a period.
The Company could violate debt covenants.
The Senior Credit Agreement contains covenants including, among other requirements, limitations on certain
additional indebtedness and guarantees of indebtedness. The Senior Credit Agreement is collateralized by certain of
the Company's Boeing 767 and 757 aircraft that are not collateralized under aircraft loans. Under the terms of the
Senior Credit Agreement, the Company is required to maintain aircraft collateral coverage equal to 150% of the
outstanding balance of the term loan and the maximum capacity of the revolving credit facility or 175% of the outstanding
15
balance of the term loan and the total funded revolving credit facility, whichever is less. The Senior Credit Agreement
stipulates events of default, including unspecified events that may have material adverse effects on the Company. The
Senior Credit Agreement and aircraft loans cross default. If an event of default occurs, the Company may be forced
to repay, renegotiate or replace the Senior Credit Agreement and loans. In such an event, the Company’s cost of
borrowings could increase, and our ability to modify and deploy aircraft could be limited as a result.
The Company's share buy-back plan may reduce liquidity.
Beginning in 2014, the Company's Board of Directors approved a share repurchase plan to buy ATSG 's common
shares. As described in Item 5 to this report, as of December 31, 2016, we could purchase $26 million more shares
under the existing repurchase plan. Future purchases, if any, would be funded from the Company's cash balances and
could reduce the Company's financial liquidity and indirectly add to the Company's indebtedness.
The Company's existing sources of liquidity may not be sufficient if opportunities to expand the aircraft fleet or make
strategic investment in other companies arise.
As of December 31, 2016, the Company's liquidity included $16.4 million of cash balances and $61.5 million
available under the revolving credit facility through the Senior Credit Agreement and, subject to the creditors consent,
$100 million through an accordion feature of the Senior Credit Agreement. As discussed under the caption "Liquidity"
in the "Management's Discussion and Analysis" of this Report, we expect to obtain additional borrowings through our
current group of lenders to fund planned expenditures for expansion of our fleet. If such additional borrowing is not
available, we may seek other sources of funding or slow the pace of our fleet expansion during 2017. Raising additional
sources of credit could result in an increase in our borrowing costs and additional covenant requirements.
Operating results may be affected by fluctuations in interest rates.
The Company enters into interest rate derivative instruments from time to time in conjunction with its debt levels.
The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for fluctuating
interest rates for at least 50% of the outstanding balance of the new unsubordinated term loan. We typically do not
designate the derivative instruments as hedges for accounting purposes. Future fluctuations in LIBOR interest rates
will result in the recording of gains and losses on interest rate derivatives that the Company holds.
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 earnings before interest, taxes, depreciation and amortization
expenses ("EBITDA"). At the Company's current debt-to-EBITDA ratio, the unsubordinated term loan and the revolving
credit facility both bear a variable interest rate of 2.77%. Additional debt or lower EBITDA may result in higher interest
rates on the variable rate portion of the Company's debt.
The Company sponsors defined benefit pension plans and post-retirement healthcare plans for certain eligible
employees. The Company's related pension expense, the plans' funded status and funding requirements are sensitive
to changes in interest rates. The plans' funded status and annual pension expense are recalculated at the beginning of
each calendar year using the fair value of plan assets and market-based interest rates at that point in time, as well as
assumptions for asset returns and other actuarial assumptions. Future fluctuations in interest rates including the impact
on asset returns, could result in the recording of additional expense for pension and other post-retirement healthcare
plans.
The costs of insurance coverage or changes to our reserves for self-insured claims could affect our operating results
and cash flows.
The Company is self-insured for certain claims related to workers’ compensation, aircraft, automobile, general
liability and employee healthcare. We record a liability for reported claims and an estimate for incurred claims that
have not yet been reported. Accruals for these claims are estimated utilizing historical paid claims data and recent
claims trends. Changes in claim severity and frequency could impact our results of operations and cash flows.
The ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes
may be further limited.
Limitations imposed on the ability to use net operating losses (“NOLs”) to offset future taxable income could cause
U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect and
16
could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules
and limitations may apply for state income tax purposes.
Changes in the ownership of the Company on the part of significant shareholders could limit our ability to use
NOLs to offset future taxable income. In general, under Section 382 of the Internal Revenue Code of 1986, as amended
(the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its
pre-change NOLs to offset future taxable income. In general, an ownership change occurs if the aggregate stock
ownership of significant stockholders increases by more than 50 percentage points over such stockholders’ lowest
percentage ownership during the testing period (generally three years).
We may need to reduce the carrying value of the Company’s assets.
The Company owns a significant amount of aircraft, aircraft parts and related equipment. Additionally, the balance
sheet reflects assets for income tax carryforwards and other deferred tax assets. The removal of aircraft from service
or continual losses from aircraft operations could require us to evaluate the recoverability of the carrying value of those
aircraft, related parts and equipment and record an impairment charge through earnings to reduce the carrying value.
We have recorded goodwill and other intangible assets related to acquisitions. If we are unable to achieve the
projected levels of operating results, it may be necessary to record an impairment charge to reduce the carrying value
of goodwill and related intangible assets. Similarly, if we were to lose a key customer or one of our airlines were to
lose its authority to operate, it could be necessary to record an impairment charge.
If the Company incurs operating losses or our estimates of expected future earnings indicate a decline, it may be
necessary to reassess the need for a valuation allowance for some or all of the Company’s net deferred tax assets.
We may be impacted by government requirements associated with transacting business in foreign jurisdictions.
The U.S and other governments have imposed trade and economic sanctions in certain geopolitical areas. The U.S.
Departments of Justice, Commerce and Treasury, as well as other government agencies have a broad range of civil and
criminal penalties they may seek to impose for violations of the Foreign Corrupt Practices Act (“FCPA”), sanctions
administered by the Office of Foreign Assets Control (“OFAC”) and other regulations. In addition, the DOT, FAA and
TSA may at times limit the ability of our airline subsidiaries to conduct flight operations in certain areas of the world.
Under such laws and regulations, we may be obliged to limit our business activities, we may incur costs for compliance
programs and we may be subject to enforcement actions or penalties for noncompliance. In recent years, the U.S.
government has increased their oversight and enforcement activities with respect to these laws and the relevant agencies
may continue to increase these activities.
Penalties, fines and sanctions levied by governmental agencies or the costs of complying with government regulations
could negatively affect our results of operations.
The operations of the Company’s subsidiaries are subject to complex aviation, transportation, security,
environmental, labor, employment and other laws and regulations. These laws and regulations generally require our
subsidiaries to maintain and comply with a wide variety of certificates, permits, licenses and other approvals. Their
inability to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or
regulations could result in substantial fines or, in the case of DOT and FAA requirements, possible suspension or
revocation of their authority to conduct operations.
The costs of maintaining our aircraft in compliance with government regulations could negatively affect our results of
operations and require further investment in our aircraft fleet.
All aircraft in the Company’s fleet were manufactured prior to 1995. Manufacturer Service Bulletins and FAA
regulations and FAA airworthiness directives issued under its “Aging Aircraft” program cause operators of such aged
aircraft to be subject to additional inspections and modifications to address problems of corrosion and structural fatigue
at specified times. The FAA may issue airworthiness directives that could require significant costly inspections and
major modifications to such aircraft. The FAA may issue airworthiness directives that could limit the usability of certain
aircraft types. In 2012, the FAA issued an airworthiness directive that requires the replacement of the aft pressure
bulkhead on Boeing 767-200 aircraft based on a certain number of landing cycles. As a result, we expect that 24 of
the Company's Boeing 767-200 aircraft will be affected. The cost of compliance is estimated to be $1.0 million per
aircraft over the next ten years.
17
In addition, FAA regulations require that aircraft manufacturers establish limits on aircraft flight cycles to address
issues involving aging, but still economically viable, aircraft, as described in Item 1 of this report, under "Federal
Aviation Administration." These regulations may increase our maintenance costs and eventually limit the use of our
aircraft.
The FAA and ICAO are in the process of developing programs to modernize air traffic control and management
systems. The FAA's program, Next Generation Air Transportation Systems, is an integrated system that requires
updating aircraft navigation and communication equipment. The FAA has mandated the replacement of current ground
based radar systems with more accurate satellite based systems on our aircraft by 2020. The ICAO began phasing in
similar requirements for aircraft operating in Europe during 2015. These programs may increase our costs and limit
the use of our aircraft. Aircraft not equipped with advanced communication systems may be restricted to certain
airspace.
Failure to maintain the operating certificates and authorities of our airlines would adversely affect our business.
The airline subsidiaries have the necessary authority to conduct flight operations pursuant to the economic authority
issued by the DOT and the safety based authority issued by the FAA. The continued effectiveness of such authority is
subject to their compliance with applicable statutes and DOT, FAA and TSA rules and regulations, including any new
rules and regulations that may be adopted in the future. The loss of such authority by an airline subsidiary could cause
a default of covenants within the Senior Credit Agreement and would materially and adversely affect its airline
operations, effectively eliminating the airline's ability to continue to provide air transportation services.
The Company may be affected by global climate change or by legal, regulatory or market responses to such potential
climate change.
The Company is subject to the regulations of the U.S. Environmental Protection Agency and state and local
governments regarding air quality and other matters. In part, because of the highly industrialized nature of many of the
locations where the Company operates, there can be no assurance that we have discovered all environmental
contamination or other matters for which the Company may be responsible.
Concern over climate change, including the impact of global warming, has led to significant federal, state and
international legislative and regulatory efforts to limit greenhouse gas emissions. The European Commission has
mandated the extension of the European Union Emissions Trading Scheme ("ETS") for greenhouse gas emissions to
the airline industry. Under the European Union ETS, all ABX and ATI flights that are wholly within the European
Union are now covered by the ETS requirements, and each year we are required to submit emission allowances in an
amount equal to the carbon dioxide emissions from such flights. Exceedance of the airlines' emission allowances would
require the airlines to purchase additional emission allowances on the open market.
Recently, ICAO adopted a new regulatory requirement mandating operators in countries that are party to the
regulation (most developed countries have signed onto the program) to offset their excess emissions above the 2020
baseline levels by purchasing qualifying carbon offset credits from greenhouse gas reduction and limitation projects
in other industries. The first two phases of the regulatory arrangement, from 2021 to 2026, will be voluntary and
countries may join or opt out of the scheme at any time. From 2027 to 2035, it will be mandatory, except for those
countries, flights and operators specifically exempt from the rule. The engines used to power the aircraft currently
operated by the Company's airlines comply with the newly proposed standard and would not require modification to
be able to continue to operate after the rule, if adopted as proposed, takes effect. Adoption of the ICAO international
standard should prevent individual countries or unions from imposing unilateral measures on international aviation,
such as the European Union’s Emissions Trading Scheme (EU ETS).
The U.S. Congress and certain states have also considered legislation regulating greenhouse gas emissions. In
addition, even in the absence of such legislation, the U.S. Environmental Protection Agency could regulate greenhouse
gas emissions, especially aircraft engine emissions. The cost to comply with potential new laws and regulations could
be substantial for the Company. These costs could include an increase in the cost of fuel and capital costs associated
with updating aircraft. Until the timing, scope and extent of any future regulation becomes known, we cannot predict
its effect on the Company’s cost structure or operating results. Further, even without such legislation or regulation,
increased awareness and adverse publicity in the global marketplace about greenhouse gas emitted by companies in
the airline and transportation industries could harm our reputation and reduce demand for our services.
18
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company leases portions of the air park in Wilmington, Ohio, under lease agreements with a regional port
authority, the terms of which expire in May of 2019 and June 2036 with options to extend. The leases include corporate
offices, 310,000 square feet of maintenance hangars and a 100,000 square foot component repair shop at the air park.
ABX also has the non-exclusive right to use the airport, which includes one active runway, taxiways and ramp space.
Additionally, the Company leases and operates a 311,500 square foot, two hangar aircraft maintenance complex in
Tampa, Florida.
As of December 31, 2016, the Company and its subsidiaries' in-service aircraft fleet consisted of 60 owned aircraft.
The aircraft were all formerly passenger aircraft that have been modified for cargo operations. The aircraft are generally
described as being mid-size or having medium wide-body cargo capabilities. The cargo aircraft carry gross payloads
ranging from approximately 58,000 to 129,000 pounds. These aircraft are well suited for intra-continental flights and
medium range inter-continental flights. Because an airline's flight operations can be hindered by inclement weather,
sophisticated landing systems and other equipment are utilized to minimize the effect that weather may have on flight
operations. For example, ABX’s Boeing 767-200 and 767-300 aircraft are operated for Category III landings. This
allows their crews to land under weather conditions with forward runway visibility of only 600 feet at airports with
Category III Instrument Landing Systems.
The table below shows the combined fleet of aircraft in service condition.
In-service
Aircraft as of
December 31, 2016
Aircraft Type
Total
Owned
Year of
Manufacture
Gross Payload
(Lbs.)
Still Air Range
(Nautical Miles)
767-200 SF (1)
767-300 SF (1)
757-200 PCF (1)
757-200 Combi (2)
Total in-service
36
16
4
4
60
36
16
4
4
60
1982 - 1987
85,000 - 100,000
1,700 - 5,300
1988 - 1997
121,000 - 129,000
3,200 - 7,100
1984 - 1991
1989 - 1992
68,000
58,000
2,100 - 4,800
2,600 - 4,300
____________________
(1)
These aircraft are configured for standard cargo containers loaded through large standard main deck cargo
doors.
These aircraft are configured as “combi” aircraft capable of carrying passenger and cargo containers on the
main flight deck.
(2)
In addition, as of December 31, 2016, CAM had one Boeing 767-200 and seven Boeing 767-300 passenger aircraft
that are not reflected in the table above. The Boeing 767-200 aircraft discontinued passenger service in 2015 when a
customer's operation ended. The seven Boeing 767-300 aircraft were undergoing or preparing to undergo modification
to a standard freighter configuration and are expected to be completed in 2017.
We believe that our existing facilities and aircraft fleet are appropriate for our current operations. As described in
Note G to the accompanying financial statements, we plan to invest in additional aircraft to meet our growth plans. We
may make additional investments in aircraft and facilities if we identify favorable opportunities in the markets that we
serve.
19
ITEM 3. LEGAL PROCEEDINGS
We are currently a party to legal proceedings, including FAA enforcement actions, in various federal and state
jurisdictions arising out of the operation of the Company's business. The amount of alleged liability, if any, from these
proceedings cannot be determined with certainty; however, we believe that the Company's ultimate liability, if any,
arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims
which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material
to our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
20
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
ATSG's common stock is publicly traded on the NASDAQ Global Select Market under the symbol ATSG. The
following table shows the range of high and low prices per share of ATSG common stock for the periods indicated:
2016 Quarter Ended:
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
2015 Quarter Ended:
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
Low
High
12.94
12.73
12.36
9.05
8.42
7.60
9.04
7.80
$
$
$
$
$
$
$
$
Low
17.29
14.91
15.43
15.53
High
10.39
10.96
10.96
9.72
$
$
$
$
$
$
$
$
On March 7, 2017, there were 1,511 stockholders of record of ATSG’s common stock. The closing price of the
ATSG’s common stock was $17.13 on March 7, 2017.
Dividends
We are restricted from paying dividends on ATSG's common stock in excess of $50.0 million during any calendar
year under the provisions of the Senior Credit Agreement. No cash dividends have been paid or declared.
Stock Repurchases
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. The
Board's authorization does not require the Company to repurchase a specific number of shares 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. All of the repurchases done by the Company during the fourth quarter of 2016 were
in the open market. There is no expiration date for the repurchase program. The following table summarizes the
Company's repurchases of its common stock during the fourth quarter ended December 31, 2016:
Period
October 1, 2016 through October 31,
2016
November 1, 2016 through November
30, 2016
December 1, 2016 through December
31, 2016
Total for the quarter
Total Number of
Shares Purchased
30,000
Average Price
paid Per Share
14.15
$
16.33
16.71
15.73
30,000
30,000
90,000
$
$
$
21
Total Number of
Shares Purchased
as Part of
Publicly
Announced
Program
Maximum Dollar
Value of Shares
That May Yet Be
Purchased Under
the Program
30,000
30,000
30,000
90,000
$
$
$
$
27,076,017
26,586,207
26,084,868
26,084,868
Securities authorized for issuance under equity compensation plans
For the response to this Item, see Item 12.
Performance Graph
The graph below compares the cumulative total stockholder return on a $100 investment in ATSG’s common stock
with the cumulative total return of a $100 investment in the NASDAQ Composite Index and the cumulative total return
of a $100 investment in the NASDAQ Transportation Index for the period beginning on December 31, 2011 and ending
on December 31, 2016.
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
Air Transport Services Group, Inc.
NASDAQ Composite Index
NASDAQ Transportation Index
100.00
100.00
100.00
84.96
116.41
106.01
171.40
165.47
143.98
181.36
188.69
202.99
213.56
200.32
173.16
338.14
216.54
207.87
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the consolidated financial
statements and the notes thereto and the information contained in Item 7 of Part II, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data and the
consolidated operations data below are derived from the Company’s audited consolidated financial statements.
OPERATING RESULTS:
Continuing revenues
Operating expenses (1) (3)
Net interest expense and other non operating charges
Financial instrument (gain) loss (2)
Earnings (loss) from continuing operations before
income taxes
Income tax expense
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations, net of
taxes (3)
Net earnings (loss) (1) (2)
EARNINGS (LOSS) PER SHARE FROM
CONTINUING OPERATIONS:
Basic
Diluted
WEIGHTED AVERAGE SHARES:
Basic
Diluted
SELECTED CONSOLIDATED
FINANCIAL DATA:
Cash and cash equivalents
Property and equipment, net
Goodwill and intangible assets (1)
Total assets
Post-retirement liabilities (3)
Long term debt and current maturities, other than leases
Deferred income tax liability
Stockholders’ equity
____________________
(1)
(2)
2016
As of and for the Years Ended December 31
2014
(In thousands, except per share data)
2013
2015
2012
$ 768,870
705,122
11,187
18,107
$ 619,264
546,474
11,147
(920)
$ 589,592
525,067
13,845
(1,096)
$ 580,023
566,838
14,175
(631)
$ 607,438
528,750
14,247
(1,879)
34,454
62,563
51,776
(359)
66,320
(13,394)
21,060
2,428
(23,408)
39,155
2,067
(19,702)
32,074
(2,214)
(19,266)
(19,625)
(3)
(24,672)
41,648
(774)
$
23,488
$
41,222
$
29,860
$ (19,628) $
40,874
$
$
0.34
0.33
$
$
0.61
0.60
$
$
0.50
0.49
$
$
(0.31) $
(0.31) $
0.66
0.65
61,330
62,994
64,242
65,127
64,253
65,211
63,992
63,992
63,461
64,420
16,358
$
1,000,992
45,586
1,259,330
79,528
458,721
122,532
331,902
$
17,697
875,401
38,729
1,041,721
110,166
318,200
96,858
364,157
$
30,560
847,268
39,010
1,011,203
94,368
344,094
83,223
347,489
$
31,699
838,172
39,291
1,018,613
32,865
384,515
95,912
368,968
$
15,442
818,924
92,126
1,015,808
187,533
364,481
27,268
299,256
(3)
In 2013, the Company recorded an impairment charge of $52.6 million on goodwill.
During 2016, the re-measurement of financial instrument fair values, primarily for warrants granted to a customer resulted
in a loss of $18.1 million before income taxes. (See note B to the accompanying consolidated financial statements.)
During 2014, ABX offered vested, former employee participants of the qualified pension plan and vested employee
participants of the crewmembers qualified pension plan a one-time option to settle their pension benefit with the Company
through a single payment or a nonparticipating annuity contract. As a result, ABX settled $98.7 million of pension
obligation in December of 2014 from the pension plans assets. The settlement resulted in pre-tax charges of $6.7 million
to continued operations and $5.0 million to discontinued operations for 2014. As a result of fluctuating interest rates and
investment returns, the funded status of the Company's defined benefit pension and retiree medical plans vary from year
to year. (See notes H and K to the accompanying consolidated financial statements.) Effective December 31, 2016, ABX
modified its unfunded, non-pilot retiree medical plan to terminate benefits to all participants. As a result, ABX settled
$0.6 million of retiree medical obligations and recorded a pre-tax gain of $2.0 million to continued operations.
23
ITEM 7. 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 and should be read in
conjunction with the “Risk Factors” in Item 1A of this report, our historical financial statements, and the related notes
contained in this report.
INTRODUCTION
The Company leases aircraft, provides air cargo lift and performs aircraft maintenance and other support services
primarily to the air cargo transportation and package delivery industries. Through the Company's subsidiaries, we offer
a range of complementary services to delivery companies, freight forwarders, e-commerce operators, airlines and
government customers. The Company's principal subsidiaries include two independently certificated airlines, ABX
Air, Inc. (“ABX”) and Air Transport International, Inc. (“ATI”), and an aircraft leasing company, Cargo Aircraft
Management, Inc. (“CAM”). CAM provides competitive aircraft lease rates by converting passenger aircraft into
cargo freighters and offering them to customers under long-term leases.
The Company has two reportable segments: CAM, which leases Boeing 767 and Boeing 757 aircraft and aircraft
engines, and ACMI Services, which primarily includes the cargo transportation operations of the Company's two airlines.
The Company's other business operations, which primarily provide support services to the transportation industry,
include aircraft maintenance, aircraft parts sales, ground and material handling equipment maintenance and mail
handling services. These operations do not constitute reportable segments due to their size.
At December 31, 2016, the Company owned 59 cargo aircraft that were in revenue service. The combined fleets
consisted of 35 Boeing 767-200 aircraft, 16 Boeing 767-300 aircraft, four Boeing 757-200 aircraft and four Boeing
757 "combi" aircraft. CAM also owned one Boeing 767-200 aircraft that was being prepped for a lease beginning in
2017 and seven Boeing 767-300 aircraft either already undergoing or awaiting induction in the freighter conversion
process.
The Company has had long term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL"),
since August 2003. DHL is the Company's largest customer and accounted for 34%, 46% and 55% of the Company's
consolidated revenues during the years ended December 31, 2016, 2015 and 2014, respectively. In 2010, the Company
and DHL executed commercial agreements under which DHL leased thirteen Boeing 767 freighter aircraft from CAM
and ABX operates those aircraft under a separate crew, maintenance and insurance (“CMI”) agreement. The initial
term of the CMI agreement was five years while the terms of the aircraft leases were seven years. In 2015, the Company
and DHL amended and restated the CMI agreement ("restated CMI agreement"). As a result, effective April 1, 2015,
the existing monthly aircraft lease rates for the thirteen Boeing 767-200 freighter aircraft declined approximately 5%,
DHL agreed to lease an additional two Boeing 767 aircraft which were previously supporting DHL under short-term
operating arrangements, and the Boeing 767 aircraft lease terms with DHL were extended through March 2019.
Under the restated CMI agreement, ABX continues to operate and maintain the aircraft through March 2019.
Similar to the previous agreement, pricing for services provided under the restated CMI agreement is based on pre-
defined fees scaled for the number of aircraft hours flown, aircraft scheduled and flight crews provided to DHL for its
network. Under the pricing structure of the restated CMI agreement, ABX is responsible for complying with FAA
airworthiness directives, the cost of Boeing 767 airframe maintenance and certain engine maintenance events for the
DHL-leased aircraft that it operates. Generally, provisions of the restated CMI agreement negatively impact the
Company's ACMI services operating results, but were partially offset by extending the agreements and by adding two
additional aircraft leases during 2015. As of December 31, 2016, the Company, through CAM, leased 16 Boeing 767
aircraft to DHL, 14 of which were being operated by the Company's airlines for DHL. Additionally, the airlines operated
five CAM-owned Boeing aircraft under other operating arrangements with DHL.
During September 2015, the Company began to operate a trial air network for Amazon Fulfillment Services, Inc.
(“AFS”), a subsidiary of Amazon.com, Inc. (“Amazon”). The network grew to five Boeing 767 freighter aircraft through
the first quarter of 2016 and included services for cargo handling and logistical support. On March 8, 2016, the Company
entered into an Air Transportation Services Agreement (the “ATSA”) with AFS pursuant to which CAM will lease 20
Boeing 767 freighter aircraft to AFS, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight
Boeing 767-300 freighter aircraft for a term of seven years.
24
As of December 31, 2016, the Company, through CAM, leased 12 Boeing 767-200 freighter aircraft and two
Boeing 767-300 freighter aircraft to AFS. The ATSA, which has a term of five years, also provides for the operation
of those aircraft by the Company’s airline subsidiaries, and the performance of hub and gateway services by the
Company's subsidiary, LGSTX Services, Inc. ("LGSTX"). CAM owns all of the Boeing 767 aircraft that will be leased
and operated under the ATSA. The remaining six Boeing 767-300 aircraft are being converted to freighter aircraft and
are scheduled to enter service during 2017. The ATSA became effective on April 1, 2016. Revenues performed for
AFS comprised approximately 29% and 5% of the Company's consolidated revenues from continuing operations during
the years ended December 31, 2016. and 2015, respectively.
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. The exercise price of
the warrants is $9.73 per share, which represents the closing price of ATSG’s common shares on February 9, 2016.
Warrants vest as AFS leases aircraft from us, up to 20 aircraft. Each of the three tranches of warrants will be exercisable
in accordance with its terms through March 8, 2021.
The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance
for equity-based payments to non-employees and for financial instruments. The fair value of the warrants issuable to
Amazon is recorded as a lease incentive asset and is amortized against revenues over the duration of the aircraft leases.
The warrants are accounted for as financial instruments, and accordingly, the fair value of the outstanding warrants
are measured and classified in liabilities at the end of each reporting period. As of December 31, 2016, the Company's
liabilities reflected 11.06 million warrants having a fair value of $8.09 per share. During 2016, the re-measurements
of the warrants to fair value resulted in a non-operating loss of $19.1 million before the effect of income taxes. As of
December 31, 2016, 3.8 million additional warrants are expected to vest as AFS leases additional aircraft from the
Company.
The U.S. Military comprised 12%, 16% and 16% of the Company's consolidated revenues during the years ended
December 31, 2016, 2015 and 2014, respectively. The Company's airlines contract their services to the Air Mobility
Command ("AMC"), through the U.S. Transportation Command ("USTC"), both of which are organized under the U.S.
Military. Our fourth and final Boeing 757 combi aircraft entered service in the first quarter of 2014, after completing
the necessary regulatory certification, and serves as a maintenance spare.
RESULTS OF OPERATIONS
Fleet Summary
Our CAM-owned operating aircraft fleet has increased by seven aircraft since the end of 2014. As of December 31,
2016, the combined operating fleet of owned freighter aircraft consisted of 36 Boeing 767-200 aircraft, 16 Boeing
767-300 aircraft, four Boeing 757-200 aircraft and four Boeing 757 "combi" aircraft. The Boeing 757 combi aircraft
are capable of simultaneously carrying passengers and cargo containers on the main flight deck. At December 31,
2016, the Company owned seven Boeing 767-300 aircraft that were either already undergoing or awaiting induction
into the freighter conversion process.
Aircraft fleet activity during 2016 is summarized below:
- CAM completed the modification of two Boeing 767-300 freighter aircraft purchased in the previous year and
began to lease both aircraft under a multi-year lease to external customers. One of these aircraft is being operated
by ABX for the customer.
- CAM purchased eleven Boeing 767-300 passenger aircraft during 2016 for the purpose of converting the aircraft
into standard freighter configuration. Two aircraft completed the freighter modification and entered into long-
term leases with AFS in 2016, and are both being operated by ATI under multi-year leases. CAM sold one of
the eleven aircraft to an external customer during 2016. One aircraft completed the freighter modification and
entered into service with ATI during the fourth quarter. This aircraft was subsequently entered into a long-term
lease with AFS in January 2017, and is being operated by ATI under a multi-year agreement. The remaining
25
seven Boeing 767-300 passenger aircraft were undergoing or preparing to undergo modification to a standard
freighter configuration as of December 31, 2016 and are expected to be completed in 2017.
- In conjunction with the ATSA, ABX and ATI returned a total of ten Boeing 767-200 freighter aircraft to CAM
and external lessees returned two Boeing 767-200 freighter aircraft. All twelve were subsequently leased to
AFS under multi-year leases. ABX and ATI were separately contracted to operate the aircraft for AFS.
- Five other Boeing 767-200 were returned from external lessees. Four were subsequently leased to ABX or
ATI while one is now being prepped for other leasing.
- ABX returned one Boeing 767-200 freighter and one Boeing 767-300 freighter to CAM which were
subsequently leased to different external lessees. ABX is operating the Boeing 767-300 freighter for the
customer.
- ATI ceased operating one DHL-owned Boeing 757-200 freighter aircraft during the third quarter.
The Company’s cargo aircraft fleet is summarized below as of December 31, 2016, 2015 and 2014:
2016
2015
2014
ACMI
Services CAM Total
ACMI
Services CAM Total
ACMI
Services CAM Total
In-service aircraft
Aircraft owned
Boeing 767-200
Boeing 767-300
Boeing 757-200
Boeing 757-200 Combi
Total
Operating lease
Boeing 767-200
Boeing 767-300
Boeing 757-200
Total
Other aircraft
Owned Boeing 767-300
under modification
Owned Boeing 767 available
or staging for lease
6
4
29
12
4 —
4 —
18
41
— —
— —
— —
— —
—
—
7
1
35
16
4
4
59
—
—
—
—
7
1
13
4
23
7
4 —
4 —
25
30
— —
— —
1 —
1 —
—
2
— —
36
11
4
4
55
—
—
1
1
2
—
14
6
22
2
4 —
4 —
28
24
2 —
1 —
— —
3 —
— —
1
—
36
8
4
4
52
2
1
—
3
—
1
As of December 31, 2016, ABX and ATI were leasing 18 in-service aircraft internally from CAM for use in ACMI
Services. As of December 31, 2016, eight of CAM's 29 Boeing 767-200 aircraft shown in the aircraft fleet table above
and six of the twelve Boeing 767-300 aircraft were leased to DHL and operated by ABX. Additionally, twelve of
CAM's 29 Boeing 767-200 aircraft and two of CAM's twelve Boeing 767-300 aircraft were leased to AFS and operated
by ABX or ATI. CAM leased the other nine Boeing 767-200 aircraft and four Boeing 767-300 aircraft to external
customers, including two Boeing 767-200 aircraft to DHL that are being operated by a DHL-owned airline. The carrying
values of the total in-service fleet as of December 31, 2016, 2015 and 2014 were $793.9 million, $742.6 million and
$734.5 million, respectively. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM.
Summary
External customer revenues from continuing operations increased by $149.6 million to $768.9 million during 2016
compared to 2015. Excluding directly reimbursed revenues, customer revenues increased $105.0 million, or 18%
during 2016 compared with 2015. Increased external customer revenues from CAM's leasing operations, expanded
ACMI services for AFS, increased aircraft maintenance services and additional logistics services, also for AFS, were
partially offset by lower ACMI service revenues for DHL during 2016, compared to 2015.
26
The consolidated net earnings from continuing operations were $21.1 million for 2016 compared to $39.2 million
for 2015. The pre-tax earnings from continuing operations were $34.5 million for 2016 compared to $62.6 million,
for 2015. Earnings were affected by specific events and certain adjustments that do not directly reflect our underlying
operations among the years presented. On a pre-tax basis, earnings included net losses of $18.1 million for the year
ended December 31, 2016, for the re-measurement of financial instruments, primarily warrant obligations granted to
Amazon during 2016, to fair value. The larger re-measurement loss for 2016 compared to 2015 primarily reflects the
increase in the value of the traded ATSG share price after the warrants were granted in 2016. Pre-tax earnings for
2016 were also reduced by $4.5 million for the amortization of lease incentives given to AFS in the form of warrants
during 2016. Additionally, pre-tax earnings from continuing operations for 2016 were unfavorably impacted by a
$9.9 million increase in actuarial losses for the non-service component of retiree benefit plan costs compared to 2015.
Separately, pre-tax earnings for the year ended December 31, 2016, included an actuarial gain of $2.0 million for the
settlement of a retiree medical plan during 2016. Pre-tax earnings for the year ended December 31, 2016, also included
a $1.2 million charge for the Company's share of capitalized debt issuance costs that were charged off when West
Atlantic AB, a non-consolidated affiliate, restructured its debt. After removing the effects of these items, Adjusted
pre-tax earnings from continuing operations, a non-GAAP measure (a definition and reconciliation of adjusted pre-tax
earnings from continuing operations follows) were $65.1 million for 2016 compared to $60.6 million for 2015.
Adjusted pre-tax earnings from continuing operations for 2016 improved compared to 2015, driven by additional
aircraft lease revenues, increased aircraft maintenance revenues and additional logistics support services for AFS. This
growth in revenue was partially offset by the cost necessary to support expanded operations, including training costs
for new flight crews, additional premium pay for ABX flight crews, higher aircraft depreciation expense and more
employee expenses, particularly in our support services businesses. Operating results for 2016 were negatively impacted
when ABX flight crew members went on strike for two days, which disrupted our customers' operations and reduced
our revenues.
During 2014, we offered vested, former employee participants of the qualified pension plan and vested employee
participants of the crewmembers qualified pension plan a one-time option to settle their pension benefit with the
Company through a single payment or a nonparticipating annuity contract. As a result, pre-tax earnings from continuing
operations reflects an actuarial charge of $6.7 million in 2014. Effective December 31, 2016, ABX modified its
unfunded, non-pilot retiree medical plan to settle benefits to all participants. As a result, pre-tax earnings from continuing
operations reflects an actuarial gain of $2.0 million for 2016.
27
A summary of our revenues and pre-tax earnings and adjusted pre-tax earnings from continuing operations is
shown below (in thousands):
Revenues from Continuing Operations:
CAM
Aircraft leasing and related services
Lease amortization against revenue
Total CAM
ACMI Services
Airline services
Reimbursable
Total ACMI Services
Other Activities
Total Revenues
Eliminate internal revenues
Customer Revenues
Pre-Tax Earnings from Continuing Operations:
CAM, inclusive of interest expense
ACMI Services
Airline services
Retiree benefit curtailments and settlements
Total ACMI Services
Other Activities
Net unallocated interest expense
$
$
$
Net financial instrument re-measurement (loss) gain
Pre-Tax Earnings from Continuing Operations
Add other non-service components of retiree benefit costs, net
Add retiree benefit curtailments and settlements
Add debt issuance costs from non-consolidating affiliate
Add lease incentive amortization
Add net loss (gain) on financial instruments
Adjusted Pre-Tax Earnings from Continuing Operations
$
Years Ending December 31
2015
2014
2016
$
199,598
(4,506)
195,092
410,598
82,261
492,859
262,539
950,490
$
177,789
—
177,789
395,486
37,623
433,109
161,995
772,893
166,303
—
166,303
399,376
40,543
439,919
142,294
748,516
(181,620)
(153,629)
(158,924)
768,870
$
619,264
$
589,592
68,608
$
57,457
$
53,159
(33,719)
1,594
(32,125)
16,623
(545)
(18,107)
34,454
8,812
(1,997)
1,229
4,506
18,107
65,111
$
(2,654)
—
(2,654)
8,561
(1,721)
920
62,563
(1,040)
—
—
—
(920)
60,603
$
(5,381)
(6,700)
(12,081)
11,363
(1,761)
1,096
51,776
(8,152)
6,700
—
—
(1,096)
49,228
Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding non-
service components of retiree benefit costs, gains and losses for the fair value re-measurement of financial instruments,
lease incentive amortizations, the pension settlement costs and the charge off of debt issuance costs from a non-
consolidated affiliate during the first quarter of 2016. We exclude these items from adjusted pre-tax earnings because
they are distinctly different in their predictability or not closely related to our on-going operating activities. Management
uses adjusted pre-tax earnings to compare the performance of core operating results between periods. Presenting this
measure provides investors with a comparative metric of fundamental operations while highlighting changes to certain
items among periods. Adjusted pre-tax earnings should not be considered in isolation or as a substitute for analysis of
the Company's results as reported under GAAP.
ACMI Reimbursable revenues shown above include revenues related to fuel, landing fees, navigation fees, aircraft
rent and certain other operating costs that are directly reimbursed to the airlines by their customers. Prior to April 1,
2015, the cost of airframe maintenance for CAM-owned, Boeing 767-200 aircraft operated for DHL and provided by
the airlines were directly reimbursed. For all periods presented above, airline services revenues include the compensation
for maintenance provided by the airlines on aircraft operated for DHL.
28
2016 and 2015
CAM
CAM offers aircraft leasing and related services to external customers and also leases aircraft internally to the
Company's airlines. Aircraft leases normally cover a term of five to eight years. In a typical leasing agreement,
customers pay rent and maintenance deposits on a monthly basis.
CAM's revenues grew $17.3 million during 2016 compared to 2015, primarily as a result of additional aircraft
leases. As of December 31, 2016 and 2015, CAM had 41 and 30 aircraft under lease to external customers, respectively.
Revenues from external customers totaled $117.6 million and $93.4 million for 2016 and 2015, respectively. CAM's
revenues from the Company's airlines totaled $77.5 million during 2016, compared to $84.4 million for 2015. Since
mid-2015, we have added six Boeing 767-300 freighter aircraft to CAM's lease portfolio through December 31, 2016.
CAM's pre-tax earnings, inclusive of an interest expense allocation, were $68.6 million and $57.5 million during
2016 and 2015, respectively. Increased earnings reflect additional external lease revenues and lower interest expense,
offset by higher depreciation expense for additional Boeing 767-300 aircraft and increased expenses to place and support
the larger fleet of Boeing aircraft.
During 2016, CAM purchased eleven 767-300 passenger aircraft for freighter conversion. As of December 31,
2016, seven of these Boeing 767-300 passenger aircraft were being modified from passenger to freighter configuration.
One aircraft had been sold, while another three had completed freighter modification.
CAM's agreement to lease 20 Boeing 767 freighter aircraft to AFS includes 12 Boeing 767-200 freighter aircraft
for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. Leases for six of these
aircraft began in April 2016, eight more were executed as of December 31, 2016. To fulfill the 20 aircraft requirement
for AFS, CAM plans to lease six more Boeing 767-300 freighter aircraft, each for a seven year term, to AFS by mid-2017.
CAM's operating results will depend on its ability to provide freighter aircraft to AFS on an agreed schedule and
within planned costs, as well as the value of warrant amortization. CAM's operating results will be negatively impacted
by the amortization of the value of warrants issued to Amazon as a lease incentive.
ACMI Services
The ACMI Services segment provides airline operations to its customers, typically under contracts providing for
a combination of aircraft, crews, maintenance and insurance ("ACMI"). Our customers are usually responsible for
supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating
expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the
airline. Aircraft charter agreements, including those for the U.S. Military, usually require the airline to provide full
service, including fuel and other operating expenses for a fixed, all-inclusive price. As of December 31, 2016, ACMI
Services included 46 in-service aircraft, including 18 leased internally from CAM, 14 CAM-owned freighter aircraft
which are under lease to DHL and operated by ABX under the restated CMI agreement, and 14 CAM-owned freighter
aircraft which are under lease to AFS and operated by ATI and ABX under the ATSA.
Revenues from ACMI Services increased $59.8 million during 2016 compared with 2015 to $492.9 million. Airline
services revenues from external customers, which do not include revenues for the reimbursement of fuel and certain
operating expenses, increased $15.1 million. Improved revenues were driven by additional aircraft operations for AFS
and reflect an 18% increase in billable block hours. As of December 31, 2016, ACMI Services were operating six more
CAM-owned aircraft compared to December 31, 2015. Beginning in April 2016, in conjunction with the long-term
leases executed between AFS and CAM, the related aircraft rent revenues for five aircraft operated for AFS during
2015 are reflected under CAM instead of ACMI Services. Compared to 2015, billable block hours for DHL declined
during 2016, reflecting three fewer aircraft in service for DHL.
Operating results for ACMI Services were impacted in 2016 by additional costs for flight crews to keep pace with
AFS's expanding air network. Flight crew compensation increased by $13.0 million to pay additional crews while being
trained for expanded aircraft operations and when ABX's flight crews stopped volunteering for additional flight time,
ABX paid a premium to assign trips to crewmembers and awarded additional compensatory days off. Operating results
for ACMI Services were also negatively impacted by $7.0 million in lost revenue due to a work stoppage by ABX
crewmembers represented by the Airline Professionals Association of the International Brotherhood of Teamsters in
29
November 2016. Although the flight crews were ordered back to work within two days through a temporary restraining
order issued by a U.S. district court, the full revenue schedule of flying operations did not resume for nearly three
weeks.
Primarily due to these flight crew related factors, ACMI Services incurred pre-tax losses of $32.1 million during
2016, compared to pre-tax losses of $2.7 million for 2015. Larger pre-tax losses in 2016 compared to 2015 were also
affected by more scheduled airframe maintenance events during 2016, and increased pension expenses. Scheduled
airframe maintenance expense increased $6.5 million during 2016 compared to 2015. Airframe maintenance expense
varies depending upon the number of C-checks and the scope of the checks required for those airframes scheduled for
maintenance. Pension expense for ACMI Services, including the non-service components of retiree benefit costs,
increased $9.6 million as actuarially determined for 2016, compared to 2015. Operating results for ACMI Services
were also impacted by increased depreciation expense for two additional Boeing 767-300 aircraft in operation and
reductions in CMI operations for DHL compared to 2015.
We expect ACMI Services to add six CAM-owned Boeing 767-300 aircraft into service for AFS during the first
seven months of 2017, as the aircraft freighter modifications are completed. Additionally, we expect the level of new
crew training costs and ABX Flight crew premium pay to decline in the second quarter of 2017. Achieving profitability
in ACMI Services will depend on a number of factors, including revenue levels for airline services, crewmember training
costs, crewmember productivity, the level of pilot premium pay, employee benefits, aircraft maintenance schedules
and the number of aircraft we operate.
Other Activities
We provide related support services to our ACMI Services customers and other airlines by leveraging our knowledge
and capabilities developed for our own operations over the years. The Company's aircraft maintenance, engineering
and repair business, Airborne Maintenance and Engineering Services, Inc. ("AMES"), sells aircraft parts and provides
aircraft maintenance and modification services. We also provide mail sorting, parcel handling and logistical support
to the U.S. Postal Service (“USPS”) at five USPS facilities and similar services to certain AFS hub and gateway locations
in the U.S. We provide other ground services for our own airlines and external customers, including the sale of aviation
fuel, the lease of ground equipment such as ground power units and cargo loaders, as well as facility and equipment
maintenance services.
External customer revenues from all other activities were $158.4 million and $93.9 million for 2016 and 2015,
respectively. Revenues from our mail sorting, parcel handling and logistical support services increased $56.7 million
during 2016 compared to 2015, reflecting higher contractual costs and increased volumes at the USPS and AFS locations.
Additionally, airframe maintenance revenues from external customers increased by $7.0 million. Revenues from aircraft
maintenance can vary among periods due to the timing of scheduled maintenance events and the completion level of
work during a period.
The pre-tax earnings from other activities increased by $8.1 million to $16.6 million in 2016, reflecting increased
airframe maintenance services, mail and parcel handling services and aviation fuel sales during 2016. We expect
earnings from parcel handling, logistical services, aviation fuel and other ground service to decline in 2017 as AFS
transfers its hub operation from the airport in Wilmington, Ohio, which we operate, to the Cincinnati/Northern Kentucky
International Airport. We expect operations of Pemco World Air Services, Inc., an aircraft maintenance and modification
business we acquired at the end of 2016, to contribute to our operating earnings during 2017.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $49.9 million during 2016 compared to 2015 driven by higher
headcount for flight operations, maintenance services, package handling services and additional pilot premium pay
while new crewmembers were being trained for our customers' expanding networks. Our employee headcount increased
32% during 2016 compared to 2015. We have added employees to support the AFS network, additional aircraft
maintenance contracts and increased volume for the USPS. The non-service components of retiree benefit costs
increased $9.9 million during 2016 due to lower investment returns during the previous year.
Depreciation and amortization expense increased $10.1 million during 2016 compared to 2015. The increase in
depreciation expense reflects incremental depreciation for six Boeing 767-300 aircraft and additional aircraft engines
added to the operating fleet since mid-2015, as well as capitalized heavy maintenance and navigation technology
30
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 $9.7 million during 2016 compared to 2015. The increase
stemmed primarily from additional airframe checks and related component repairs, driven by increased block hours
flown. Aircraft maintenance expenses can vary among periods due to the number of scheduled airframe maintenance
checks and the scope of the checks that are performed.
Fuel expense increased by $34.5 million during 2016 compared to 2015. Fuel expense includes the cost of fuel to
operate U.S. Military charters, reimbursable fuel billed to DHL, AFS and other ACMI customers, as well as fuel used
to position aircraft for service and for maintenance purposes. The average price per gallon of aviation fuel decreased
about 24% for 2016 compared to 2015. The decrease in the average price per gallon of fuel was offset by a higher
level of customer-reimbursed fuel which increased $45.1 million for 2016 compared to 2015.
Travel expense increased by $2.0 million during 2016 compared to 2015. The increase reflects the higher level
of employee headcount in airline operations during 2016 compared to 2015.
Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services
and other airport services. Contracted ground and aviation services increased $38.5 million due to additional volumes
of mail and parcels processed for the USPS and AFS.
Rent expense was flat in 2016 compared to 2015. Rent expense decreased during the first half of 2016 primarily
due to the purchase of one Boeing 767-300 aircraft and the return of two Boeing 767-200 aircraft which were previously
leased from external providers during the first quarter of 2015. This was offset by increased rent in the second half of
2016 associated with an aircraft simulator rented to train new flight crews.
Landing and ramp expense, which includes the cost of deicing chemicals, increased by $3.7 million during 2016
compared to 2015, driven by additional flight operations. Landing and ramp fees can vary based on the flight schedules
and the airports that are used in a period.
Insurance expense increased by $0.8 million during 2016 compared to 2015. Aircraft fleet insurance has increased
due to additional aircraft operations during 2016 compared to 2015.
Other operating expenses increased by $9.5 million during 2016 compared to 2015. Other operating expenses
include professional fees, employee training, utilities, the cost of parts sold to customers and gains on the disposition
of equipment. Other operating expenses during the first quarter of 2016 included a $1.2 million charge for the Company's
share of capitalized debt issuance costs that were written off when West Atlantic AB, a non-consolidated affiliate,
restructured its debt. Other operating expenses also increased due to additional sales of aircraft parts during 2016
compared to 2015.
Interest expense increased by $0.1 million during 2016 compared to 2015. Interest expense increased due to a
higher average debt level and interest rates on the Company's outstanding loans, offset by more capitalized interest
related to our fleet expansion during 2016. Capitalized interest increased $1.1 million during 2016 to $1.3 million.
The Company recorded pre-tax net losses on financial instruments of $18.1 million during the year ended December
31, 2016, compared to gains of $0.9 million during 2015. The 2016 losses are primarily a result of remeasuring, as of
December 31, 2016, the fair value of the stock warrants granted to Amazon in March of 2016. An increase in the fair
value of the warrant obligation since the initial measurement on May 12, 2016, corresponded to an increase in the
traded price of the Company's shares and resulted in the non-cash, pre-tax loss of $19.1 million for 2016. The non-
cash gains and losses resulting from quarterly re-measurements of the warrants may vary widely among quarters.
Income tax expense for earnings from continuing operations decreased $10.0 million for 2016 compared to 2015
and includes a deferred income tax deduction for the warrant loss and the amortization of the customer lease incentive.
The income tax deductibility of the warrant loss and the amortization of the customer lease incentive is less than the
GAAP expenses for these items because for tax purposes, the warrants are valued at a different time and under a different
valuation method than required by GAAP. The effective tax rate, before including the warrant loss and incentive
amortization was 35.3% for 2016 compared to 37.4% for the year ended December 31, 2015. The lower effective tax
rate for 2016 compared to 2015 reflects the recognition of a discrete tax benefit related to the conversion of employee
stock awards during the first and fourth quarters of 2016.
31
The Company's effective tax rate for 2017 will be impacted by a number of factors, including the re-measurement
of the stock warrants at the end of each reporting period. As a result of the warrant re-measurements and related income
tax treatment, the overall effective tax can vary significantly from period to period. We estimate that the Company's
effective tax rate for 2017, before applying the deductibility of the stock warrant re-measurement and related incentive
amortization and the benefit of the stock compensation, will be approximately 38.5%. We project this increase in the
effective tax rate due to the apportionment of more pre-tax earnings during 2017 to states with higher income tax rates
and a lower tax benefit related to the conversion of employee stock awards.
As of December 31, 2016, the Company had operating loss carryforwards for U.S. federal income tax purposes
of approximately $40.2 million, which will begin to expire in 2031 if not utilized before then. We expect to utilize the
loss carryforwards to offset federal income tax liabilities in the future. As a result, we do not expect to pay federal
income taxes until 2019 or later. The Company may, however, be required to pay alternative minimum taxes and certain
state and local income taxes before then. The Company's taxable income earned from international flights are primarily
sourced to the United States under international aviation agreements and treaties. When we operate in countries without
such agreements, the Company could incur additional foreign income taxes.
Discontinued Operations
The financial results of discontinued operations primarily reflect pension, workers' compensation cost adjustments
and other benefits for former employees previously associated with ABX's former hub operations, package sorting and
aircraft fueling services provided to DHL through 2009. Pre-tax earnings related to the former sorting operations were
$3.8 million for 2016 compared to $3.2 million for 2015. Pre-tax earnings during 2016 and 2015 were a result of
reductions in self insurance reserves for former employee claims and pension credits.
2015 compared to 2014
Summary
External customer revenues from continuing operations increased by $29.7 million to $619.3 million during 2015
compared to 2014. Excluding directly reimbursed revenues, customer revenues increased 6%, or by $32.6 million
during 2015 compared with 2014. Increased external customer revenues from CAM's leasing operations, aircraft
maintenance services and parcel handling operations were offset by lower revenues from ACMI Services during 2015,
which reflect six fewer Boeing 767 aircraft under ACMI operations compared to 2014.
The consolidated net earnings from continuing operations were $39.2 million for 2015 compared to $32.1 million
for 2014. The pre-tax earnings from continuing operations were $62.6 million for 2015 compared to $51.8 million for
2014, the latter of which included a one-time charge of $6.7 million for pension obligation settlements. Adjusted pre-
tax earnings from continuing operations, a non-GAAP measure, were $60.6 million for 2015 compared to $49.2 million
for 2014. Adjusted pre-tax earnings from continuing operations for 2015 improved compared to 2014 due to additional
aircraft lease revenues and better ACMI Services aircraft utilization, offset by higher aircraft depreciation and more
employee expenses, particularly in our support services businesses.
During 2014, we offered vested, former employee participants of the qualified pension plan and vested employee
participants of the crewmembers qualified pension plan a one-time option to settle their pension benefit with the
Company through a single payment or a nonparticipating annuity contract. As a result, ABX settled $98.7 million of
pension obligations in December of 2014 funded by pension plan assets. The settlement resulted in a pre-tax charge of
$6.7 million to continuing operations.
Fleet Summary 2015 & 2014
As of December 31, 2015, ACMI Services leased 25 of its in-service aircraft internally from CAM. As of
December 31, 2015, 11 of CAM's 23 Boeing 767-200 aircraft shown in the aircraft fleet table above and four of the
seven Boeing 767-300 aircraft, were leased to DHL and operated by ABX. CAM leased the other twelve Boeing
767-200 aircraft and three Boeing 767-300 aircraft to external customers, including two Boeing 767-200 aircraft to
DHL for operation by a DHL affiliate. Aircraft fleet activity during 2015 is summarized below:
- During the first quarter, two DHL-owned Boeing 767-200 aircraft, previously leased to ABX for operation in
DHL's network, were returned to DHL.
32
- CAM placed one recently modified Boeing 767-300 freighter aircraft with an external customer in February
2015 under a multi-year lease.
- In February 2015, CAM purchased a Boeing 767-300 freighter aircraft that ABX was leasing from an external
lessor and began to lease it to ABX.
- ABX returned three Boeing 767-200 freighters to CAM, two of which were leased to external lessees in April
and the third of which was leased to another external lessee in October.
- During the second quarter, DHL began to lease directly from CAM three Boeing 767-300 aircraft that ABX
had been providing under shorter term arrangements. ABX continued to operate the aircraft.
- During the second quarter, ATI began to operate a Boeing 757 freighter that DHL leases from a third party.
- During the fourth quarter, DHL transitioned two CAM Boeing 767-200 aircraft leases to another airline in the
Middle East.
- External lessees returned two other Boeing 767-200 freighter aircraft to CAM, which leased one to another
external customer and the other aircraft to ABX during the fourth quarter of 2015.
- CAM purchased one Boeing 767-300 passenger aircraft in June and completed its modification to standard
freighter configuration in November. CAM began to lease that aircraft, which is operated by ABX, to DHL
under a multi-year lease.
- CAM purchased one Boeing 767-300 passenger aircraft in July and another one in November, which were both
being modified to standard freighter configuration as of December 31, 2015. One was subsequently leased to
an external customer in February 2016 and the other was leased to an external customer in July 2016.
As of December 31, 2014, ACMI Services leased 28 aircraft internally from CAM. As of December 31, 2014, 13
of CAM's 22 Boeing 767-200 aircraft were leased to DHL and operated by ABX. CAM leased the other nine Boeing
767-200 and two Boeing 767-300 aircraft to external airlines. Aircraft fleet activity during 2014 is summarized below:
- CAM completed the modification of one Boeing 767-300 freighter aircraft and it was available for lease until
it was placed with an external customer in February 2015 under a multi-year lease.
- CAM completed the modification of one Boeing 757 combi aircraft and leased the aircraft internally to ATI,
which deployed the aircraft for the U.S. Military.
- ABX returned two Boeing 767-200 freighter aircraft and ATI returned one Boeing 767-200 freighter aircraft
and two Boeing 767-300 freighter aircraft to CAM. CAM leased two Boeing 767-200 aircraft and two Boeing
767-300 aircraft to external customers and leased a Boeing 767-200 to ABX for peak season flying.
- Near the end of September 2014, CAM purchased two Boeing 767-300 freighter aircraft that ABX was leasing
from an external lessor and began to lease them to ABX.
- During the fourth quarter of 2014, ABX began leasing one Boeing 767-300 freighter aircraft from an external
lessor. (CAM purchased this aircraft in February 2015 and subsequently leased it to ABX.)
- Two DHL-owned Boeing 767-200 aircraft, previously leased by ABX for operation in DHL's network, were
returned to DHL.
- CAM's only Boeing 767-200 passenger aircraft was under lease to an external airline at December 31, 2014.
CAM
As of December 31, 2015, CAM had 55 freighter aircraft under lease, 25 of them were leased internally to the
Company's airlines. CAM's revenues grew $11.5 million during 2015 compared to 2014, primarily as a result of
additional aircraft leases. As of December 31, 2015 and 2014, CAM had 30 and 24 aircraft under lease to external
customers, respectively. Revenues from external customers totaled $93.4 million and $77.7 million for 2015 and 2014,
respectively. CAM's revenues from the Company's airlines totaled $84.4 million during 2015, compared to $88.6
million for 2014. Since mid-2014, we have added four Boeing 767 freighter aircraft to CAM's lease portfolio through
December 31, 2015.
33
CAM's pre-tax earnings, inclusive of an interest expense allocation, were $57.5 million and $53.2 million during
2015 and 2014, respectively. Increased earnings reflect additional external lease revenues and lower interest expense,
offset by higher depreciation expense for additional Boeing 767-300 and Boeing 757 aircraft and increased expenses
to place and support the larger fleet of Boeing aircraft.
During 2015, CAM purchased four 767-300 aircraft, one in each quarter. Two of the aircraft were in service by
the end of 2015, and two were being modified from passenger to freighter configuration. These two were later completed
and leased in February 2016 and in July 2016.
ACMI Services
As of December 31, 2015, ACMI Services included 41 in-service aircraft, including 25 leased internally from
CAM, one DHL-supplied aircraft operated by ATI and 15 CAM-owned freighter aircraft which are under lease to DHL
and operated by ABX under the restated CMI agreement.
Revenues from ACMI Services declined $6.8 million during 2015 compared with 2014 to $433.1 million. Airline
services revenues from external customers, which do not include revenues for the reimbursement of fuel and certain
operating expenses, declined $3.9 million. Lower revenues reflect fewer aircraft being operated for our customers and
contract rate changes under the restated CMI agreement with DHL compared to 2014. Billable block hours declined
2% for 2015 compared to 2014. Excluding billable block hours for DHL, block hours grew 22% for 2015 compared
to 2014. Block hours flown for the U.S. Military were up 3% compared to 2014.
ACMI Services incurred pre-tax losses of $2.7 million during 2015, compared to pre-tax losses of $12.1 million
for 2014. Excluding pension settlement charges of $6.7 million recorded during 2014, ACMI Services incurred pre-
tax losses of $2.7 million and $5.4 million in 2015 and 2014, respectively. Smaller pre-tax losses in 2015 compared
to 2014 were primarily a result of improved fleet utilization and more routes for our customers, other than DHL. Since
mid 2014, ACMI Services returned under-utilized aircraft to CAM, which subsequently leased those aircraft to external
customers.
Other Activities
External customer revenues from all other activities were $93.9 million and $72.0 million for 2015 and 2014,
respectively. Revenues from our mail and package handling services increased $13.3 million during 2015 compared
to 2014, reflecting higher contractual costs and increased mail volumes at the USPS facilities we operate, as well as
parcel handling services for the AFS trial U.S. network during the fourth quarter of 2015. Additionally, aircraft
maintenance revenues from external customers increased by $7.3 million. Revenues from aircraft maintenance can
vary among periods due to the timing of scheduled maintenance events and the completion level of work during a
period.
The pre-tax earnings from other activities decreased by $2.8 million to $8.6 million in 2015. Improved earnings
from increased revenues during 2015, were offset by lower gains from the reduction of employee benefit obligations
compared to 2014, and additional unallocated corporate expenses to support growth initiatives.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $8.6 million during 2015 compared to 2014 driven by higher
headcount for maintenance and other support services. Pension expense for continuing operations, excluding the 2014
pension settlement expense of $6.7 million, increased $4.3 million due to a lower interest rate on pension plan obligations
at the beginning of 2015 and other retiree benefit expenses increased $2.8 million during 2015 compared to 2014.
While the number of airline employees increased 4% during 2015 compared to 2014, total headcount increased 20%
during 2015 compared to 2014 as we added employees for facility maintenance, package sorting and aircraft maintenance
operations, driven by additional revenue opportunities and expanded hangar capabilities.
Fuel expense decreased by $0.9 million during 2015 compared to 2014. The average price per gallon of aviation
fuel decreased about 19% for 2015 compared to 2014. Fuel expense includes the cost of fuel to operate U.S. Military
charters, reimbursable fuel billed to DHL and other ACMI customers, as well as fuel used to position aircraft for service
and for maintenance purposes. The decrease in the average price per gallon of fuel was offset by a higher level of
customer reimbursed fuel which increased $3.7 million in 2015 compared to 2014.
34
Maintenance, materials and repairs expense increased by $4.5 million during 2015 compared to 2014. The increase
stemmed primarily from additional airframe checks and related component repairs, partially offset by lower engine
maintenance expense driven by fewer block hours flown.
Depreciation and amortization expense increased $17.2 million during 2015 compared to 2014. The increase in
depreciation expense reflects incremental depreciation expense for four Boeing 767-300 aircraft added to the in-service
fleet since mid-2014 and additional aircraft engines, capitalized heavy maintenance and navigation technology upgrades.
Travel expense increased by $0.3 million during 2015 compared to 2014. The increase reflects the higher level
of employee headcount in airline operations during 2015 compared to 2014.
Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services
and other airport services. Contracted ground and aviation services increased $5.7 million due to additional volumes
of mail and packages processed for customers compared to 2014.
Rent expense decreased by $15.0 million during 2015 compared to 2014. Rent expense decreased primarily due
to the purchase of two Boeing 767-300 aircraft in September 2014 and the return of four Boeing 767-200 aircraft which
were previously leased from an external provider during 2014.
Landing and ramp expense, which includes the cost of deicing chemicals, decreased by $0.6 million during 2015
compared to 2014. Landing and ramp fees can vary based on the flight schedules and the airports that are used in a
period.
Insurance expense decreased by $1.7 million during 2015 compared to 2014. Aircraft fleet insurance has decreased
due to fewer aircraft in ACMI operations during 2015 compared to 2014.
Other operating expenses increased by $3.2 million during 2015 compared to 2014. Other operating expenses
include professional fees, employee training, utilities, the cost of parts sold to customers and gains on the disposition
of equipment. Other operating expenses increased due to higher professional expenses to support growth initiatives,
higher taxes at certain locations, offset by larger gains from the disposition of equipment during 2015 compared to
2014.
Interest expense decreased by $2.7 million during 2015 compared to 2014. Interest expense decreased due to a
lower average debt level and interest rates on the Company's outstanding loans during 2015 compared to 2014.
The Company recorded pre-tax net gains on derivatives of $0.9 million during the year ended December 31, 2015
compared to $1.1 million during 2014, reflecting the impact of fluctuating market interest rates.
Income tax expense from continuing operations increased $3.7 million for 2015 compared to 2014, due to higher
pre-tax earnings. The Company's effective income tax rate from continuing operations was 37.4% for the year ended
December 31, 2015 as compared to 38.1% for the year ended December 31, 2014. The decrease in the effective tax
rate primarily reflects a lower ratio of non-deductible expenses to pre-tax income in 2015 compared to 2014.
Discontinued Operations
Pre-tax earnings related to the former sorting operations were $3.2 million for 2015 compared to pre-tax losses of
$3.5 million for 2014. During 2014, pension expense for discontinued operations included approximately $5.0 million
due primarily to the effects of the pension settlement charge for former sorting operation employees. Pre-tax earnings
during 2015 were primarily a result of pension credits due to the well funded status of the pension plans at the beginning
of 2015.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash generated from operating activities totaled $193.1 million, $173.7 million and $148.8 million in 2016,
2015 and 2014, respectively. Improved cash flows generated from operating activities during 2016 compared to 2015,
were driven by additional aircraft leases, which are typically paid faster than revenues related to ACMI services, and
improved fleet utilization. Cash flows generated from operating activities increased in 2015 compared to 2014 primarily
due to additional aircraft leases, which are typically paid faster than revenues related to ACMI services, additional
collections from DHL and the timing of vendor payments at the end of the year. Cash outlays for pension contributions
were $6.3 million, $6.2 million and $6.1 million in 2016, 2015 and 2014, respectively.
35
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 $264.5 million, $158.7 million and $112.2 million
in 2016, 2015 and 2014, respectively. Capital expenditures in 2016 included $185.3 million for the acquisition of
eleven Boeing 767-300 aircraft, freighter modification costs and next generation navigation modifications; $30.4 million
for required heavy maintenance; and $48.8 million for other equipment, including purchases of aircraft engines and
rotables. Capital expenditures in 2015 included $78.3 million for the acquisition of four Boeing 767-300 aircraft,
freighter modification costs and next generation navigation modifications; $45.3 million for required heavy
maintenance; and $35.1 million for other equipment. Our capital expenditures in 2014 included $61.9 million for the
acquisition of two Boeing 767-300 aircraft and next generation navigation modifications; $26.0 million for required
heavy maintenance; $7.3 million for construction of a new aircraft hangar; and $17.0 million for other equipment.
During 2014, we made an investment in West Atlantic AB for $15 million.
Cash proceeds of $12.4 million, $6.8 million and $3.6 million were received in 2016, 2015 and 2014, respectively,
for the sale of aircraft engines, airframes and parts.
Net cash provided by financing activities in 2016 was $75.1 million while net cash used for financing activities
was $34.7 million and $26.3 million in 2015 and 2014, respectively. During 2016, we drew $185.0 million from the
revolving credit facility under the Senior Credit Agreement to fund capital spending and we made debt principal
payments of $44.1 million. Our borrowing activities were necessary to acquire and modify aircraft for deployment
into air cargo markets. During 2016, we spent $63.6 million to buy 4,825,545 shares of the Company's common stock
pursuant to a share repurchase plan authorized in 2014 and amended in May 2016 by the Board of Directors to repurchase
up to $100 million of the Company's common stock.
Commitments
The table below summarizes the Company's contractual obligations and commercial commitments (in thousands)
as of December 31, 2016.
Contractual Obligations
Long term debt, including interest payments
Facility leases
Aircraft and modification obligations
Other leases
Payments Due By Period
Total
Less Than
1 Year
2-3
Years
4-5
Years
After 5
Years
$ 509,402
$
42,014
$ 56,166
$ 411,222
$
—
36,602
237,722
525
8,321
197,325
233
10,887
40,397
242
3,629
13,765
—
50
—
—
Total contractual cash obligations
$ 784,251
$ 247,893
$ 107,692
$ 414,901
$ 13,765
The long term debt bears interest at 2.77% to 7.06% per annum. For additional information about the Company's
debt obligations, see Note F of the accompanying financial statements.
The Company provides defined benefit pension plans to certain employee groups. The table above does not include
cash contributions for pension funding, due to the absence of scheduled maturities. The timing of pension and post-
retirement healthcare payments cannot be reasonably determined, except for $5.0 million expected to be funded in
2017. For additional information about the Company's pension obligations,see Note H of the accompanying financial
statements.
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. As of December 31, 2016, 3.8 million more warrants are expected to vest as AFS leases additional
aircraft. For additional information about the Company's warrant obligations, see Note B of the accompanying financial
statements.
We estimate that capital expenditures for 2017 will total $355 million of which $285 million 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 the capital expenditures from current cash
balances, future operating cash flow and the Senior Credit Agreement, the latter of which we anticipate amending for
the purpose of obtaining additional borrowing. The Company outsources a significant portion of the aircraft freighter
36
modification process to a non-affiliated third party. The modification primarily consists of the installation of a standard
cargo door and loading system. For additional information about the Company's aircraft modification obligations, see
Note G of the accompanying financial statements.
In September 2015, we entered into a joint venture agreement to establish an express cargo airline serving multiple
destinations within the Peoples Republic of China (including Hong Kong, Macau and Taiwan) and surrounding countries.
The airline will be based in mainland China with registered capital of 400 million RMB (US$63 million). It will be
established pending the receipt of required governmental approvals and plans to commence flight operations in 2017.
We expect to contribute $15 million to the joint venture during the next twelve months. We plan to offer the new airline
aircraft leases to build its fleet.
Liquidity
The Company has a Senior Credit Agreement with a consortium of banks that includes an unsubordinated term
loan of $85.6 million, net of debt issuance costs, and a revolving credit facility from which the Company has drawn
$355.0 million, net of repayments, as of December 31, 2016. On May 31, 2016, the Company executed an amendment
to the Senior Credit Agreement (the "Sixth Credit Amendment"). The Sixth Credit Amendment extended the maturity
of the term loan and revolving credit facility to May 30, 2021, increased the capacity of the Revolving credit facility
by $100.0 million to $425.0 million, increased the accordion feature such that the Company can now draw up to an
additional $100.0 million subject to the lenders' consent. Under the terms of the Senior Credit Agreement, the Company
is required to maintain collateral coverage equal to 150% of the outstanding balances of the term loan and the maximum
capacity of revolving credit facility or 175% of the outstanding balance of the term loan and the total funded revolving
credit facility, whichever is less. The minimum collateral coverage which must be maintained is 50% of the outstanding
balance of the term loan plus the revolving credit facility commitment which was $425.0 million. The revolving credit
facility has permitted additional indebtedness of $150.0 million. Each year, through May 6, 2019, the Company may
request a one year extension of the final maturity date, subject to the lenders' consent.
Under the Senior Credit Agreement, the Company is subject to covenants and warranties that are usual and
customary including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness,
as well as a total debt to EBITDA ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates
events of default including unspecified events that may have a material adverse effect on the Company. If an event of
default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement.
Additional debt or lower EBITDA may result in higher interest rates. Under the Senior Credit Agreement, interest
rates are adjusted quarterly based on the prevailing LIBOR or prime rates and a ratio of the Company's outstanding
debt level to EBITDA (earnings before interest, taxes, depreciation and amortization expenses). At the Company's
current debt-to-EBITDA ratio, the unsubordinated term loan and the revolving credit facility both bear a variable interest
rate of 2.77%.
At December 31, 2016, the Company had $16.4 million of cash balances. The Company had $61.5 million available
under the revolving credit facility, net of outstanding letters of credit, which totaled $8.5 million. We believe that the
Company's current cash balances and forecasted cash flows provided from its operating agreements, combined with
its Senior Credit Agreement, will be sufficient to fund operations, scheduled debt payments and required pension funding
for at least the next 12 months. To fund planned expenditures for expansion of our fleet, we expect to obtain additional
borrowings through our current group of lenders. If such additional borrow is not available, we may seek other sources
of funding or slow the pace of our fleet expansion during 2017.
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 December 31, 2016 and 2015, we were not involved in any material
unconsolidated SPE transactions.
37
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. We believe the following significant and critical accounting policies involve the more significant
judgments and estimates used in preparing the consolidated financial statements.
Revenue Recognition
Revenues generated from airline service agreements are typically recognized based on hours flown or the amount
of aircraft and crew resources provided during a reporting period. Certain agreements include provisions for incentive
payments based upon on-time reliability. These incentives are typically measured on a monthly basis and recorded to
revenue in the corresponding month earned. Revenues for operating expenses that are reimbursed through customer
agreements, including consumption of aircraft fuel, are generally recognized as the costs are incurred. Revenues from
charter service agreements are recognized on scheduled and non-scheduled flights when the specific flight has been
completed. Aircraft lease revenues are recognized as operating lease revenues on a straight-line basis over the term of
the applicable lease agreements. Revenues from the sale of aircraft parts and engines are recognized when the parts
are delivered. Revenues earned and expenses incurred in providing aircraft-related maintenance, repair or technical
services are recognized in the period in which the services are completed and delivered to the customer. Revenues
derived from sorting parcels are recognized in the reporting period in which the services are performed. Revenue is
not recognized until collectibility is reasonably assured.
Goodwill and Intangible Assets
We assess in the fourth quarter of each year whether the Company’s goodwill acquired in acquisitions is impaired
in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic
350-20 Intangibles—Goodwill and Other. Additional assessments may be performed on an interim basis whenever
events or changes in circumstances indicate an impairment may have occurred. Indefinite-lived intangible assets are
not amortized but are assessed for impairment annually, or more frequently if impairment indicators occur. Finite-lived
intangible assets are amortized over their estimated useful economic lives and are periodically reviewed for impairment.
The application of the goodwill impairment test requires significant judgment, including the determination of the
fair value of each reporting unit that has goodwill. We estimate the fair value using a market approach and an income
approach utilizing discounted cash flows applied to a market-derived rate of return. The market approach utilizes
market multiples from comparable publicly traded companies. The market multiples include revenues and EBITDA
(earnings before interest, taxes, depreciation and amortization). We derive cash flow assumptions from many factors
including recent market trends, expected revenues, cost structure, aircraft maintenance schedules and long term strategic
plans for the deployment of aircraft. Key assumptions under the discounted cash flow models include projections for
38
the number of aircraft in service, capital expenditures, long term growth rates, operating cash flows and market-derived
discount rates.
The first step of the goodwill impairment test requires a comparison of the fair value of the reporting unit to its
respective carrying value. If the carrying value of a reporting unit is less than its fair value, no indication of impairment
exists and a second step is not performed. If the carrying amount of a reporting unit is higher than its fair value, there
is an indication that an impairment may exist and a second step is performed. In the second step, fair values are assigned
to all of the assets and liabilities of a reporting unit, including any unrecognized intangible assets, and the implied fair
value of goodwill is calculated. If the implied fair value of goodwill is less than the recorded goodwill, an impairment
loss is recorded for the difference and charged to operations.
We have used the assistance of an independent business valuation firm in estimating an expected market rate of
return, and in the development of a market approach for CAM using multiples of EBITDA and revenues from comparable
publicly traded companies. Based on our analysis, as of December 31, 2016, CAM's fair value exceeded its carrying
value by more than 25%. The Company's key assumptions used for goodwill testing include uncertainties, including
the level of demand for cargo aircraft by shippers, the U.S. Military and freight forwarders and CAM's ability to lease
aircraft and the lease rates that will be realized. The demand for customer airlift is projected based on input from
customers, management's interface with customer planning personnel and aircraft utilization trends. Certain events or
changes in circumstances could negatively impact our key assumptions. Customer preferences for cargo aircraft may
be impacted by changes in aviation fuel prices. Key customers, including DHL and the U.S. Military, may decide that
they do not need as many aircraft as projected, or they may find alternatives.
Long-lived assets
Aircraft and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate
the carrying value of the assets may not be recoverable. Factors which may cause an impairment include termination
of aircraft from a customer's network, extended operating cash flow losses from the assets and management's decisions
regarding the future use of assets. To conduct impairment testing, we group assets and liabilities at the lowest level
for which identifiable cash is largely independent of cash flows of other assets and liabilities. For assets that are to be
held and used, impairment is recognized when the estimated undiscounted cash flows associated with an asset group
is less than the carrying value. If impairment exists, an adjustment is made to write the assets down to fair value, and
a loss is recorded as the difference between the carrying value and fair value. Fair values are determined considering
quoted market values, discounted cash flows or internal and external appraisals, as applicable.
Depreciation
Depreciation of property and equipment is provided on a straight-line basis over the lesser of an asset’s useful life
or lease term. We periodically evaluate the estimated service lives and residual values used to depreciate our property
and equipment. The acceleration of depreciation expense or the recording of significant impairment losses could result
from changes in the estimated useful lives of our assets. We may change the estimated useful lives due to a number of
reasons, such as the existence of excess capacity in our air networks, or changes in regulations grounding or limiting
the use of aircraft.
Self-Insurance
We self-insure certain claims related to workers’ compensation, aircraft, automobile, general liability and employee
healthcare. We record a liability for reported claims and an estimate for incurred claims that have not yet been reported.
Accruals for these claims are estimated utilizing historical paid claims data and recent claims trends. Changes in claim
severity and frequency could result in actual claims being materially different than the costs provided for in our results
of operations. We maintain excess claim coverage with common insurance carriers to mitigate our exposure to large
claim losses.
Contingencies
We are involved in legal matters that have a degree of uncertainty associated with them. We continually assess the
likely outcomes of these matters and the adequacy of amounts, if any, provided for these matters. There can be no
assurance that the ultimate outcome of these matters will not differ materially from our assessment of them. There also
can be no assurance that we know all matters that may be brought against us at any point in time.
39
Income Taxes
We account for income taxes under the provisions of FASB ASC Topic 740-10 Income Taxes. The objectives of
accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred
tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial
statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been
recognized in the Company’s financial statements or tax returns. Fluctuations in the actual outcome of expected future
tax consequences could materially impact the Company’s financial position or its results of operations.
The Company has significant deferred tax assets including net operating loss carryforwards (“NOL CFs”) for federal
income tax purposes which begin to expire in 2031. Based upon projections of taxable income, we determined that it
was more likely than not that the NOL CF’s will be realized prior to their expiration. Accordingly, we do not have an
allowance against these deferred tax assets at this time.
We recognize the impact of a tax position, if that position is more likely than not of being sustained on audit, based
on the technical merits of the position.
Stock Warrants
The Company’s accounting for warrants issued to a lessee is determined in accordance with the financial reporting
guidance for equity-based payments to non-employees and for financial instruments. The warrants issued to lessee are
recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligation.
The lease incentive is amortized against revenues over the duration of related aircraft leases. The unexercised warrants
are classified in liabilities and remeasured to fair value at the end of each reporting period, resulting in a non-operating
gain or loss.
Post-retirement Obligations
The Company sponsors qualified defined benefit pension plans for ABX’s flight crewmembers and other eligible
employees. The Company also sponsors non-qualified, unfunded excess plans that provide benefits to executive
management and crewmembers that are in addition to amounts permitted to be paid through our qualified plans under
provisions of the tax laws. Employees are no longer accruing benefits under any of the defined benefit pension plans.
The Company also sponsors unfunded post-retirement healthcare plans for ABX’s flight crewmembers.
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 on our post-retirement costs. In actuarially valuing
our pension obligations and determining related expense amounts, key assumptions include discount rates, expected
long term investment returns, retirement ages and mortality. Actual results and future changes in these assumptions
could result in future costs that are materially different than those recorded in our annual results of operations.
Our actuarial valuation includes an assumed long term rate of return on pension plan assets of 6.25%. Our assumed
rate of return is based on a targeted long term investment allocation of 30% equity securities, 65% fixed income securities
and 5% real estate. The actual asset allocation at December 31, 2016 was 30% equities, 64% fixed income, 5% real
estate and 1% cash. The pension trust includes $59.3 million of investments (8% of the plans' assets) whose fair values
have been estimated in the absence of readily determinable fair values. Such investments include private equity, hedge
fund investments and real estate funds. Management’s estimates are based on information provided by the fund managers
or general partners of those funds.
In evaluating our assumptions regarding expected long term investment returns on plan assets, we consider a
number of factors, including our historical plan returns in connection with our asset allocation policies, assistance from
investment consultants hired to provide oversight over our actively managed investment portfolio, and long term
inflation assumptions. The selection of the expected return rate materially affects our pension costs. Our expected long
term rate of return was 6.25% after analyzing expected returns on investment vehicles and considering our long term
asset allocation expectations. Fluctuations in long-term interest rates can have an impact on the actual rate of return.
If we were to lower our long term rate of return assumption by a hypothetical 100 basis points, expense in 2016 would
be increased by approximately $7.0 million. We use a market value of assets as of the measurement date for determining
pension expense.
40
In selecting the interest rate to discount estimated future benefit payments that have been earned to date to their
net present value (defined as the projected benefit obligation), we match the plan’s benefit payment streams to high-
quality bonds of similar maturities. The selection of the discount rate not only affects the reported funded status
information as of December 31 (as shown in Note H to the accompanying consolidated financial statements), but also
affects the succeeding year’s pension and post-retirement healthcare expense. The discount rates selected for
December 31, 2016, based on the method described above, were 4.50% for crewmembers and 4.60% for non-
crewmembers. If we were to lower our discount rates by a hypothetical 50 basis points, pension expense in 2016 would
be increased by approximately $6.5 million.
Our mortality assumptions at December 31, 2016, reflect the most recent projections released by the Actuaries
Retirement Plans Experience Committee, a committee within the Society of Actuaries, a professional association in
North America. The assumed future increase in salaries and wages is not a significant estimate in determining pension
costs because each defined benefit pension plan was frozen during 2009 with respect to additional benefit accruals.
The following table illustrates the sensitivity of the aforementioned assumptions on our pension expense, pension
obligation and accumulated other comprehensive income (in thousands):
Change in assumption
100 basis point decrease in rate of return
50 basis point decrease in discount rate
Aggregate effect of all the above changes
Discontinued Operations
Effect of change
December 31, 2016
2016
Pension
expense
Pension
obligation
Accumulated
other
comprehensive
income (pre-tax)
$
6,995
$
— $
6,464
13,459
(49,724)
(49,724)
—
49,724
49,724
In accordance with the guidance of FASB ASC Topic 205-20 Presentation of Financial Statements, a business
component whose operations are discontinued is reported as discontinued operations if the cash flows of the component
have been eliminated from the ongoing operations of the Company and represents a strategic shift that had a major
impact on the Company. The results of discontinued operations are aggregated and presented separately in the
consolidated statement of operations. FASB ASC Topic 205-20 requires the reclassification of amounts presented for
prior years to reflect their classification as discontinued operations.
New Accounting Pronouncements
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 Consolidated Financial Statements included in Part II, Item
8 of this Form 10-K.
ITEM 7A. 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 our customers.
The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for fluctuating
interest rates, for at least fifty percent of the outstanding balance of the unsubordinated term loan. Accordingly, in June
2013, the Company entered into an interest rate swap instrument. Additionally, the Company entered into another
interest rate swap in February 2016. As a result, future fluctuations in LIBOR interest rates will result in the recording
of unrealized gains and losses on interest rate derivatives held by the Company. The notional values were $43.1 million
as of December 31, 2016. See Note J in the accompanying consolidated financial statements for a discussion of our
accounting treatment for these hedging transactions.
As of December 31, 2016, the Company has $18.1 million of fixed interest rate debt and $440.6 million of variable
interest rate debt outstanding. Variable interest rate debt exposes us to differences in future cash flows resulting from
41
changes in market interest rates. Variable interest rate risk can be quantified by estimating the change in annual cash
flows resulting from a hypothetical 20% increase in interest rates. A hypothetical 20% increase or decrease in interest
rates would have resulted in a change in interest expense of approximately $2.0 million for the year ended December 31,
2016.
The debt issued at fixed interest rates is exposed to fluctuations in fair value resulting from changes in market
interest rates. Fixed interest rate risk can be quantified by estimating the increase in fair value of our long term debt
through a hypothetical 20% increase in interest rates. As of December 31, 2016, a 20% increase in interest rates would
have decreased the fair value of our fixed interest rate debt by approximately $0.1 million.
The Company is exposed to concentration of credit risk primarily through cash deposits, cash equivalents, marketable
securities and derivatives. As part of our risk management process, we monitor and evaluate the credit standing of the
financial institutions with which we do business. The financial institutions with which we do business are generally
highly rated. The Company is exposed to counterparty risk, which is the loss we could incur if a counterparty to a
derivative contract defaulted.
The Company sponsors defined benefit pension plans and post-retirement healthcare plans for certain eligible
employees. The Company's related pension expense, plans' funded status, and funding requirements are sensitive to
changes in interest rates. The funded status of the plans and the annual pension expense is recalculated at the beginning
of each calendar year using the fair value of plan assets. market-based interest rates at that point in time, as well as
assumptions for asset returns and other actuarial assumptions. Higher interest rates could result in a lower fair value
of plan assets and increased pension expense in the following years. At December 31, 2016, ABX's defined benefit
pension plans had total investment assets of $715.9 million under investment management. See Note H in the
accompanying consolidated financial statements for further discussion of these assets.
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
Page
44
45
46
47
48
49
50
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Air Transport Services Group, Inc.
Wilmington, Ohio
We have audited the accompanying consolidated balance sheets of Air Transport Services Group, Inc. and
subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations,
comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December
31, 2016. Our audits also included the financial statement schedule listed in the Table of Contents at Item 15a (2). These
financial statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2016 and 2015, and results of their operations and their cash flows for each of the
three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set
forth therein.
As discussed in Note B to the consolidated financial statements, the Company’s three principal customers account
for a substantial portion of the Company’s revenue. The Company’s financial security is dependent on its ongoing
relationship with its three principal customers existing as of December 31, 2016.
We have also audited in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 8, 2017 expressed an unqualified opinion on the Company’s internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Cincinnati, Ohio
March 8, 2017
44
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net of allowance of $1,264 in 2016 and $415 in 2015
Inventory
Prepaid supplies and other
TOTAL CURRENT ASSETS
Property and equipment, net
Other assets
Goodwill and acquired intangibles
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued salaries, wages and benefits
Accrued expenses
Current portion of debt obligations
Unearned revenue
TOTAL CURRENT LIABILITIES
Long term debt
Post-retirement obligations
Other liabilities
Stock Warrants
Deferred income taxes
TOTAL LIABILITIES
Commitments and contingencies (Note G)
STOCKHOLDERS’ EQUITY:
December 31, December 31,
2016
2015
$
16,358
77,247
19,925
19,123
132,653
1,000,992
80,099
45,586
$ 1,259,330
$
17,697
57,986
12,963
12,660
101,306
875,401
26,285
38,729
$ 1,041,721
$
$
60,704
37,044
10,324
29,306
18,407
155,785
429,415
77,713
52,542
89,441
122,532
927,428
44,417
27,454
8,107
33,740
12,963
126,681
283,918
108,194
61,913
—
96,858
677,564
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior
Participating Preferred Stock
Common stock, par value $0.01 per share; 85,000,000 shares authorized;
59,461,291 and 64,077,140 shares issued and outstanding in 2016 and 2015,
respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
—
—
595
443,416
(32,243)
(79,866)
331,902
$ 1,259,330
641
518,259
(55,731)
(99,012)
364,157
$ 1,041,721
See notes to consolidated financial statements.
45
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
REVENUES
OPERATING EXPENSES
Salaries, wages and benefits
Depreciation and amortization
Maintenance, materials and repairs
Fuel
Travel
Contracted ground and aviation services
Rent
Landing and ramp
Insurance
Other operating expenses
OPERATING INCOME
OTHER INCOME (EXPENSE)
Interest income
Net gain (loss) on financial instruments
Interest expense
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
INCOME TAX EXPENSE
EARNINGS FROM CONTINUING OPERATIONS
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES
NET EARNINGS
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations
Discontinued operations
TOTAL BASIC EARNINGS PER SHARE
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations
Discontinued operations
TOTAL DILUTED EARNINGS PER SHARE
WEIGHTED AVERAGE SHARES
Basic
Diluted
$
$
$
$
$
$
Year Ended December 31
2015
619,264
2016
768,870
$
$
2014
589,592
231,667
135,496
105,735
87,134
20,048
57,491
11,625
13,455
4,456
38,015
705,122
63,748
131
(18,107)
(11,318)
(29,294)
34,454
(13,394)
21,060
2,428
181,785
125,443
96,044
52,615
18,007
18,983
11,677
9,727
3,645
28,548
546,474
72,790
85
920
(11,232)
(10,227)
62,563
(23,408)
39,155
2,067
173,226
108,254
91,528
53,521
17,662
13,245
26,650
10,305
5,304
25,372
525,067
64,525
92
1,096
(13,937)
(12,749)
51,776
(19,702)
32,074
(2,214)
23,488
$
41,222
$
29,860
0.34
0.04
0.38
0.33
0.04
0.37
$
$
$
$
0.61
0.03
0.64
0.60
0.03
0.63
$
$
$
$
0.50
(0.04)
0.46
0.49
(0.03)
0.46
61,330
62,994
64,242
65,127
64,253
65,211
See notes to consolidated financial statements.
46
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years Ended December 31
2015
2014
2016
NET EARNINGS
OTHER COMPREHENSIVE INCOME (LOSS):
Defined Benefit Pension
Defined Benefit Post-Retirement
Gains and Losses on Derivatives
Foreign Currency Translation
$
23,488
$
41,222
$
29,860
20,214
(16,111)
(986)
—
(82)
315
(4)
(336)
(50,119)
(1,875)
(5)
(1,059)
TOTAL COMPREHENSIVE INCOME (LOSS), net of tax
$
42,634
$
25,086
$
(23,198)
See notes to consolidated financial statements.
47
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
OPERATING ACTIVITIES:
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization
Pension and post-retirement
Deferred income taxes
Amortization of stock-based compensation
Amortization of DHL promissory note
Net (gain) loss on financial instruments
Changes in assets and liabilities:
Accounts receivable
Inventory and prepaid supplies
Accounts payable
Unearned revenue
Accrued expenses, salaries, wages, benefits and other liabilities
Pension and post-retirement assets
Other
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES:
Capital expenditures
Proceeds from property and equipment
Acquisitions and investments in businesses
NET CASH (USED IN) INVESTING ACTIVITIES
FINANCING ACTIVITIES:
Principal payments on long term obligations
Proceeds from borrowings
Purchase of common stock
Withholding taxes paid for conversion of employee stock awards
Funding for hangar construction
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
75,061
NET (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amount capitalized
Federal alternative minimum and state income taxes paid
SUPPLEMENTAL NON-CASH INFORMATION:
Debt extinguished
Accrued capital expenditures
$
$
$
$
$
See notes to consolidated financial statements.
48
Years Ended December 31
2015
2014
2016
$
21,060
2,428
$
39,155
2,067
$
32,074
(2,214)
140,002
11,532
13,807
3,165
—
18,107
(9,597)
(5,269)
5,603
(3,216)
5,678
(11,819)
1,611
193,092
125,443
6,920
23,691
2,454
(1,550)
(920)
(14,410)
(3,896)
4,424
(1,116)
8,375
(16,098)
470
175,009
108,254
8,492
17,757
2,924
(6,200)
(1,096)
9,582
(4,164)
(803)
1,148
344
(14,662)
(1,711)
149,725
(264,477)
12,380
(17,395)
(269,492)
(158,714)
6,841
—
(151,873)
(112,184)
3,602
(15,000)
(123,582)
(44,069)
185,000
(63,570)
(2,300)
—
(1,339)
17,697
16,358
10,738
923
$
$
$
(69,344)
45,000
(10,345)
(1,310)
—
(35,999)
(12,863)
30,560
17,697
10,748
870
— $
$
9,118
1,550
7,033
(79,221)
45,000
—
(940)
7,879
(27,282)
(1,139)
31,699
30,560
13,576
604
6,200
7,648
$
$
$
$
$
AIR TRANSPORT SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
BALANCE AT JANUARY 1, 2014
Stock-based compensation plans
Grant of restricted stock
Issuance of common shares, net of
withholdings
Forfeited restricted stock
Tax benefit from common stock
compensation
Amortization of stock awards and
restricted stock
Common Stock
Number
64,618,305
Amount
646
$
Additional
Paid-in
Capital
$ 524,953
196,000
49,545
(8,900)
2
1
—
(2)
(939)
—
(267)
2,924
Total comprehensive income (loss)
BALANCE AT DECEMBER 31, 2014 64,854,950
Stock-based compensation plans
$
649
$ 526,669
$
Grant of restricted stock
Issuance of common shares, net of
withholdings
Forfeited restricted stock
Purchase of common stock
Tax benefit from common stock
compensation
Amortization of stock awards and
restricted stock
170,800
137,457
(6,900)
(1,079,167)
2
1
—
(11)
(2)
(1,311)
—
(10,334)
783
2,454
Total comprehensive income (loss)
BALANCE AT DECEMBER 31, 2015 64,077,140
Stock-based compensation plans
$
641
$ 518,259
$
Grant of restricted stock
Issuance of common shares, net of
withholdings
Forfeited restricted stock
Purchase of common stock
Tax benefit from common stock
compensation
Warrants granted to customer
Amortization of stock awards and
restricted stock
171,500
42,796
(4,600)
(4,825,545)
2
—
—
(48)
(2)
(2,300)
—
(63,522)
1,087
(13,271)
3,165
Total comprehensive income
BALANCE AT DECEMBER 31, 2016 59,461,291
$
595
$ 443,416
$
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
(126,813) $
$
Total
(29,818) $ 368,968
—
(938)
—
(267)
29,860
(96,953) $
2,924
(53,058)
(23,198)
(82,876) $ 347,489
—
(1,310)
—
(10,345)
783
41,222
(55,731) $
2,454
(16,136)
25,086
(99,012) $ 364,157
—
(2,300)
—
(63,570)
1,087
(13,271)
23,488
(32,243) $
3,165
19,146
42,634
(79,866) $ 331,902
See notes to consolidated financial statements.
49
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations
Air Transport Services Group, Inc. is a holding company whose principal subsidiaries include an aircraft leasing
company and two U.S. certificated airlines. The Company provides airline operations, aircraft leases, aircraft
maintenance and other support services primarily to the cargo transportation and package delivery industries. Through
the Company's subsidiaries, it offers a range of complementary services to delivery companies, freight forwarders,
airlines and government customers.
The Company's leasing subsidiary, Cargo Aircraft Management, Inc. (“CAM”), leases aircraft to each of the
Company's airlines as well as to non-affiliated airlines and other lessees. The airlines, ABX Air, Inc. (“ABX”) and Air
Transport International, Inc. (“ATI”), each have the authority, through their separate U.S. Department of Transportation
("DOT") and Federal Aviation Administration ("FAA") certificates, to transport cargo worldwide. ATI provides
passenger transportation, primarily to the U.S. Military, using "combi" aircraft, which are certified to carry passengers
as well as cargo on the main deck.
The Company serves a base of concentrated customers who typically have a diverse line of international cargo
traffic. The Company provides aircraft and airline operations to its customers, typically under contracts providing for
a combination of aircraft, crews, maintenance and insurance ("ACMI") services. In addition to its airline operations
and aircraft leasing services, the Company sells aircraft parts, provides aircraft maintenance and modification services,
equipment maintenance services, and operates mail and package sorting facilities.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Air Transport Services Group, Inc.
and its wholly-owned subsidiaries. Investments in an affiliate in which the Company has significant influence but does
not exercise control are accounted for using the equity method of accounting. Using the equity method, the Company’s
share of a nonconsolidated affiliate's income or loss is recognized in the consolidated statement of earnings and
cumulative post-acquisition changes in the investment are adjusted against the carrying amount of the investment.
Inter-company balances and transactions are eliminated. The financial statements of the Company are prepared in
accordance with accounting principles generally accepted in the United States of America ("GAAP").
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial statements. Estimates and assumptions are used
to record allowances for uncollectible amounts, self-insurance reserves, spare parts inventory, depreciation and
impairments of property, equipment, goodwill and intangibles, stock warrants, post-retirement obligations, income
taxes, contingencies and litigation. Changes in estimates and assumptions may have a material impact on the
consolidated financial statements.
Cash and Cash Equivalents
The Company classifies short-term, highly liquid investments with maturities of three months or less at the time
of purchase as cash and cash equivalents. These investments, consisting of money market funds, are recorded at cost,
which approximates fair value. Substantially all deposits of the Company’s cash are held in accounts that exceed
federally insured limits. The Company deposits cash in common financial institutions which management believes are
financially sound.
Accounts Receivable and Allowance for Uncollectible Accounts
The Company's accounts receivable is primarily due from its significant customers (see Note B), other airlines, the
U.S. Postal Services ("USPS"), delivery companies and freight forwarders. The Company performs a quarterly
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evaluation of the accounts receivable and the allowance for uncollectible accounts by reviewing specific customers'
recent payment history, growth prospects, financial condition and other factors that may impact a customer's ability to
pay. The Company establishes an allowance for uncollectible accounts for probable losses due to a customer's potential
inability or unwillingness to make contractual payments. Account balances are written off against the allowance when
the Company ceases collection efforts.
Inventory
The Company’s inventory is comprised primarily of expendable aircraft parts and supplies used for aircraft
maintenance. Inventory is generally charged to expense when issued for use on a Company aircraft. The Company
values its inventory of aircraft parts and supplies at weighted-average cost and maintains a related obsolescence reserve.
The Company records an obsolescence reserve on a base stock of inventory for each fleet type. The amortization of
base stock for the obsolescence reserve corresponds to the expected life of each fleet type. Additionally, the Company
monitors the usage rates of inventory parts and segregates parts that are technologically outdated or no longer used in
its fleet types. Slow moving and segregated items are actively marketed and written down to their estimated net
realizable values based on market conditions.
Management analyzes the inventory reserve for reasonableness at the end of each quarter. That analysis includes
consideration of the expected fleet life, amounts expected to be on hand at the end of a fleet life, and recent events and
conditions that may impact the usability or value of inventory. Events or conditions that may impact the expected life,
usability or net realizable value of inventory include additional aircraft maintenance directives from the FAA, changes
in DOT regulations, new environmental laws and technological advances.
Goodwill and Intangible Assets
The Company assesses, during the fourth quarter of each year, the carrying value of goodwill. The first step of
the assessment is the estimation of fair value of each reporting unit, which is compared to the carrying value. If step
one indicates that impairment potentially exists, a second step is performed to measure the amount of impairment, if
any. Goodwill impairment exists when the implied fair value of goodwill is less than its carrying value. The Company
also conducts impairment assessments of goodwill, indefinite-lived intangible assets and finite-lived intangible assets
whenever events or changes in circumstance indicate an impairment may have occurred. Finite-lived intangible assets
are amortized over their estimated useful economic lives.
Property and Equipment
Property and equipment held for use is stated at cost, net of any impairment recorded. The cost and accumulated
depreciation of disposed property and equipment are removed from the accounts with any related gain or loss reflected
in earnings from operations.
Depreciation of property and equipment is provided on a straight-line basis over the lesser of the asset’s useful life
or lease term. Depreciable lives are summarized as follows:
Boeing 767 and 757 aircraft and flight equipment
Ground equipment
Leasehold improvements, facilities and office equipment
10 to 18 years
3 to 10 years
3 to 25 years
The Company periodically evaluates the useful lives, salvage values and fair values of property and equipment.
Acceleration of depreciation expense or the recording of significant impairment losses could result from changes in
the estimated useful lives of assets due to a number of reasons, such as excess aircraft capacity or changes in regulations
governing the use of aircraft.
Aircraft and other long-lived assets are tested for impairment when circumstances indicate the carrying value of
the assets may not be recoverable. To conduct impairment testing, the Company groups assets and liabilities at the
lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. For
assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated
with the asset group is less than the carrying value. If impairment exists, an adjustment is made to write the assets
down to fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are
51
determined considering quoted market values, discounted cash flows or internal and external appraisals, as applicable.
For assets held for sale, impairment is recognized when the fair value less the cost to sell the asset is less than the
carrying value.
The Company’s accounting policy for major airframe and engine maintenance varies by subsidiary and aircraft
type. The costs for ABX's Boeing 767-200 airframe maintenance, which is the majority of the Company's aircraft fleet,
are expensed as they are incurred. The costs of major airframe maintenance for the Company's other aircraft are
capitalized and amortized over the useful life of the overhaul. Many of the Company's General Electric CF6 engines
that power the Boeing 767-200 aircraft are maintained under “power by the hour” and "power by the cycle" agreements
with an engine maintenance provider. Under these agreements, the engines are maintained by the service provider for
a fixed fee per flight hour and cycle; accordingly, the cost of engine maintenance is generally expensed as flights occur.
Maintenance for the airlines’ other aircraft engines, including Boeing 767-300 and Boeing 757 aircraft, are typically
contracted to service providers on a time and material basis and the costs of those engine overhauls are capitalized and
amortized over the useful life of the overhaul.
In the event the Company leases aircraft from external lessors, the Company may be required to make periodic
payments to the lessor under certain aircraft leases for future maintenance events such as engine overhauls and major
airframe maintenance. Such payments are recorded as deposits until drawn for qualifying maintenance costs. The
maintenance costs are expensed or capitalized in accordance with the airline's accounting policy for major airframe
and engine maintenance. The Company evaluates at the balance sheet date, whether it is probable that an amount on
deposit will be returned by the lessor to reimburse the costs of the maintenance activities. When an amount on deposit
is less than probable of being returned, it is recognized as additional maintenance expense.
Capitalized Interest
Interest costs incurred while aircraft are being modified are capitalized as an additional cost of the aircraft until the
date the asset is placed in service. Capitalized interest was $1.3 million, $0.2 million and $0.1 million for the years
ended December 31, 2016, 2015 and 2014, respectively.
Discontinued Operations
A business component whose operations are discontinued is reported as discontinued operations if the cash flows
of the component have been eliminated from the ongoing operations of the Company and represents a strategic shift
that had a major impact on the Company. The results of discontinued operations are aggregated and presented separately
in the consolidated statements of operations.
Self-Insurance
The Company is self-insured for certain workers’ compensation, employee healthcare, automobile, aircraft, and
general liability claims. The Company maintains excess claim coverage with common insurance carriers to mitigate
its exposure to large claim losses. The Company records a liability for reported claims and an estimate for incurred
claims that have not yet been reported. Accruals for these claims are estimated utilizing historical paid claims data and
recent claims trends. Other liabilities included $18.7 million and $23.3 million at December 31, 2016 and December 31,
2015, respectively, for self-insured reserves. Changes in claim severity and frequency could result in actual claims
being materially different than the costs accrued.
Pension and Post-Retirement Benefits
The funded status of the Company's defined benefits pension or post-retirement health care plan is the difference
between the fair value of plan assets and the accumulated benefit obligations to plan participants. The over funded or
underfunded status of a plan is reflected in the consolidated balance sheet as an asset for over funded plans, or as a
liability for underfunded plans.
The funded status is ordinarily remeasured annually at year end using the fair value of plans assets, market based
discount rates and actuarial assumptions. Changes in the funded status of the plans as a result of remeasuring plan
assets and benefit obligations, are recorded to accumulated comprehensive loss and amortized into operating expense
using a corridor approach. The Company's corridor approach amortizes variances in plan assets and benefit obligations
52
that are a result of the previous measurement assumptions into earnings when the net deferred variances exceed 10%
of the greater of the market value of plan assets or the benefit obligation at the beginning of the year. The amount in
excess of the corridor is amortized over the average remaining service period to retirement date of active plan participants.
Costs adjustments for plan amendments are also deferred and amortized over the expected working life or the life
expectancy of plan participants.
Security and Maintenance Deposits
The Company's customer leases typically obligate the lessee to maintain the Company's aircraft in compliance with
regulatory standards for flight and aircraft maintenance. The Company may require an aircraft lessee to pay a security
deposit or provide a letter of credit until the expiration of the lease. Additionally, the Company's leases may require a
lessee to make monthly payments toward future expenditures for scheduled heavy maintenance events. The Company
records security and maintenance deposits in other liabilities. If a lease requires monthly maintenance payments, the
Company is typically required to reimburse the lessee for costs they incur for scheduled heavy maintenance events
after completion of the work and receipt of qualifying documentation. Reimbursements to the lessee are recorded
against the previously paid maintenance deposits.
Income Taxes
Income taxes have been computed using the asset and liability method, under which deferred income taxes are
provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets
and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. A valuation allowance
against net deferred tax assets is recorded when it is more likely than not that such assets will not be fully realized. Tax
credits are accounted for as a reduction of income taxes in the year in which the credit originates. All deferred income
taxes are classified as noncurrent in the statement of financial position.
The Company recognizes the benefit of a tax position taken on a tax return, if that position is more likely than not
of being sustained on audit, based on the technical merits of the position. An uncertain income tax position is not
recognized if it has a less than a 50% likelihood of being sustained. The Company recognizes interest and penalties
accrued related to uncertain tax positions in operating expense.
Purchase of Common Stock
The Company's Board of Directors has authorized management to repurchase outstanding common stock of the
Company from time to time on the open market or in privately negotiated transactions. The authorization does not
require the Company to repurchase a specific number of shares and the Company may terminate the repurchase program
at any time. Upon the retirement of common stock repurchased, the excess purchase price over the par value for retired
shares of common stock is recorded to additional paid-in-capital.
Stock Warrants
The Company’s accounting for warrants issued to a lessee is determined in accordance with the financial reporting
guidance for equity-based payments to non-employees and for financial instruments. The warrants issued to lessee are
recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligation.
The lease incentive is amortized against revenues over the duration of related aircraft leases. The unexercised warrants
are classified in liabilities and remeasured to fair value at the end of each reporting period, resulting in a non-operating
gain or loss.
Comprehensive Income
Comprehensive income includes net earnings and other comprehensive income or loss. Other comprehensive
income or loss results from certain changes in the Company’s liabilities for pension and other post retirement benefits,
gains and losses associated with interest rate hedging instruments and fluctuations in currency exchange rates related
to the foreign affiliate.
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Fair Value Information
Assets or liabilities that are required to be measured at fair value are reported using the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic
820-10 Fair Value Measurements and Disclosures establishes three levels of input that may be used to measure fair
value:
•
•
•
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities.
Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities. Level 3 assets and liabilities include items where the determination
of fair value requires significant management judgment or estimation.
Revenue Recognition
Aircraft lease revenues are recognized as operating lease revenues on a straight-line basis over the term of the
applicable lease agreements. Revenues generated from airline service agreements are typically recognized based on
hours flown or the amount of aircraft and crew resources provided during a reporting period. Certain agreements
include provisions for incentive payments based upon on-time reliability. These incentives are typically measured on
a monthly basis and recorded to revenue in the corresponding month earned. Revenues for operating expenses that are
reimbursed through airline service agreements, including consumption of aircraft fuel, are generally recognized as the
costs are incurred. Revenues from charter service agreements are recognized on scheduled and non-scheduled flights
when the specific flight has been completed. Revenues from the sale of aircraft parts and engines are recognized when
the parts are delivered. Revenues earned and expenses incurred in providing aircraft-related maintenance, repair or
technical services are recognized in the period in which the services are completed and delivered to the customer.
Revenues derived from sorting parcels are recognized in the reporting period in which the services are performed.
Revenue is not recognized until collectibility is reasonably assured.
New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-09, "Improvements to Employee Share-Based Payment Accounting," (“ASU 2016-09”) which addresses several
aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU
2016-9 is effective for annual reporting periods beginning after December 15, 2016 and earlier adoption is permitted.
The new standard requires that an entity recognize all excess tax benefits and tax deficiencies as income tax expense
or benefit in the income statement as discrete items in the reporting period in which they occur. Under the previous
standard, excess tax benefits are recognized in additional paid-in capital and tax deficiencies are recognized either as
an offset to accumulated excess tax benefits, or in the income statement.
The Company elected to early adopt this standard in the quarter ended March 31, 2016. The impact of the early
adoption resulted in the Company recording a tax benefit of $0.7 million within income tax expense for the three months
ended March 31, 2016 related to the excess tax benefit on stock incentive awards that settled during the quarter ended
March 31, 2016. The tax benefit for the year ended December 31, 2016 was $1.2 million. Prior to adoption of ASU
2016-09, this amount would have been recorded as an increase of additional paid-in capital. The tax benefit for the
year ended December 31, 2015 would have been $0.8 million.
The Company accounts for forfeitures as they occur. Under ASU 2016-09, excess tax benefits related to employee
share-based payments are not reclassified from operating activities to financing activities in the statement of cash flows.
The Company applied the effect of ASU 2016-09 to the presentation of excess tax benefits in the statement of cash
flows, prospectively. Under ASU 2016-09, cash paid when withholding shares for tax withholding purposes are
classified as a financing activity in the statement of cash flows. The Company has applied the effect of this change on
54
prior period statements of cash flows retrospectively. The Company excluded the excess tax benefits from the assumed
proceeds available to repurchase shares in the computation of our diluted earnings per share for the year ended December
31, 2016. This increased the diluted weighted average common shares outstanding by 141,364 shares.
In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers, Identifying
Performance Obligations and Licensing" clarify the accounting under ASU 2014-09 for licenses of intellectual property
and for identifying distinct performance obligations in a contract.
ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to
depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive
in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount,
timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and
changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective
for annual reporting periods beginning after December 15, 2017 with earlier adoption permitted for reporting periods
beginning after December 15, 2016. ASU 2014-09 may be applied using either a full retrospective approach, under
which all years included in the financial statements will be presented under the revised guidance, or a modified
retrospective approach, under which financial statements will be prepared under the revised guidance for the year of
adoption, but not for prior years. Under the latter method, entities would recognize a cumulative catch-up adjustment
to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity,
and disclose all line items in the year of adoption as if they were prepared under the old revenue guidance.
The Company is currently evaluating the methods of adoption allowed by the new standard and the effect the standard
is expected to have on the Company's consolidated financial position, results of operations or cash flows and related
disclosures. The evaluation includes each of the five steps identified in the ASU 2014-09 revenue recognition model,
which are as follows: 1) identify the contract with the customer; 2) identify the performance obligations in the contract;
3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize
revenue when (or as) performance obligations are satisfied. The Company's lease contracts within the scope of ASC
840, Leases, are specifically excluded from ASU 2014-09. As the Company completes its evaluation of this new
standard, new information may arise that could change the Company's current understanding of the impact to revenue
and expense recognized. Additionally, industry activities and other guidance provided by regulators, standards setters,
and the accounting profession may affect the Company’s assessment and implementation plans.
In April 2015, the FASB issued ASU, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs" ("ASU 2015-03"). ASU 2015-03 requires debt issuance costs related to a
recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt
liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not
affected by ASU 2015-03. The amendments in ASU 2015-03 are effective retrospectively for fiscal years, and interim
periods within those years, beginning after December 15, 2015. As a result of the adoption of ASU 2015-03, the amounts
of debt issuance costs were reclassified on the Company's balance sheets from other assets to long term debt and were
not significant.
In July 2015, FASB issued ASU "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU
2015-11"). ASU 2015-11 more closely aligns the measurement of inventory in GAAP with the measurement of inventory
in International Financial Reporting Standards ("IFRS"). The amendment in ASU 2015-11 is for fiscal years beginning
after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendment
should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting
period. The Company does not expect the impact of adopting ASU 2015-11 to be material to the Company's financial
statements and related disclosures.
In January 2016, the FASB issued an Exposure Draft of a proposed ASU, "Compensation - Retirement Benefits
(Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost."
The proposed ASU would require an employer to report the service cost component of retiree benefits in the same line
item or items as other compensation costs arising from services rendered by the pertinent employees during the period.
The other components of net benefit cost would be presented in the income statement separately from the service cost
component and outside a subtotal of income from operations, if one is presented. If adopted, the proposed standard
55
would impact the Operating Income subtotal as reported in the Company's Consolidated Statement of Operations by
excluding interest expense and investment returns components of retiree benefit expenses.
In February 2016, the FASB issued ASU "Leases (Topic 842)" ("ASU 2016-02"), which will require the recognition
of right to-use-assets and lease liabilities for leases previously classified as operating leases by lessees. The standard
will take effect for annual reporting periods beginning after December 15, 2018, including interim reporting periods.
Early application will be permitted for all entities. In addition, the FASB has decided to require a lessee to apply a
modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements (the date of initial application). The modified
retrospective approach would not require any transition accounting for leases that expired before the date of initial
application. The FASB decided to not permit a full retrospective transition approach. The Company is currently
evaluating the impact of the standard on its financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 clarifies how cash receipts and cash payments in
certain transactions are presented and classified in the statement of cash flows. The effective date of this update is for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption
permitted. The update requires retrospective application to all periods presented but may be applied prospectively if
retrospective application is impracticable. The Company is currently evaluating the impact of the adoption of the
standard on the its financial statements and disclosures.
In November 2016, the FASB issued ASU "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU
2016-18"). ASU 2016-18 requires that the statement of cash flows explain the changes in the combined total of
restricted and unrestricted cash balance. Amounts generally described as restricted cash or restricted cash equivalents
will be combined with unrestricted cash and cash equivalents when reconciling the beginning and end of period balances
on the statement of cash flows. Further, the ASU requires a reconciliation of balances from the statement of cash flows
to the balance sheet in situations in which the balance sheet includes more than one line item of cash, cash equivalents,
and restricted cash. Companies will also be disclosing the nature of the restrictions. ASU 2016-18 is effective for
financial statements issued for fiscal years beginning after December 15, 2017. The Company is currently evaluating
the impact of the standard on its financial statements and disclosures.
In January 2017, the FASB issued ASU "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 will simplify the subsequent measurement of goodwill by
eliminating the second step from the goodwill impairment test. ASU 2017-04 would require applying a one-step
quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit's carrying value
over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not
amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 are effective
for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The
Company is currently evaluating the impact of the standard on its financial statements and disclosures.
NOTE B—SIGNIFICANT CUSTOMERS
DHL
The Company's largest customer is DHL Network Operations (USA), Inc. and its affiliates ("DHL"). The Company
has had long term contracts with DHL since August 2003. Revenues from continuing operations performed for DHL
were approximately 34%, 46% and 55% of the Company's consolidated revenues from continuing operations for the
years ended December 31, 2016, 2015 and 2014, respectively. The Company’s balance sheets include accounts
receivable with DHL of $7.3 million and $9.8 million as of December 31, 2016 and December 31, 2015, respectively.
The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under
a separate crew, maintenance and insurance (“CMI”) agreement, the Company operates Boeing 767 aircraft that DHL
leases from the Company. Pricing for services provided through the CMI agreement is based on pre-defined fees,
scaled for the number of aircraft operated and the number of flight crews provided to DHL for its U.S. network. The
Company provides DHL with scheduled maintenance services for aircraft that DHL leases. The Company also provides
Boeing 767 and Boeing 757 air cargo transportation services for DHL through additional ACMI agreements in which
56
the Company provides the aircraft, crews, maintenance and insurance under a single contract. Revenues generated
from the ACMI agreements are typically based on hours flown. The Company also provides ground equipment, such
as power units, air starts and related maintenance services to DHL under separate agreements.
Amazon
During September 2015, the Company began to operate a trial air network for Amazon Fulfillment Services, Inc.
(“AFS”), a subsidiary of Amazon.com, Inc. (“Amazon”). The network grew to five freighter aircraft through first
quarter of 2016 and included services for cargo handling and logistical support. On March 8, 2016, the Company entered
into an Air Transportation Services Agreement (the “ATSA”) with AFS pursuant to which CAM will lease 20 Boeing
767 freighter aircraft to AFS, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing
767-300 freighter aircraft for a term of seven years. The ATSA, which has a term of five years, also provides for the
operation of those aircraft by the Company’s airline subsidiaries, and the performance of hub and gateway services by
the Company's subsidiary LGSTX Services Inc. ("LGSTX"). CAM owns all of the Boeing 767 aircraft that are or will
be leased and operated under the ATSA. The ATSA became effective on April 1, 2016. As of December 31, 2016, the
Company has leased 14 aircraft to AFS and is obligated to lease six more Boeing 767-300 aircraft to AFS during 2017
to meets its 20 aircraft commitment.
Revenues from continuing operations performed for AFS comprised approximately 29% and 5% of the Company's
consolidated revenues from continuing operations for the years ending December 31, 2016 and 2015, respectively. The
Company’s balance sheets include accounts receivable with AFS of $24.6 million and $10.5 million as of December 31,
2016 and December 31, 2015, respectively.
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement
and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants
in three tranches which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common
shares as described below. The first tranche of warrants, issued upon execution of the Investment Agreement, grants
Amazon the right to purchase approximately 12.81 million ATSG common shares, with the right to purchase 7.69
million common shares which vested upon issuance on March 8, 2016 and the right to purchase the remaining 5.12
million common shares, vesting as the Company delivers additional aircraft leased under the ATSA, or as the Company
achieves specified revenue targets in connection with the ATSA. The second tranche of warrants grants Amazon a right
to purchase approximately 1.59 million ATSG common shares, and will be issued on March 8, 2018. The third tranche
of warrants will be issued on September 8, 2020. The third tranche of warrants will grant Amazon the right to purchase
such additional number of ATSG common shares as is necessary to bring Amazon’s ownership to 19.9% of the
Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances
and repurchases by the Company following the date of the Investment Agreement and after giving effect to the warrants
granted. The exercise price of the warrants will be $9.73 per share, which represents the closing price of ATSG’s
common shares on February 9, 2016. Each of the three tranches of warrants will be exercisable in accordance with its
terms through March 8, 2021. The Company anticipates making available the common shares required for the underlying
warrants through a combination of share repurchases and the issuance of additional shares.
The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance
for equity-based payments to non-employees and for financial instruments. The warrants issued to Amazon as of March
8, 2016, were recorded to stockholders equity, having a fair value of $4.89 per share. At that time, the fair value of
the 7.69 million vested warrants issued to Amazon was recorded as a lease incentive asset and is being amortized against
revenues over the duration of the aircraft leases. On May 12, 2016, the Company’s stockholders approved an amendment
to the Certificate of Incorporation of the Company at the annual meeting of stockholders to increase the number of
authorized common shares and to approve the warrants in full as required under the rules of the Nasdaq Global Select
Market. The stockholders' approval enabled features of the warrants that required the vested warrants of the first tranche
and the warrants of the second and third tranches to be classified as financial instruments as of May 12, 2016.
Accordingly, the fair value of those warrants was measured and classified in liabilities on that date. Since May 12,
2016, 1.3 million additional warrants vested in conjunction with the execution of two aircraft leases. As of December
31, 2016, the Company's liabilities reflected 11.06 million warrants having a fair value of $8.09 per share. During
2016, the re-measurements of the warrants to fair value resulted in a non-operating loss of $19.1 million before the
effect of income taxes. As of December 31, 2016, an additional 3.8 million warrants are expected to vest as AFS leases
additional aircraft from the Company.
57
The Company's earnings in future periods will be impacted by the number of warrants granted, the re-measurements
of warrant fair value, amortizations of the lease incentive asset and the related income tax effects. For income tax
calculations, the value and timing of related tax deductions will differ from the guidance described above for financial
reporting.
U.S. Military
A substantial portion of the Company's revenues are also derived from the U.S. Military. The U.S. Military awards
flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from
services performed for the U.S. Military were approximately 12%, 16% and 16% of the Company's total revenues from
continuing operations for the years ended December 31, 2016, 2015 and 2014, respectively. The Company's balance
sheets included accounts receivable with the U.S. Military of $7.0 million and $9.7 million as of December 31, 2016
and December 31, 2015, respectively.
NOTE C—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS
As of December 31, 2016, 2015 and 2014, the goodwill amount for CAM was retested for impairment. To perform
the first step of the goodwill impairment test, the Company determined the fair value of CAM using industry market
multiples and discounted cash flows utilizing a market-derived rate of return (level 3 fair value inputs). The goodwill
included in the CAM segment was not impaired.
On December 30, 2016, the Company purchased 100% of the outstanding stock of Pemco World Air Inc., ("Pemco")
for cash consideration in a debt-free acquisition. Pemco offers aircraft maintenance, repair, and overhaul services as
well as aircraft modification services to airlines. The Company intends to operate Pemco as a division of its existing
aircraft maintenance businesses and it is expected to help grow the Company's revenues. The purchase price has been
allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair
values at the date of acquisition. The excess purchase price over the estimated fair value of net assets acquired was
recorded as goodwill and reflects the strategic value of marketing Pemco's aircraft conversion capabilities and current
aircraft hangar operations with the Company's air transportation solutions. Identified intangible assets include
Supplemental Type Certificates ("STCs") granting approval by FAA for Pemco to market and complete certain aircraft
modifications. The Company is in process of refining its estimates of certain assets including goodwill and intangible
assets, therefore the allocation of purchase price is preliminary at this time.
The carrying amounts of goodwill are as follows (in thousands):
Carrying value as of December 31, 2014
Carrying value as of December 31, 2015
Acquisition of Pemco
Carrying value as of December 31, 2016
CAM
All Other
Total
$
$
$
34,395
34,395
—
34,395
$
$
$
— $
— $
2,738
2,738
$
34,395
34,395
2,738
37,133
The Company's acquired intangible assets are as follows (in thousands):
Carrying value as of December 31, 2014
Amortization
Carrying value as of December 31, 2015
Acquisition of Pemco
Amortization
Carrying value as of December 31, 2016
Airline
Amortizing
Certificates
Intangibles
Total
$
$
$
3,000
—
3,000
$
$
—
—
3,000
$
1,615
(281)
1,334
4,400
(281)
5,453
$
$
$
4,615
(281)
4,334
4,400
(281)
8,453
58
The airline certificates have an indefinite life and therefore are not amortized. The Company recorded intangible
amortization expense of $0.3 million, $0.3 million and $0.3 million for the years ending December 31, 2016, 2015 and
2014, respectively. The Company amortizes finite-lived intangibles assets, including customer relationship and STC
intangibles, over 4 to 7 years. Estimated amortization expense for the next five years is $1.2 million, $1.2 million, $1.2
million, $1.1 million and $0.3 million.
In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden
("West"). West, through its two airlines, Atlantic Airlines Ltd. and West Air Sweden AB, operates a fleet of aircraft on
behalf of European regional mail carriers and express logistics providers. The airlines operate a combined fleet of
British Aerospace ATPs, Bombardier CRJ-200-PFs, and Boeing 767 and 737 aircraft. West leases three Boeing 767
aircraft from the Company. The Company’s carrying value of West was $9.9 million and $13.1 million at December
31, 2016 and 2015, respectively, including $5.5 million of excess purchase price over the Company's fair value of
West's nets assets in January of 2014. The carrying value is reflected in “Other Assets” in the Company’s consolidated
balance sheets as of December 31, 2016 and 2015.
Stock warrants issued to a lessee (see Note B) as an incentive are recorded as a lease incentive asset using their
fair value at the time that the lessee has met its performance obligation and amortized against revenues over the duration
of related aircraft leases. The Company's lease incentive granted to the lessee was as follows (in thousands):
Carrying value as of December 31, 2015
Warrants granted
Amortization
Carrying value as of December 31, 2016
Lease
Incentive
$
$
—
59,236
(4,506)
54,730
The lease incentive began to amortize in April 2016, with the commencement of certain aircraft leases. Based on
vested warrants as of December 31, 2016, the Company expects to record amortization, as a reduction to the lease
revenue, of $9.1 million, $9.9 million, $9.9 million, $9.9 million and $6.9 million for each of the next five years ending
December 31, 2021.
NOTE D—FAIR VALUE MEASUREMENTS
The Company’s money market funds and interest rate swaps are reported on the Company’s consolidated balance
sheets at fair values based on market values from identical or comparable transactions. The fair value of the Company’s
money market funds and interest rate swaps are based on observable inputs (Level 2) from comparable market
transactions. The use of significant unobservable inputs (Level 3) was not necessary in determining the fair value of
the Company’s financial assets and liabilities as of December 31, 2016 and 2015.
The fair value of the stock warrant obligation was determined using a Black-Scholes pricing model which considers
the Company’s common stock price and various assumptions, such as the volatility of the Company’s common stock,
the expected dividend yield, and the risk-free interest rate. At December 31, 2016 each warrant was valued at $8.09
using a risk-free interest rate of 1.7% and a stock volatility of 37.5%, based on the time period corresponding with
the expiration period of the warrants (see Note B).
59
The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
As of December 31, 2016
Fair Value Measurement Using
Level 1
Level 2
Level 3
Total
Assets
Cash equivalents—money market
Interest rate swap
Total Assets
Liabilities
Interest rate swap
Stock warrant obligation
Total Liabilities
As of December 31, 2015
Assets
Cash equivalents—money market
Total Assets
Liabilities
Interest rate swap
Total Liabilities
$
$
$
$
$
$
$
$
— $
—
— $
— $
—
— $
482
547
1,029
$
$
(77) $
(89,441)
(89,518) $
— $
—
— $
— $
—
— $
482
547
1,029
(77)
(89,441)
(89,518)
Fair Value Measurement Using
Level 1
Level 2
Level 3
Total
— $
— $
— $
— $
8,711
8,711
$
$
(499) $
(499) $
— $
— $
— $
— $
8,711
8,711
(499)
(499)
As a result of lower market interest rates compared to the stated interest rates of the Company’s fixed and variable
rate debt obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was
approximately $0.2 million more than the carrying value, which was $458.7 million at December 31, 2016. As of
December 31, 2015, the fair value of the Company’s debt obligations was approximately $1.3 million more than the
carrying value, which was $317.7 million. The non-financial assets, including goodwill, intangible assets and property
and equipment are measured at fair value on a non-recurring basis.
NOTE E—PROPERTY AND EQUIPMENT
The Company's property and equipment consists primarily of cargo aircraft, aircraft engines and other flight
equipment. Property and equipment, to be held and used, is summarized as follows (in thousands):
Flight equipment
Ground equipment
Leasehold improvements, facilities and office equipment
Aircraft modifications and projects in progress
Accumulated depreciation
Property and equipment, net
$
December 31,
2016
1,541,872
49,229
27,364
113,518
1,731,983
(730,991)
1,000,992
$
$
December 31,
2015
1,372,099
36,593
25,327
52,717
1,486,736
(611,335)
875,401
$
CAM owned aircraft with a carrying value of $524.3 million and $369.2 million that were under leases to external
customers as of December 31, 2016 and 2015, respectively. Minimum future lease payments for aircraft and equipment
leased to external customers as of December 31, 2016 is scheduled to be $80.2 million, $77.6 million, $45.2 million,
$28.5 million and $17.1 million for each of the next five years ending December 31, 2021.
60
NOTE F—DEBT OBLIGATIONS
Long term obligations consisted of the following (in thousands):
Unsubordinated term loan
Revolving credit facility
Aircraft loans
Total long term obligations
Less: current portion
Total long term obligations, net
December 31,
December 31,
2016
2015
$
85,636
$
355,000
18,085
458,721
(29,306)
429,415
$
$
100,708
180,000
36,950
317,658
(33,740)
283,918
The Company executed a syndicated credit agreement ("Senior Credit Agreement") in May 2011 which includes
an unsubordinated term loan and a revolving credit facility. On May 31, 2016, the Company executed an amendment
to the Senior Credit Agreement (the "Sixth Credit Amendment"). The Sixth Credit Amendment extended the maturity
of the term loan and revolving credit facility to May 30, 2021, increased the capacity of the Revolving credit facility
by $100.0 million to $425.0 million and increased the accordion feature such that the Company can now draw up to
an additional $100.0 million subject to the lenders' consent. Under the terms of the Senior Credit Agreement, the
Company is required to maintain collateral coverage equal to 150% of the outstanding balances of the term loan and
the maximum capacity of revolving credit facility or 175% of the outstanding balance of the term loan and the total
funded revolving credit facility, whichever is less. The minimum collateral coverage which must be maintained is 50%
of the outstanding balance of the term loan plus the revolving credit facility commitment which was $425.0 million.
The revolving credit facility has permitted additional indebtedness of $150.0 million. Each year, through May 6, 2019,
the Company may request a one year extension of the final maturity date, subject to the lenders' consent.
The balances of the unsubordinated term loan are net of debt issuance costs of $0.6 million and $0.5 million for
the years ended December 31, 2016 and 2015, respectively. Under the terms of the Senior Credit Agreement, interest
rates are adjusted quarterly based on the Company's earnings before interest, taxes, depreciation and amortization
expenses ("EBITDA"), its outstanding debt level and prevailing LIBOR or prime rates. At the Company's current debt-
to-EBITDA ratio, the LIBOR based financing for the unsubordinated term loan and revolving credit facility bear a
variable interest rate of 2.77% and 2.77%, respectively. The Senior Credit Agreement provides for the issuance of
letters of credit on the Company's behalf. As of December 31, 2016, the unused revolving credit facility totaled $61.5
million, net of draws of $355.0 million and outstanding letters of credit of $8.5 million.
The aircraft loans are collateralized by four aircraft, and amortize monthly with a balloon payment of approximately
20% with maturities between 2017 and early 2018. Interest rates range from 6.74% to 7.06% per annum payable
monthly.
The scheduled annual principal payments on long term debt, as of December 31, 2016, for the next five years are
as follows (in thousands):
2017
2018
2019
2020
2021
2022 and beyond
61
$
Principal
Payments
29,306
18,501
14,861
14,861
381,192
—
$
458,721
The Senior Credit Agreement is collateralized by certain of the Company's Boeing 767 and 757 aircraft that are
not collateralized under aircraft loans. The Senior Credit Agreement contains covenants including, among other things,
limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt to EBITDA ratio and
a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default, including unspecified events
that may have material adverse effects on the Company. If an event of default occurs, the Company may be forced to
repay, renegotiate or replace the Senior Credit Agreement. The Senior Credit Agreement limits the amount of dividends
the Company can pay and the amount of common stock it can repurchase to $75.0 million during any calendar year,
provided the Company's total debt to EBITDA ratio is under 2.75 times, after giving effect to the dividend or repurchase.
NOTE G—COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases portions of the air park in Wilmington, Ohio, under lease agreements with a regional port
authority, the terms of which expire in May of 2019 and June of 2036 with options to extend the leases. The leased
facilities include corporate offices, 310,000 square feet of maintenance hangars and a 100,000 square foot component
repair shop at the air park. ABX also has the non-exclusive right to use the airport, which includes one active runway,
taxi ways and ramp space. The Company also leases and operates a 311,500 square foot, two hangar aircraft maintenance
complex in Tampa, Florida. Additionally, the Company leases certain equipment and airport facilities, office space,
maintenance facilities at locations outside of the airpark in Wilmington. The future minimum lease payments of the
Company as of December 31, 2016 are scheduled below (in thousands):
2017
2018
2019
2020
2021
2022 and beyond
Total minimum lease payments
Purchase Commitments
Facility
Leases
Other
Leases
$
8,321 $
7,237
3,650
1,895
1,734
13,765
233
167
75
50
—
—
$
36,602 $
525
The Company has agreements with Israel Aerospace Industries Ltd. ("IAI") for the conversion of Boeing 767
passenger aircraft into a standard configured freighter aircraft. The conversions primarily consist of the installation of
a standard cargo door and loading system. At December 31, 2016, the Company was committed to acquire and modify
additional Boeing 767-300 passenger aircraft into standard freighter aircraft. In addition to five aircraft that were in
the modification process at December 31, 2016, the Company is committed to induct 12 more aircraft into the freighter
modification process through 2018. As of December 31, 2016, the Company's commitments to complete the conversions
of aircraft it owns or has the contracts to purchase totaled $237.7 million. Additionally, the Company could incur a
cancellation fee for part kits for any aircraft that is not inducted into conversion at IAI.
Guarantees and Indemnifications
Certain leases and agreements of the Company contain guarantees and indemnification obligations to the lessor, or
one or more other parties that are considered reasonable and customary (e.g. use, tax and environmental
indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may
continue after expiration of the respective lease or agreement.
Other
In September 2015, the Company entered into a joint venture agreement to establish an express cargo airline serving
multiple destinations within the People's Republic of China (including Hong Kong, Macau and Taiwan) and surrounding
countries. The airline will be based in mainland China with registered capital of 400 million RMB (US$63 million).
62
It will be established pending the receipt of required governmental approvals and plans to commence flight operations
in 2017. The Company may offer the new airline aircraft leases to build its fleet. The Company expects to contribute
$15 million to the joint venture over the next twelve months.
In addition to the foregoing matters, the Company is also currently a party to legal proceedings, including FAA
enforcement actions, in various federal and state jurisdictions arising out of the operation of the Company's business.
The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, the
Company believes that its 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.
Employees Under Collective Bargaining Agreements
As of December 31, 2016, the flight crewmember employees of ABX and ATI and flight attendant employees of
ATI were represented by the labor unions listed below:
Airline
ABX
ATI
Labor Agreement Unit
International Brotherhood of Teamsters
Air Line Pilots Association
Percentage of
the
Company’s
Employees
8.8%
5.1%
In addition, the Company has approximately 30 flight attendants that are represented by a recognized labor unit
and are beginning to negotiate a collective bargaining agreement.
NOTE H—PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Defined Benefit and Post-retirement Healthcare Plans
ABX sponsors a qualified defined benefit pension plan for ABX crewmembers and a qualified defined benefit
pension plan for a major portion of its 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 employees, 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. 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.
Effective December 31, 2016, ABX modified its unfunded, non-pilot retiree medical plan to terminate benefits to
all participants. Retired participants were directed to public healthcare exchanges for more flexible and lower cost
alternatives. As a result, ABX settled $0.6 million of retiree medical obligations.
63
Funded Status (in thousands):
Accumulated benefit obligation
Change in benefit obligation
Obligation as of January 1
Service cost
Interest cost
Plan transfers
Benefits paid
Curtailments and settlement
Actuarial (gain) loss
Obligation as of December 31
Change in plan assets
Fair value as of January 1
Actual gain on plan assets
Plan transfers
Employer contributions
Benefits paid
Fair value as of December 31
Funded status
Underfunded plans
Current liabilities
Non-current liabilities
Pension Plans
2016
791,182
777,320
—
35,872
1,226
(33,593)
—
10,357
791,182
672,153
69,836
1,226
6,263
(33,593)
715,885
$
$
$
$
$
2015
777,320
807,992
—
34,584
2,558
(32,696)
—
(35,118)
777,320
719,787
(23,677)
2,558
6,181
(32,696)
672,153
$
$
$
$
$
Post-retirement
Healthcare Plans
2016
2015
4,231
4,999
123
170
—
(667)
(560)
166
4,231
$
$
$
— $
—
—
667
(667)
— $
4,999
6,163
177
192
—
(788)
—
(745)
4,999
—
—
—
788
(788)
—
(1,357) $
(73,940) $
(1,346) $
(103,821) $
(458) $
(3,773) $
(626)
(4,373)
$
$
$
$
$
$
$
Components of Net Periodic Benefit Cost
ABX’s net periodic benefit costs for its defined benefit pension plans and post-retirement healthcare plans for the
years ended December 31, 2016, 2015 and 2014, are as follows (in thousands):
Service cost
Interest cost
Expected return on plan assets
Curtailments and settlements
Amortization of prior service cost
Amortization of net (gain) loss
Net periodic benefit cost (income)
Pension Plans
Post-Retirement Healthcare Plan
2016
2015
2014
2016
2015
2014
$
— $
— $
— $
35,872
34,584
39,517
(41,056)
(44,082)
(46,111)
$
123
170
—
—
—
—
—
13,472
7,170
11,660
(1,997)
—
(2)
(103)
160
$
8,288
$
(2,328) $
5,064
$
(1,647) $
177
192
—
—
239
286
—
—
(542)
(3,487)
292
119
321
$
(2,641)
During 2014, ABX offered vested, former employee participants of the qualified pension plan and vested employee
participants of the crewmembers qualified pension plan a one-time option to settle their pension benefit with the
Company through a single payment or a nonparticipating annuity contract. As a result, ABX settled $98.7 million of
pension obligations in December of 2014 from the pension plans assets. The settlement resulted in pre tax charges of
$6.7 million to continued operations and $5.0 million to discontinued operations for 2014 due to the reclassification
of $11.7 million of pre-tax losses from accumulated other comprehensive loss.
64
Unrecognized Net Periodic Benefit Expense
The pre-tax amounts in accumulated other comprehensive loss that have not yet been recognized as components
of net periodic benefit expense at December 31 are as follows (in thousands):
Unrecognized prior service cost
Unrecognized net actuarial loss
Pension Plans
Post-Retirement
Healthcare Plans
2016
2015
2016
2015
$
— $
— $
(51) $
112,506
144,402
1,893
(153)
449
Accumulated other comprehensive loss
$ 112,506
$ 144,402
$
1,842
$
296
The following table sets forth the amounts of unrecognized net actuarial loss and (gain) recorded in accumulated
other comprehensive loss that is expected to be recognized as components of net periodic benefit expense during 2017
(in thousands):
Amortization of actuarial loss
Prior Service Cost
Assumptions
Post-
Retirement
Healthcare
Plans
Pension
Plans
$
7,746
$
—
283
(51)
Assumptions used in determining the funded status of ABX’s pension plans at December 31 were as follows:
Discount rate - crewmembers
Discount rate - non-crewmembers
Expected return on plan assets
2016
4.50%
4.60%
6.25%
Pension Plans
2015
4.70%
4.75%
6.25%
2014
4.35%
4.40%
6.25%
Net periodic benefit cost was based on the discount rate assumptions at the end of the previous year.
The discount rate used to determine post-retirement healthcare obligations was 3.55% for pilots at December 31,
2016. The discount rate used to determine post-retirement healthcare obligations was 3.65% for pilots and 3.35% for
non-pilots at December 31, 2015. The discount rate used to determine post-retirement healthcare obligations was 3.35%
for pilots and 3.30% for non-pilots at December 31, 2014. Post-retirement healthcare plan obligations have not been
funded. The Company's retiree healthcare contributions have been fixed for each participant, accordingly, healthcare
cost trend rates do not effect the post-retirement healthcare obligations.
65
Plan Assets
The weighted-average asset allocations by asset category are as shown below:
Asset category
Cash
Equity securities
Fixed income securities
Real estate
Composition of Plan Assets
as of December 31
2016
2015
1%
30%
64%
5%
100%
1%
28%
67%
4%
100%
ABX uses an investment management firm to advise it in developing and executing an investment policy. The
portfolio is managed with consideration for diversification, quality and marketability. The investment policy permits
the following ranges of asset allocation: equities – 15% to 35%; fixed income securities – 60% to 80%; real estate –
0% to 5%; cash – 0% to 5%. Except for U.S. Treasuries, no more than 10% of the fixed income portfolio and no more
than 5% of the equity portfolio can be invested in securities of any single issuer.
The overall expected long term rate of return was developed using various market assumptions in conjunction with
the plans’ targeted asset allocation. The assumptions were based on historical market returns.
Cash Flows
In 2016 and 2015, the Company made contributions to its defined benefit plans of $6.3 million and $6.2 million,
respectively. The Company estimates that its contributions in 2017 will be approximately $4.5 million for its defined
benefit pension plans and $0.5 million for its post-retirement healthcare plans.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid out
of the respective plans as follows (in thousands):
2017
2018
2019
2020
2021
Years 2022 to 2026
Fair Value Measurements
Pension
Benefits
Post-retirement
Healthcare
Benefits
$
36,417
$
42,206
41,937
44,190
46,201
253,444
458
476
509
523
536
2,128
The pension plan assets are valued at fair value. The following is a description of the valuation methodologies used
for the investments measured at fair value, including the general classification of such instruments pursuant to the
valuation hierarchy.
Common Trust Funds—Common trust funds are composed of shares or units in non-publicly traded funds
whereby the underlying assets in these funds (cash, cash equivalents, fixed income securities and equity securities)
are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. Holdings
of common trust funds are classified as Level 2 investments.
Corporate Stock—This investment category consists of common and preferred stock issued by domestic and
international corporations that are regularly traded on exchanges and price quotes for these shares are readily
available. These investments are classified as Level 1 investments.
66
Mutual Funds—Investments in this category include shares in registered mutual funds, unit trust and
commingled funds. These funds consist of domestic equity, international equity and fixed income strategies.
Investments in this category that are publicly traded on an exchange and have a share price published at the close
of each business day are classified as Level 1 investments and holdings in the other mutual funds are classified as
Level 2 investments.
Fixed Income Investments—Securities in this category consist of U.S. Government or Agency securities, state
and local government securities, corporate fixed income securities or pooled fixed income securities. Securities
in this category that are valued utilizing published prices at the close of each business day are classified as Level
1 investments. Those investments valued by bid data prices provided by independent pricing sources are classified
as Level 2 investments.
The pension plan assets measured at fair value on a recurring basis were as follows (in thousands):
As of December 31, 2016
Fair Value Measurement Using
Level 1
Level 2
Total
Plan assets
Common trust funds
Corporate stock
Mutual funds
Fixed income investments
Benefit Plan Assets
Investments measured at net asset value ("NAV")
Total benefit plan assets
As of December 31, 2015
Plan assets
Common trust funds
Corporate stock
Mutual funds
Fixed income investments
Benefit Plan Assets
$
$
$
$
— $
3,469
$
20,818
59,370
777
—
114,940
457,237
80,965
$
575,646
$
$
3,469
20,818
174,310
458,014
656,611
59,273
715,884
Fair Value Measurement Using
Level 1
Level 2
Total
— $
4,354
$
14,832
46,991
4,954
—
99,056
443,600
66,777
$
547,010
$
4,354
14,832
146,047
448,554
613,787
58,366
672,153
Investments measured at net asset value ("NAV")
Total benefit plan assets
$
Investments that were measured at NAV per share (or its equivalent) as a practical expedient have not been classified
in the fair value hierarchy. These investments include hedge funds, private equity and real estate funds. Management’s
estimates are based on information provided by the fund managers or general partners of those funds.
Real Estate—The real estate investment in a commingled trust account consists of publicly traded real estate
investment trusts and collateralized mortgage backed securities as well as private market direct property
investments. The valuations for the holdings in these investments are not based on readily observable inputs. These
assets have been valued using NAV as a practical expedient.
Hedge Funds and Private Equity—These investments are not readily tradeable and have valuations that are
not based on readily observable data inputs. The fair value of these assets is estimated based on information provided
by the fund managers or the general partners. These assets have been valued using NAV as a practical expedient.
67
The following table presents investments measured at fair value based on NAV per share as a practical expedient:
Fair Value
Redemption
Frequency
Redemption
Notice Period
Unfunded
Commitments
As of December 31, 2016
Hedge Funds & Private Equity
Real Estate
Total investments measured at NAV
As of December 31, 2015
Hedge Funds & Private Equity
Real Estate
Total investments measured at NAV
$
$
$
$
25,831
33,442
59,273
28,649
29,717
58,366
(1) (2)
(3)
90 days
90 days
(1) (2)
(3)
90 days
90 days
$
$
$
$
—
—
—
—
—
—
(1) Quarterly - hedge funds
(2) None - private equity
(3) Monthly
Defined Contribution Plans
The Company sponsors defined contribution capital accumulation plans (401k) that are funded by both voluntary
employee salary deferrals and by employer contributions. Expenses for defined contribution retirement plans were
$7.1 million, $5.7 million and $5.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
NOTE I—INCOME TAXES
At December 31, 2016, the Company had cumulative net operating loss carryforwards (“NOL CFs”) for federal
income tax purposes of approximately $40.2 million, which begin to expire in 2031 if not utilized before then. The
deferred tax asset balance includes $1.8 million net of a $0.2 million valuation allowance related to state NOL CFs,
which have remaining lives ranging from one to twenty years. These NOL CFs are attributable to excess tax deductions
related primarily to the accelerated tax depreciation of fixed assets. At December 31, 2016 and 2015, the Company
determined that, based upon projections of taxable income, it was more likely than not that the NOL CF’s will be
realized prior to their expiration, accordingly, no allowance against these deferred tax assets was recorded.
68
The significant components of the deferred income tax assets and liabilities as of December 31, 2016 and 2015 are
as follows (in thousands):
Deferred tax assets:
December 31
2016
2015
Net operating loss carryforward and federal credits
$
20,596
$
30,981
Warrants
Post-retirement employee benefits
Employee benefits other than post-retirement
Inventory reserve
Deferred revenue
Other
Deferred tax assets
Deferred tax liabilities:
Accelerated depreciation
Partnership items
State taxes
Valuation allowance against deferred tax assets
Deferred tax liabilities
Net deferred tax (liability)
4,746
27,060
13,785
2,727
7,728
4,411
81,053
—
36,589
13,773
2,924
8,650
2,344
95,261
(186,015)
(8,777)
(8,564)
(229)
(203,585)
(122,532) $
(175,572)
(9,489)
(6,830)
(229)
(192,120)
(96,859)
$
The following summarizes the Company’s income tax provisions (benefits) (in thousands):
Years Ended December 31
2016
2015
2014
$
820
$
524
$
—
151
11,338
—
1,085
12,423
13,394
1,384
$
$
—
371
21,073
—
1,440
22,513
23,408
1,178
$
$
338
—
345
17,411
—
1,608
19,019
19,702
(1,262)
Current taxes:
Federal
Foreign
State
Deferred taxes:
Federal
Foreign
State
Total deferred tax expense
Total income tax expense from continuing operations
Income tax expense (benefit) from discontinued operations
$
$
69
The reconciliation of income tax from continuing operations computed at the U.S. statutory federal income tax rates
to effective income tax rates is as follows:
Statutory federal tax rate
State income taxes, net of federal tax benefit
Tax effect of non-deductible warrant expense
Tax effect of stock compensation
Tax effect of other non-deductible expenses
Other
Effective income tax rate
Years Ended December 31
2016
2015
2014
35.0 %
2.3 %
4.0 %
(3.4)%
1.6 %
(0.6)%
38.9 %
35.0 %
1.9 %
— %
— %
0.9 %
(0.4)%
37.4 %
35.0 %
2.5 %
— %
— %
0.8 %
(0.2)%
38.1 %
The reconciliation of income tax from discontinued operations computed at the U.S. statutory federal income tax
rates to effective income tax rates is as follows:
Statutory federal tax rate
State income taxes, net of federal tax benefit
Effective income tax rate
Years Ended December 31
2015
2016
2014
35.0%
1.3%
36.3%
35.0%
1.3%
36.3%
(35.0)%
(1.3)%
(36.3)%
The Company files income tax returns in the U.S. federal jurisdiction and various international, state and local
jurisdictions. The returns may be subject to audit by the Internal Revenue Service (“IRS”) and other jurisdictional
authorities. International returns consist primarily of disclosure returns where the Company is covered by the sourcing
rules of U.S. international treaties. The Company recognizes the impact of an uncertain income tax position in the
financial statements if that position is more likely than not of being sustained on audit, based on the technical merits
of the position. At December 31, 2016, 2015 and 2014, the Company's unrecognized tax benefits were $0.0 million,
$0.0 million and $0.0 million respectively. Accrued interest and penalties on tax positions are recorded as a component
of interest expense. Interest and penalties expense was immaterial for 2016, 2015 and 2014.
The Company began to file, effective in 2008, federal tax returns under a common parent of the consolidated group
that includes ABX and all the wholly-owned subsidiaries, except for Pemco which was acquired on December 30,
2016. The returns for 2015, 2014 and 2013 related to the consolidated group remain open to examination. The
consolidated federal tax returns prior to 2013 remain open to federal examination only to the extent of net operating
loss carryforwards carried over from or utilized in those years. Pemco filed returns on its own behalf prior to its
acquisition by the Company. State and local returns filed for 2005 through 2015 are generally also open to examination
by their respective jurisdictions, either in full or limited to net operating losses.
70
NOTE J—DERIVATIVE INSTRUMENTS
The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for protection
from fluctuating interest rates, for at least fifty percent of the outstanding balance of the term loan. Accordingly, the
Company entered into an interest rate swaps. The Company entered into a new interest rate swap in February 2016
having an initial value of $48.8 million and a forward start date of May 9, 2016. Under this swap, the Company pays
a fixed rate of 1.09% and receives a floating rate that resets monthly based on LIBOR. Under the swap expiring in
2017, the Company pays a fixed rate of 1.1825% and receives a floating rate that resets monthly based on LIBOR.
The outstanding interest rate swaps are not designated as hedges for accounting purposes. The effects of future
fluctuations in LIBOR interest rates on derivatives held by the Company will result in the recording of unrealized gains
and losses into the statement of operations. The Company recorded net gains on derivatives of $1.0 million, $0.9
million and $1.1 million for the years ending December 31, 2016, 2015 and 2014, respectively. The liability for
outstanding derivatives is recorded in other liabilities and in accrued expenses. The table below provides information
about the Company’s interest rate swaps (in thousands):
Expiration Date
May 9, 2016
June 30, 2017
May 5, 2021
December 31, 2016
December 31, 2015
Stated
Interest
Rate
Notional
Amount
Market
Value
(Liability)
Notional
Amount
Market
Value
(Liability)
2.020%
1.183%
1.090%
—
43,125
43,125
—
(77)
547
50,625
50,625
—
(247)
(252)
—
71
NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes the following items by components for the years ended
December 31, 2016, 2015 and 2014 (in thousands):
Defined
Benefit
Pension
(31,072)
Defined
Benefit Post-
Retirement
1,245
Gains and
Losses on
Derivative
9
Foreign
Currency
Translation
—
Total
(29,818)
Balance as of January 1, 2014
Other comprehensive income (loss) before
reclassifications:
Actuarial gain (loss) for retiree liabilities
Foreign currency translation adjustment
Amounts reclassified from accumulated other
comprehensive income:
Pension settlement
Actuarial costs (reclassified to salaries, wages
and benefits)
Negative prior service cost (reclassified to
salaries, wages and benefits)
Hedging gain (reclassified to interest expense)
Income Tax (Expense) or Benefit
Other comprehensive income (loss), net of tax
Balance as of December 31, 2014
Other comprehensive income (loss) before
reclassifications:
Actuarial gain (loss) for retiree liabilities
Foreign currency translation adjustment
Amounts reclassified from accumulated other
comprehensive income:
Actuarial costs (reclassified to salaries, wages
and benefits)
Negative prior service cost (reclassified to
salaries, wages and benefits)
Hedging gain (reclassified to interest expense)
Income Tax (Expense) or Benefit
Other comprehensive income (loss), net of tax
Balance as of December 31, 2015
Other comprehensive income (loss) before
reclassifications:
(90,400)
—
11,660
(2)
—
—
28,623
(50,119)
(81,191)
(32,640)
—
7,170
—
—
9,359
(16,111)
(97,302)
Actuarial gain (loss) for retiree liabilities
18,424
Foreign currency translation adjustment
Amounts reclassified from accumulated other
comprehensive income:
Plan curtailment and settlement
Actuarial costs (reclassified to salaries, wages
and benefits)
Negative prior service cost (reclassified to
salaries, wages and benefits)
Income Tax (Expense) or Benefit
Other comprehensive income (loss), net of tax
Balance as of December 31, 2016
—
—
13,472
—
(11,682)
20,214
(77,088)
72
220
—
—
321
(3,487)
—
1,071
(1,875)
(630)
745
—
292
(542)
—
(180)
315
(315)
394
—
(1,997)
160
(103)
560
(986)
(1,301)
—
—
—
—
—
(42)
37
(5)
4
—
—
—
—
(50)
46
(4)
—
—
—
—
—
—
—
—
—
—
(1,629)
(90,180)
(1,629)
—
—
—
—
570
(1,059)
(1,059)
11,660
319
(3,487)
(42)
30,301
(53,058)
(82,876)
—
(517)
(31,895)
(517)
—
—
—
181
(336)
(1,395)
7,462
(542)
(50)
9,406
(16,136)
(99,012)
—
(126)
18,818
(126)
—
—
—
44
(82)
(1,477)
(1,997)
13,632
(103)
(11,078)
19,146
(79,866)
NOTE L—STOCK-BASED COMPENSATION
The Company's Board of Directors has granted stock incentive awards to certain employees and board members
pursuant to a long term incentive plan which was approved by the Company's stockholders in May 2005 and in May
2015. Employees have been awarded non-vested stock units with performance conditions, non-vested stock units with
market conditions and non-vested restricted stock. The restrictions on the non-vested restricted stock awards lapse at
the end of a specified service period, which is typically approximately three years from the date of grant. Restrictions
could lapse sooner upon a business combination, death, disability or after an employee qualifies for retirement. The
non-vested stock units will be converted into a number of shares of Company stock depending on performance and
market conditions at the end of a specified service period, lasting approximately three years. The performance condition
awards will be converted into a number of shares of Company stock based on the Company's average return on invested
capital during the service period. Similarly, the market condition awards will be converted into a number of shares
depending on the appreciation of the Company's stock compared to the NASDAQ Transportation Index. Board members
were granted time-based awards with vesting periods of approximately six or twelve months. The Company expects
to settle all of the stock unit awards by issuing new shares of stock. The table below summarizes award activity.
Year Ended December 31
2016
2015
2014
Number of
Awards
Weighted
average
grant-date
fair value
Number of
Awards
Weighted
average
grant-date
fair value
Number of
Awards
Weighted
average
grant-date
fair value
Outstanding at beginning of period
1,157,659
$
7.52
1,406,550
$
Granted
Converted
Expired
Forfeited
Outstanding at end of period
Vested
314,060
(329,200)
(92,750)
(9,200)
1,040,569
472,294
$
$
15.47
7.32
7.44
10.23
9.97
6.60
390,200
(498,491)
(126,800)
(13,800)
1,157,659
511,109
$
$
6.21
9.61
5.97
5.52
7.36
7.52
6.03
1,477,762
$
467,567
(404,179)
(116,800)
(17,800)
1,406,550
555,927
$
$
5.83
7.52
6.49
5.70
6.26
6.21
5.73
The average grant-date fair value of each performance condition award, non-vested restricted stock award and time-
based award granted by the Company was $14.39, $9.22 and $7.44 for 2016, 2015 and 2014, respectively, 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
was $19.65, $10.99 and $7.83 for 2016, 2015 and 2014, respectively. The market condition awards were valued using
a Monte Carlo simulation technique based on volatility over three years for the awards granted in 2016, 2015 and 2014
using daily stock prices and using the following variables:
Risk-free interest rate
Volatility
2016
1.1%
36.9%
2015
0.9%
41.5%
2014
0.8%
48.9%
For the years ended December 31, 2016, 2015 and 2014, the Company recorded expense of $3.2 million, $2.5
million and $2.9 million, respectively, for stock incentive awards. At December 31, 2016, there was $3.3 million of
unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average
period of 1.4 years. As of December 31, 2016, none of the awards were convertible, 338,919 units of the Board members
time-based awards had vested and none of the outstanding shares of the restricted stock had vested. These awards
could result in a maximum number of 1,256,394 additional outstanding shares of the Company’s common stock
depending on service, performance and market results through December 31, 2018.
73
NOTE M—COMMON STOCK AND EARNINGS PER SHARE
Earnings per Share
The calculation of basic and diluted earnings per common share are as follows (in thousands, except per share
amounts):
December 31
2016
2015
2014
Earnings from continuing operations
Weighted-average shares outstanding for basic earnings per share
$
21,060
$
39,155
$
61,330
64,242
Common equivalent shares:
Effect of stock-based compensation awards
Weighted-average shares outstanding assuming dilution
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
1,664
62,994
0.34
0.33
$
$
885
65,127
0.61
0.60
$
$
$
$
32,074
64,253
958
65,211
0.50
0.49
Basic weighted average shares outstanding for purposes of basic earnings per share are less than the shares
outstanding due to 327,700 shares, 348,600 shares and 435,600 shares of restricted stock for 2016, 2015 and 2014,
respectively, which are accounted for as part of diluted weighted average shares outstanding in diluted earnings per
share. The determination of diluted earnings per share requires the exclusion of the fair value re-measurement of the
stock warrants recorded as a liability (see Note B), if such warrants have a anti-dilutive effect on earnings per share.
The dilutive effect of the weighted-average shares outstanding was calculated using the treasury method. Under this
method, the number of diluted shares is determined by dividing the assumed proceeds of the warrants by the average
stock price during the period and comparing that amount with the number of warrants outstanding. The number of
equivalent shares that were not included in weighted average shares outstanding assuming dilution, because their effect
would have been anti-dilutive, was 1.9 million, eleven thousand and none at December 31, 2016, 2015 and 2014,
respectively. The underlying warrants as of December 31, 2016, could result in 11.1 million additional shares of the
Company's common stock if the warrants are settled by tendering cash.
Purchase of Common Stock
The Company's Board of Directors has authorized management to repurchase outstanding common stock of the
Company from time to time on the open market or in privately negotiated transactions. The authorization does not
require the Company to repurchase a specific number of shares and the Company may terminate the repurchase program
at any time. Upon the retirement of common stock repurchased, the excess purchase price over the par value for retired
shares of common stock is recorded to additional paid-in-capital.
On July 5, 2016 the Company purchased 3,825,554 shares of the Company's common stock from its largest
shareholder, Red Mountain Partners, L.P., a fund that is affiliated with Red Mountain Capital Partners, LLC (“Red
Mountain”), a related party, for an aggregate purchase price of $50.0 million. The purchase price was previously
negotiated based on the closing price of the shares on June 20, 2016. The purchase price of $13.07 per share represents
a large block discount of 2.5% and 6.2%, respectively, from the volume-weighted average prices of $13.41 for the 10
trading days and $13.93 for the 60 trading days prior to June 20, 2016.
NOTE N—SEGMENT INFORMATION
The Company operates in two reportable segments. The CAM segment consists of the Company's aircraft leasing
operations and its segment earnings includes an allocation of interest expense. The ACMI Services segment consists
of the Company's airline operations, including CMI agreements as well as ACMI and charter service agreements that
the Company has with other customers. Due to the similarities among the Company's airline operations, the airline
operations are aggregated into a single reportable segment, ACMI Services. The Company's other activities, which
include mail and parcel handling services, as well as hub managements services for the USPS and AFS, the sale of
aircraft parts, aircraft maintenance services, aircraft modifications, facility and ground equipment services, the sales
of aviation fuel and other services, are not large enough to constitute reportable segments and are combined in “All
74
other” with inter-segment profit eliminations. Inter-segment revenues are valued at arms-length market rates. Cash
and cash equivalents are reflected in Assets - All other below.
The Company's segment information from continuing operations is presented below (in thousands):
Total revenues:
CAM
ACMI Services
All other
Eliminate inter-segment revenues
Total
Customer revenues:
CAM
ACMI Services
All other
Total
Depreciation and amortization expense:
CAM
ACMI Services
All other
Total
Segment earnings (loss):
CAM
ACMI Services
All other
Net unallocated interest expense
Net gain (loss) on financial instruments
Pre-tax earnings from continuing operations
$
$
$
$
$
$
$
Year Ended December 31
2015
2014
2016
195,092
$
177,789
$
492,859
262,539
433,109
161,995
166,303
439,919
142,294
(181,620)
(153,629)
(158,924)
768,870
$
619,264
$
589,592
117,642
$
93,395
$
492,859
158,369
431,989
93,880
768,870
$
619,264
$
92,396
$
87,765
$
41,487
1,613
37,526
152
77,668
439,919
72,005
589,592
78,866
29,929
(541)
135,496
$
125,443
$
108,254
68,608
$
57,457
$
(32,125)
16,623
(545)
(18,107)
(2,654)
8,561
(1,721)
920
$
34,454
$
62,563
$
53,159
(12,081)
11,363
(1,761)
1,096
51,776
The Company's assets are presented below by segment (in thousands):
December 31, December 31, December 31,
2015
2014
2016
Assets:
CAM
ACMI Services
All other
Total
$
971,986
$
804,776
$
164,489
122,855
154,852
82,093
798,508
133,861
78,834
$
1,259,330
$
1,041,721
$
1,011,203
Interest expense allocated to CAM was $10.6 million, $9.4 million and $11.8 million for the years ending
December 31, 2016, 2015 and 2014, respectively.
During 2016, the Company had capital expenditures of $30.8 million and $227.9 million for the ACMI Services
and CAM segments, respectively.
75
Entity-Wide Disclosures
The Company had revenues of approximately $168.2 million, $206.5 million and $205.0 million for 2016, 2015
and 2014, respectively, derived from aircraft leases in foreign countries or routes with flights departing from or arriving
in foreign countries. All revenues from the CMI agreement with DHL and the ATSA agreement with AFS are attributed
to U.S. operations. As of December 31, 2016 and 2015, the Company had 12 and 17 aircraft, respectively, deployed
outside of the United States.
CAM's revenues include $17.4 million, $12.6 million and $11.5 million for 2016, 2015 and 2014, respectively, for
engine and other maintenance related payments from customers. The Company's external customers revenues from
other activities for the years ended December 31, 2016, 2015 and 2014 are presented below (in thousands):
December 31,
2016
2015
2014
Mail and package handling services
$
103,191
$
47,307
$
Aircraft maintenance, modifications and part sales
Facility and ground equipment services
Other
Total customer revenues
40,754
12,709
1,715
33,687
11,490
1,396
34,025
26,393
11,119
468
$
158,369
$
93,880
$
72,005
Mail and package handling services include mail sorting, parcel handling and logistical support to the USPS at five
facilities and similar services at certain AFS hub and gateway locations in the U.S. None of these operations are large
enough to constitute a reportable segment.
NOTE O—DISCONTINUED OPERATIONS
The Company's results of discontinued operations consist primarily of pension benefits, adjustments to workers
compensation liabilities and other benefits for former employees previously associated with ABX's former freight
sorting and aircraft fueling services provided to DHL through 2009. ABX sponsors defined benefit plans for retirees
that include the former employees of the hub operations. Additionally, ABX is self-insured for medical coverage and
workers' compensation. The Company may incur expenses and cash outlays in the future related to pension obligations,
reserves for medical expenses and wage loss for former employees. Carrying amounts of significant assets and liabilities
of the discontinued operations are below (in thousands):
Liabilities
Employee compensation and benefits
Post-retirement
Total Liabilities
December 31
2016
2015
$
$
19,885
5,663
25,548
$
$
23,400
10,929
34,329
The revenues and pre-tax earnings of the discontinued operations are below (in thousands):
Pre-tax earnings (loss)
$
3,813
$
3,245
$
(3,477)
2016
December 31
2015
2014
76
NOTE P—QUARTERLY RESULTS (Unaudited)
The following is a summary of quarterly results of operations (in thousands, except per share amounts):
2016 (1)
Revenues from continuing operations
Operating income from continuing operations
Net earnings (loss) from continuing operations
Net earnings from discontinued operations
Weighted average shares:
Basic
Diluted
Earnings per share from continuing operations
Basic
Diluted
2015
Revenues from continuing operations
Operating income from continuing operations
Net earnings from continuing operations
Net earnings from discontinued operations
Weighted average shares:
Basic
Diluted
Earnings per share from continuing operations
Basic
Diluted
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
$
177,385
$
176,549
$
193,261
$ 221,675
15,351
8,171
47
63,636
65,057
0.13
0.13
147,025
17,529
8,895
214
64,454
65,337
$
$
$
15,801
11,528
47
63,267
66,763
0.18
0.12
148,353
19,794
10,570
214
64,541
65,471
14,456
2,116
47
59,379
60,283
18,140
(755)
2,287
59,083
59,083
$
$
$
0.04
0.04
$
$
(0.01)
(0.01)
142,305
$ 181,581
12,917
6,347
214
64,239
65,171
22,550
13,343
1,425
63,742
64,536
0.14
0.14
$
$
0.16
0.16
$
$
0.10
0.10
$
$
0.21
0.21
$
$
$
$
$
1. During 2016, the Company recorded a $0.4 million loss, a $5.8 million gain, a $8.8 million loss and a $15.6 million loss
on the remeasurement of financial instruments related to the warrants issued to Amazon for the quarters ended March 31,
2016, June 30, 2016, September 30, 2016 and December 31, 2016, respectively.
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2016, the Company carried out an evaluation, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")). Based upon the evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective
to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized and reported within time periods specified in the Securities and
Exchange Commission rules and forms and is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in Internal Controls
There were no changes in internal control over financial reporting during the most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial
reporting.
Management’s Annual Report on Internal Controls over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with
generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).
Based on management’s assessment of those criteria, management believes that, as of December 31, 2016, the
Company’s internal control over financial reporting was effective.
March 8, 2017
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Air Transport Services Group, Inc.
Wilmington, Ohio
We have audited the internal control over financial reporting of Air Transport Services Group, Inc. and subsidiaries
(the “Company”) as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of the inherent limitation of internal control over financial reporting, including the possibility of collusion
or improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standard of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedule as of and for the year ended December
31, 2016 of the Company and our report dated March 8, 2017 expressed an unqualified opinion on those financial
statements and financial statement schedule and included an explanatory paragraph regarding the Company’s three
principal customers.
/s/ DELOITTE & TOUCHE LLP
Cincinnati, Ohio
March 8, 2017
79
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The response to this Item is incorporated herein by reference to the definitive Proxy Statement for the 2017 Annual
Meeting of Stockholders under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” and “Corporate Governance and Board Matters.”
Executive Officers
The following table sets forth information about the Company’s executive officers. The executive officers serve at
the pleasure of the Company’s Board of Directors.
Name
Joseph C. Hete
Age
62
Quint O. Turner
54
Richard F. Corrado
57
W. Joseph Payne
53
Information
President and Chief Executive Officer, Air Transport Services Group,
Inc., since December 2007 and Chief Executive Officer, ABX Air, Inc.,
since August 2003.
Mr. Hete was President of ABX Air, Inc. from January 2000 to February
2008. Mr. Hete was Chief Operating Officer of ABX Air, Inc. from
January 2000 to August 2003. From 1997 until January 2000, Mr. Hete
held the position of Senior Vice President and Chief Operating Officer
of ABX Air, Inc. Mr. Hete served as Senior Vice President,
Administration of ABX Air, Inc. from 1991 to 1997 and Vice President,
Administration of ABX Air, Inc. from 1986 to 1991. Mr. Hete joined
ABX Air, Inc. in 1980.
Chief Financial Officer, Air Transport Services Group, Inc., since
February 2008 and Chief Financial Officer, ABX Air, Inc. since
December 2004.
Mr. Turner was Vice President of Administration of ABX Air, Inc. from
February 2002 to December 2004. Mr. Turner was Corporate Director
of Financial Planning and Accounting of ABX Air, Inc. from 1997 to
2002. Prior to 1997, Mr. Turner held positions of Manager of Planning
and Director of Financial Planning of ABX Air, Inc. Mr. Turner joined
ABX Air, Inc. in 1988.
Chief Commercial Officer, Air Transport Services Group, Inc., and
President of Cargo Aircraft Management, Inc. since April 2010.
President of Airborne Global Solutions, Inc. since July 2010.
Before joining ATSG, Mr. Corrado was President of Transform
Consulting Group from July 2006 through March 2010 and Chief
Operating Officer of AFMS Logistics Management from February
2008 through March 2010. He was Executive Vice President of Air
Services and Business Development for DHL Express from September
2003 through June of 2006; and Senior Vice President of Marketing
for Airborne Express from August 2000 through August 2003.
Chief Legal Officer & Secretary, Air Transport Services Group, Inc.,
since May 2016; Senior Vice President, Corporate General Counsel
and Secretary, Air Transport Services Group, Inc., since February
2008; and Vice President, General Counsel and Secretary, ABX Air,
Inc. since January 2004.
Mr. Payne was Corporate Secretary/Counsel of ABX Air, Inc. from
January 1999 to January 2004, and Assistant Corporate Secretary from
July 1996 to January 1999. Mr. Payne joined ABX Air, Inc. in April
1995.
80
The executive officers of the Company are appointed annually at the Board of Directors meeting held in conjunction
with the annual meeting of stockholders. There are no family relationships between any directors or executive officers
of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is incorporated herein by reference to the definitive Proxy Statement for the 2017 Annual
Meeting of Stockholders under the captions “Executive Compensation” and “Director Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The responses to this Item are incorporated herein by reference to the definitive Proxy Statement for the 2017
Annual Meeting of Stockholders under the captions “Equity Compensation Plan Information,” “Voting at the Meeting,”
“Stock Ownership of Management” and “Common Stock Ownership of Certain Beneficial Owners.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The response to this Item is incorporated herein by reference to the definitive Proxy Statement for the 2017 Annual
Meeting of Stockholders under the captions “Related Person Transactions” and “Independence.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The response to this Item is incorporated herein by reference to the definitive Proxy Statement for the 2017 Annual
Meeting of Stockholders under the caption “Fees of the Independent Registered Public Accounting Firm.”
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
List of Documents filed as part of this report:
(1)
Consolidated Financial Statements
The following are filed in Part II, item 8 of this Form 10-K Annual Report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedules
81
Description
Accounts receivable reserve:
Year ended:
December 31, 2016
December 31, 2015
December 31, 2014
Schedule II—Valuation and Qualifying Account
Balance at
beginning
of period
Additions
charged to
cost and expenses
Deductions
Balance at end
of period
$
$
415,336
811,875
716,913
$
1,006,307
138,310
137,555
$
157,432
534,849
42,593
1,264,211
415,336
811,875
All other schedules are omitted because they are not applicable or are not required, or because the required
information is included in the consolidated financial statements or notes thereto.
(3)
Exhibits
The following exhibits are filed with or incorporated by reference into this report.
Exhibit No.
Description of Exhibit
Articles of Incorporation
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Amended and Restated Certificate of Incorporation of Air Transport Services Group, Inc.
reflecting corrections and amendments through August 16, 2013, filed herewith. [This
document represents the Amended and Restated Certificate of Incorporation of Air Transport
Services Group, Inc. in compiled form, incorporating all corrections and amendments. This
compiled document has not been filed with the Delaware Secretary of State.]
Amended and Restated Bylaws of Air Transport Services Group, Inc., reflecting amendments
through May 10, 2013. (16)
Material Contracts
Director compensation fee summary. (8)
Aircraft Loan and Security Agreement and related promissory note, dated August 24, 2006, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (2)
Aircraft Loan and Security Agreement and related promissory note, dated October 10, 2006, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (3)
Aircraft Loan and Security Agreement and related promissory note, dated February 16, 2007, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (4)
Aircraft Loan and Security Agreement and related promissory note, dated April 25, 2007, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (5)
Aircraft Loan and Security Agreement and related promissory note, dated October 26, 2007, by
and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (7)
Aircraft Loan and Security Agreement and related promissory note, dated December 19, 2007,
by and among ABX Air, Inc. and Chase Equipment Leasing, Inc. (7)
Guaranty by Air Transport Services Group, Inc. in favor of DHL Express (USA), Inc., dated
May 8, 2009 (6), as amended by Amendment to the Guaranty dated as of January 14, 2015 (20)
Form of Time-Based Restricted Stock Award Agreement under Air Transport Services Group, Inc.
2005 Amended and Restated Long-Term Incentive Plan. (9)
10.10
Form of Performance-Based Stock Unit Award Agreement under Air Transport Services Group,
Inc. 2005 Amended and Restated Long-Term Incentive Plan. (9)
82
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Form of Restricted Stock Unit Award Agreement under Air Transport Services Group, Inc. 2005
Amended and Restated Long-Term Incentive Plan. (18)
Conversion Agreement dated August 3, 2010, between Cargo Aircraft Management, Inc., M&B
Conversions Limited and Israel Aerospace Industries Ltd. (10)
Credit Agreement, dated as of May 9, 2011, among Cargo Aircraft Management, Inc., as
Borrower, Air Transport Services Group, Inc., the Lenders from time to time party thereto,
SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan Chase Bank, N.A., as
Syndication Agents, and Bank of America, N.A., as Documentation Agent. (11)
Guarantee and Collateral Agreement, dated as of May 9, 2011, made by Cargo Aircraft
Management, Inc. and certain of its Affiliates in favor of SunTrust Bank, as Administrative
Agent. (11)
Amendment to Confidentiality and Standstill Agreement, dated as of June 11, 2012, between
Air Transport Services Group, Inc. and Red Mountain Capital Partners LLC. (12)
Form of amended and restated change-in-control agreement in effect between Air Transport
Services Group, Inc. and its executive officers. (14)
Amendment to the Credit Agreement, dated July 20, 2012, among Cargo Aircraft Management,
Inc., as Borrower, Air Transport Services Group, Inc., the Lenders from time to time party
thereto, SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan Chase Bank,
N.A., as Syndication Agents, and Bank of America, N.A., as Documentation Agent. (13)
Amended and Restated Lease Agreement, dated December 27, 2012, between Clinton County
Port Authority and Air Transport Services Group, Inc. (15)
Loan Agreement, Chapter 166, Ohio Revised Code, dated December 1, 2012, between the
Director of Development Services Agency of Ohio and Clinton County Port Authority. (15)
Guaranty Agreement, dated December 1, 2012, among Air Transport Services Group, Inc.,
Airborne Maintenance and Engineering Services, Inc., Air Transport International, LLC,
Clinton County Port Authority, the Directory of Development Services Agency of Ohio, and the
Huntington National Bank. (15)
Lease Agreement for the Jump Hangar Facility, dated December 1, 2012, between Clinton
County Port Authority and Air Transport International, LLC. (15)
Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Financing
Statement, dated December 1, 2012, among Air Transport International, LLC and the Director
of Development Services Agency of Ohio. (15)
Bond Purchase Agreement, dated December 13, 2012, among the State of Ohio, acting by and
through its Treasurer of State, the Development Services Agency of Ohio, acting by and through
a duly authorized representative, Clinton County Port Authority, Air Transport International,
LLC and Stifel, Niolaus & Company, Inc. (15)
Air Transport Services Group, Inc. Nonqualified Deferred Compensation Plan, dated October
31, 2013. (17)
Second Amendment to the Credit Agreement, dated October 22, 2013, among Cargo Aircraft
Management, Inc., as Borrower, Air Transport Services Group, Inc., the Lenders from time to
time party thereto, SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan
Chase Bank, N.A., as Syndication Agents, and Bank of America, N.A., as Documentation
Agents. (17)
Third Amendment to Credit Agreement and First Amendment to Guarantee and Collateral
Agreement, dated May 6, 2014, by and among Cargo Aircraft Management, Inc., as Borrower,
Air Transport Services Group, Inc., each of the Guarantors party thereto, each of the financial
institutions party thereto as "Lenders", and SunTrust Bank as Administrative Agent. (19)
83
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
Amended and Restated Air Transportation Services Agreement between DHL Network
Operations (USA), Inc., ABX Air, Inc. and Cargo Aircraft Management, Inc., dated January 14,
2015. Those portions of the Agreement marked with an [*] have been omitted pursuant to a
request for confidential treatment and have been filed separately with the SEC. (20)
Fifth Amendment to Credit Agreement, dated May 8, 2015, by and among Cargo Aircraft
Management, Inc., as Borrower, Air Transport Services Group, Inc., each of the Guarantors
party thereto, each of the financial institutions party thereto as "Lenders" and SunTrust Bank, in
its capacity as Administrative Agent. (21)
Air Transportation Services Agreement, dated as of March 8, 2016, by and between Airborne
Global Solutions, Inc. and Amazon Fulfillment Services Inc. Those portions of the Agreement
marked with an [*] have been omitted pursuant to a request for confidential treatment and have
been filed separately with the SEC. (22)
Investment Agreement, dated as of March 8, 2016, by and between Air Transport Services
Group, Inc., and Amazon.com, Inc. Those portions of the Agreement marked with an [*] have
been omitted pursuant to a request for confidential treatment and have been filed separately with
the SEC. (22)
Warrant to Purchase Common Stock, issued March 8, 2016, by and between Air Transport
Services Group, Inc. and Amazon.com. Those portions of the Warrant marked with an [*] have
been omitted pursuant to a request for confidential treatment and have been filed separately with
the SEC. (22)
Stockholders Agreement, dated as of March 8, 2016, by and between Air Transport Services
Group, Inc., and Amazon.com, Inc. Those portions of the Agreement marked with an [*] have
been omitted pursuant to a request for confidential treatment and have been filed separately with
the SEC. (22)
Amended and Restated Credit Agreement, dated as of May 31, 2016, among Cargo Aircraft
Management, Inc., as Borrower, Air Transport Services Group, Inc., the Lenders from time to
time party hereto, SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan Chase
Bank, N.A., as Syndication Agents and Bank of America, N.A., as Documentation Agent. (23)
Guarantee and Collateral Agreement made by Cargo Aircraft Management, Inc. and certain of
its Affiliates in favor of SunTrust Bank, as Administrative Agent, dated as of May 31, 2016.
(23)
Air Transport Services Group, Inc. Executive Incentive Compensation Plan, last modified
August 5, 2016. (23)
Form of Time-Based Restricted Stock Award Agreement under Air Transport Services Group,
Inc. 2015 Amended and Restated Long-Term Incentive Plan. (24)
Form of Performance-Based Stock Unit Award Agreement under Air Transport Services Group,
Inc. 2015 Amended and Restated Long-Term Incentive Plan. (24)
Form of Restricted Stock Unit Award Agreement under Air Transport Services Group, Inc. 2015
Amended and Restated Long-Term Incentive Plan. (24)
Stock Purchase Agreement, dated June 21, 2016, between Air Transport Services Group, Inc.
and Red Mountain Partners, L.P. (25)
84
14.1
21.1
23.1
31.1
31.2
32.1
32.2
Code of Ethics
Code of Ethics—CEO and CFO. (1)
List of Significant Subsidiaries
List of Significant Subsidiaries of Air Transport Services Group, Inc., filed within.
Consent of experts and counsel
Consent of independent registered public accounting firm, filed herewith.
Certifications
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Labels Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
____________________
(1)
(2)
The Company's Code of Ethics can be accessed from the Company's Internet website at www.atsginc.com.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and
Exchange Commission on August 9, 2006.
Incorporated by reference to the Company’s Annual Report on Form 10-K/A filed on August 14, 2007 with
the Securities and Exchange Commission.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A, filed with the Securities and
Exchange Commission on August 14, 2007.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and
Exchange Commission on August 14, 2007.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and
Exchange Commission on August 10, 2009.
Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 17, 2008 with the
Securities and Exchange Commission.
Incorporated by reference to the Company's Proxy Statement for the 2016 Annual Meeting of Stockholders,
Corporate Governance and Board Matters, filed April 1, 2016 with the Securities and Exchange Commission.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 10, 2010.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 3, 2010. Those portions of the Agreement marked with an [*] have been
omitted pursuant to a request for confidential treatment and have been filed separately with the SEC.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 3, 2011.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on June 18, 2012.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
85
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on July 24, 2012.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 2, 2012.
Incorporated by reference to the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 4, 2013. Those portions of the Agreement marked with an [*] have been
omitted pursuant to a request for confidential treatment and have been filed separately with the SEC.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 8, 2013.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 6, 2013.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 12, 2014.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 5, 2014.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 8, 2015, as amended by the Company's Quarterly Report on Form 10-Q/A
filed with the Securities and Exchange Commission on August 7, 2015.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 7, 2015.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 10, 2016.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 8, 2016.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on March 15, 2016.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on June 27, 2016.
86
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.
SIGNATURES
Air Transport Services Group, Inc.
Signature
/S/ JOSEPH C. HETE
Joseph C. Hete
Title
President and Chief Executive Officer (Principal
Executive Officer)
Date
March 8, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons in the capacities and on the date indicated:
Signature
/S/ RANDY D. RADEMACHER
Randy D. Rademacher
Director and Chairman of the Board
March 8, 2017
Title
Date
/S/ RICHARD M. BAUDOUIN
Richard M. Baudouin
Director
March 8, 2017
/S/ JOSEPH C. HETE
Joseph C. Hete
/S/ J. CHRISTOPHER TEETS
J. Christopher Teets
/S/ JEFFREY J. VORHOLT
Jeffrey J. Vorholt
/S/ QUINT O. TURNER
Quint O. Turner
Director, President and Chief Executive Officer
(Principal Executive Officer)
March 8, 2017
Director
Director
March 8, 2017
March 8, 2017
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
March 8, 2017
87
This Page Intentionally Left Blank
This Page Intentionally Left Blank
Air Transport Services Group 2016 Annual Report
Investor Information
Stock Information
NASDAQ: ATSG.
Company documents electronically filed with
the SEC also may be found at www.atsginc.com.
Registrar and Transfer Agent
Computershare Investor Services
(877) 581-5548 or (781) 575-2879
www.computershare.com/investor
By mail:
P.O. Box 30170
College Station, TX 77842
By courier:
211 Quality Circle, Ste 210
College Station, TX 77845
Independent Auditors
Deloitte & Touche LLP
Cincinnati, Ohio
Annual Meeting
The annual meeting of stockholders will be May
5, 2017, at 11 a.m. local time at The Roberts
Centre, 123 Gano Road, Wilmington, Ohio.
Investor Relations
Telephone inquiries may be directed
to (937) 434-2700.
Board of Directors
Randy D. Rademacher
Sr. Vice President and Chief
Financial Officer for Reading
Rock, Inc., a privately owned
manufacturer and distributor of
concrete products and other
building materials. Mr.
Rademacher has been a
Director of the Company since
December 2006 and Chairman
of the Board since May 2015.
He is a member of both the
Nominating and Governance
Committee and the Audit
Committee.
Richard M. Baudouin
Principal of Infinity Aviation
Capital, LLC, an investment
firm involved in aircraft leasing.
Mr. Baudouin has been a
Director of the Company since
January 2013. He is the
Chairman of the Nominating
and Governance Committee
and is a member of both the
Audit Committee and the
Compensation Committee.
Joseph C. Hete
President and Chief Executive
Officer of Air Transport
Services Group, Inc. and Chief
Executive Officer of ABX Air,
Inc. Mr. Hete has been with the
company since 1980.
J. Christopher Teets
Partner of Red Mountain
Capital Partners LLC. Mr.
Teets has been a Director of the
Company since February 2009.
He is the Chairman of the
Compensation Committee and
a member of the Nominating
and Governance Committee.
Jeffrey J. Vorholt
Independent consultant and
private investor. Mr. Vorholt has
been a Director of the Company
since January 2004. He is the
Chairman of the Audit
Committee and is a member of
the Compensation Committee.
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Air Transport Services Group, Inc.
145 Hunter Drive
Wilmington, Ohio 45177
www.atsginc.com