2019
annual report
Air Transport Services Group, Inc.
145 Hunter Drive
Wilmington, OH 45177
www.atsginc.com
QuickFactsannual reportHighlightsBLOCKHOUR 40% INCREASE YOY2019 23% AMAZON 14%DHL 34%DOD 29%OTHER Revenue by CustomerBILLION$1.45 Revenues $452MILLIONADJ. EBITDA*$60MILLIONGAAP Earnings *Adjusted EBITDA is a non-GAAP measure. For an explanation and a reconciliation to GAAP measures, see our 8-K filed on March 2,20202019 Results Continued strong growth in revenues, earnings and operating cash flow Revenues up 63% to $1.45 billion Eight more Boeing 767-300 freighter deployments and one passenger deployment for a total of nineOwned aircraft portfolio focused on mid-size freighterLong-term leases and operating contracts with blue-chip customer baseLargest global lessor of freighter aircraft Business model minimally exposed to trade disruptions or business cycleIN SERVICEFLEET COUNT777-200 - 3767-200 - 36767-300 - 50757-200 - 8737-400 - 198 TOTALAIRCRAFT 12-31-2019 ATSG Advantage /ATSGinc/air-transport-services-group/atsgincDifferentiated business model providing bundled services to our Lessees including A/CMI, maintenance, and logistics servicesAdj. EBITDA* up 45% to $452 millionOperating cash flow up 33% to $397 million Randy D. RademacherSenior Vice President-Strategy & Acquisitions at Reading Rock, Inc.Richard M. BaudouinSenior Advisor for Infinity TransportationRaymond E. Johns, Jr. United States Air Force General, RetiredLaura PetersonFormer Vice President, China Business Development, Boeing Commercial Airplanes Fellow, Stanford Distinguished Careers InstituteJ. Christopher TeetsPartner of Red Mountain Capital Partners LLCJeffrey J. VorholtIndependent Consultant and Private InvestorJoseph C. Hete Chief Executive Officer of ATSG, Inc.InvestorinformationStock InformationNASDAQ: ATSG Company documents electronically filed with the SEC also may be found at www.atsginc.comRegistrar and Transfer AgentComputershare Investor Services877.581.5548 or 781.575.2879www.computershare.com/investorP.O.Box 505000462 South 4th Street, Ste 1600Louisville, KY 40233-5000Independent AuditorsDeloitte & Touche LLPCincinnati, OHAnnual MeetingThe annual meeting of stockholders will be May 7, 2020 at 11 a.m. edt.via a live audio webcast atwww.virtualshareholdermeeting.com/ATSG2020. Investor RelationsInquires may be directed to investor.relations@atsginc.com©2020 Air Transport Services Group, Inc. 2019 was a year of record financial performance, as the company's major initiatives over the last several years yielded substantial gains in revenues, operating income, and cash flow.Thanks to our acquisition of Omni Air International in November 2018, ATSG began 2019 as a much larger company, with passenger as well as freighter aircraft in its fleet and the U.S. Government–primarily the Department of Defense–as its largest customer. I mentioned last year that diversifying our customer base has been a major objective e v e r s i n c e o u r s p i n - o ff f r o m t h e DHL/Airborne merger in 2003, when we were dependent on a single contract with DHL for 99% of our revenue and earnings. Sixteen years later, DHL remains a major customer, but represented just 14% of our 2019 revenues. We earned 23% of our revenues from Amazon last year, while the U.S. Department of Defense accounted for 34% of our 2019 revenues, up from 15% the year before, illustrating the increase in public sector work resulting from our acquisition of Omni.Those revenues grew by 63% to $1.45 billion, a record since we became a public company in 2003, excluding the reimbursements we used to include in revenue. On a Generally Accepted Accounting Principles basis, our earnings from continuing operations were $60.0 million, or $1.02 per share basic.Our operating results overall were strong. Operating Cash Flow, which excludes the many non-cash and non-recurring items affecting our GAAP earnings, increased 33% to a record $397 million last year. But once again, non-cash gains and losses had a major effect on our 2019 earnings. The largest impact continues to be from revaluation of unexercised warrants issued to Amazon. Those and other unrealized effects of re-measurement of financial instrumentvalues decreased ATSG's 2019 earningsby $8.1 million for 2019.Warrant losses for 2019 were a result of an increase in the probability of additional warrant issuances related to additional aircraft leases, and a 3% increase in the traded value of ATSG shares during the year. Increases in interest expense, depreciation and amortization expense, and in retiree benefit costs were also significant.“ was a year of record2019financial performance, as the company's major initiatives over the last several years yielded substantial gains in revenues, operating income, and cash flow.”To Our Shareholders ACMI Services, our airline operations segment, achieved more than $1 billion in revenues for the first time last year, and increased its pretax earnings to $32 million, nearly triple what it earned in 2018. That was a result of adding Omni, plus more flying for Amazon in support of its one-day delivery commitment. Cargo Aircraft Management, or CAM, grew larger as well, with a 25% increase in revenues to $285 million in 2019, including amortization of lease incentives to Amazon. CAM owned ninety-four aircraft in service at the end of 2019 (82 cargo, 12 passenger) versus 88 a year earlier. It owned ten other aircraft in cargo conversion or staging for lease. In May 2019, we completed another multi-year extension of our sixteen-year relationship with DHL. The extensions were for eleven of the fourteen 767 freighters we lease them; three are covered under longer leases with more than three years to run. ABX Air operates eight of the fourteen in DHL's U.S. network under a CMI agreement that we also extended. Six of the leased aircraft are in the Middle East, operated by one of DHL's airline affiliates there. We look forward to continuing our long-standing relationship with DHL.The acquisition of Omni was an important step in furthering one of ATSG's fundamental business goals – to invest in and deploy aircraft assets and related services in markets that are least vulnerable to business-cycle swings that affect other transport companies. That strategy is paying big dividends right now, as global transport is constrained by the coronavirus even as the demand for goods continues. The Amazon- and DHL-leased 767s we fly across the U.S. are helping to fill the gap caused by reduced belly space in passenger aircraft. Our military flying is keeping troop rotations and other force movements on schedule. The majority of our cash flow stems from multi-year leases and operating agreements with some of the most creditworthy entities in the world. In 2020, we expect our capital spending to fall about $30 million from 2019 levels to $420 million. Of that amount, about $300 million will be used to acquire, convert and lease more 767 freighters. The eight to ten additional 767s we expect to deploy this year include four freighters we will lease to Amazon, completing our current commitment for thirty freighters to them, plus three more of the five we committed to United Parcel Service, two of which we delivered last year. “ is paying big That strategydividends right now, as global transport is constrained by the coronavirus even as the demand for goods continues.” Most of those 2020 deployments will be from feedstock 767-300s we acquired in 2019, and we expect to end 2020 with eight 767s in cargo conversion, including three that by then are virtually complete. In 2021, we expect our capital spending to fall again. We will investigate additional opportunities to allocate incremental cash flow toward debt reduction and other avenues for promoting shareholder value. As of today, we have more than $60 million in share repurchasing authority under our current Board authorization. With lender approval, we may even take advantage of today's low stock prices to exercise some of that authority sooner and keep prudent repurchasing of shares as a key component of our capital allocation toolkit going forward. On March 2, 2020, we set a 2020 financial goal of upper single-digit growth in a cash-flow measure that excludes the warrant and other mainly non-cash items that trigger most of the volatility in our reported GAAP earnings. At that time, it reflected, among other items, organic growth and the impact of seven aircraft – three 767 and four 757 freighters – that will be returned to us by their lessors and operators. We intend to redeploy most of them with other customers, but for several months they will be staging for their next opportunity. Since early March, however, we have seen impacts from the coronavirus pandemic particularly through reductions on our passenger flying for the Department of Defense and others. We expect these operations to return to previous levels once the pandemic restrictions are lifted. One of our key goals for 2020 has already been accomplished. We began discussions with our lenders and underwriters last fall about an offering of unsecured notes that would replace a portion of our secured variable-rate bank debt. In November, we amended our secured credit facility to reduce its interest rate pricing and extend its term into late 2024. “We hope to mark off another commitment this summer with federal approval of a Supplemental Type Certificate for the Airbus A321 freighter conversion program we launched more than two years ago.” That action paved the way in January for our first-ever publicly rated debt offering. Response to the offering of eight-year unsecured notes was so favorable that we were able to raise its size from $400 million to $500 million, and it priced at an attractive 4.75% fixed rate. The addition of the unsecured bond in our debt capital structure lengthens our remaining debt duration, and along with the favorable bank amendment in November, reduces our annual interest expense. We used the proceeds to pay down balances on our revolver debt, which provides us with great liquidity and flexibility going forward. We hope to mark off another commitment this summer with federal approval of a Supplemental Type Certificate for the Airbus A321 freighter conversion program we launched more than two years ago. When approved, we expect that aircraft to fill a key niche in the air express network market. It will be a more efficient replacement of the Boeing 757, but with the operating economics of a Boeing 737. We are talking with customers about it today and may elect to begin A321 feedstock investments in the future. This is my last letter as your CEO. I will be retiring at the end of our Annual Meeting on May 7th, when Rich Corrado becomes CEO and I take on the role of Board Chairman. I have been honored to work alongside and lead the best team in the air cargo industry, over my nearly four decades with ATSG. Our employees have been dedicated to growing ATSG into a global leader, but our growth would not have been possible without support from our community and state who have been supportive throughout our history. From my first day in 1980 to my final day in 2020, I have been privileged to witness this company achieve results that delivered value to our customers and shareholders around the globe. While challenging times can sometimes throw financial markets into turmoil, I am proud of the long-term shareholder value we have created together, and the strong reputation for service and quality we have earned. I wish all of you well in the future, as I remain confident that even better days are ahead for ATSG. Best regards,Joseph C. HeteChief Executive Officer“I have been honored to work alongside and lead the best team in the air cargo industry, over my nearly four decades with .”ATSG 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, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 000-50368
________________________________________________________________
Air Transport Services Group, Inc.
(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 Exchange Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
ATSG
NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Exchange 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
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
No
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”
and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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:
$1,416,475,681.
As of March 2, 2020, there were 59,329,431 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders scheduled to be held May 7, 2020 are incorporated by reference into
Parts II and III.
FORWARD LOOKING STATEMENTS
This annual report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
in Item 7, contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks
and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and includes any
statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as
“future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar
terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed
in “Risk Factors” in Item 1A . The Company assumes no obligation to revise or update any forward-looking statements for any reason, except
as required by law.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
2018 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
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
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
SIGNATURES
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PART I
ITEM 1. BUSINESS
Company Overview
We are a leading provider of aircraft leasing and air cargo transportation and related services in the United States
and internationally and are the largest lessor of freighter aircraft in the world. In addition, we are the largest provider
of passenger charter service to the United States Department of Defense (“DoD”) and other governmental agencies.
Our portfolio of freighter aircraft is focused on mid-sized air freighters, which is the category of choice for express and
e-commerce driven regional air networks operating both within and outside the United States. Approximately 94% of
our freighter fleet are Boeing 767 aircraft, which is highly sought because of its reliability, cubic cargo capacity and
durable performance. We have also launched a joint venture to convert Airbus A321 passenger aircraft into freighters,
which is intended to further support our ability to meet the growing demand worldwide for narrow body air freighters.
(When the context requires, we may use the terms “Company,” "we," "our" and “ATSG” in this report to refer to the
business of Air Transport Services Group, Inc. and its subsidiaries on a consolidated basis.)
Through our subsidiaries, we own and lease aircraft to external customers and to our own airline subsidiaries. In
addition, we provide airline operations, ground handling services, aircraft maintenance and modification services, and
other support services to the air transportation and logistics industries. Our customers consist of delivery businesses,
freight forwarders, ecommerce companies, airlines and governmental agencies. We believe our ability to offer our
customers a bundle of customized and differentiated services, including aircraft leasing, airline express operations, line
and heavy maintenance, freighter conversions, material handling equipment and ground handling services makes us
unique from other service providers in the air transportation industry. Through our decades of experience with express
network airline operations, we offer best in class, reliable services to customers including Amazon.com, Inc.
(“Amazon”), DHL Network Operations (USA), Inc. and its affiliates (“DHL”), and United Parcel Service.
We are a leader in an industry with established barriers to entry, possessing reliable airlift capability, and strategic
alignment with our key customers. We are unique in our ability to offer a broad range of integrated, operational solutions
to air cargo and express package transportation companies and e-commerce companies, as well as charter passenger
transport to governmental and commercial entities. Our services are tailored to the needs of the customer and include
a combination of aircraft, crews and maintenance services as well as aircraft charter and lease transitioning services.
We also offer a broad range of ancillary services including engineering services, sort and gateway operations, equipment
installation, maintenance and leasing, and aircraft modifications. Our differentiated business model reduces our exposure
to trade disruption and cyclical GDP, with limited payload and fuel risk. We believe that the wide scope of our services
combined with our ability to provide services in a customized bundle to meet the requirements of each customer gives
us a competitive advantage over other companies in our industry.
We were founded in 1980 as a wholly-owned subsidiary of Airborne Express. We became an independent, publicly-
owned company in August 2003, as a result of a spin-off by Airborne Express prior to its acquisition by DHL. The
spin-off was necessitated in large part due to restrictions imposed by federal law on foreign ownership of U.S. airlines.
Our headquarters are located at the Wilmington Air Park in Wilmington, Ohio, which also serves as a regional air hub
for Amazon. The Company is incorporated in Delaware. Our common shares are publicly traded on the NASDAQ
Stock Market under the symbol ATSG.
Principal Services
Our principal services fall into three general categories:
Aircraft leasing. We own and lease aircraft through our subsidiary Cargo Aircraft Management, Inc. (“CAM”).
We are able to provide competitive lease rates for our cargo freighters by purchasing passenger aircraft, typically 15
to 20 years old, and converting them into cargo freighters, after which we anticipate an economic life of 20 years or
more. We monitor the global market for available passenger aircraft and only purchase aircraft for conversion that
meet our requirements for condition and technical specifications and that can be purchased and converted into freighters
at a price that will meet or exceed our targeted return on capital. Aircraft freighters that are converted from passenger
aircraft can be deployed into markets more economically in comparison to newly-built freighters.
Aircraft operations. We own and operate three separate airline subsidiaries: ABX Air, Inc. (“ABX”), Air Transport
International, Inc. (“ATI”), and Omni Air International, LLC (“OAI”). Each of these airlines is independently certificated
1
by the United States Department of Transportation ("DOT") and by the Federal Aviation Administration, ("FAA"), a
constituent agency of the DOT. Our airline subsidiaries offer different combinations of aircraft, crews, maintenance
and insurance to provide customized transportation capacity to our customers. We specialize in carrying both freight
and passengers for a variety of customers, including private sector companies and governmental organizations. ABX
operates all-cargo aircraft; ATI operates all-cargo and passenger/freighter combination ("combi") aircraft; and OAI
operates passenger aircraft.
Support services. We provide a wide range of air transportation related services to our customers including aircraft
maintenance and modification, ground handling and crew training. We offer these support services to delivery
companies, e-commerce companies, freight forwarders and other airlines. Our ground support services, which are
provided through our subsidiary, LGSTX Services, Inc. (“LGSTX”), consist of load transfer and sorting, the design,
installation and maintenance of material handling equipment, the leasing and maintenance of ground support equipment,
and general facilities maintenance. LGSTX has more than 30 years of experience in material handling, facilities
maintenance, equipment installation and maintenance, vehicle maintenance and repair, and jet fuel and deicing services.
Our aircraft maintenance and modification services, which are provided by our subsidiaries, Airborne Maintenance
and Engineering Services, Inc. (“AMES”) and Pemco World Air Services, Inc. (“Pemco”), provide airframe modification
and heavy maintenance, component repairs, engineering services and aircraft line maintenance. Another subsidiary,
AMES Material Services, Inc. ("AMS"), resells and brokers aircraft parts. Our support services also involve the training
of flight crews, which we offer through our subsidiary, ABX.
The business development and marketing activities of our operating subsidiaries are supported by our 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 our customers' own resources and support
our operational growth. AGS assists our subsidiaries in achieving their sales and marketing plans by identifying their
customers' business and operational requirements while providing sales leads.
The Company has two reportable segments, "CAM" which includes our aircraft and engine leasing and “ACMI
Services" which includes the airlines' operations. Our support services operations do not constitute reportable segments.
External revenues for 2019 are summarized below (in thousands):
CAM
ACMI
Services
Support Services
Aircraft
Maintenance &
Modification
Ground
Services
Other
External revenues (in thousands)
$168,106
$1,078,143
$117,772
69,596
$18,566
Percent of consolidated revenues
12%
74%
8%
5%
1%
Aircraft maintenance and modification services revenues include the operations of our AMES and Pemco
subsidiaries. Ground services revenues include load transfer as well as ground equipment leasing and maintenance
primarily provided by our LGSTX subsidiaries.
Major Customers
We have long-standing, strategic customer relationships with Amazon, DHL and the DoD in addition to numerous
other companies and government agencies that rely on aircraft services in their operations.
DHL. We have provided aircraft services to DHL under multi-year contracts since August 2003. DHL accounted
for 14% of our consolidated revenues for 2019. As of December 31, 2019, we were leasing 14 of our Boeing 767
aircraft to DHL under multi-year contracts. We operate eight of these aircraft for DHL under a separate operating
agreement. We provide ground service equipment to DHL in multiple airport locations in the Unites States and provide
aircraft line and heavy maintenance for DHL affiliates.
Amazon. We have been providing freighter aircraft and cargo handling and logistics support services to Amazon.com
Services, LLC (“ASI”), successor to Amazon.com Services, Inc., a subsidiary of Amazon, since September 2015.
Revenues from our commercial arrangements with ASI comprised approximately 23% of our consolidated revenues
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for 2019. Our CAM subsidiary has leased 26 Boeing 767 freighter aircraft to ASI as of December 31, 2019, with five
additional aircraft to be leased in 2020. We also provide flight crew and aircraft maintenance services for those aircraft
under an Air Transportation Services Agreement with ASI.
U.S. Department of Defense. Our airline subsidiaries have been providing services to the DoD since the 1990’s.
The DoD comprised 34% of our consolidated revenues for 2019. Our business with the DoD and other government
agencies expanded significantly as a result of our November 2018 acquisition of OAI, which is discussed below.
Business Development
On November 9, 2018, we acquired OAI, a passenger airline, along with related entities Advanced Flight Services,
LLC; Omni Aviation Leasing, LLC; and T7 Aviation Leasing, LLC (referred to collectively herein as "Omni"). OAI is
a leading provider of contracted passenger airlift for the U.S. Department of Defense ("DoD") via the Civil Reserve
Air Fleet ("CRAF") program, and a provider of full-service passenger charter and ACMI services. OAI carries
passengers worldwide for a variety of private sector customers and other government services agencies. The addition
of Omni expanded our customer solution offerings primarily through additional passenger transportation capabilities
and the authority to operate Boeing 777 aircraft. The acquisition increased the Company's revenues, cash flows and
customer diversification. (Additional information about the acquisition of Omni is presented in Note B to the
accompanying consolidated financial statements.)
In September 2015, we began to operate a trial air network for Amazon.com Services, LLC ("ASI"), the successor
to Amazon.com Services, Inc., 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 ASI entered into an Air Transportation Services Agreement (the “ATSA”) which became effective
April 1, 2016. Pursuant to the ATSA, CAM leased 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200
freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. Under
the ATSA, ABX and ATI operate those aircraft for an initial term of five years while our LGSTX subsidiary provides
gateway services for ASI at certain airports.
In conjunction with the execution of the original ATSA, the Company and Amazon entered into an Investment
Agreement and a Stockholders Agreement, each dated March 8, 2016. The Investment Agreement calls for the Company
to issue warrants in three tranches, which will result in Amazon having the right to acquire up to 19.9% of the Company’s
outstanding common shares measured as further described below. The first tranche of warrants, issued upon execution
of the Investment Agreement, gives Amazon the right to purchase approximately 12.81 million ATSG common shares,
all of which are now vested. The second tranche of warrants, which were issued and vested on March 8, 2018, gives
Amazon the right to purchase approximately 1.59 million ATSG common shares. The third tranche of warrants will
be issued on September 8, 2020 and will immediately be exercisable upon issuance. The third tranche of warrants will
give 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, 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. 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.
On December 22, 2018, we announced amendments to our agreements with Amazon to 1) lease and operate ten
additional Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing 767-200 aircraft then leased to ASI by
two years to 2023, with an option for ASI to extend the lease term for three additional years, 3) extend the term of the
eight Boeing 767-300 aircraft then leased to ASI by three years to 2026 and 2027, with an option for ASI to extend the
lease term for three additional years and 4) extend the ATSA for five years through March 2026, with an option for ASI
to extend the term for an additional three years. We delivered six of the 767-300 aircraft in 2019 and expect to deliver
the remaining four in 2020, each under a ten year lease.
In conjunction with ASI's commitment for ten additional 767 aircraft leases, extensions of twenty existing Boeing
767 aircraft leases and the ATSA described above, Amazon was issued warrants for 14.8 million common shares which
could expand its potential ownership in the Company to approximately 33.2%, including the warrants described above
under the 2016 agreements. Warrants for 11.1 million of these common shares vested as existing leases were extended
and six additional aircraft leases were executed and added to the ATSA operations. Additional warrants will vest as
3
four additional aircraft leases are executed, which is expected to occur in 2020. These warrants will expire if not
exercised within seven years from their issuance date. They have an exercise price of $21.53 per share, based on the
volume-weighted average price of the Company's shares over the 30 trading days' immediately preceding execution
of a non-binding term sheet by the parties on October 29, 2018.
Additionally, Amazon can earn incremental warrant rights, increasing its potential ownership from 33.2% up to
approximately 39.9% of the Company, by leasing up to seventeen more cargo aircraft from the Company before January
2026. The exercise price of incremental warrants related to future aircraft leases will be based on the volume-weighted
average price of ATSG’s shares during the 30 trading days immediately preceding the contractual commitment for each
lease.
We have had multi-year contracts with DHL Network Operations (USA), Inc. and its affiliates ("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 agreement.
Effective April 1, 2015, the Company and DHL amended and restated the agreements (together, the "CMI agreement")
which extended the Boeing 767 aircraft lease terms and the operation of those aircraft through March 2019. In March
2019, the expiring Boeing 767 aircraft leases and CMI agreement with DHL were renewed under terms similar to the
previous agreements. On April 30, 2019, we extended the leases for four of the 767-300 aircraft and one of the 767-200
aircraft leased to DHL through April 2022. We also extended the leases for six of the 767-200 aircraft through March
2022.
Through CAM and the acquisition of Omni, we have expanded our combined fleet of Boeing 777, 767, 757 and
737 aircraft in recent years. Since the beginning of 2016, CAM has managed the modification of 30 Boeing 767-300
passenger aircraft to a freighter configuration and two Boeing 737 passenger aircraft to a freighter configuration. CAM
added two Boeing 767-200 passenger aircraft, six Boeing 767-300 passenger aircraft and three Boeing 777-200
passenger aircraft through the Company's acquisition of Omni on November 9, 2018. We have agreements to acquire
15 more Boeing 767-300 extended-range aircraft through 2021. They were manufactured between 1989 and 2003, and
are powered by General Electric CF6-series engines. Most of these will be converted into freighters. Additionally we
own eight Boeing 767-300 aircraft that were being prepared for cargo service as of December 31, 2019. A complete
list of the Company's aircraft is included in Item 2, Properties.
On February 1, 2019, the we acquired a group of companies under common control, referred to as TriFactor.
TriFactor resells material handling equipment and provides engineering design solutions for warehousing, retail
distribution and e-commerce operations. TriFactor is managed through our LGSTX business.
On August 3, 2017, we entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop
a passenger-to-freighter conversion program for Airbus A321-200 aircraft. We anticipate approval of an FAA
supplemental type certificate in 2020. We expect to make contributions equal to our 49% ownership percentage of the
program's total costs over the next year and account for our investment in the joint venture under the equity method of
accounting.
In December 2016, we 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. 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. Pemco's aircraft
conversion capabilities and aircraft hangar operations are marketed with our other air transportation support services.
On January 28, 2020, we completed a debt offering of $500 million in senior unsecured notes (the “Senior Notes”).
The Senior Notes were sold only to qualified institutional buyers in the United States pursuant to Rule 144A under the
Securities Act of 1933, as amended (the “Securities Act”), and certain investors pursuant to Regulation S under the
Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a rate of 4.75% per year, payable
semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2020. The Senior Notes will
mature on February 1, 2028. The Senior Notes contain financial and non-financial covenants and events of default
which are generally no more restrictive than those set forth in the Senior Credit Agreement. The net proceeds from the
Senior Notes were used to pay down the Company's revolver credit facility.
4
Description of Businesses
CAM
CAM leases aircraft to ATSG's airlines and to external customers, including DHL and ASI, 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 and cycles 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.
ACMI Services
ACMI Services consists of the operations of the Company's three airline subsidiaries. Through the airlines, we
provide airlift operations to DHL, ASI, the DoD and other transportation customers. 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 for specified transportation operations. These services are commonly referred to as ACMI,
CMI or charter services depending on the selection of services contracted by the customer. The customer bears the
responsibility for capacity utilization and unit pricing in all cases.
ACMI - The airline provides the aircraft, flight crews, aircraft maintenance and aircraft hull and liability
insurance while the customer is typically responsible for substantially all other aircraft operating expenses,
including fuel, landing fees, parking fees and ground and cargo handling expenses.
CMI -The customer is responsible for providing the aircraft, in addition to the fuel and other operating
expenses. The airline provides the flight crews, aircraft hull and liability insurance and typically aircraft line
maintenance as needed between network flights.
Charter - The airline is responsible for providing full service, including fuel, aircraft, flight crews,
maintenance, aircraft hull and liability insurance, landing fees, parking fees, ground and cargo handling
expenses and other operating expenses for an all-inclusive price.
Our airlines participate in the DoD CRAF Program which allows our airlines to bid for military charter operations
for passenger and cargo transportation. Our airlines provide charter operations to the Air Mobility Command ("AMC")
through contracts awarded by the U.S. Transportation Command ("USTC"), both of which are organized under the
DoD. The USTC secures airlift capacity through fixed awards, which are awarded annually, and through bids for
"expansion routes" which are awarded on a quarterly, monthly and as-needed basis. Under the contracts, we are
responsible for all operating expenses including fuel, landing and ground handling expenses. We receive reimbursements
from the USTC each month if the price of fuel paid by us for the flights exceeds a previously set peg price. If the price
of fuel paid by us is less than the peg price, then we pay the difference to the USTC. Airlines may participate in the
CRAF program either independently, or through teaming arrangements with other airlines. Our airlines are members
of the Patriot Team of CRAF airlines. We pay a commission to the Patriot Team, based on certain revenues we receive
under USTC contracts.
ATI contracts with the USTC to operate 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 DoD since 1993. In January 2018, the USTC contracted with ATI to provide combi aircraft operations through
December 2021 and awarded ATI three international routes for combi aircraft. OAI has been operating aircraft for the
DoD since 1995. Contracts with the USTC are typically for a one-year period, however, the current passenger
international charter contract has a two year term with option periods, at the election of the USTC, through September
2024.
Approximately 15% of the Company's consolidated revenues for 2019 were derived from providing airline
operations for customers other than DHL, ASI and the DoD. These ACMI and charter operations are typically provided
to delivery companies, freight forwarders, vacation businesses and other airlines.
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We provide contracted transportation capacity to our customers. We do not sell passenger travel tickets, nor do
we sell individual package delivery services. Our airlines operate wide-body and medium wide-body aircraft usually
on intra-continental flights and medium and long range inter-continental flights. The airlines typically operate our
freighter aircraft in the customers' regional networks that connect to and from global cargo networks. The aircraft 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 aircraft, such as the Boeing 747 and Airbus A380.
Demand for air cargo transportation 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
increases the need for air 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
and Amazon, like most of our ACMI customers, procure 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
component. We market our subsidiaries capabilities by identifying aviation-related maintenance and modification
opportunities and matching them to customer needs.
AMES operates in Wilmington, Ohio, a repair station certified by the Federal Aviation Administration (“FAA”)
under Part 145 of the Federal Aviation Regulations, 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. The Wilmington facility is capable of
servicing airframes as large as the Boeing 747-400 and the Boeing 777 aircraft. AMES , through its Pemco subsidiary,
also operates an FAA certificated Part 145 repair station from a two hangar facility in Tampa, Florida. The Tampa
location has the capability to perform airframe maintenance on Boeing 767, 757, 737, McDonnell Douglas MD-80,
Airbus A320, A321 and various regional jet model aircraft. We have the ability to perform line maintenance and
airframe maintenance on McDonnell Douglas MD-80, Boeing 767, 757, 737, 777, 727 and Airbus A320 aircraft. We
also have the capability to refurbish airframe components, including approximately 60% of the components utilized
by Boeing 767 aircraft. Through Pemco, we also perform aircraft modification and engineering services, including
passenger-to-freighter and passenger-to-combi conversions for Boeing 737-200, 737-300, 737-400 and 737-700 series
aircraft.
AMS is an Aviation Suppliers Association, ASA 100 Accredited reseller and broker of aircraft parts. AMS carries
an inventory of Boeing 767, 757 and 737 spare parts and also maintains inventory on consignment from original
equipment manufacturers, resellers, lessors and other airlines. AMS's 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.
Ground Services
Through the Company's LGSTX subsidiaries, we provide labor and management for load transfer and sorting
services at certain facilities inside or near airports in the U.S. LGSTX also arranged similar load transfer services to
support ASI at certain locations, but the contracts for these services were terminated as of August 2019. LGSTX also
provides maintenance services for material handling and sorting equipment as well as 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, ground handlers, airlines and other customers. LGSTX is also licensed
6
to resell aircraft fuel. Additionally, we provide international mail forwarding services through the John F. Kennedy
International Airport and the O'Hare International Airport.
We provided mail sorting services at various United States Postal Service ("USPS") locations between September
2004 and September 2018. The contracts for the five USPS facilities we serviced were not renewed with us after they
expired during September 2018.
Flight Support
ABX and OAI are FAA certificated to offer flight crew training to customers. ATI has a Boeing 757 flight simulator
and ABX has a Boeing 767 flight simulator which can be rented for customer outside training programs. The simulators
allow airlines to qualify flight crewmembers under FAA requirements without performing check flights in an aircraft.
Competitive Conditions
Competition for aircraft lease placements is generally affected by aircraft type, aircraft availability and lease rates.
The aircraft in our fleet provide cost-effective air transportation for medium range requirements. We target our leases
to cargo airlines and delivery companies seeking medium widebody airlift. We believe our fleet gives us the ability to
offer our customers a superior value proposition. Competitors in the aircraft leasing markets include GE Capital Aviation
Services and Altavair Aviation Leasing, among others. The Airbus A300-600 and A330 aircraft can provide capabilities
similar to the Boeing 767 for medium wide-body airlift.
Our airline subsidiaries compete with other airlines to place aircraft under ACMI arrangements and charter contracts.
Other cargo airlines include Amerijet International, Inc., Atlas Air, Inc., Kalitta Air LLC, Northern Air Cargo, LLC,
National Air Cargo Group, Inc., Southern Air, Inc. and Western Global Airlines, LLC. Of these, Atlas Air, Inc. also
operates passenger aircraft. The primary competitive factors in the air transportation 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 transportation industry is capital intensive and highly competitive, especially during
periods of excess aircraft capacity competing for commercial cargo and passenger volumes and DoD requirements.
The scheduled delivery industry is dominated by integrated door-to-door delivery companies including DHL, the
USPS, FedEx Corporation, United Parcel Service, Inc. and ASI. Although the volume of our business is impacted by
competition among these integrated carriers, we do not usually compete directly with them.
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
The Company's airline operations are conducted pursuant to authority granted to each of the three airlines by the
FAA and the U.S. 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
minimum 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 length of 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
7
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 and Pemco, to perform heavy maintenance on airframes and engines.
Each airline owns and maintains an inventory of spare aircraft engines, engine parts, 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 ABX and ATI to comply with security protocols as
set out in each carrier’s standard all-cargo aircraft operator security plan which provide for extensive security practices
and procedures that must be followed. The security plan provides for the conducting of background checks on persons
with access to cargo and/or aircraft, the securing of the aircraft while on the ground, the acceptance and screening of
cargo 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. In the
case of OAI, a passenger carrier, and for ATI's passenger/freighter "combi" operations, additional requirements apply
under the carriers' respective security programs, including passenger and baggage screening, airport terminal security,
assessment and distribution of intelligence including the TSA "no-fly" list, and threat response.
Customers are required to inform the airlines in writing of the nature and composition of any freight which is
classified as "Hazardous Materials" or “Dangerous Goods” by the DOT and passengers are generally prohibited from
carrying "Hazardous Materials" or “Dangerous Goods” in their baggage. Notwithstanding these procedures, our airline
subsidiaries could unknowingly transport contraband or undeclared hazardous materials for customers, or could
unknowingly transport an unauthorized passenger or a passenger in possession of an unauthorized item, 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, 2019, the Company had approximately 4,380 full-time and part-time employees. The Company
employed approximately 910 flight crewmembers, 355 flight attendants, 1,880 aircraft maintenance technicians and
flight support personnel, 770 employees for airport maintenance and logistics, 45 employees for sales and marketing
and 420 employees for administrative functions. In addition to full time and part time employees, the Company
typically has approximately 275 temporary employees mainly serving the aircraft line maintenance operations. On
December 31, 2018, the Company had approximately 3,830 full-time and part-time employees.
8
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, 2019.
Airline
ABX
ATI
Omni
ATI
Omni
Labor Agreement Unit
International Brotherhood of Teamsters
Air Line Pilots Association
International Brotherhood of Teamsters
Association of Flight Attendants
Association of Flight Attendants
Contract
Amendable
Date
12/31/2014
3/21/2021
4/1/2021
11/14/2023
12/1/2021
Percentage of
the Company’s
Employees
5.3%
8.3%
7.1%
0.9%
7.3%
Under the Railway Labor Act (“RLA”), as amended, 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, including
flight attendants for passenger and "combi" aircraft. 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.
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 dependent on technology to conduct our daily operations including data processing, communications and
regulatory compliance. We rely on critical computerized systems for aircraft maintenance records, flight planning,
crew scheduling, employee training, financial records, cyber-security and other processes. We utilize information
systems to maintain records about the maintenance status and history of each major aircraft component, as required by
FAA regulations. Using our information systems, we track maintenance schedules and also control inventories and
maintenance tasks, including the work directives of personnel performing those tasks. We rely on information systems
to track crewmember flight and duty times, and crewmember training status. The Company’s flight operations systems
coordinate flight schedules and crew schedules.
We invest significant time and financial resources to acquire, develop and maintain information systems to facilitate
our operations. Our information technology infrastructure includes security measures, backup procedures and
redundancy capabilities. We rely increasingly on third party applications and hosted technologies. To remain
competitive we must continue to deploy new technologies while controlling costs and maintaining regulatory
compliance.
9
Regulation
Our subsidiaries’ airline operations are primarily regulated by the DOT, the FAA and the Transportation Security
Administration ("TSA"). Those operations must comply with numerous economic, safety, security and environmental
laws, ordinances and regulations. In addition, they must comply with various other federal, state, local and foreign laws
and regulations.
Environment
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 2016,
however, the EPA issued a finding on greenhouse gas ("GHG") emissions from aircraft and its relationship to air
pollution. This finding is a regulatory prerequisite to the EPA’s adoption of a new certification standard for aircraft
emissions. In its regulatory agenda issued in the fall of 2019, the EPA expressed an intent to publish these proposed
regulations in early 2020; based on previous postponements, the agency may or may not meet that target. 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 GHG 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 GHG emissions to the airline industry. Currently, under the European Union’s ETS, all ABX, ATI
and OAI 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 produces 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. Our airlines operate intra-EU flights from time to time and management believes that such flights are operated
in compliance with ETS requirements.
Similarly, in 2016, the ICAO passed a resolution adopting the Carbon Offsetting and Reduction Scheme for
International Aviation (“CORSIA”), which is a global, market-based emissions offset program to encourage carbon-
neutral growth beyond 2020. A pilot phase is scheduled to begin in 2021 in which countries may voluntarily participate,
and full mandatory participation is scheduled to begin in 2027. ICAO continues to develop details regarding
implementation, but compliance with CORSIA will increase our operating costs.
However, the U.S. recently withdrew from the Paris climate accord, an agreement among 196 countries to reduce
GHG emissions, and the effect of that withdrawal on future U.S. policy regarding GHG emissions, on CORSIA and
on other GHG regulation is uncertain.
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 and international air transportation serving the United
States, such as consumer protection, accommodation of passengers with disabilities, requiring a minimum level of
insurance and the requirement that a company 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 certain international routes.
The DOT has issued to ABX a Domestic All-Cargo Air Service Certificate for air cargo transportation between all
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points within the U.S., the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The DOT has issued to 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 to 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 approximately 130
foreign countries. ABX and ATI also hold 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 a liberal ("open-skies")
air transportation agreement. The DOT has issued to OAI a Certificate of Public Convenience and Necessity for
Interstate Charter Air Transportation and a Certificate of Public Convenience and Necessity for Foreign Charter Air
Transportation that authorizes it to engage in interstate and foreign charter air transportation of persons, property and
mail. In 2019, the DOT also issued OAI exemption authority to engage in scheduled foreign air transportation of
property and mail between the U.S. and all existing and future countries with an open-skies air service agreement with
the U.S.
By maintaining these certificates, the Company, through ABX and ATI, can and currently does conduct all-cargo
charter operations worldwide subject to the receipt of any necessary foreign government approvals. Further, the
certificates issued to ATI and OAI authorize the air carriers to conduct passenger charter operations worldwide subject
to the receipt of any necessary foreign government approvals. Periodically, the DOT re-examines a company’s
managerial competence, financial resources and plans, compliance disposition and citizenship in order to determine
whether the carrier remains fit, willing and able to engage in the transportation services it is authorized to provide.
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 or a limited
liability company structured like a corporation holding the above-referenced certificates and exemption authorities
must continuously 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 no more 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 their current operations
and that each continues 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 safely 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, ATI and OAI believe they hold
all airworthiness and other FAA certificates and authorities required for the conduct of their business and the operation
of their aircraft. The FAA has the power to suspend, modify or revoke such certificates for cause and to impose civil
penalties for any failure to comply with federal laws or 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 found 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
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basis. FAA regulations mandate that aircraft manufacturers establish aircraft limits of validity and service action
requirements based on the number of aircraft flight cycles (a cycle being one takeoff and one landing) and flight hours
before widespread fatigue damage might occur. Service action requirements include inspections and modifications to
preclude development of significant 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, 767 and 777 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 an extension 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 our airline subsidiaries to implement a drug and alcohol testing program with respect to
all employees performing safety sensitive functions and, unless already subject to testing, contractor employees that
engage in safety sensitive functions. Each of the Company's 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 and their baggage. TSA rules also dictate the manner in which cargo must be screened prior to being loaded
on aircraft. Our airline subsidiaries comply with all applicable aircraft, passenger and cargo security requirements.
The TSA has adopted cargo security-related rules that have imposed additional burdens on our airlines and our customers.
The TSA also 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. The TSA holds (and has exercised) authority to issue regulations, including in cases of emergency the
authority to do so without advance notice, including issuance of a grounding order as occurred on September 11, 2001.
TSA's enforcement powers are similar to the DOT's and FAA's described above.
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, the airlines' operating rights are governed 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. Foreign laws, rules, regulations and licensing requirements governing air transportation are generally
similar, in principle, to the regulatory scheme of the United States as described above, although in some cases foreign
requirements are comparatively less onerous and in others, more onerous. Such authorities have enforcement powers
generally similar to those of the U.S. agencies described above.
Data Protection
There has recently been increased regulatory and enforcement focus on data protection in the U.S. (at both the state
and federal level) and in other countries. For example, the European Union ("E.U.") General Data Protection Regulation
("GDPR"), which became effective in May 2018, greatly increases the jurisdictional reach of E.U. law and increases
the requirements related to the protection of personal data, including individual notice and opt-out preferences and
public disclosure of significant data breaches. Additionally, violations of the GDPR can result in significant fines.
Other governments have enacted or are enacting similar data protection laws, and are considering data localization
laws that would govern the use of data outside of their respective jurisdictions.
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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:
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•
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•
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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 issues landing rights, inspects passengers entering the United States,
and inspects cargo imported to the U.S. from our subsidiaries’ international operations, and those operations
are subject to similar regulatory requirements in foreign jurisdictions;
The Company and its subsidiaries must comply with U.S. Citizenship and Immigration Services regulations
regarding the eligibility of our employees to work in the U.S., and the entry of passengers to the U.S.;
The Company and its subsidiaries must comply with wage, work conditions and other regulations of the
Department of Labor regarding our employees; and
The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury and other government
agencies administer and enforce 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.
A limited number of key customers are critical to our business and the loss of one or more of such customers could
materially adversely affect our business, results of operations and financial condition.
Our business is dependent on a limited number of key customers. There is a risk that any one of our key customers
may not renew their contracts with us on favorable terms or at all, perhaps due to reasons beyond our control. As
discussed below, certain key customers have the opportunity to terminate their agreements in advance of the expiration
date.
The economic conditions in the U.S. and in other markets may negatively impact the demand for the Company’s aircraft
and services.
Air 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, ASI and other delivery
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businesses, in particular expedited shipping services utilizing aircraft, as well as the demand for the chartered passenger
flights OAI operates. Further, during an economic slowdown, cargo customers generally prefer to use ground-based
or marine transportation services instead of more expensive air transportation services. Accordingly, an economic
downturn could reduce the demand for airlift and aircraft leases. Additionally, if the price of aviation fuel rises
significantly, the demand for aircraft and air transportation 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. When the cost of air transportation increases, the demand for passenger transportation may decline.
On occasion, declines in demand may stem from other uncontrollable factors such as geopolitical tensions or conflicts,
trade embargoes or tariffs, and human health crises. We may experience delays in the deployment of available aircraft
with customers under lease, ACMI or charter arrangements and our revenues may be adversely affected.
Our operating results could be negatively impacted by the outbreak of contagious diseases.
The recent outbreak of a novel strain of the coronavirus (COVID-19) has resulted in the limitation of flights in
and out of China, quarantines and supply chain disruptions. In the near term, the coronavirus and the governmental
responses thereto are anticipated to result in reduced activity on international lanes linked to China as well as
reduced freight activity in the U.S. arising from a fall-off in imported container goods. The coronavirus outbreak
may also result in a reduction in the passenger flight operations that we perform on behalf of customers.
Our costs incurred in providing airline services could be more than the contractual revenues generated.
Each airline develops business proposals for the performance of ACMI, CMI, charter and other services for its
customers, including DHL, ASI and the DoD, 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. Lastly, because the majority of OAI's business currently consists of flights chartered by
the U.S. Department of Defense (DoD) for the transportation of DoD personnel, a downturn in DoD's need for such
services could adversely affect OAI's operating results.
The Company’s airlines rely on flight crews that are unionized. If collective bargaining agreements increase our
costs and we cannot recover such increases, our operating results would be negatively impacted. It may be necessary
for us to terminate customer contracts or curtail planned growth.
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 and OAI'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 the IBT is
currently amendable. The IBT and ABX management are in the process of renegotiating the terms of the 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 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
one or more customer agreements.
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.
During 2017, the NMB ruled that ABX and ATI do not constitute a single transportation system for the purposes of
collective bargaining. The NMB could reconsider whether the airlines constitute a single transportation system and
require that the ABX and ATI crewmembers, or that the ABX, ATI and OAI crewmembers, be represented by the same
union. A single transportation system determination by the NMB could give rise to complex contractual issues, including
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integrating the airlines' seniority lists, and materially impact the dynamics with respect to future CBA negotiations.
While it is unlikely that the NMB would reconsider or find that ABX and ATI, or that ABX, ATI and OAI, constitute
a single transportation system, the case-by-case analysis used by the NMB makes such predictions uncertain.
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 support of 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. Deploying an aircraft into service typically requires various approvals
from the FAA. Aircraft deployments could be delayed if FAA approval is delayed.
The actual demand for Boeing 777, 767, 757 and 737 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 customer agreements.
If CAM cannot meet the agreed delivery schedule for an aircraft lease, the customer may have the right to cancel
the aircraft lease, thus delaying revenues until the aircraft can be completed and re-marketed successfully and exposing
CAM to potential liability to the original customer.
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 the 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 with
DHL 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.
If our airlines fail to maintain aircraft reliability above a minimum threshold under the ATSA with ASI 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, ASI may elect to terminate the ATSA and
pursue those rights and remedies available to it at law or in equity.
If OAI fails to maintain reliability above a minimum threshold under its contract with the DoD with respect to the
flight segments flown during a given month, we could be held in default. In that event, the DoD may elect to terminate
the contract. In addition, missions that experience carrier controllable delays are subject to monetary penalties.
Depending on the delay interval, the compensation paid to OAI for the performance of the services can be reduced by
a specified percentage amount.
Under the terms 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 and paying to the
Company a termination fee which reduces over the term of the agreement.
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DHL may terminate the CMI agreement in its entirety after providing 180 days of advance notice and paying a
significant termination fee which amortizes down during the term of the agreement.
The DoD may not renew our contracts or may reduce the number of routes that we operate.
Our contracts with the DoD are typically for one year and are not required to be renewed. The DoD 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.
The anticipated strategic and financial benefits of our relationship with ASI and Amazon may not be realized.
We have entered into agreements with ASI and Amazon with the expectation that the transactions will 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
unforeseen costs and less flying than expected. If we are unable to achieve our objectives, 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 Amazon stock warrants.
The Amazon warrants are subject to fair value measurements during periods that they are outstanding. Accordingly,
future fluctuations in the fair value of the warrants are expected to adversely impact the Company's reported earnings
measures from time to time. See Note D in the accompanying consolidated financial statements for further information
about warrants.
If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, it will dilute the ownership
interests of our then-existing stockholders and could adversely affect the market price of our common stock.
If Amazon exercises its right to acquire shares of our common stock pursuant to the warrants, it will dilute the
ownership interests of our then-existing stockholders and reduce our earnings per share. In addition, any sales in the
public market of any common stock issuable upon the exercise of the warrants by Amazon could adversely affect
prevailing market prices of our common stock.
Changes in the fair value of certain financial instruments could impact the financial results of the Company.
Certain financial instruments are subject to fair value measurements at the end of each reporting period. Accordingly,
future fluctuations in their fair value may adversely impact the Company's reported earnings. See Note E in the
accompanying consolidated financial statements for further information about the fair value of our financial instruments.
The convertible note hedge transactions and the warrant transactions that we entered into in September 2017 may
affect the value of our common stock.
In connection with the pricing of our 1.125% senior convertible notes due 2024 (the "Convertible Notes") and the
exercise by the initial purchasers of their option to purchase additional Convertible Notes, we entered into privately-
negotiated convertible note hedge transactions with the hedge counterparties. The convertible note hedge transactions
cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the
Convertible Notes. We also entered into separate, privately-negotiated warrant transactions with the hedge counterparties
relating to the same number of shares of our common stock that initially underlie the Convertible Notes, subject to
customary anti-dilution adjustments.
The hedge counterparties and/or their affiliates may modify their hedge positions with respect to the Convertible
Note hedge transactions and the warrant transactions from time to time. They may do so by purchasing and/or selling
shares of our common stock and/or other securities of ours, including the Convertible Notes in privately-negotiated
transactions and/or open-market transactions or by entering into and/or unwinding various over-the-counter derivative
transactions with respect to our common stock. The hedge counterparties are likely to modify their hedge positions
during any observation period for the Convertible Notes.
The effect, if any, of these activities on the market price of our common stock will depend on a variety of factors,
including market conditions, and cannot be determined at this time. Any of these activities could, however, adversely
affect the market price of our common stock. In addition, the hedge counterparties and/or their affiliates may choose
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to engage in, or to discontinue engaging in, any of these transactions with or without notice at any time, and their
decisions will be at their sole discretion and not within our control.
We are subject to counterparty risk with respect to the Convertible Note hedge transactions. The hedge counterparties
are financial institutions, and we will be subject to the risk that they might default under the Convertible Note hedge
transactions. Our exposure to the credit risk of the hedge counterparties is unsecured by any collateral. Global economic
conditions have from time to time resulted in failure or financial difficulties for many financial institutions. If a hedge
counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings
with a claim equal to our exposure at that time under our transactions with that hedge counterparty. Our exposure will
depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market
price and volatility of our common stock. In addition, upon a default by a hedge counterparty, we may suffer adverse
tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide
no assurances as to the financial stability or viability of any hedge counterparty.
Conversion of the Convertible Notes or exercise of the warrants may dilute the ownership interest of stockholders.
Any sales in the public market of the common stock issuable upon such conversion of the Convertible Notes or such
exercise of the warrants could adversely affect prevailing market prices of our common stock. In addition, the existence
of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible
Notes could depress the price of our common stock.
Our business could be negatively impacted by adverse audit findings by the U.S. Government.
Our DoD 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 DoD. In addition, the DOT, FAA and TSA can initiate announced or unannounced
investigations of our subsidiary air carriers and repair stations to determine if they are continuously conducting their
operations in accordance with all applicable laws, rules and regulations.
Our participation in the CRAF Program could adversely restrict our commercial business in times of national emergency.
All three of our airlines participate in the CRAF Program, which permits the DoD 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.
FAA rules for Flightcrew Member Duty and Rest Requirements (FMDRR) for passenger airline operations became
effective in January 2014. The rules apply to our operation of passenger and combi aircraft for the DoD and other
customers and impact the required amount and timing of rest periods for pilots between work assignments and modified
duty and rest 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.
There are separate crew rest requirements applicable to all-cargo aircraft of the type operated by the Company.
The FAA has rejected, as have the Courts, an attempt to apply the passenger airline crew rest rules to all-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 three 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 777, 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 777, 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.
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Our airlines provide flight 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 in part on our lease customers' ability to make lease 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 the 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.
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 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 and data breaches.
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, ransomware attacks, malware attacks, cyberattacks, natural
disasters, power failures, telecommunication outages, or other causes. Hackers, foreign governments, cyber-terrorists
and cyber-criminals, acting individually or in coordinated groups, may launch distributed denial of service attacks or
other coordinated attacks that may cause service outages, gain inappropriate or block legitimate access to systems or
information, or result in other interruptions in our business. In addition, the foregoing breaches in security could expose
us and our customers, or the individuals affected, to a risk of loss, disclosure or misuse of proprietary information and
sensitive or confidential data, including personal information of customers, employees and others. 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 financial results and operating 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 safeguards, recovery capabilities and preventive measures may continue to rise. Further,
the costs of recovering or replacing a failed system could be very expensive.
We also depend on and interact with the information technology networks and systems of third parties for some
aspects of our business operations, including our customers and service providers, such as cloud service providers.
These third parties may have access to information we maintain about our company, operations, customers, employees
and vendors, or operating systems that are critical to or can significantly impact our business operations. Like us, these
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third parties are subject to risks imposed by data breaches and IT systems disruptions like those described above, and
other events or actions that could damage, disrupt or close down their networks or systems. Security processes, protocols
and standards that we have implemented and contractual provisions requiring security measures that we may have
sought to impose on such third parties may not be sufficient or effective at preventing such events. These events could
result in unauthorized access to, or disruptions or denials of access to, misuse or disclosure of, information or systems
that are important to our business, including proprietary information, sensitive or confidential data, and other information
about our operations, customers, employees and suppliers, including personal information.
Any of these events that impact our information technology networks or systems, or those of customers, service
providers or other third parties, could result in disruptions in our operations, the loss of existing or potential customers,
damage to our brand and reputation, regulatory scrutiny, and litigation and potential liability for us. Among other
consequences, our customers’ confidence in our ability to protect data and systems and to provide services consistent
with their expectations could be impacted, further disrupting our operations. Similarly, an actual or alleged failure to
comply with applicable U.S. or foreign data protection regulations or other data protection standards may expose us
to litigation, fines, sanctions or other penalties.
In addition, the provision of services to our customers and the operation of our networks and systems involve the
storage and transmission of significant amounts of proprietary information and sensitive or confidential data, including
personal information of customers, employees and others. To conduct our operations, we regularly move data across
national borders, and consequently we are subject to a variety of continuously evolving and developing laws and
regulations in the United States and abroad regarding privacy, data protection and security. The scope of the laws that
may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws. For example,
the European Union's General Data Protection Regulation ("GDPR"), which greatly increases the jurisdictional reach
of European Union law and adds a broad array of requirements for handling personal data, including the public disclosure
of significant data breaches, became effective in May 2018. Other countries and states have enacted or are enacting
privacy and data localization laws that require data to stay within their borders. All of these evolving compliance and
operational requirements impose significant costs that are likely to increase over time.
The costs of our aircraft maintenance facilities could negatively impact our financial results.
We lease and operate a 310,000 square foot, three-hangar 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 the operating costs for our aircraft
maintenance and conversion business 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.
Our Senior Credit Agreement and our Senior Notes include covenants that could limit our operating and financial
flexibility.
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 777, 767 and 757 aircraft. Under the terms of the Senior Credit Agreement, the Company is
required to maintain aircraft collateral coverage equal to 115% of the outstanding balance of the term loan and the total
funded revolving credit facility. Our Senior Notes and related Indenture also include a number of restrictions and
covenants including limitations on our ability to incur additional indebtedness, grant liens, make investments, repurchase
or redeem capital stock, pay dividends, enter into transactions with affiliates, merge with other entities or transfer or
sell assets. The covenants under the Senior Notes, which are generally no more restrictive than those set forth in the
Senior Credit Agreement, are subject to exceptions and qualifications as described in the Indenture. Complying with
these covenants in the Senior Credit Agreement and the Senior Notes may impair our ability to finance our operations
or capital needs or to take advantage of other business opportunities. Our ability to comply with these covenants will
depend on our future performance, which may be affected by events beyond our control. Our failure to comply with
these covenants would represent an event of default. An event of default under the Senior Credit Agreement or the
Senior Notes could result in all indebtedness thereunder being declared due and payable immediately.
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Operating results may be affected by fluctuations in interest rates.
We enter 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 unsubordinated term loans. 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 loans and the
revolving credit facility bear variable interest rates of 3.675% and 3.649%, respectively. 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
could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of those 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).
Strategic investments in other businesses may not result in the desired benefits.
We enter into joint venture and other business ownership agreements with the expectation that such investments
will result in various benefits including revenue growth through geographic diversification and product diversification,
improved cash flows and better operating efficiencies. Achieving the anticipated benefits from such agreements is
subject to a number of challenges and uncertainties. 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. We may make additional capital contributions to these businesses.
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.
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We have recorded goodwill and other intangible assets related to acquisitions and equity investments. 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, equity investments 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
and trade policies 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 terms of 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.
Recently, trade discussions between the U.S. and some of its trading partners have been fluid and any trade
agreements that may be entered into are subject to a number of uncertainties, including the imposition of new tariffs
or adjustments and changes to the products covered by existing tariffs. The impact of new laws, regulations and policies
that affect global trade cannot be predicted.
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.
Manufacturer Service Bulletins and FAA regulations and FAA airworthiness directives issued under its “Aging
Aircraft” program cause operators of older 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
takeoff-and-landing cycles. As a result, some of the Company's Boeing 767-200 aircraft have been affected. The cost
of compliance is estimated to be approximately $1.0 million per aircraft.
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. See Item 2. Properties, for a description of the company's aircraft, including year of manufacture.
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
21
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 ("EPA") 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 ("GHG") emissions. The European Commission
has mandated the extension of the European Union Emissions Trading Scheme ("ETS") for GHG emissions to the
airline industry. Under the European Union ETS, all ABX, ATI and OAI 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.
Similarly, in 2016, the International Civil Aviation Organization (“ICAO”) passed a resolution adopting the Carbon
Offsetting and Reduction Scheme for International Aviation (“CORSIA”), which is a global, market-based emissions
offset program to encourage carbon-neutral growth beyond 2020. A pilot phase is scheduled to begin in 2021 in which
countries may voluntarily participate, and full mandatory participation is scheduled to begin in 2027. ICAO continues
to develop details regarding implementation, but compliance with CORSIA will increase our operating costs.
The U.S. Congress and certain states have also considered legislation regulating GHG emissions. In addition, even
in the absence of such legislation, the EPA could regulate GHG emissions, especially aircraft engine emissions. In July
2016, the EPA issued a finding that aircraft engine emissions cause or contribute to air pollution that may reasonably
be anticipated to endanger public health. This finding is a regulatory prerequisite to the EPA’s adoption of a new
certificate standard for aircraft emissions. However, the U.S. recently withdrew from the Paris climate accord, an
agreement among 196 countries to reduce GHG emissions, and the effect of that withdrawal on future U.S. policy
regarding GHG emissions, on CORSIA and on other GHG regulations is uncertain. Nevertheless, the extent to which
other countries implement the agreement could have an adverse impact on us.
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.
Severe weather or other natural or man-made disasters and epidemics could adversely affect our business.
Severe weather conditions and other natural or man-made disasters, including storms, floods, fires or earthquakes,
epidemics or pandemics (including those caused by the emergence of the novel coronavirus (COVID-19)), conflicts
or unrest, or terrorist attacks, may result in decreased revenues, as our customers reduce their transportation needs, or
increased costs to operate our business, which could have a material adverse effect on our results of operations for a
quarter or year. Any such event affecting one of our major facilities could result in a significant interruption in or
disruption of our business.
22
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease portions of the air park in Wilmington, Ohio, under lease agreements with a regional port authority, the
terms of which expire in June 2026 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. We also have the
non-exclusive right to use the Wilmington airport, which includes one active runway, taxiways and ramp space. We
also lease and operate a 311,500 square foot, two hangar aircraft maintenance complex at the Tampa International
Airport in Florida. We lease approximately 82,500 square feet of office and warehouse space at the Tulsa International
Airport in Oklahoma. In addition, we lease smaller maintenance stations, offices and ramp space at certain airport and
regional locations typically on a short-term basis. Further, we lease warehousing space inside or near certain U.S.
airports to support our customers' parcel handling requirements.
As of December 31, 2019, our in-service aircraft fleet consisted of 94 owned aircraft and four aircraft leased from
external companies. The majority of the aircraft were formerly passenger aircraft that have been modified for cargo
operations. These cargo aircraft are generally described as being mid-size or having medium wide-body cargo
capabilities. The cargo aircraft carry gross payloads ranging from approximately 47,900 to 129,000 pounds. These
cargo aircraft are well suited for intra-continental flights and medium range inter-continental flights.
The table below shows the combined fleet of aircraft in service condition.
In-service Aircraft as of
December 31, 2019
Aircraft Type
Total
Owned
Operating
Lease
Year of
Manufacture
Gross Payload
(Lbs.)
Still Air Range
(Nautical Miles)
767-200 SF (1)
767-200 Passenger
767-300 SF (1)
767-300 Passenger
777-200 Passenger
757-200 PCF (1)
757-200 Combi (2)
737-400 SF (1)
Total in-service
33
3
42
8
3
4
4
1
33
2
40
7
3
4
4
1
98
94
—
1
2
1
—
—
—
—
4
1982 - 1987
85,000 - 100,000
1,700 - 5,300
2001
63,000 - 73,000
6,500 - 7,600
1988 - 1999
121,000 - 129,000
3,200 - 7,100
1993 - 2002
85,000 - 99,700
6,300 - 7,200
2004 - 2007
119,500 - 123,900
8,700 - 9,500
1984 - 1991
1989 - 1992
1991
68,000
58,000
47,900
2,100 - 4,800
2,600 - 4,300
2,200 - 2,800
____________________
(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 simultaneously carrying passengers and cargo
containers on the main flight deck.
(2)
In addition, as of December 31, 2019, CAM had one Boeing 767-200 passenger aircraft that is not reflected in the
table above. CAM also owns eight Boeing 767-300 aircraft which were undergoing or preparing to undergo modification
to a standard freighter configuration and are expected to be completed in 2020. Additionally, CAM has two Boeing
767-200 cargo aircraft being prepped for future leasing.
We believe that our existing facilities and aircraft fleet are appropriate for our current operations. As described in
Note I 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.
23
ITEM 3. LEGAL PROCEEDINGS
We are currently a party to legal proceedings in various federal and state jurisdictions arising out of the operation
of the Company's business. 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
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's common stock is publicly traded on the NASDAQ Global Select Market under the symbol ATSG.
The closing price of ATSG’s common stock was $17.55 on March 2, 2020.
Holders
On March 2, 2020, there were approximately 1,360 stockholders of record of ATSG’s common stock.
Dividends
We currently do not pay a dividend. Future dividends, if any, and the timing of declaration of any such dividends,
will be at the discretion of the Board and will depend upon many factors including, but not limited to, certain restrictions
that we have on our ability to pay dividends. We are restricted from paying dividends on our common stock in excess
of $100.0 million during any calendar year under the provisions of the Senior Credit Agreement. Additionally, the
Senior Notes and related Indenture generally restrict our ability to pay dividends on or make distributions in respect
of capital stock or make certain other restricted payments or investments, subject to certain exceptions therein including,
upon the satisfaction of certain conditions, the making of permitted dividends up to $100.0 million during any calendar
year and other additional permitted dividends, investments and other restricted payments not to exceed the amounts
set forth therein.
Securities authorized for issuance under equity compensation plans
For the response to this Item, see Item 12
Purchases of equity securities by the issuer and affiliated purchasers
On August 5, 2014, the Board of Directors authorized the Company to repurchase up to $50.0 million of outstanding
common stock. In May 2016, the Board amended the Company's common stock repurchase program increasing the
amount that management may repurchase from $50.0 million to $100.0 million of outstanding common stock. In
February 2018, the Board increased the authorization from $100.0 million to $150.0 million (less amounts previously
repurchased). The Board's authorization does not require the Company to repurchase a specific number of shares or
establish a time frame for any repurchase and the Board may terminate the repurchase program at any time. Repurchases
may be made from time to time in the open market or in privately negotiated transactions. There is no expiration date
for the repurchase program. There were no repurchases made during the fourth quarter of 2019. As of December 31,
2019, the Company had repurchased 6,592,349 shares and the maximum dollar value of shares that could then be
purchased under the program was $61.3 million.
24
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, 2014 and ending
on December 31, 2019.
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
Air Transport Services Group, Inc.
NASDAQ Composite Index
NASDAQ Transportation Index
100.00
100.00
100.00
117.76
106.96
86.61
186.45
116.45
104.22
270.33
150.96
128.89
266.47
146.67
117.83
274.07
200.49
137.84
25
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 “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.
2019
As of and for the Years Ended December 31
2017
(In thousands, except per share data)
2018
2016
2015
OPERATING RESULTS:
Revenues from continuing operations (1)
Operating expenses (3)
Net interest expense and other non operating charges
Financial instrument (gain) loss (2)
Earnings (loss) from continuing operations before
income taxes
Income tax gain (expense) (4)
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations, net of
taxes (3)
Consolidated net earnings (loss)
EARNINGS (LOSS) PER SHARE FROM
CONTINUING OPERATIONS:
Basic
Diluted
FINANCIAL DATA:
$1,452,183
1,275,186
93,123
12,302
71,572
$ 892,345
781,327
30,836
(7,296)
87,478
$1,068,200
968,800
26,147
79,789
(6,536)
$ 768,870
698,307
18,002
18,107
34,454
$ 619,264
547,514
10,107
(920)
62,563
(11,589)
59,983
1,219
(19,595)
67,883
1,402
28,276
21,740
(3,245)
(13,394)
21,060
2,428
(23,408)
39,155
2,067
$
61,202
$
69,285
$
18,495
$
23,488
$
41,222
$
$
1.02
0.78
$
$
1.16
0.89
$
$
0.37
0.36
$
$
0.34
0.33
$
$
0.61
0.60
Cash and cash equivalents
Property and equipment, net
Goodwill and intangible assets (5)
Total assets
Post-retirement liabilities (3)
Long term debt and current maturities, other than leases
Deferred income tax liability (4)
Stockholders’ equity
$
46,201
1,766,020
527,654
2,820,178
40,971
1,484,384
127,476
460,342
$
59,322
1,555,005
535,359
2,470,585
68,907
1,401,252
113,243
436,438
$
32,699
1,159,962
44,577
1,548,844
63,266
515,758
99,444
395,279
$
16,358
1,000,992
45,586
1,259,330
79,528
458,721
122,532
311,902
$
17,697
875,401
38,729
1,041,721
110,166
318,200
96,858
364,157
____________________
(1)
Revenues reflect the adoption of Financial Accounting Standards Board's Accounting Standards Update No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” using a modified retrospective approach, under which financial
statements are prepared under the revised guidance for the year of adoption, but not for prior years. (See Note O to the
accompanying consolidated financial statements.)
During 2019, 2018, 2017 and 2016, the re-measurement of financial instrument fair values, primarily for warrants granted
to a customer, resulted in losses of $12.3 million, gains of $7.3 million, losses of $79.8 million and losses of $18.1 million,
respectively, before income taxes. (See Note D 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. On August 30, 2017, ABX transferred investment assets from the pension plan trust to purchase
a group annuity contract. As a result, ABX recorded pre-tax settlement charges of $5.3 million to continued operations
and $7.6 million to discontinued operations. 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 Note J to the
accompanying consolidated financial statements.)
Earnings from continuing operations for 2017 was impacted by a $59.9 million reduction in deferred income taxes related
to the Tax Cuts and Jobs Act legislation enacted in December 2017. (See Note K to the accompanying consolidated financial
statements.)
On November 9, 2018, the Company acquired Omni. (See Note B and Note C to the accompanying consolidated financial
statements.)
(2)
(3)
(4)
(5)
26
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. It should be read in
conjunction with the accompanying consolidated financial statements and related notes included in Item 8 of this report
as well as business development described in Item 1 and risk factors in Item 1A of this report.
OVERVIEW
We lease aircraft and provide airline operations, aircraft modification and maintenance services, ground services,
and other support services to the air transportation and logistics industries. Through the Company's subsidiaries, we
offer a range of complementary services to delivery companies, freight forwarders, e-commerce operators, airlines and
government customers. Our principal subsidiaries include three independently certificated airlines (ABX, ATI and
OAI) and an aircraft leasing company (CAM ). CAM provides competitive aircraft lease rates by converting passenger
aircraft into cargo freighters and offering them to customers under long-term leases.
We have two reportable segments: CAM, which leases Boeing 777, 767, 757 and 737 aircraft and aircraft engines,
and ACMI Services, which includes the cargo and passenger transportation operations of the three airlines. Our other
business operations, which primarily provide support services to the transportation industry, include providing aircraft
maintenance and modification services to customers, load transfer and sorting services as well as related equipment
maintenance services. These operations do not constitute reportable segments. On November 9, 2018, the Company
acquired OAI, a passenger airline, along with related entities (referred to collectively as Omni). Revenues and operating
expenses include the activities of Omni for periods since their acquisition by the Company on November 9, 2018.
At December 31, 2019, we owned 94 Boeing aircraft that were in revenue service. At December 31, 2019, CAM
also owned eight Boeing 767-300 aircraft either already undergoing or awaiting induction into the freighter conversion
process, and two Boeing 767-200 aircraft being staged for redeployment. In addition to these aircraft, we leased two
passenger aircraft and two freighter aircraft provided by a customer. Our largest customers are DHL ; ASI, which is a
subsidiary of Amazon; and the U.S. Department of Defense.
DHL accounted for 14%, 26% and 30% of the Company's consolidated revenues, excluding directly reimbursed
revenues, during the years ended December 31, 2019, 2018 and 2017, respectively. Under a CMI agreement with DHL,
ABX operates and maintains aircraft 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 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 aircraft leased to DHL that it operates. As of December 31, 2019, the Company,
through CAM, leased 14 Boeing 767 aircraft to DHL comprised of seven Boeing 767-200 aircraft and seven Boeing
767-300 aircraft expiring between 2022 and 2024. Eight of the 14 Boeing 767 aircraft were being operated by the
Company's airlines for DHL. We also operated four CAM-owned Boeing 757 aircraft under other operating
arrangements with DHL.
Revenues from our commercial arrangements with ASI comprised approximately 23%, 27% and 27% of our
consolidated revenues, excluding directly reimbursed revenues, during the years ended December 31, 2019, 2018 and
2017, respectively. On March 8, 2016, we entered into an Air Transportation Services Agreement (the “ATSA”) with
ASI pursuant to which CAM leased 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200 freighter
aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. The ATSA also
provides for the operation of those aircraft by our airline subsidiaries for a term of five years, and the performance of
ground handling services by our subsidiary, LGSTX. In December 2018, the Company announced agreements with
Amazon to 1) lease and operate ten additional Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing
767-200 aircraft currently leased to ASI by two years to 2023 with an option on the part of ASI to extend the lease term
for three more years, 3) extend the term of the eight Boeing 767-300 aircraft currently leased to ASI by three years to
2026 and 2027 with an option on the part of ASI to extend the lease term for three more years and 4) extend the ATSA
by five years through March 2026, with an option on the part of ASI to extend the term for an additional three years.
During January 2019, amendments to extend the terms of the aircraft leases were executed. As of December 31, 2019,
we had executed leases with ASI for six of the ten Boeing 767-300 aircraft. We plan to deliver the remainder in 2020.
27
All ten of these aircraft leases will be for ten years. Under the ATSA, we operate the aircraft based on pre-defined fees
scaled for the number of aircraft hours flown, aircraft scheduled and flight crews provided to ASI for its network.
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement
and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants
in three tranches which grant Amazon the right to acquire up to 19.9% of the Company’s pre-transaction outstanding
common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company
following the date of the Investment Agreement and after giving effect to the warrants granted. In conjunction with
the commitment for the ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and
additional aircraft operations under the ATSA, Amazon was issued additional warrants for 14.8 million common shares
which, if exercised, could expand its potential ownership in the Company to approximately 33.2%, including the
warrants described above under the 2016 agreements. These new warrants will vest as existing leases are extended
and additional aircraft leases are executed and added to the ATSA operations. Additionally, Amazon can earn incremental
warrant rights, increasing its potential ownership from 33.2% up to approximately 39.9% of the Company, by leasing
up to seventeen more cargo aircraft from the Company before January 2026.
Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting
guidance for financial instruments. The fair value of the warrants issued or issuable to Amazon are recorded as a lease
incentive asset and are amortized against revenues over the duration of the aircraft leases. The warrants are accounted
for as financial instruments, and accordingly, the fair value of the outstanding warrants are measured and classified in
liabilities at the end of each reporting period. The Company's earnings are impacted by the fair value re-measurement
of the Amazon warrants at the end of each reporting period, customer incentive amortization and the related income
tax effects. For income tax calculations, the value and timing of related tax deductions will differ from the guidance
described below for financial reporting. For additional information about the warrants, see Note D to the accompanying
consolidated financial statements.
The DoD comprised 34%, 15% and 10% of the Company's consolidated revenues excluding directly reimbursed
revenues during the years ended December 31, 2019, 2018 and 2017, respectively. The Company's airlines provide
passenger and cargo airlift services to the U.S. DoD. Due to the acquisition of OAI, the DoD comprises a larger portion
of our 2019 consolidated revenues compared to previous years.
RESULTS OF OPERATIONS
Aircraft Fleet Summary
Our fleet of cargo and passenger aircraft is summarized in the following table as of December 31, 2019, 2018 and
2017. Our CAM-owned operating aircraft fleet has increased by 24 aircraft since the end of 2017, driven by customer
demand for the Boeing 767-300 converted freighter as well as the purchase of 11 passenger aircraft operated by OAI.
Our freighters, converted from passenger aircraft, utilize standard shipping containers and can be deployed into regional
cargo markets more economically than larger capacity aircraft, newly built freighters or other competing alternatives.
At December 31, 2019, the Company owned eight Boeing 767-300 aircraft that were either already undergoing or
awaiting induction into the freighter conversion process.
Aircraft fleet activity during 2019 is summarized below:
- CAM completed the modification of four Boeing 767-300 freighter aircraft purchased in the previous year and
three Boeing 767-300 freighter aircraft purchased in 2019. After leasing one aircraft to ATI for a short period,
CAM began to lease that aircraft to an external customer under a multi-year lease. CAM leased four other
aircraft to an external customer under multi-year leases. ATI operates all five of these aircraft for the customer.
CAM leased the last two aircraft to another external customer under multi-year leases.
- ATI returned one Boeing 767-300 freighter and CAM began to lease this aircraft to an external customer under
a multi-year lease. ATI operates the aircraft for the customer.
- External customers returned three Boeing 767-200 freighter aircraft, one Boeing 767-300 freighter aircraft and
one Boeing 737-400 freighter aircraft to CAM. CAM leased two of the Boeing 767-200 aircraft to ABX and
the Boeing 767-300 aircraft to ATI. CAM sold the Boeing 737-400 aircraft to an external customer.
28
- ATI began to operate two Boeing 767-300 freighter aircraft provided by our customer, ASI.
- CAM purchased ten Boeing 767-300 passenger aircraft and one Boeing 767-300 freighter aircraft for the
purpose of converting nine of the passenger aircraft into a standard freighter configuration. CAM leased one
of these aircraft to Omni as a passenger aircraft.
2019
2018
2017
ACMI
Services CAM Total
ACMI
Services CAM Total
ACMI
Services CAM Total
In-service aircraft
Aircraft owned
Boeing 767-200 Freighter
Boeing 767-200 Passenger
Boeing 767-300 Freighter
Boeing 767-300 Passenger
Boeing 777-200 Passenger
Boeing 757-200 Freighter
Boeing 757-200 Combi
Boeing 737-400 Freighter
Total
Operating lease
Boeing 767-200 Passenger
Boeing 767-300 Passenger
Boeing 767-300 Freighter
Total
Other aircraft
Owned Boeing 767-300
under modification
Owned Boeing 737-400
under modification
Owned Boeing 767 available
or staging for lease
7
26
2 —
5
35
7 —
3 —
4 —
4 —
—
32
1
62
1 —
1 —
2 —
4 —
—
8
— —
2
—
33
2
40
7
3
4
4
1
94
1
1
2
4
8
—
2
5
29
2 —
5
28
6 —
3 —
4 —
4 —
—
29
2
59
1 —
1 —
— —
2 —
—
5
— —
1
—
34
2
33
6
3
4
4
2
88
1
1
—
2
5
—
1
29
7
— —
21
4
— —
— —
4 —
4 —
—
19
1
51
— —
— —
— —
— —
—
6
—
1
— —
36
—
25
—
—
4
4
1
70
—
—
—
—
6
1
—
As of December 31, 2019, ABX, ATI and OAI were leasing 32 in-service aircraft internally from CAM for use in
ACMI Services. As of December 31, 2019, one of CAM's 26 Boeing 767-200 freighter aircraft shown in the fleet table
above and seven of the 35 Boeing 767-300 freighter aircraft were leased to DHL and operated by ABX. Additionally,
12 of CAM's 26 Boeing 767-200 freighter aircraft and 14 of CAM's 35 Boeing 767-300 freighter aircraft were leased
to ASI and operated by ABX or ATI. CAM leased the other 13 Boeing 767-200 freighter aircraft and 14 Boeing 767-300
aircraft to external customers, including six Boeing 767-200 aircraft to DHL that are being operated by a DHL-affiliated
airline. The carrying values of the total in-service fleet as of December 31, 2019, 2018 and 2017 were $1,387.6 million,
$1,334.9 million and $955.2 million, respectively. The table above does not reflect one Boeing 767-200 passenger
aircraft owned by CAM that is not in service condition or the process of freighter modification.
29
Revenue and Earnings Summary
External customer revenues from continuing operations increased by $559.8 million, or 63%, to $1,452.2 million
during 2019 compared to 2018. Revenues in 2019 primarily grew due to passenger transportation services provided
to the DoD as a result of our acquisition of OAI in November 2018. Revenues also increased due to additional aircraft
leases from CAM's leasing operations, expanded CMI, aviation fuel sales and logistics services for ASI. External
customer revenues from continuing operations for 2018, including the historical revenues of OAI, would have been
$1,320.2 million. Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” ("Topic 606”). As a result of adopting Topic 606 beginning
January 1, 2018, the Company reported certain revenues net of related expenses that are directly reimbursed by
customers. Corresponding 2017 revenues include such expense reimbursements. Revenues for 2017, excluding
reimbursable costs, were $778.3 million. Customer revenues, excluding revenues directly reimbursed in 2017, increased
by $113.6 million, or 15%, during 2018 compared to 2017, driven by additional aircraft leases, additional airlines
services for ASI and the inclusion of passenger transportation services for the DoD beginning with the our acquisition
of OAI in November 2018.
The consolidated net earnings from continuing operations were $60.0 million for 2019 compared to $67.9 million
for 2018 and $21.7 million for 2017. The pre-tax earnings from continuing operations were $71.6 million for 2019
compared to $87.5 million for 2018 and pre-tax losses of $6.5 million for 2017. Earnings were affected by specific
events and certain adjustments that do not directly reflect our underlying operations among the years presented.
Consolidated net earnings for 2017 were impacted by $59.9 million of tax benefits for the re-measurement of the
Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21% enacted by the Tax Cuts and
Jobs Act legislation ("Tax Act") in December 2017. Consolidated net earnings for 2019 and 2018 benefited from the
lower corporate tax rate, reduced from 35% in 2017. On a pre-tax basis, earnings included net losses of $12.3 million,
net gains of $7.3 million and net losses of $79.8 million for the years ended December 31, 2019, 2018 and 2017,
respectively, for the re-measurement of financial instruments, including warrant obligations granted to Amazon. Pre-
tax earnings were also reduced by $17.2 million, $16.9 million and $14.0 million for the years ended December 31,
2019, 2018 and 2017, respectively, for the amortization of customer incentives given to ASI in the form of warrants.
Additionally, pre-tax earnings from continuing operations included expenses of $9.4 million, gains of $8.2 million and
expenses of $6.1 million for the years ended December 31, 2019, 2018 and 2017, respectively, for settlement charges,
curtailments and other non-service components of retiree benefit plans. Pre-tax earnings included losses of $17.4
million, $10.5 million and $3.1 million for the years ended December 31, 2019, 2018 and 2017, respectively, for the
Company's share of development costs for a joint venture and the partial sale of an airline investment. Pre-tax earnings
for 2019 and 2018 also included expense of $0.4 million and $5.3 million, respectively, for acquisition fees incurred
during the Company's acquisition of Omni. 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 $128.3 million for 2019 compared to $104.6 million for 2018 and $96.5 million
for 2017.
Adjusted pre-tax earnings from continuing operations for 2019 improved by 22.6% compared to 2018, driven
primarily by additional revenues and the improved financial results of our airline operations, including Omni. We
experienced additional revenues and earnings due to the acquisition of Omni in November 2018. Adjusted pre-tax
earnings from continuing operations also improved due to additional aircraft leases and the expansion of gateway
ground operations for ASI. Growth in revenue was partially offset by the costs necessary to support expanded flight
operations, higher costs for flight crews, higher depreciation expense and employee expenses, particularly in support
of logistical services. Pre-tax earnings for 2019 and 2018 included additional interest expense of $37.8 million and
$11.8 million due to the acquisition of Omni and the expansion of the fleet. Pre-tax earnings for 2018 included
contributions from the Company's former USPS contracts for parcel sorting, which expired in September 2018.
30
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 incentive amortization
Total CAM
ACMI Services
Other Activities
Total Revenues
Eliminate internal revenues
Customer Revenues - non reimbursed
Revenues for reimbursed expenses
Customer Revenues
Pre-Tax Earnings (Loss) from Continuing Operations:
CAM, inclusive of interest expense
ACMI Services
Other Activities
Net unallocated interest expense
Net financial instrument re-measurement (loss) gain
Transaction fees
Other non-service components of retiree benefits costs, net
Loss from non-consolidated affiliate
Pre-Tax Earnings (Loss) from Continuing Operations
Add other non-service components of retiree benefit costs, net
Add charges for non-consolidated affiliates
Add lease incentive amortization
Add transaction fees
Add net loss (gain) on financial instruments
Adjusted Pre-Tax Earnings from Continuing Operations
$
Years Ending December 31
2018
2017
2019
301,984
(16,708)
285,276
1,078,288
314,014
1,677,578
(225,395)
1,452,183
—
1,452,183
$
$
$
245,860
(16,904)
228,956
548,839
286,579
1,064,374
(172,029)
892,345
—
892,345
$
$
$
223,199
(13,986)
209,213
459,272
299,257
967,742
(188,962)
778,780
289,420
1,068,200
68,643
$
65,576
$
32,055
13,422
(3,024)
(12,302)
(373)
(9,404)
(17,445)
71,572
9,404
17,445
17,178
373
12,302
128,274
$
11,448
11,170
(460)
7,296
(5,264)
8,180
(10,468)
87,478
(8,180)
10,468
16,904
5,264
(7,296)
104,638
$
61,510
7,747
13,748
(512)
(79,789)
—
(6,105)
(3,135)
(6,536)
6,105
3,135
13,986
—
79,789
96,479
Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding
settlement charges and other non-service components of retiree benefit costs, gains and losses for the fair value re-
measurement of financial instruments, customer incentive amortization, the transaction fees related to the acquisition
of Omni, the start-up costs of a non-consolidated joint venture and the partial sale of an airline investment. We exclude
these items from adjusted pre-tax earnings because they are distinctly different in their predictability or not closely
related to our on-going operating activities. 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.
We adopted Topic 606 using a modified retrospective approach under which financial statements are prepared
under the revised guidance for the year of adoption, but not for prior years. We determined that under Topic 606, the
Company is an agent for aircraft fuel and certain other costs reimbursed under its ACMI and CMI contracts and for
certain ground services that it arranges for ASI. Under the new standard, such reimbursed amounts are reported net of
the corresponding expenses beginning in 2018. Revenues during 2017 included $289.4 million for reimbursable
revenues under its ACMI and CMI contracts and for directly reimbursed ground services which, under the new standard,
have been reported net of the related expenses in 2019 and 2018.
31
2019 and 2018
CAM
CAM offers aircraft leasing and related services to external customers and also leases aircraft internally to the
Company's airlines. CAM acquires passenger aircraft and manages the modification of the aircraft into freighters. The
follow-on aircraft leases normally cover a term of five to eight years.
As of December 31, 2019 and 2018, CAM had 62 and 59 aircraft under lease to external customers, respectively.
CAM's revenues grew by $56.3 million during 2019 compared to 2018, primarily as a result of additional aircraft leases.
Revenues from external customers totaled $168.1 million and $156.5 million for 2019 and 2018, respectively. CAM's
revenues from the Company's airlines totaled $117.2 million during 2019, compared to $72.4 million for 2018, reflecting
lease revenues for the addition of the eleven passenger aircraft acquired with Omni in November 2018. CAM's aircraft
leasing and related services revenues, which exclude customer lease incentive amortization, increased $56.1 million
in 2019 compared to 2018, primarily as a result of the addition of the eleven passenger aircraft acquired with Omni in
November 2018 and new aircraft leases in 2019. Since the beginning of 2019, CAM has added eight Boeing 767-300
aircraft to its lease portfolio. CAM also added two Boeing 767-200 passenger aircraft, six Boeing 767-300 passenger
aircraft and three Boeing 777-200 passenger aircraft to its lease portfolio after the Company's acquisition of Omni in
November 2018.
CAM's pre-tax earnings, inclusive of internally allocated interest expense, were $68.6 million and $65.6 million
during 2019 and 2018, respectively. Increased pre-tax earnings reflect the eleven passenger aircraft leased to Omni as
well as the eight aircraft placed into service in 2019, offset by a $16.5 million increase in internally allocated interest
expense due to higher debt levels and $31.6 million more depreciation expense driven by the addition of eight Boeing
aircraft in 2019 compared to 2018.
During 2019, CAM purchased ten Boeing 767-300 passenger aircraft for freighter conversion and one Boeing
767-300 freighter aircraft. Three of the passenger aircraft were converted to freighters and leased to external customers
during 2019 and one of the passenger aircraft was leased internally as a passenger aircraft. As of December 31, 2019,
CAM has eight Boeing 767-300 aircraft being modified from passenger to freighter configuration.
In addition to the eight Boeing 767-300 aircraft which were in the modification process at December 31, 2019,
CAM has agreements to purchase 15 more Boeing 767-300 aircraft and expects to complete their modifications through
2021. CAM's operating results will depend on its continuing ability to convert passenger aircraft into freighters within
planned costs and within the time frames required by customers. During 2020, four leases for Boeing 767-200 aircraft
are timed to expire. CAM's future operating results will also depend on the timing and lease rates under which these
aircraft are ultimately leased or redeployed. CAM's future operating results will also be impacted by the amortization
of additional warrants committed to Amazon in conjunction with agreements for additional long-term aircraft leases.
ACMI Services
The ACMI Services segment provides airline operations to its customers, typically under contracts providing for
a combination of aircraft, crews, maintenance, insurance and aviation fuel. Our customers are typically responsible
for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating
expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the
airline. Aircraft charter agreements, including those for the DoD, usually require the airline to provide full service,
including fuel and other operating expenses for a fixed, all-inclusive price. As of December 31, 2019, ACMI Services
included 71 in-service aircraft as follows:
• Twelve passenger aircraft and 20 freighter aircraft leased internally from CAM
• Eight CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under the DHL CMI
agreement
• Twenty-six CAM-owned freighter aircraft which are under lease to ASI and operated by ATI and ABX under
the ATSA
• Two freighter aircraft from an external lessor under lease to ASI and operated by ATI under the ATSA
• Another CAM-owned freighter leased to a customer and operated by ATI
32
• Two passenger aircraft leased from an external lessor
As of December 31, 2019, ACMI Services revenues included the operation of seven more CAM-owned aircraft
compared to December 31, 2018. Total revenues from ACMI Services increased $529.4 million during 2019 compared
with 2018 to $1,078.3 million. Improved revenues were driven by the acquisition of OAI and a 40% increase in billable
block hours. Increased revenues for 2019 included additional aircraft operations for ASI and the DoD. On a combined
basis, ACMI Services revenues for the year ended December 31, 2018 would have been $980.6 million with the inclusion
of OAI.
ACMI Services had pre-tax earnings of $32.1 million during 2019, compared to $11.4 million for 2018 inclusive
of internally allocated interest expense. Improved pre-tax results in 2019 compared to 2018 were bolstered by expanded
revenues from the acquisition of OAI and the timing of scheduled airframe maintenance events. Scheduled airframe
maintenance expense decreased $2.9 million during 2019 compared to 2018. Airframe maintenance expense varies
depending upon the number of C-checks and the scope of the checks required for those airframes scheduled for
maintenance. Internally allocated interest expense increased to $25.0 million for 2019 compared to $6.3 million for
2018 as a result of acquiring OAI. ACMI Services results were negatively impacted by unscheduled engines repairs
and the training costs of new flight crew members to keep pace with customers expanding flight schedules. In March
2018, ATI began to implement an amendment to the collective bargaining agreement with its crewmembers. The
amendment resulted in increased wages for the ATI crewmembers beginning in the second quarter of 2018.
The future growth of the ACMI Services segment may be impacted by additional aircraft operations for Amazon.
During 2019, we began to operate six CAM-owned Boeing 767-300 aircraft under the ATSA and we expect Amazon
to lease at least four additional Boeing 767-300 aircraft from CAM with placements in 2020. We expect Amazon to
contract the operation of those aircraft through our existing ATSA. Future operating results would also be impacted
by the vesting of additional warrants for Amazon, as Amazon leases additional aircraft from CAM and our airlines
begin to operate the aircraft under the ATSA.
Maintaining profitability in ACMI Services will depend on a number of factors, including customer flight schedules,
crewmember productivity and pay, employee benefits, aircraft maintenance schedules and the number of aircraft we
operate. DHL has informed us that it intends to discontinue the ACMI agreements for the Boeing 757 freighter aircraft
in 2020. While we are evaluating alternatives for these aircraft, interruptions to revenue are expected to occur. ABX
is negotiating with its flight crewmembers' collective bargaining unit. These negotiations could result in changes that
may affect ABX's productivity, its crewmembers compensation levels and the marketability of its services.
Other Activities
We provide other support services to our ACMI Services customers and other airlines by leveraging our knowledge
and capabilities developed for our own operations over the years. Through AMES and Pemco, we sell aircraft parts
and provide maintenance and modification services. We arrange and perform logistical services and package sorting
services for certain ASI gateway locations in the U.S. We also provide maintenance for ground equipment, facilities
and material handling equipment and we also resell aviation fuel in Wilmington, Ohio. Additionally, our airlines also
provide flight training services.
We provided mail and package sorting and logistical support to the USPS at five USPS facilities through September
30, 2018. During the second quarter of 2019, ASI began to in-source some of the gateway locations for which we
arrange contracted logistical support.
External customer revenues from all other activities increased $18.9 million in 2019 compared to 2018. Declines
in USPS revenue during 2019 were offset by additional facility maintenance services, ground support services and fuel
sales provided to ASI. The pre-tax earnings from other activities increased by $2.3 million to $13.4 million in 2019,
primarily due to additional ground services and fuel sales to ASI.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $133.0 million during 2019 compared to 2018 driven by higher
headcount for flight operations, maintenance services and package sorting services. The increase in expense for 2019
included $100.4 million for Omni, acquired in November 2018. The increase during 2019 also included higher flight
crew wages in conjunction with an amendment to the collective bargaining agreement with the ATI crewmembers, and
33
additional aircraft maintenance technician time to support increased block hours. Increases in salaries, wages and
benefits expense were partially offset by personnel reductions due to the expiration of the USPS contracts.
Depreciation and amortization expense increased $78.6 million during 2019 compared to 2018. The increase in
depreciation expense included $56.5 million for Omni assets acquired in November 2018. The increase also reflects
incremental depreciation for 12 Boeing 767-300 aircraft and additional aircraft engines added to the operating fleet
since mid-2018, as well as capitalized heavy maintenance and navigation technology upgrades. We expect depreciation
expense to increase during future periods in conjunction with our fleet expansion and capital spending plans.
Maintenance, materials and repairs expense increased by $23.5 million during 2019 compared to 2018. The increase
in expense for 2019 included $15.6 million for Omni, acquired in November 2018. Increased maintenance expense
for 2019 included unscheduled engine repairs and additional costs to support increased block hours that were flown
for cargo customers. Aircraft maintenance and material expenses can vary among periods due to the number of
maintenance events and the scope of airframe checks that are performed.
Fuel expense increased by $115.7 million during 2019 compared to 2018. Fuel expense includes the cost of fuel
to operate DoD charters, fuel used to position aircraft for service and for maintenance purposes, as well as the cost of
fuel sales. The increase for 2019 included $95.8 million for Omni and $14.8 million for increased fuel sales. The
remainder of the increase was due to increased fuel for more cargo block hours flown for the DoD in 2019.
Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling
services, baggage handling services and other airport services. Contracted ground and aviation services increased $47.4
million during 2019 compared to 2018. This increase included $45.7 million for Omni.
Travel expense increased by $56.6 million during 2019 compared to 2018. The increase for 2019 included $50.5
million for Omni.
Landing and ramp expense, which includes the cost of deicing chemicals, increased by $5.2 million during 2019
compared to 2018. The increase included $5.7 million for Omni.
Rent expense increased by $2.1 million during 2019 compared to 2018. This increase included $5.1 million for
Omni. This increase was partially offset by decreases in building rent after the expiration of the contracts for the five
USPS facilities.
Insurance expense increased by $1.2 million during 2019 compared to 2018. Aircraft fleet insurance has increased
due to additional aircraft operations during 2019 compared to 2018.
Other operating expenses increased by $35.4 million during 2019 compared to 2018. Other operating expenses
include professional fees, employee training, utilities, commission expense to our CRAF team for DoD revenues and
other expenses. The increase for 2019 included $27.4 million for Omni which was acquired in November 2018 and
over $6.5 million related to employee training for additional flight crews necessary to support revenue growth.
34
The following table provides pro forma operating expenses (in thousands) for the Company after giving effect to
the Omni acquisition. This information is based on adjustments to the historical consolidated financial statements of
Omni using the purchase method of accounting for business combinations. The pro forma adjustments do not include
any of the cost savings and other synergies anticipated to result from the acquisition. These pro forma expenses have
been prepared for comparative purposes only and do not purport to be indicative of results that would have actually
been reported as of the date or for the quarter presented had the acquisition taken place on such date or at the beginning
of the quarter indicated, or to project the Company’s financial position or results of operations which may be reported
in the future. The pro forma results exclude non-recurring charges recorded by Omni that were directly related to the
acquisition by the Company.
Operating Expenses
Salaries, wages and benefits
Depreciation and amortization
Maintenance, materials and repairs
Fuel
Contracted ground and aviation services
Travel
Landing and ramp
Rent
Insurance
Transaction fees
Other operating expenses
Total Operating Expenses
Year Ended December 31, 2018
Actual
ATSG
Actual Omni
Pro Forma
Adjustments
Pro Forma
Results
$
300,514
$
85,316
$
178,895
146,692
39,293
16,640
34,443
5,968
13,899
6,112
5,264
33,607
54,118
14,525
89,653
44,898
39,101
6,171
6,471
1,724
—
21,012
(2,880) $
9,960
(467)
—
—
—
—
—
—
(5,264)
—
382,950
242,973
160,750
128,946
61,538
73,544
12,139
20,370
7,836
—
54,619
$
781,327
$
362,989
$
1,349
$ 1,145,665
The following adjustments were made to the historical financial records to create the unaudited pro forma
information in the table above:
• Adjustments to eliminate transactions between the Company and Omni during the year ended December 31,
2018.
• Adjustment to reflect estimated additional depreciation and amortization expense of $10.0 million for the year
ended December 31, 2018, resulting from the fair value adjustments to Omni’s intangible and tangible assets.
Pro forma combined depreciation expense for the periods presented reflect the increased fair values of the
aircraft acquired and longer useful lives of the aircraft, indicative of the Company's polices and intent to modify
certain aircraft to freighters as an aircraft is removed from passenger service.
Non Operating Income, Adjustments and Expenses
Interest expense increased by $37.8 million during 2019 compared to 2018. Interest expense increased due to a
higher average debt level, including additional financing under the Senior Credit Agreement of $675.0 million to finance
the acquisition of Omni and higher interest rates on the Company's outstanding loans. We expect interest expense to
increase for 2020 reflecting a higher average borrowing level.
The Company recorded unrealized pre-tax losses on financial instruments re-measurements of $12.3 million during
the year ended December 31, 2019, compared to unrealized pre-tax net gains of $7.3 million for 2018. The gains and
losses include the results of re-valuing, as of December 31, 2019 and 2018, the fair value of the stock warrants granted
to Amazon. Generally, the warrant value increases or decreases with corresponding increases or decreases in the ATSG
stock price during the measurement period. Additionally, the value of certain warrants depend partially on the probability
that warrants will vest upon the execution of aircraft leases. Increases in the traded value of ATSG shares and increases
in the probability of vested warrants each result in an increase to the warrant value and resulted in warrant losses
recorded to financial instruments for 2019. Warrant losses for 2019 were a result of a 3% increase in the traded value
35
of ATSG shares and an increase in the probabilities of additional aircraft leases. The decrease in the fair value of the
warrant obligation between December 31, 2017 and December 31, 2018 corresponded to a decrease in the traded price
of ATSG's shares and resulted in a gain in 2018. The unrealized gains and losses resulting from quarterly re-
measurements of the warrants may vary widely among quarters.
Non service components of retiree benefits were a net loss of $9.4 million for 2019 compared to a net gain of $8.2
million for 2018. The non service component gain and losses of retiree benefits are actuarially determined and include
the amortization of unrecognized gain and loss stemming from changes in assumptions regarding discount rates,
expected investment returns and other retirement plan assumptions. Non service components of retiree benefits can
varying significantly from one year to the next based on investment results and changes in discount rates used to account
for defined benefit retirement plans.
Income tax expense from earnings from continuing operations decreased $8.0 million for 2019 compared to 2018.
Income taxes included deferred income tax effects for the gains and losses from warrants re-measurements and the
amortization of the customer incentive. The income tax effects of the warrant re-measurements and the amortization
of the customer incentive are different than the book expenses and benefits required by generally accepted accounting
principles because for tax purposes, the warrants are valued at a different time and under a different valuation method.
The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants
and other items have an impact on the effective rate during a period. The effective tax rate, before including the warrant
revaluations and incentive amortization was 19 % for 2019 compared to 24.0% for the year ended December 31, 2018.
The adjusted effective tax rate declined for 2019 compared to 2018 due to a higher percentage of our revenues and
earnings occurring in states and other tax jurisdictions with lower tax rates than previously estimated for the services
and leases that we provide. Income tax expense for 2019 reflects a tax benefit of $4.9 million to re-measure deferred
state income taxes using lower tax rates than previously estimated.
The effective rate for 2020 will be impacted by a number of factors, including the apportionment of income among
taxing jurisdictions and 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 2020, before applying the deductibility of the
stock warrant re-measurement and related incentive amortization and the benefit of the stock compensation, will be
approximately 24%.
As of December 31, 2019, the Company had operating loss carryforwards for U.S. federal income tax purposes
of approximately $172.5 million which do not expire but which use is limited to 80% of taxable income in any given
year. 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 2024 or later. The Company may, however, be required to pay certain
federal minimum taxes and certain state and local income taxes before then. The Company's taxable income earned
from international flights is primarily sourced to the United States under international aviation agreements and treaties.
When we operate in countries without such agreements, the Company could incur additional foreign income taxes.
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 pursuant to which
ABX performed package sorting services for DHL. Pre-tax gains related to the former sorting operations were $1.6
million for 2019 compared to $1.8 million for 2018. Pre-tax earnings during 2019 and 2018 were a result of reductions
in self-insurance reserves for former employee claims and pension credits.
2018 compared to 2017
Fleet Summary 2018 & 2017
As of December 31, 2018, ABX, ATI and OAI were leasing 29 in-service aircraft internally from CAM for use in
ACMI Services. As of December 31, 2018, three of CAM's 29 Boeing 767-200 aircraft shown in the aircraft fleet table
above and seven of the 28 Boeing 767-300 aircraft were leased to DHL and operated by ABX. Additionally, 12 of
CAM's 29 Boeing 767-200 aircraft and eight of CAM's 28 Boeing 767-300 aircraft were leased to ASI and operated
by ABX or ATI. CAM leased the other 14 Boeing 767-200 aircraft and 13 Boeing 767-300 aircraft to external customers,
including six Boeing 767-200 aircraft to DHL that are being operated by a DHL-owned airline. The carrying values
36
of the total in-service fleet as of December 31, 2018, 2017 and 2016 were $1,334.9 million, $955.2 million and $793.9
million, respectively. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM that is
not in service condition or the process of freighter modification.
Aircraft fleet activity during 2018 is summarized below:
- CAM completed the modification of nine Boeing 767-300 freighter aircraft, six purchased in the previous year
and three purchased in 2018. CAM began to lease seven of those aircraft under multi-year leases to external
customers. CAM began to lease the other two aircraft to ATI.
- CAM completed the modification of one Boeing 737-400 freighter aircraft purchased in the previous year and
entered into a multi-year lease with an external customer.
- With the Company's acquisition of Omni, CAM added two Boeing 767-200 passenger aircraft, six Boeing
767-300 passenger aircraft and three Boeing 777-200 passenger aircraft. All eleven of these passenger aircraft
are being leased to OAI. Additionally, OAI leases two other Boeing 767 aircraft from third party lessors.
- ABX returned one Boeing 767-300 and two Boeing 767-200 freighter aircraft to CAM. The 767-300 aircraft
was then leased to an external customer under a multi-year lease and is being operated by ABX while the two
767-200 aircraft were leased to different external customers under multi-year leases.
- CAM sold one Boeing 767-300 freighter aircraft, which was under lease to an external customer.
- CAM purchased eight Boeing 767-300 passenger aircraft for the purpose of converting the aircraft into standard
freighter configuration.
- External lessees returned two Boeing 767-200 freighter aircraft to CAM. One of these aircraft is being prepped
for redeployment to another lessee while the other aircraft was removed from service.
As of December 31, 2017, ABX and ATI were leasing 19 in-service aircraft internally from CAM for use in ACMI
Services. As of December 31, 2017, six of CAM's 29 Boeing 767-200 aircraft shown in the aircraft fleet table above
and six of the 21 Boeing 767-300 aircraft were leased to DHL and operated by ABX. Additionally, 12 of CAM's 29
Boeing 767-200 aircraft and eight of CAM's 21 Boeing 767-300 aircraft were leased to ASI and operated by ABX or
ATI. CAM leased the other 11 Boeing 767-200 aircraft and seven Boeing 767-300 aircraft to external customers,
including four 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, 2017, 2016 and 2015 were $955.2 million, $793.9 million and $742.6
million, respectively.
Aircraft fleet activity during 2017 is summarized below:
- CAM completed the modification of seven Boeing 767-300 freighter aircraft purchased in the previous year
and began to lease five of those aircraft, which are being operated by ATI, under multi-year leases to ASI. CAM
began to lease the sixth aircraft to ATI and the Company leased the seventh aircraft under a multi-year lease to
an external customer.
- CAM leased one Boeing 767-300 freighter aircraft, which was modified during 2016, to ASI under a multi-
year lease. ATI was separately contracted to operate that aircraft.
- CAM leased one Boeing 767-200 freighter, which was being staged for leasing, to ATI.
- External lessees returned two Boeing 767-200 freighter aircraft which were operated by ABX. Two Boeing
767-200 aircraft were redeployed to external customers.
- CAM purchased eight Boeing 767-300 passenger aircraft during 2017 for the purpose of converting the aircraft
into a standard freighter configuration. Two of these aircraft completed the freighter modification process and
entered into multi-year leases with external customers.
- The Company purchased two Boeing 737-400 passenger aircraft during 2017 for the purpose of converting the
aircraft into a standard freighter configuration. One aircraft completed the freighter modification process and
entered into a multi-year lease with an external customer.
37
CAM
As of December 31, 2018 and 2017, CAM had 59 and 51 aircraft under lease to external customers, respectively.
CAM's revenues grew by $19.4 million during 2018 compared to 2017, primarily as a result of additional aircraft leases.
Revenues from external customers totaled $156.5 million and $140.4 million for 2018 and 2017, respectively. CAM's
revenues from the Company's airlines totaled $72.4 million during 2018, compared to $69.1 million for 2017, reflecting
lease revenues for the addition of the eleven passenger aircraft acquired with Omni in November 2018. CAM's aircraft
leasing and related services revenues, which exclude customer lease incentive amortization, increased $22.3 million
in 2018 compared to 2017, primarily as a result of new aircraft leases in 2018. Since the beginning of 2018, CAM has
added nine Boeing 767-300 freighter aircraft and one Boeing 737-400 freighter aircraft to its lease portfolio. CAM also
added two Boeing 767-200 passenger aircraft, six Boeing 767-300 passenger aircraft and three Boeing 777-200
passenger aircraft to its lease portfolio after the Company's acquisition of Omni in November 2018.
CAM's pre-tax earnings, inclusive of internally allocated interest expense, were $65.6 million and $61.5 million
during 2018 and 2017, respectively. Increased pre-tax earnings reflect the eleven passenger aircraft leased to Omni as
well as the ten freighter aircraft placed into service in 2018, offset by a $6.2 million increase in internally allocated
interest expense due to higher debt levels, the $2.9 million increase in the amortization of the ASI lease incentive in
2018 compared to 2017, and $18.8 million more depreciation expense driven by the addition of ten Boeing aircraft in
2018 compared to 2017.
During 2018, CAM purchased eight Boeing 767-300 passenger aircraft for freighter conversion, two of which
were leased to external customers and one leased internally during 2018 after completing the conversion process. As
of December 31, 2018, the remaining five of these Boeing 767-300 passenger aircraft were being modified from
passenger to freighter configuration. The Company also leased one Boeing 737-400 aircraft which was purchased
during 2017 to an external customer after completing the conversion process in 2018.
ACMI Services
As of December 31, 2018, ACMI Services included 62 in-service aircraft, including 29 leased internally from
CAM, ten CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under a CMI agreement,
20 CAM-owned freighter aircraft which are under lease to ASI and operated by ATI and ABX under the ATSA, two
passenger aircraft leased from an external lessor and another CAM-owned freighter operated by ATI.
Total revenues from ACMI Services decreased $65.9 million during 2018 compared with 2017 to $548.8 million.
ACMI Services revenues for the 2017 year included $155.5 million for the reimbursement of fuel and certain operating
expenses. Such revenues for 2018 are reported net of expenses after the adoption of Topic 606. Airline services revenues
from external customers, excluding revenues for the reimbursement of fuel and certain operating expenses, increased
$89.6 million. Improved revenues, excluding directly reimbursed expenses, were driven by additional aircraft operations
for ASI, a 5% increase in billable block hours as well as the acquisition of OAI. As of December 31, 2018, ACMI
Services revenues included the operation of eleven more CAM-owned aircraft compared to December 31, 2017.
ACMI Services had pre-tax earnings of $17.7 million during 2018, compared to $8.6 million for 2017. Improved
pre-tax results in 2018 compared to 2017 were bolstered by expanded revenues, the timing of scheduled airframe
maintenance events, and the acquisition of OAI. Scheduled airframe maintenance expense decreased $0.7 million
during 2018 compared to 2017. Airframe maintenance expense varies depending upon the number of C-checks and the
scope of the checks required for those airframes scheduled for maintenance. In March 2018, ATI began to implement
an amendment to the collective bargaining agreement with its crewmembers. The amendment resulted in increased
wages for the ATI crewmembers beginning in the second quarter of 2018.
Other Activities
External customer revenues from all other activities decreased $126.0 million to $187.0 million for 2018. External
customer revenues from all other activities, excluding directly reimbursed revenues, increased 7.9 million. Revenues
for 2018 reflect the change in accounting standards beginning in 2018 after the adoption of Topic 606 to recognize
certain aircraft maintenance and modification services over time instead of upon completion. During 2017, revenues
were recognized in large amounts upon completion and redelivery of an aircraft to the customer. Customer revenues
also increased due to additional ground support services provided to ASI, offset by declines in USPS revenue during
2018. The pre-tax earnings from other activities decreased by $2.6 million to $11.2 million in 2018, reflecting a mix
38
of more lower margin maintenance services revenues and longer completion times partially offset by additional ASI
services and improved results from an airline affiliate accounted for under the equity method.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $24.4 million during 2018 compared to 2017 driven by higher
headcount for flight operations, maintenance services and package sorting services. The increase in expense for 2018
included $13.4 million for Omni, acquired in November 2018. The increase during 2018 also included higher flight
crew wages in conjunction with an amendment to the collective bargaining agreement with the ATI crewmembers,
additional employees and additional aircraft maintenance technician time to support increased block hours and increased
aircraft maintenance and modification services revenues.
Depreciation and amortization expense increased $24.3 million during 2018 compared to 2017. The increase in
depreciation expense included $8.7 million for Omni assets acquired in November 2018. The increase also reflects
incremental depreciation for 15 Boeing 767-300 aircraft and additional aircraft engines added to the operating fleet
since mid-2017, as well as capitalized heavy maintenance and navigation technology upgrades. We expect depreciation
expense to increase during future periods in conjunction with our fleet expansion and capital spending plans.
Maintenance, materials and repairs expense increased by $5.1 million during 2018 compared to 2017. The increase
in expense for 2018 included $2.8 million for Omni, acquired in November 2018. The remainder of the increase was
due primarily to aircraft maintenance and modification services for external customers. During 2018, the Company
had an increased level of aircraft maintenance and modification customer revenues and direct expenses compared to
2017. Aircraft maintenance and material expenses can vary among periods due to the number of maintenance events
and the scope of airframe checks that are performed.
Fuel expense decreased by $110.3 million during 2018 compared to 2017. In 2017, fuel expense included
reimbursable fuel billed to DHL, ASI and other ACMI customers which is being netted against the revenue in 2018
after the adoption of Topic 606. The customer-reimbursed fuel for 2017 was $133.5 million. Fuel expense includes the
cost of fuel to operate DoD charters as well as fuel used to position aircraft for service and for maintenance purposes.
Fuel expense, excluding customer-reimbursed fuel, increased $23.2 million for 2018 compared to 2017. The increase
for 2018 included $13.8 million for Omni. The remainder of the increase was due to more block hours flown for military
customers in 2018.
Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling
services, baggage handling services and other airport services. Contracted ground and aviation services decreased
$130.5 million during 2018 compared to 2017. The decrease is primarily due to the netting of reimbursable revenues
from certain ground services arranged for ASI against the expense in 2018 due to the adoption of Topic 606. The
customer-reimbursed expenses in 2017 were $138.4 million. Without these customer-reimbursed expenses, contracted
ground and aviation services increased $7.9 million during 2018 compared to 2017. This increase included $5.8 million
for Omni.
Travel expense increased by $7.1 million during 2018 compared to 2017. The increase for 2018 included $6.3
million for Omni.
Landing and ramp expense, which includes the cost of deicing chemicals, decreased by $16.3 million during 2018
compared to 2017. The decrease is primarily due to the netting of reimbursable revenues from landing and ramp fees
billed to DHL, ASI and other ACMI customers against expense in 2018 due to the adoption of Topic 606.
Rent expense increased by $0.3 million during 2018 compared to 2017. This increase included $1.1 million for
Omni. This increase was partially offset by decreases in building rent after the expiration of the contracts for the five
USPS facilities.
Insurance expense increased by $1.3 million during 2018 compared to 2017. Aircraft fleet insurance has increased
due to additional aircraft operations during 2018 compared to 2017.
Other operating expenses increased by $1.8 million during 2018 compared to 2017. Other operating expenses
include professional fees, employee training and utilities. The increase for 2018 included $4.0 million for Omni. Other
operating expenses during 2018 were partially offset by improved operating results of an airline affiliate accounted for
under the equity method.
39
Non Operating Income, Adjustments and Expenses
Interest expense increased by $11.8 million during 2018 compared to 2017. Interest expense increased due to a
higher average debt level, including additional financing under the Senior Credit Agreement of $675.0 million to finance
the acquisition of Omni and higher interest rates on the Company's outstanding loans. Interest expense in 2018 and
2017 was also impacted by the convertible notes issued in September 2017. The convertible notes have a principal
value of $258.8 million and bear interest at a cash coupon rate of 1.125%. At the time of issuance, the value of the
conversion feature of the convertible notes was recorded as a debt discount and is being amortized along with debt
issuance costs to interest expense over the seven year term of the convertible notes. The amortization of the convertible
debt discount and issuance costs was $8.3 million and $2.1 million during 2018 and 2017, respectively.
The Company recorded pre-tax net gains on financial instruments of $7.3 million during the year ended December
31, 2018, compared to losses of $79.8 million during 2017. The gains and losses are primarily a result of re-measuring,
as of December 31, 2018 and 2017, the fair value of the stock warrants granted to Amazon. The increase in the fair
value of the warrant obligation since December 31, 2016 corresponded to an increase in the traded price of the Company's
shares and resulted in a non-cash loss in 2017.
Non service components of retiree benefits were a net gain of $8.2 million for 2018 compared to a net loss of $6.1
million for 2017. The non service component gains and losses of retiree benefits are actuarially determined and include
the amortization of unrecognized gains and losses stemming from changes in assumptions regarding discount rates,
expected investment returns and other retirement plan assumptions. Non service components also include the effects
of large pension settlement transactions. As a result of a pension settlement transaction, the Company recognized pretax
settlement charges of $5.3 million to continued operations during 2017.
Income tax expense from earnings from continuing operations decreased $47.9 million for 2018 compared to 2017.
Income tax benefits from earnings from continuing operations for 2017 included a benefit of $59.9 million due to the
enactment of Federal legislation known as The Tax Cuts and Jobs Acts ("Tax Act") in December 2017. The re-
measurement of deferred tax balances using the lower federal rates enacted by the Tax Act, resulted in a reduction in
our net deferred tax liability and the recognition of a deferred tax benefit. Income taxes included deferred income tax
effects for the gains and losses from warrants re-measurements and the amortization of the customer incentive. The
effective tax rate, before including the warrant revaluations and incentive amortization was 24.0% for 2018 compared
to 37.5% for the year ended December 31, 2017. The effective tax rate declined for 2018 primarily due to the effects
of the lower statutory tax rates enacted by the Tax Act.
Discontinued Operations
Pre-tax gains related to the former sorting operations were $1.8 million for 2018 compared to pre-tax losses of
$5.1 million for 2017. Pre-tax earnings during 2018 were a result of reductions in self-insurance reserves for former
employee claims and pension credits. During 2017, pension expense for discontinued operations included a $7.6 million
pre-tax charge for the settlement of certain retirement obligations through a third party group annuity contract.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash generated from operating activities totaled $396.9 million, $298.0 million and $235.0 million in 2019,
2018 and 2017, respectively. Improved cash flows generated from operating activities during 2019 and 2018 were
driven primarily by additional aircraft leases to customers and by increased operating levels of the ACMI Services
segment. Cash outlays for pension contributions were $5.4 million, $22.2 million and $4.5 million in 2019, 2018 and
2017, respectively.
Capital spending levels were primarily the result of aircraft modification costs and the acquisition of aircraft for
freighter modification. Cash payments for capital expenditures were $453.5 million, $292.9 million and $296.9 million
in 2019, 2018 and 2017, respectively. Capital expenditures in 2019 included $328.0 million for the acquisition of
eleven Boeing 767-300 aircraft and freighter modification costs; $76.1 million for required heavy maintenance; and
$49.4 million for other equipment, including purchases of aircraft engines and rotables. Capital expenditures in 2018
included $197.1 million for the acquisition of eight Boeing 767-300 aircraft and freighter modification costs; $61.7
million for required heavy maintenance; and $34.1 million for other equipment, including purchases of aircraft engines
40
and rotables. Our capital expenditures in 2017 included $209.4 million for the acquisition of eight Boeing 767-300
aircraft, two Boeing 737-400 aircraft and freighter modification costs; $53.3 million for required heavy maintenance;
and $34.2 million for other equipment, including purchases of aircraft engines and rotables.
Cash proceeds of $10.8 million, $17.6 million and $0.4 million were received in 2019, 2018 and 2017, respectively,
for the sale of aircraft engines and airframes.
During 2019 and 2018, we spent $24.4 million and $866.6 million, respectively, for acquisitions and investments
in other businesses. Spending in 2018 included $855.1 million for the acquisition of Omni, net of cash acquired. During
2019, 2018 and 2017, we contributed $12.3 million, $11.4 million and $8.7 million for entry and subsequent contributions
into a joint-venture with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program
for Airbus A321-200 aircraft. In 2019, we acquired a group of companies that had been under common control referred
to as TriFactor, a material handling systems integrator.
Net cash provided by financing activities was $57.0 million, $870.5 and $79.7 million in 2019, 2018 and 2017,
respectively. On November 9, 2018, in conjunction with the Omni acquisition, the Company amended its Senior Credit
Agreement to include a term loan of $675.0 million and drew an additional $180.0 million from the revolving credit
facility. During 2019, we drew a total $100.0 million from the revolving credit facility. We made debt principal
payments of $39.5 million. Our borrowing activities were necessary to purchase and modify aircraft for deployment
into air cargo markets.
In September 2017, we received proceeds of $258.8 million from the issuance of convertible notes. In conjunction
with the issuance of convertible notes, we received $38.5 million for the issuance of stock warrants and paid $56.1
million for related convertible note hedges. We paid issuance costs of $6.5 million for these transactions. The net
proceeds from these transactions were $234.7 million, of which $205.0 million was used to pay down the balance of
our revolving credit facility, thereby increasing the amount available for future draws under that facility. The convertible
notes and the related transactions are described further in Note G of the accompanying condensed consolidated financial
statements.
During 2018, we spent $3.6 million to buy 157,000 shares of the Company's common stock pursuant to a share
repurchase plan authorized in 2014. The repurchase plan, which originally authorized the Company to purchase up to
$50.0 million of common stock, was amended by the Board in May 2016 to increase such authorization to up to $100
million and amended by the Board again in February 2018 to increase such authorization to up to $150 million. We
spent $11.2 million during 2017 to repurchase shares under the authorized plan.
Commitments
The table below summarizes the Company's contractual obligations and commercial commitments (in thousands)
as of December 31, 2019.
Payments Due By Year
Contractual Obligations
Debt obligations, including interest payments
Facility leases
Aircraft and modification obligations
Aircraft and other leases
Total contractual cash obligations
Total
2020
$ 1,772,087
31,938
369,088
16,033
$ 2,189,146
$
65,756
8,690
270,416
5,859
$ 350,721
2021 and
2022
$ 145,339
10,904
98,672
6,285
$ 261,200
2023 and
2024
$ 1,551,340
7,689
—
3,389
$ 1,562,418
2025 and
after
$
9,652
4,655
—
500
$ 14,807
The long term debt bears interest at 1.125% to 3.675% per annum at December 31, 2019. For additional information
about the Company's debt obligations, see Note G 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 $11.3 million expected to be funded in
2020. For additional information about the Company's pension obligations, see Note J of the accompanying financial
statements.
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As of December 31, 2019, the Company had eight aircraft that were in or awaiting the modification process.
Additionally, we placed non-refundable deposits to purchase 15 more Boeing 767-300 passenger aircraft through 2021.
We estimate that capital expenditures for 2020 will total $420 million of which the majority will be related to aircraft
purchases and freighter modifications. Actual capital spending for any future period will be impacted by aircraft
acquisitions, maintenance and modification processes. We expect to finance the capital expenditures from current cash
balances, future operating cash flows and the Senior Credit Agreement. The Company outsources a significant portion
of the aircraft freighter modification process to a non-affiliated third party. The modification 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 I of the accompanying financial statements.
Since August 3, 2017, the Company has been part of a joint-venture with Precision Aircraft Solutions, LLC, to
develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. We anticipate approval of a
supplemental type certificate from the FAA in 2020. We expect to make contributions equal to the Company's 49%
ownership percentage of the program's total costs during 2020.
Liquidity
We have a Senior Credit Agreement with a consortium of banks that includes an unsubordinated term loan of
$626.3 million, net of debt issuance costs, and a revolving credit facility from which the Company has drawn $632.9
million, net of repayments, as of December 31, 2019. The Senior Credit Agreement expires in November 2024 if
certain liquidity measures are maintained during the 2024 and contains an incremental accordion capacity based on
debt ratios. As of December 31, 2019, the unused revolving credit facility totaled $103.9 million, net of draws of $632.9
million and outstanding letters of credit of $13.2 million. As of December 31, 2019, the Senior Credit Agreement
permitted additional indebtedness, subject to compliance with other covenants, of up to $750.0 million of which $258.8
million had been utilized for the issuance of convertible notes as of such date.
On January 28, 2020, we completed a debt offering of $500 million in senior unsecured notes (the “Senior Notes”).
The Senior Notes were sold only to qualified institutional buyers in the United States pursuant to Rule 144A under the
Securities Act of 1933, as amended (the “Securities Act”), and certain investors pursuant to Regulation S under the
Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a rate of 4.750% per year, payable
semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2020. The Senior Notes will
mature on February 1, 2028. The Senior Notes contain customary events of default and covenants which are generally
no more restrictive than those set forth in the Senior Credit Agreement. The net proceeds from the Senior Notes were
used to pay down the revolver credit facility.
The Senior Credit Agreement is collateralized by our fleet of Boeing 777, 767 and 757 freighter aircraft. Under
the terms of the Senior Credit Agreement, we are required to maintain collateral coverage equal to 115% of the
outstanding balances of the term loans and the total funded revolving credit facility. 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 $750.0 million.
Under the Senior Credit Agreement, the Company is subject to covenants and warranties that are usual and
customary including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness,
as well as a total debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization expenses) ratio and
a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default including unspecified events
that may have a material adverse effect on the Company. If an event of default occurs, the Company may be forced to
repay, renegotiate or replace the Senior Credit Agreement.
Additional debt or lower EBITDA may result in higher interest rates. Under the Senior Credit Agreement, interest
rates are adjusted quarterly based on the prevailing LIBOR or prime rates and a ratio of the Company's outstanding
debt level to EBITDA. At the Company's current debt-to-EBITDA ratio, the unsubordinated term loans and the revolving
credit facility bear variable interest rates of 3.675% and 3.649%, respectively.
At December 31, 2019, the Company had $46.2 million of cash balances. 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, capital spending, scheduled debt payments and required pension
funding for at least the next 12 months.
42
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, 2019 and 2018, we were not involved in any material
unconsolidated SPE transactions.
Certain of our operating leases and agreements contain indemnification obligations to the lessor or one or more
other parties that are considered usual and customary (e.g. use, tax and environmental indemnifications), the terms of
which range in duration and are often limited. Such indemnification obligations may continue after the expiration of
the respective lease or agreement. No amounts have been recognized in our financial statements for the underlying
fair value of guarantees and indemnifications.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as certain
disclosures included elsewhere in this report, are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation
of these financial statements requires us to select appropriate accounting policies and make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies.
In certain cases, there are alternative policies or estimation techniques which could be selected. On an ongoing basis,
we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition,
post-retirement liabilities, bad debts, self-insurance reserves, valuation of spare parts inventory, useful lives, salvage
values and impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates
on historical experience, current conditions and on various other assumptions that are believed to be reasonable under
the circumstances. Those factors form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with
respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions
or conditions. 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
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, on a net basis. 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. Effective January 1, 2018, the Company records revenues and estimated
earnings for its airframe maintenance and aircraft modification contracts using the percentage-of-completion cost input
method. Prior to January 1, 2018, revenues earned and expenses incurred in providing aircraft-related maintenance,
repair or modification services were usually recognized in the period in which the services were completed and delivered
to the customer. Revenues derived from sorting parcels are recognized in the reporting period in which the services
are performed.
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.
43
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 the number of aircraft in
service, capital expenditures, long term growth rates, operating cash flows and market-derived discount rates.
The performance of the goodwill impairment test is the 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 impairment exists. If
the carrying value of a reporting unit is higher than its fair value an impairment loss is recorded for the difference and
charged to operations. See additional information about the goodwill impairment tests in Note C of the accompanying
consolidated financial statements.
Based on our analysis, the individual fair values of each reporting unit having goodwill exceeded their respective
carrying values as of December 31, 2019. 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 and OAI separately,
using multiples of EBITDA and revenues from comparable publicly traded companies. Our key assumptions used for
CAM's goodwill testing include uncertainties, including the level of demand for cargo aircraft by shippers, the DoD
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. Our key assumptions used for OAI's goodwill testing include the number of aircraft that
OAI will operate, the amount of revenues that the aircraft will generate, the number of flight crews and cost of flight
crews needed. Our key assumptions used for Pemco's and TriFactor's goodwill testing includes the level of revenues
that customers will seek and the cost of labor, parts and contract resources expected to be utilized. Certain events or
changes in circumstances could negatively impact our key assumptions. Customer preferences may be impacted by
changes in aviation fuel prices. Key customers, including DHL, Amazon and the DoD may decide that they do not
need as many aircraft as projected or may find alternative providers.
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 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 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
44
of operations. We maintain excess claims 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.
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. Based upon projections of taxable income, we determined that it was more likely than not that
the NOL CF’s will be realized. 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 lessees
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 re-measured 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 6.10%. Our assumed
rate of return is based on a targeted long term investment allocation of 30% equity securities, 65% fixed income securities
and 5% cash. The actual asset allocation at December 31, 2019 was 26% equities, 74% fixed income and 0% cash.
The pension trust includes $2.1 million of investments (less than 1% 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
45
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 6.10% 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 2019 would
be increased by approximately $7.3 million. We use a market value of assets as of the measurement date for determining
pension expense.
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 J 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, 2019, based on the method described above, were 3.65% for crewmembers and 3.70% for non-
crewmembers. If we were to lower our discount rates by a hypothetical 50 basis points, pension expense in 2019 would
be increased by approximately $9.4 million.
Our mortality assumptions at December 31, 2019, 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
Effect of change
December 31, 2019
2019
Pension
expense
Pension
obligation
Accumulated
other
comprehensive
income (pre-tax)
$
7,325
$
— $
9,362
16,687
(48,377)
(48,377)
—
48,377
48,377
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.
The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for fluctuating
interest rates for at least twenty-five percent of the outstanding balance of the term loan issued in November 2018.
Accordingly, the Company has entered into an interest rate swap instruments. 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 combined notional values were $460.6 million as of December 31, 2019. See Note H in the accompanying
consolidated financial statements for a discussion of our accounting treatment for these hedging transactions.
As of December 31, 2019, the Company has $213.5 million of fixed interest rate convertible debt and $1,259.2
million of variable interest rate debt outstanding. Variable interest rate debt exposes us to differences in future cash
46
flows resulting from 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 $11.1 million for the
year ended December 31, 2019.
The convertible 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
convertible debt through a hypothetical 20% increase in interest rates. As of December 31, 2019, a 20% increase in
interest rates would have decreased the fair value of our fixed interest rate convertible debt by approximately $0.6
million.
The Company is exposed to concentration of credit risk primarily through cash deposits, cash equivalents, marketable
securities and derivatives. As part of its risk management process, the Company monitors and evaluates the credit
standing of the financial institutions with which it does business. The financial institutions with which it does business
are generally highly rated. The Company is exposed to counterparty risk, which is the loss it could incur if a counterparty
to a derivative contract defaulted.
As of December 31, 2019, the Company's liabilities reflected stock warrants issued to a customer. The fair value
of the stock warrants obligation is re-measured at the end of each reporting period and marked to market. The fair
value of the stock warrants is dependent on a number of factors which change, including the Company's common stock
price, the volatility of the Company’s common stock and the risk-free interest rate. See Note E in the accompanying
consolidated financial statements for further information about the fair value of the stock warrants
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, 2019, ABX's defined benefit
pension plans had total investment assets of $746.8 million under investment management. See Note J in the
accompanying consolidated financial statements for further discussion of these assets.
The Company is exposed to market risk for changes in the price of jet fuel. The risk associated with jet fuel,
however, is largely mitigated by reimbursement through the agreements with its customers.
47
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
Note A - Summary of Financial Statement Preparation and Significant Accounting Policies
Note B - Acquisition of Omni
Note C - Goodwill, Intangibles and Equity Investments
Note D - Significant Customers
Note E - Fair Value Measurements
Note F - Property and Equipment
Note G - Debt Obligations
Note H - Derivative Instruments
Note I - Commitments and Contingencies
Note J - Pension and Other Post-Retirement Benefit Plans
Note K - Income Taxes
Note L - Accumulated Other Comprehensive Income (Loss)
Note M - Stock-Based Compensation
Note N - Common Stock and Earnings Per Share
Note O - Segment and Revenue Information
Note P - Discontinued Operations
Note Q - Investments in Non-Consolidated Affiliates (Unaudited)
Note R - Quarterly Results (Unaudited)
Page
49
51
52
53
54
55
56
56
62
64
66
68
69
69
72
73
75
80
83
84
85
86
89
89
90
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Air Transport Services Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Air Transport Services Group, Inc. and subsidiaries
(the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive
income, cash flows, and stockholders' equity, for each of the three years in the period ended December 31, 2019, and
the related notes and the schedule listed in the Table of Contents at Item 15(a)(2) (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 2, 2020, expressed an unqualified opinion on the Company's
internal control over financial reporting.
Changes in Accounting Principles
As discussed in Note A to the financial statements, the Company changed its method of accounting for warrants in
fiscal year 2019 due to the adoption of amendments to the standard for share-based payments to non-employees. The
Company changed its method of accounting for revenue from contracts with customers in fiscal year 2018 due to the
adoption of the new revenue standard. The Company adopted these new standards using the modified retrospective
approach.
Emphasis of a Matter
As discussed in Note D to the 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, 2019.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
49
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Fair Value Measurements - Level 3 Liabilities - Refer to Notes D and E to the financial statements
Critical Audit Matter Description
In conjunction with a lease incentive agreement entered into with a customer on December 20, 2018, the Company
conditionally granted to the customer unvested warrants to purchase Company common stock, which will vest as
existing leases with the customer are extended and additional aircraft leases are executed. The warrants are reported
in the financial statements at fair value as a liability. These warrants do not have readily determinable market values
and were valued at $42.3 million as of December 31, 2019, based on a pricing model using several inputs. Those inputs
include two significant unobservable inputs, which are the estimated warrant strike prices and the probabilities that
future vesting events will occur.
We identified the valuation of these unvested warrants to purchase the Company’s stock, conditionally granted to a
customer, as a critical audit matter because of the significant unobservable inputs management uses to estimate fair
value. Valuation of these warrants included the use of a warrant valuation model with estimated warrant strike prices
and adjustments for the probability of the future vesting events occurring. A high degree of auditor judgment and an
increased extent of effort, including the use of a valuation specialist, were required to audit the estimated warrant strike
prices and the probabilities of the future vesting events occurring.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the significant unobservable inputs used in management’s estimate of fair value of the
conditionally granted, unvested warrants included the following, among others:
• We tested the effectiveness of management’s controls over the valuation of these warrants.
• We evaluated the reasonableness of management’s estimate of the probability that future vesting events will occur
and the related timing by comparing the assumptions in the warrant valuation with the assumptions in the Company’s
forecast of aircraft leases and extensions, its projected aircraft availability, its internal and external communications,
the customer’s projected revenue growth, and customer communications.
• We performed a retrospective review of management’s ability to accurately estimate the probability of future
vesting events occurring by comparing initial aircraft availability estimates prepared by management for the
Company’s prior lease agreements to the actual results.
• We assessed the consistency by which management has applied valuation assumptions to the significant
unobservable inputs.
• With the assistance of our fair value specialists, we developed independent fair value estimates and compared our
estimates to the Company’s recorded amounts.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 2, 2020
We have served as the Company's auditor since 2002.
50
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and restricted cash
Accounts receivable, net of allowance of $975 in 2019 and $1,444 in 2018
Inventory
Prepaid supplies and other
TOTAL CURRENT ASSETS
Property and equipment, net
Customer incentive
Goodwill and acquired intangibles
Operating lease assets
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued salaries, wages and benefits
Accrued expenses
Current portion of debt obligations
Current portion of lease obligations
Unearned revenue
TOTAL CURRENT LIABILITIES
Long term debt
Stock warrant obligations
Post-retirement obligations
Long term lease obligations
Other liabilities
Deferred income taxes
TOTAL LIABILITIES
Commitments and contingencies (Note I)
STOCKHOLDERS’ EQUITY:
December 31, December 31,
2019
2018
$
46,201
162,870
37,397
20,323
266,791
1,766,020
146,678
527,654
44,302
68,733
$ 2,820,178
$
59,322
147,755
33,536
18,608
259,221
1,555,005
63,780
535,359
—
57,220
$ 2,470,585
$
141,094
59,429
17,586
14,707
12,857
17,566
263,239
1,469,677
383,073
36,744
30,334
49,293
127,476
2,359,836
$
109,843
50,932
19,623
29,654
—
19,082
229,134
1,371,598
203,782
64,485
—
51,905
113,243
2,034,147
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior
Participating Preferred Stock
Common stock, par value $0.01 per share; 150,000,000 shares authorized;
59,329,431 and 59,134,173 shares issued and outstanding in 2019 and 2018,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
—
—
593
475,720
45,895
(61,866)
460,342
$ 2,820,178
591
471,158
56,051
(91,362)
436,438
$ 2,470,585
See notes to consolidated financial statements.
51
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
Contracted ground and aviation services
Travel
Landing and ramp
Rent
Insurance
Transaction fees
Other operating expenses
OPERATING INCOME
OTHER INCOME (EXPENSE)
Interest income
Non-service component of retiree benefit (costs) gains
Net gain (loss) on financial instruments
Loss from non-consolidated affiliate
Interest expense
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
INCOME TAX BENEFIT (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
2018
892,345
$
2017
$ 1,068,200
2019
$ 1,452,183
433,518
257,532
170,151
155,033
64,076
90,993
11,184
16,006
7,342
373
68,978
1,275,186
176,997
370
(9,404)
(12,302)
(17,445)
(66,644)
(105,425)
71,572
300,514
178,895
146,692
39,293
16,640
34,443
5,968
13,899
6,112
5,264
33,607
781,327
111,018
251
8,180
7,296
(10,468)
(28,799)
(23,540)
87,478
(11,589)
(19,595)
59,983
1,219
67,883
1,402
276,106
154,556
141,575
149,579
147,092
27,390
22,271
13,629
4,820
—
31,782
968,800
99,400
116
(6,105)
(79,789)
(3,135)
(17,023)
(105,936)
(6,536)
28,276
21,740
(3,245)
$
$
$
$
$
61,202
$
69,285
$
18,495
1.02
0.02
1.04
$
$
0.78
0.01
0.79
1.16
0.02
1.18
0.89
0.02
0.91
$
$
$
$
0.37
(0.06)
0.31
0.36
(0.05)
0.31
58,899
69,348
58,765
68,356
58,907
59,686
See notes to consolidated financial statements.
52
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years Ended December 31
2018
2019
2017
NET EARNINGS
OTHER COMPREHENSIVE INCOME (LOSS):
Defined Benefit Pension
Defined Benefit Post-Retirement
Foreign Currency Translation
$
61,202
$
69,285
$
18,495
27,890
139
1,467
(28,467)
16,513
256
(131)
204
129
TOTAL COMPREHENSIVE INCOME, net of tax
$
90,698
$
40,943
$
35,341
See notes to consolidated financial statements.
53
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31
2018
2019
2017
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
Loss from non-consolidated affiliates
Net (gain) loss on financial instruments
Changes in assets and liabilities:
Accounts receivable
Inventory and prepaid supplies
Accounts payable
Unearned revenue
Accrued expenses, salaries, wages, benefits and other liabilities
Pension and post-retirement assets
Other
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES:
Expenditures for property and equipment
Proceeds from property and equipment
Acquisitions and investments in businesses, net of cash acquired
Redemption of long term deposits
NET CASH (USED IN) INVESTING ACTIVITIES
FINANCING ACTIVITIES:
Principal payments on long term obligations
Proceeds from borrowings
Payments for financing costs
Proceeds from convertible notes
Purchase convertible note hedges
Proceeds from issuance of warrants
Purchase of common stock
Withholding taxes paid for conversion of employee stock awards
NET CASH PROVIDED BY FINANCING ACTIVITIES
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amount capitalized
Federal alternative minimum and state income taxes paid
SUPPLEMENTAL NON-CASH INFORMATION:
Accrued expenditures for property and equipment
Accrued consideration for acquisition
$
59,983
1,219
$
67,883
1,402
$
21,740
(3,245)
285,353
15,700
10,478
7,002
17,445
12,302
(14,551)
(6,493)
3,340
1,446
13,390
(12,132)
2,456
396,938
204,559
3,766
18,986
5,047
10,468
(7,296)
25,380
(3,273)
10,724
(3,824)
3,605
(35,293)
(4,109)
298,025
(453,502)
10,804
(24,360)
—
(467,058)
(292,915)
17,570
(866,558)
—
(1,141,903)
(39,500)
100,018
(1,081)
—
—
—
—
(2,438)
56,999
(13,121)
59,322
46,201
57,546
1,294
$
$
$
(58,640)
945,000
(9,953)
—
—
—
(3,581)
(2,325)
870,501
26,623
32,699
59,322
17,278
1,213
38,396
$
— $
11,234
7,845
$
$
$
$
$
170,751
20,933
(30,771)
3,632
3,135
79,789
(31,313)
(4,107)
23,500
(7,331)
780
(13,083)
582
234,992
(296,939)
381
(11,792)
9,975
(298,375)
(254,446)
115,000
(7,887)
258,750
(56,097)
38,502
(11,184)
(2,914)
79,724
16,341
16,358
32,699
13,693
1,938
25,142
—
$
$
$
$
$
See notes to consolidated financial statements.
54
AIR TRANSPORT SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Common Stock
Number
59,461,291
Amount
595
$
Additional
Paid-in
Capital
$ 443,416
Accumulated
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
$
(32,243) $
(79,866) $ 331,902
BALANCE AT JANUARY 1, 2017
Stock-based compensation plans
Grant of restricted stock
Issuance of common shares, net of
withholdings
Forfeited restricted stock
Purchase of common stock
Warrants issued
Amortization of stock awards and
restricted stock
Total comprehensive income (loss)
BALANCE AT DECEMBER 31, 2017
Stock-based compensation plans
Grant of restricted stock
Issuance of common shares, net of
withholdings
Forfeited restricted stock
Purchase of common stock
Reclassification of bond hedge, net
of taxes
Reclassification of note conversion
obligation, net of taxes
Cumulative effect in change in
accounting principle
Amortization of stock awards and
restricted stock
Total comprehensive income (loss)
BALANCE AT DECEMBER 31, 2018
Stock-based compensation plans
Grant of restricted stock
Issuance of common shares, net of
withholdings
Forfeited restricted stock
Cumulative effect in change in
accounting principle
Amortization of stock awards and
restricted stock
113,000
17,441
(3,900)
(530,637)
1
—
—
(5)
(1)
(2,914)
—
(11,179)
38,502
3,632
59,057,195
$
591
$ 471,456
$
198,900
36,378
(1,300)
(157,000)
2
—
—
(2)
(2)
(2,329)
—
(3,578)
(50,435)
50,999
5,047
59,134,173
$
591
$ 471,158
$
151,300
46,958
(3,000)
2
—
—
(2)
(2,438)
—
7,002
Total comprehensive income
BALANCE AT DECEMBER 31, 2019
59,329,431
$
593
$ 475,720
$
—
(2,914)
—
(11,184)
38,502
18,495
(13,748) $
3,632
35,341
16,846
(63,020) $ 395,279
—
(2,329)
—
(3,580)
(50,435)
50,999
514
5,047
(28,342)
40,943
(91,362) $ 436,438
—
(2,438)
—
(71,358)
7,002
90,698
29,496
(61,866) $ 460,342
514
69,285
56,051
$
(71,358)
61,202
45,895
$
See notes to consolidated financial statements.
55
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 subsidiaries lease aircraft, provide contracted
airline operations, ground services, aircraft modification and maintenance services and other support services mainly
to the air transportation, e-commerce and package delivery industries. The Company's subsidiaries offer 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 Company's airlines, ABX Air, Inc.
(“ABX”), Air Transport International, Inc. (“ATI”) and Omni Air International, LLC ("OAI" ) each have the authority,
through their separate U.S. Department of Transportation ("DOT") and Federal Aviation Administration ("FAA")
certificates, to transport cargo worldwide. The Company provides air transportation services to a concentrated base of
customers. The Company provides a combination of aircraft, crews, maintenance and insurance services for a customer's
transportation network through customer "CMI" and "ACMI" agreements and through charter contracts in which aircraft
fuel is also included. In addition to its aircraft leasing and airline services, the Company sells aircraft parts, provides
aircraft maintenance and modification services, equipment maintenance services and arranges load transfer and package
sorting services for customers.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Air Transport Services Group, Inc.
and its wholly-owned subsidiaries. Inter-company balances and transactions are eliminated. The consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United States of America
("GAAP").
Investments in affiliates in which the Company has significant influence but does not exercise control are accounted
for using the equity method of accounting. Under the equity method, the Company’s share of the 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. Investments in affiliates in which the
Company does not exercise control or have significant influence are reflected at cost less impairment, if any, plus or
minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
of the same issuer.
On November 9, 2018, the Company acquired OAI, a passenger airline, along with related entities Advanced Flight
Services, LLC; Omni Aviation Leasing, LLC; and T7 Aviation Leasing, LLC (referred to collectively herein as "Omni").
OAI is a leading provider of contracted passenger airlift for the U.S. Department of Defense ("DoD") via the Civil
Reserve Air Fleet ("CRAF") program, and a provider of full-service passenger charter and ACMI services. OAI carries
passengers worldwide for a variety of private sector customers and other government services agencies. Revenues and
operating expenses include the activities of Omni for periods since their acquisition by the Company on November 9,
2018.
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 and other financial instruments, post-
retirement obligations, income taxes, contingencies and litigation. Changes in estimates and assumptions may have a
material impact on the consolidated financial statements.
56
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.
Cash includes restricted cash of $10.6 million as of December 31, 2019 and $5.3 million as of December 31, 2018.
Restricted cash consists of customers’ deposits held in an escrow account as required by DOT regulations. The cash
is restricted to the extent of customers’ deposits on flights not yet flown. Restricted cash is released from escrow upon
completion of specific flights, which are scheduled to occur within the twelve months.
Accounts Receivable and Allowance for Uncollectible Accounts
The Company's accounts receivable is primarily due from its significant customers (see Note D), other airlines,
delivery companies and freight forwarders. The Company performs a quarterly 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 allowances
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 allowances 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. 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 assessment
requires an estimation of fair value of each reporting unit that has goodwill. 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 impairment exists. If the carrying amount of a reporting unit is higher than its fair
value an impairment loss is recorded for the difference and charged to operations.
The Company assesses, during the fourth quarter of each year, whether it is more likely than not that an indefinite-
lived intangible asset is impaired by considering all relevant events and circumstances that could affect the significant
inputs used to determine the fair value of the indefinite-lived intangible asset.
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.
57
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 777, 767, 757 and 737 aircraft and flight equipment
Ground equipment
Leasehold improvements, facilities and office equipment
7 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 are less than the carrying value. If impairment exists, an adjustment is recorded 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.
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 of airframe maintenance for Boeing 767-200 aircraft operated by ABX 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 a "power by the cycle" agreement with an engine maintenance provider. Further, in May 2017, the
Company entered into similar maintenance agreements for certain General Electric CF6 engines that power many of
the Company's Boeing 767-300 aircraft. Under these agreements, the engines are maintained by the service provider
for a fixed fee per cycle. As a result, the cost of maintenance for these engines is generally expensed as flights occur.
Maintenance for the airlines’ other aircraft engines, including Boeing 777 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.
For aircraft leased 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 it is less than probable that a deposit will be
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 $3.7 million, $1.8 million and $1.8 million for the years
ended December 31, 2019, 2018 and 2017, 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
58
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 $16.1 million and $17.6 million at December 31, 2019 and December 31,
2018, 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 any of the Company's defined benefit pension or post-retirement health care plans 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 re-measured 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 re-measuring plan
assets and benefit obligations, are recorded to accumulated comprehensive loss and amortized into expense using a
corridor approach. The Company's corridor approach amortizes into earnings variances in plan assets and benefit
obligations that are a result of the previous measurement assumptions 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.
Cost adjustments for plan amendments are also deferred and amortized over the expected working life or the life
expectancy of plan participants. Irrevocable settlement transactions that relieve the Company from responsibilities of
providing retiree benefits and significantly eliminate the Company's related risk may result in recognition of gains or
losses from accumulated other comprehensive loss.
Customer 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 less than a 50% likelihood of being sustained. The Company recognizes interest and penalties
accrued related to uncertain tax positions in operating expense.
59
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 a lessee
are recorded as a lease incentive asset using their fair value at the time of issuance. The lease incentive is amortized
against revenues over the duration of related aircraft leases. The unexercised warrants are classified in liabilities and
re-measured 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.
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 net,
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. Contracts for the sale of aircraft parts typically result in the
recognition of revenue when the parts are delivered. Effective January 1, 2018, the Company records revenues and
estimated earnings over time for its airframe maintenance and aircraft modification contracts based on the percentage
of costs completed. Prior to January 1, 2018, revenues earned and expenses incurred in providing aircraft-related
maintenance, repair or modification services were usually recognized in the period in which the services were completed
60
and delivered to the customer. Revenues derived from sorting parcels are recognized in the reporting period in which
the services are performed.
Accounting Standards Updates
Effective January 1, 2018, the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting
Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("Topic 606”) which
superseded previous revenue recognition guidance. Topic 606 is a comprehensive 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. The Company's lease revenues
within the scope of Accounting Standards Codification 840, Leases, ("Topic 840") are specifically excluded from Topic
606.
The Company determined that under Topic 606, it is an agent for aviation fuel and certain other costs reimbursed
by customers under its ACMI and CMI contracts and for certain cargo handling services that it arranges for a customer.
Under Topic 606, such reimbursed amounts are reported net of the corresponding expenses beginning in 2018. This
application of Topic 606 did not have a material impact on the Company's reported earnings in any period.
Under Topic 606, the Company is required to record revenue over time, instead of at the time of completion, for
certain customer contracts for airframe and modification services that do not have an alternative use and for which the
Company has an enforceable right to payment during the service cycle. The Company adopted the provisions of this
new standard using the modified retrospective method which required the Company to record a one-time adjustment
to retained earnings for the cumulative effect that the standard had on open contracts at the time of adoption. In
conjunction with the adoption of the new standard, the Company accelerated $3.6 million of revenue resulting in an
immaterial adjustment to its January 1, 2018 retained deficit for open airframe and modification services contracts.
Effective January 1, 2019, the Company adopted the FASB's ASU No. 2016-02, “Leases (Topic 842)” which
superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease model that requires a company to
recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The Company adopted the standard
using the modified retrospective approach that does not require the restatement of prior year financial statements. The
adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations and
consolidated statement of cash flows. The adoption of Topic 842 resulted in the recognition of ROU assets and
corresponding lease liabilities as of January 1, 2019 in the amount of $52.6 million for leases classified as operating
leases. Topic 842 also applies to the Company's aircraft lease revenues, however, the adoption of Topic 842 did not
have a significant impact on the Company's accounting for its customer lease agreements.
The Company adopted the package of practical expedients and transition provisions available for expired or existing
contracts, which allowed the Company to carryforward its historical assessments of 1) whether contracts are or contain
leases, 2) lease classification, and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the
practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component.
The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing
leases. Further, the Company elected the short-term lease exception policy, permitting it to exclude the recognition
requirements for leases with terms of 12 months or less. See Note I for additional information about leases.
In February 2018, the FASB issued ASU No. 2018-02 “Reclassification of Certain Tax Effects From Accumulated
Other Comprehensive Income" ("ASU 2018-02"). ASU 2018-02 amends ASC 220, Income Statement - Reporting
Comprehensive Income, to allow a reclassification from accumulated other comprehensive income to retained earnings
for stranded tax effects resulting from U.S. federal tax legislation known as the Tax Cuts and Jobs Act. ASU 2018-02
is effective for years beginning after December 15, 2018 and interim periods within those fiscal years. The Company
elected to retain stranded tax effects in accumulated other comprehensive income.
In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-based Payment
Accounting" ("ASU 2018-07"). ASU 2018-07 amends ASC 718, "Compensation - Stock Compensation" ("ASC 718"),
with the intent of simplifying the accounting for share-based payments granted to non-employees for goods and services
and aligning the accounting for share-based payments granted to non-employees with the accounting for share-based
payments granted to employees. The Company adopted ASU 2018-07 on January 1, 2019 using the modified
retrospective approach as required. ASU 2018-07 replaced ASC 505-50, "Equity-Based Payments
to
Nonemployees" ("ASC 505-50") which was previously applied by the Company for warrants granted to Amazon.com,
61
Inc. ("Amazon") as customer incentives. As a result of ASU 2018-07, the Company applied accounting guidance for
financial instruments to the unvested warrants conditionally granted to Amazon in conjunction with an investment
agreement reached with Amazon on December 22, 2018. Applying ASU 2018-07 as of January 1, 2019, through the
modified retrospective approach, resulted in the recognition of $176.9 million for unvested warrant liabilities, $100.1
million for customer incentive assets and cumulative-effect adjustments of $71.4 million, net of tax, to reduce retained
earnings for customer incentives that were not probable of being realized.
The adoption of ASU 2018-07 on January 1, 2019 did not have an impact on the accounting for vested warrants.
In January 2017, the FASB issued ASU "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment" (“ASU 2017-04”). This new standard eliminates Step 2 from the goodwill impairment test and
requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying
amount. An entity recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value. ASU 2017-04 is effective for any annual or interim goodwill impairment tests in the fiscal years
beginning after December 15, 2019 and must be applied prospectively. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this new accounting
guidance on January 1, 2018. The adoption did not have an impact on the Company's financial position, results of
operations, or cash flows.
In March 2017, the FASB issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost "(ASU 2017-07"). ASU 2017-07 requires
an employer to report the service cost component of retiree benefits in the same line item or items as other compensation
costs arising from services rendered by the pertinent employees during the period. The other components of net benefit
costs are required to be presented separately from the service cost component and outside a subtotal of income from
operations. The Company adopted ASU 2017-07 on January 1, 2018, retrospectively to all periods presented. As a
result, retiree benefit plan interest expense, investment returns, settlements and other non-service cost components of
retiree benefit expenses are excluded from the Company's operating income subtotal as reported in the Company's
Consolidated Statement of Operations, but remain included in earnings before income taxes. Information about retiree
benefit plans' interest expense, investment returns and other components of retiree benefit expenses can be found in
Note J.
In June 2016, the FASB issued ASU "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit
Losses on Financial Instruments. ("ASU 2016-13"). Under ASU 2016-13, an entity is required to utilize an “expected
credit loss model” on certain financial instruments, including trade receivables. This model requires an entity to estimate
expected credit losses over the lifetime of the financial asset including trade receivables that are not past due. Operating
lease receivables are not within the scope of Topic 326. ASU 2016-13 is effective for interim and annual reporting
periods beginning after December 15, 2019. The Company adopted the ASU effective January 1, 2020 and does not
expect the adoption to have a material impact on the consolidated financial statements or related disclosures.
NOTE B—ACQUISITION OF OMNI
On November 9, 2018, the Company acquired Omni including OAI and its aircraft fleet. The Company acquired
Omni for cash consideration of $867.7 million. The Company funded the all-cash acquisition by amending its senior
credit agreement to issue a new term loan for $675.0 million, drawing $180.0 million from its revolving credit facility
and using its available cash.
The acquisition of Omni by the Company is reported in accordance with Accounting Standards Codification 805,
Business Combinations, in which the total purchase price is allocated to Omni’s tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values as of the date of the acquisition. The excess of the purchase
price over the estimated fair value of net assets acquired was recorded as goodwill. The purchase price exceeded the
fair value of the net assets acquired due to the strategic opportunities and expected benefits associated with adding
Omni's capabilities to the Company's existing offerings in the market. The benefits of adding Omni include the following:
• Additional passenger transportation capabilities
• FAA operating authority for the Boeing 777 aircraft
•
• Passenger aircraft life cycle leading to potential freighter conversion
Increased revenues, cash flows and customer diversification
62
The allocation of the purchase price to specific assets and liabilities is based, in part, upon internal estimates of
assets and liabilities and independent appraisals. Based on the valuations, the following table summarizes estimated
fair values of the assets acquired and liabilities assumed (in thousands) for the consideration paid:
Cash
Accounts receivable
Other current assets
Other assets
Intangibles
Goodwill
Property and equipment
Current liabilities
Customer deposits
Net assets acquired
$
$
4,693
63,041
8,366
7,836
140,000
353,466
328,869
(32,646)
(5,950)
867,675
Property and equipment acquired includes the engines and airframes of eight Boeing 767 and three Boeing 777
passenger aircraft owned by Omni and leasehold improvements for two Boeing 767 aircraft under operating leases.
The fair values assigned to the acquired aircraft were derived from market comparisons with the assistance of an
independent appraiser. Depreciation expense of property and equipment is provided on a straight-line basis over the
lesser of the asset’s remaining useful life or lease term. The estimated remaining life of these airframes range between
seven and eighteen years. The estimated life of the airframes and engines include the Company's intent to convert a
portion of Omni's passenger aircraft to freighter aircraft after the aircraft are no longer used for passengers. The value
of major airframe maintenance and engine overhauls are depreciated over the useful life of the overhaul. Intangible
assets consisted of $134.0 million for customer relationships and $6.0 million for airline certificates. The value assigned
to Omni's customer relationships was determined by discounting the estimated cash flows associated with the existing
customers as of the acquisition date, taking into consideration expected attrition of the existing customer base. The
estimated cash flows were based on revenues for those existing customers, net of operating expenses and net contributory
asset charges associated with servicing those customers. The estimated revenues were based on revenue growth rates
and customer renewal rates. Operating expenses were estimated based on the supporting infrastructure expected to
sustain the assumed revenue levels. The customer relationship intangibles are estimated to amortize over seven to
twenty years on a straight-line basis and airline certificates have indefinite lives and therefore are not amortized. The
goodwill is deductible for U.S. income tax purposes over 15 years.
The following table provides unaudited pro forma financial results (in thousands) for the Company after giving
effect to the acquisition of Omni and adjustments described below. This information is based on adjustments to the
historical consolidated financial statements of Omni using the purchase method of accounting for business combinations
as if the acquisition had taken place on January 1, 2017. The unaudited pro forma adjustments do not include any of
the cost savings and other synergies which may result from the acquisition. These unaudited pro forma financial results
are based on assumptions considered appropriate by management and include all material adjustments as considered
necessary. These unaudited pro forma results have been prepared for comparative purposes only and do not purport
to be indicative of results that would have actually been reported as of the date or for the year presented had the
acquisition taken place on such date or at the beginning of the year indicated, or to project the Company’s financial
position or results of operations which may be reported in the future (in thousands).
Pro forma revenues
Pro forma net earnings from continuing operations
Year Ended December 31,
2018
1,320,234
88,454
2017
1,425,823
13,660
Revenues for 2018 reflect the adoption of Topic 606 on January 1, 2018, as described in Note O. Under this new
revenue standard, such reimbursed amounts are reported net of the corresponding expenses beginning in 2018. Pro
63
forma revenues for 2017 included $289.4 million of reimbursed expenses. The following adjustments were made to
the historical financial records to create the unaudited pro forma information in the table above:
• Adjustments to eliminate transactions between the Company and Omni during the years ended December 31, 2017
and the ten and one half months ended November 9, 2018 respectively.
• Adjustment to reflect estimated additional depreciation and amortization expense of $10.6 million and $10.0 million
for the year ended December 31, 2017 and the ten and one half months ended November 9, 2018, respectively,
resulting primarily from the fair value adjustments to Omni’s intangible assets. Pro forma combined depreciation
expense for the periods presented reflect the increased fair values of the aircraft acquired and longer useful lives
of the aircraft, indicative of the Company's polices and intent to modify certain aircraft to freighters as an aircraft
is removed from passenger service.
• Adjustment to reflect additional interest expense and amortization of debt issuance costs for the year ended
December 31, 2017 and the ten and one half months ended November 9, 2018, related to the combined $855 million
from an unsubordinated term loan and revolving facility draws using the prevailing rates of 4.57%.
• Adjustment to apply the statutory tax rate of the Company to the pre-tax earnings of Omni and the pro forma
adjustments for the year ended December 31, 2017 and the ten and one half months ended November 9, 2018.
Omni had historically elected to be treated as pass-through entities for income tax purposes. Accordingly, no
provision for income taxes had been made in Omni's consolidated statements of earnings. The adjustments reflect
tax rates of 35% for 2017 and 22.58% for the first ten and one half months ended November 9, 2018.
• Adjustment to remove acquisition related expenses of $5.3 million for professional fees and classified as
"Transaction fees " within the consolidated statement of operations for 2018.
NOTE C—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS
As disclosed in Note B, on November 9, 2018, the Company acquired Omni. The purchase price was 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. Identified intangible assets included OAI's certificated authority granted by the FAA to operate as an airline
and OAI's long term customer relationships.
On February 1, 2019, the Company acquired a group of companies under common control, referred to as TriFactor.
Trifactor resells material handling equipment and provides engineering design solutions for warehousing, retail
distribution and e-commerce operations. Revenues and operating expenses include the activities of TriFactor for periods
since its acquisition by the Company. The excess purchase price over the estimated fair value of net assets acquired
was recorded as goodwill. The acquisition of TriFactor did not have a significant impact on the Company's financial
statements or results of operations.
As of December 31, 2019, 2018 and 2017, the goodwill amounts for reporting units that have goodwill were
separately tested for impairment. To perform the goodwill impairment test, the Company determined the fair value of
the reporting units using industry market multiples and discounted cash flows utilizing a market-derived cost of capital
(level 3 fair value inputs). The goodwill amounts were not impaired. The carrying amounts of goodwill are as follows
(in thousands):
Carrying value as of December 31, 2017
Acquisition of Omni
Carrying value as of December 31, 2018
Acquisition of TriFactor
CAM
$
34,395
118,895
$ 153,290
—
Carrying value as of December 31, 2019
$ 153,290
$ 234,571
64
ACMI
Services
All Other
Total
$
— $
234,571
$ 234,571
—
$
$
2,884
—
2,884
5,229
$
37,279
353,466
$ 390,745
5,229
8,113
$ 395,974
The Company's acquired intangible assets are as follows (in thousands):
Carrying value as of December 31, 2017
Acquisition of Omni
Amortization
Carrying value as of December 31, 2018
Amortization
Right of use asset
Carrying value as of December 31, 2019
Airline
Amortizing
Certificates
Intangibles
Total
$
$
$
3,000
$
4,298
$
6,000
—
9,000
—
—
9,000
$
$
134,000
(2,684)
135,614
(11,434)
(1,500)
122,680
$
$
7,298
140,000
(2,684)
144,614
(11,434)
(1,500)
131,680
The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-
lived intangibles assets, including customer relationship and STC intangibles, over 3 to 19 years. The Company recorded
intangible amortization expense of $11.4 million, $2.7 million and $1.2 million for the years ending December 31,
2019, 2018 and 2017, respectively. Estimated amortization expense for the next five years is $11.4 million, $10.6
million, $10.6 million, $10.6 million and $10.6 million.
Stock warrants issued to a lessee (see Note D) as an incentive are recorded as a lease incentive asset using their
fair value at the time that the lessee has met its performance obligations and amortized against revenues over the duration
of related aircraft leases. The Company's lease incentive granted to the lessee was as follows (in thousands):
Carrying value as of December 31, 2017
Amortization
Carrying value as of December 31, 2018
Adoption of ASU 2018-07
Amortization
Carrying value as of December 31, 2019
Lease
Incentive
$
$
$
80,684
(16,904)
63,780
100,076
(17,178)
146,678
The lease incentive began to amortize in April 2016 with the commencement of certain aircraft leases. Based on
the warrants granted as of December 31, 2019, the Company expects to record amortization, as a reduction to the lease
revenue, of $20.5 million, $22.2 million, $22.3 million, $17.7 million and $14.8 million for each of the next five years
ending December 31, 2024.
In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden
("West"). West, through its two airlines, West Atlantic UK and West Atlantic Sweden, 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. In April 2019, West issued
additional shares to a new investor in conjunction with a capital investment and purchase agreement which reduced
the Company's ownership to approximately 10% and reduced the Company's influence over West. West leases three
Boeing 767 aircraft and one Boeing 737 from the Company.
On August 3, 2017 the Company entered into a joint-venture agreement with Precision Aircraft Solutions, LLC,
to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The Company anticipates
approval of a supplemental type certificate from the FAA in 2020. The Company expects to make contributions equal
to its 49% ownership percentage of the program's total costs over the next two years. During the 2019, 2018 and 2017
years, the Company contributed $12.3 million, $11.4 million and $8.7 million to the joint venture, respectively. The
Company accounts for its investment in the aircraft conversion joint venture under the equity method of accounting,
in which the carrying value of each investment is reduced for the Company's share of the non-consolidated affiliates
operating results.
65
The carrying value of West and the joint venture totaled $10.9 million and $12.5 million at December 31, 2019
and 2018, respectively, and are reflected in “Other Assets” in the Company’s consolidated balance sheets. The Company
monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in
accordance with GAAP. If the Company determines that an other-than-temporary decline in value has occurred, it
recognizes an impairment loss, which is measured as the difference between the recorded carrying value and the fair
value of the investment. The fair value is generally determined using an income approach based on discounted cash
flows or using negotiated transaction values.
NOTE D—SIGNIFICANT CUSTOMERS
DHL
The Company has had long term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL")
since August 2003. Revenues from aircraft leases and related services performed for DHL were approximately 14%,
26% and 24% of the Company's consolidated revenues from continuing operations for the years ended December 31,
2019, 2018 and 2017, respectively. Revenues excluding directly reimbursed expenses from continuing operations
performed for DHL comprised approximately 30% of the Company's consolidated revenues from continuing operations
for the year ended December 31, 2017. The Company’s balance sheets include accounts receivable with DHL of $12.7
million and $13.4 million as of December 31, 2019 and December 31, 2018, 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
additional air cargo transportation services for DHL through ACMI agreements in which the Company provides the
aircraft, crews, maintenance and insurance under a single contract. 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
The Company has been providing freighter aircraft and services for cargo handling and logistical support for
Amazon.com Services, LLC ("ASI"), successor to Amazon.com Services, Inc., a subsidiary of Amazon.com, Inc.
("Amazon") since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services
Agreement (the “ATSA”) with ASI, pursuant to which CAM leases 20 Boeing 767 freighter aircraft to ASI, including
12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of
seven years. The ATSA also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the
management of ground services by the Company's subsidiary LGSTX Services Inc. ("LGSTX"). The ATSA became
effective on April 1, 2016 and had an original term of five years.
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 the execution of the Investment Agreement and
all of which are now fully vested, granted Amazon the right to purchase approximately 12.81 million ATSG common
shares, with the first 7.69 million common shares vesting upon issuance on March 8, 2016, and the remaining 5.12
million common shares vesting as the Company delivered additional aircraft leased under the ATSA. The second tranche
of warrants, which were issued and vested on March 8, 2018, grants Amazon the right to purchase approximately 1.59
million ATSG common shares. The third tranche of warrants will be issued and vest on September 8, 2020, and 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 is $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 are exercisable in accordance
with its terms through March 8, 2021.
66
On December 22, 2018 the Company announced agreements with Amazon to 1) lease and operate ten additional
Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing 767-200 aircraft currently leased to ASI by two
years to 2023 with an option for three more years, 3) extend the term of the eight Boeing 767-300 aircraft currently
leased to ASI by three years to 2026 and 2027 with an option for three more years and 4) extend the ATSA by five years
through March 2026, with an option to extend for an additional three years. The Company delivered six of the 767-300
aircraft in 2019 and plans to deliver the remainder in 2020. All ten of these aircraft leases will be for ten years.
In conjunction with the commitment for ten additional 767 aircraft leases, extensions of twenty existing Boeing
767 aircraft leases and the ATSA described above, Amazon and the Company entered into another Investment Agreement
on December 20, 2018. Pursuant to the 2018 Investment Agreement, Amazon will be issued warrants for 14.8 million
common shares which could expand its potential ownership in the Company to approximately 33.2%, including the
warrants described above for the 2016 agreements. Warrants for 11.1 million common shares vested as existing leases
were extended and six additional aircraft leases were executed and added to the ATSA operations. More of these warrant
will vest as four additional aircraft leases were executed. These new warrants will expire if not exercised within seven
years from their issuance date. They have an exercise price of $21.53 per share.
Additionally, Amazon will be able to earn incremental warrant rights, increasing its potential ownership from
33.2% up to approximately 39.9% of the Company, by leasing up to seventeen more cargo aircraft from the Company
before January 2026. Incremental warrants granted for Amazon’s commitment to any such future aircraft leases will
have an exercise price based on the volume-weighted average price of the Company's shares during the 30 trading days
immediately preceding the contractual commitment for each lease.
The warrants issuable under these new agreements with Amazon required an increase in the number of authorized
common shares of the Company. Management submitted proposals for shareholder consideration at the Company's
annual meeting of shareholders on May 9, 2019 calling for an increase in the number of authorized common shares
and approval of the warrants as required under the rules of the Nasdaq Global Select Market. Both proposals were
approved by shareholders on May 9, 2019.
The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance
for financial instruments. Warrants obligations are marked to fair value at the end of each reporting period. The value
of warrants is recorded as a customer incentive asset if it is probable of vesting at the time of grant and further changes
in the fair value of warrant obligations are recorded to earnings. Upon a warrant vesting event, the customer incentive
asset is amortized as a reduction of revenue over the duration of the related revenue contract
As of December 31, 2019, the Company's liabilities reflected 14.83 million warrants from the 2016 Investment
Agreement having a fair value of $206.6 million and 24.7 million warrants from the 2018 Amazon agreements having
a fair value of $176.5 million. During the years ended December 31, 2019, 2018 and 2017 the re-measurements of all
the warrants to fair value resulted in a net non-operating losses of $2.3 million, net gains of $7.4 million and losses of
$81.8 million before the effect of income taxes, respectively.
Revenues from Amazon comprised approximately 23%, 27% and 44% of the Company's consolidated revenues
from continuing operations for the years ending December 31, 2019, 2018 and 2017, respectively. Revenues excluding
directly reimbursed expenses from continuing operations performed for Amazon comprised approximately 27% of the
Company's consolidated revenues from continuing operations for the year ended December 31, 2017. The Company’s
balance sheets include accounts receivable with Amazon of $50.1 million and $29.2 million as of December 31, 2019
and December 31, 2018, respectively.
The Company's earnings in future periods will be impacted by 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.
DoD
The Company is a provider of cargo and passenger airlift services to the DoD. The DoD awards flights to U.S.
certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from services
performed for the DoD were approximately 34%, 15% and 7% of the Company's total revenues from continuing
operations for the years ended December 31, 2019, 2018 and 2017, respectively, including revenues for Omni beginning
November 9, 2018. Revenues excluding directly reimbursed expenses from continuing operations performed for the
67
DoD comprised approximately 10% of the Company's consolidated revenues from continuing operations for the year
ended December 31, 2017. The Company's balance sheets included accounts receivable with the DoD of $44.5 million
and $50.5 million as of December 31, 2019 and December 31, 2018, respectively.
NOTE E—FAIR VALUE MEASUREMENTS
The Company’s money market funds and interest rate swaps are reported on the Company’s consolidated balance
sheets at fair values based on market values from comparable transactions. The fair value of the Company’s money
market funds, convertible note, convertible note hedges and interest rate swaps are based on observable inputs (Level
2) from comparable market transactions.
The fair value of the stock warrant obligations resulting from aircraft leased to Amazon were determined using a
Black-Scholes pricing model which considers various assumptions, including the Company’s common stock price, the
volatility of the Company’s common stock, the expected dividend yield, exercise price and the risk-free interest rate
(Level 2 inputs). The fair value of the stock warrant obligations for unvested stock warrants, conditionally granted to
Amazon for the execution of incremental, future aircraft leases, include additional assumptions including the expected
exercise prices and the probabilities that future leases will occur (Level 3 inputs).
The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
As of December 31, 2019
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 obligations
Total Liabilities
As of December 31, 2018
Assets
Cash equivalents—money market
Interest rate swap
Total Assets
Liabilities
Interest rate swap
Stock warrant obligation
Total Liabilities
$
$
$
$
$
$
$
$
— $
—
— $
— $
—
— $
1,129
111
1,240
$
$
— $
—
— $
1,129
111
1,240
(8,237) $
(340,767)
(349,004) $
— $
(42,306)
(42,306) $
(8,237)
(383,073)
(391,310)
Fair Value Measurement Using
Level 1
Level 2
Level 3
Total
— $
—
— $
— $
—
— $
17,986
2,971
20,957
$
$
(1,138) $
(203,782)
(204,920) $
— $
—
— $
— $
—
— $
17,986
2,971
20,957
(1,138)
(203,782)
(204,920)
At December 31, 2019, vested stock warrants having an exercise price of $9.73 were valued at $13.93 each using
a risk-free interest rate of 1.6% and a stock volatility of 35%, based on the time period corresponding with the expiration
period of the warrants. At December 31, 2019, vested stock warrants from the 2018 Amazon agreements having an
exercise price of $21.53 were valued at $9.30 each, using a risk-free interest rate of 1.8% and a stock volatility of
35.0%, based on the time period corresponding with the expiration period of the warrants. At December 31, 2019,
unvested stock warrants from the 2018 Amazon agreement were valued using additional assumptions for an expected
grant date, expected exercise price, the risk free rate to the expected grant date and the probabilities that future leases
will occur. At December 31, 2018, each vested stock warrant having an exercise price of $9.73 was valued at $13.76
using a risk-free rate of 2.5% and a stock volatility of 37.5%.
68
The fair value of the note conversion obligations were estimated using discounted cash flows and the fair value of
convertible note hedges were estimated using a Black-Scholes pricing model and incorporate the terms and conditions
of the underlying financial instruments (Level 2 Inputs). The valuations are, among other things, subject to changes
in both the Company's credit worthiness and the counter-parties to the instruments as well as changes in general market
conditions. While the change in fair value of the note conversion obligations and the convertible note hedges are
generally expected to move in opposite directions, the net change in any given period may be material. At December
31, 2018, the value of the convertible note hedges and note conversion obligations were valued at $50.0 million and
$50.8 million respectively.
As a result of lower market interest rates compared to the stated interest rates of the Company’s fixed rate debt
obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was approximately
$2.7 million less than the carrying value, which was $1,484.4 million at December 31, 2019. As of December 31, 2018,
the fair value of the Company’s debt obligations was approximately $6.0 million less than the carrying value, which
was $1,401.3 million. The non-financial assets, including goodwill, intangible assets and property and equipment are
measured at fair value on a non-recurring basis.
NOTE F—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,
2019
2,598,113
59,628
33,649
220,827
2,912,217
(1,146,197)
1,766,020
$
$
December 31,
2018
2,340,840
57,455
28,745
74,449
2,501,489
(946,484)
1,555,005
$
CAM owned aircraft with a carrying value of $889.3 million and $803.7 million that were under leases to external
customers as of December 31, 2019 and 2018, respectively.
NOTE G—DEBT OBLIGATIONS
Debt obligations consisted of the following (in thousands):
Unsubordinated term loans
Revolving credit facility
Convertible debt
Other financing arrangements
Total debt obligations
Less: current portion
Total long term obligations, net
December 31,
December 31,
2019
2018
$
$
626,277
632,900
213,461
11,746
1,484,384
(14,707)
1,469,677
$
$
721,406
475,000
204,846
—
1,401,252
(29,654)
1,371,598
The Company utilizes a syndicated credit agreement ("Senior Credit Agreement") which includes unsubordinated
term loans and a revolving credit facility. In November 2019, the Senior Credit Agreement was amended to increase
the maximum revolver capacity from $645.0 million to $750.0 million, combine two terms loans into one loan and
reduce the interest rate spread of the LIBOR based financing at various debt-to-EBITDA levels. This amendment also
69
extended the agreement to November 2024 provided certain liquidity measures are maintained during 2024 and added
incremental accordion capacity based on debt ratios. As of December 31, 2019, the unused revolving credit facility
totaled $103.9 million, net of draws of $632.9 million and outstanding letters of credit of $13.2 million. The Senior
Credit Agreement permitted additional indebtedness of up to $750.0 million, excluding the unsecured convertible notes
outstanding of $258.8 million as of December 31, 2019.
The balance of the unsubordinated term loan is net of debt issuance costs of $8.7 million and $9.8 million for the
years ended December 31, 2019 and 2018, respectively. Under the terms of the Senior Credit Agreement, interest rates
are adjusted at least quarterly based on the Company's EBITDA, its outstanding debt level and prevailing LIBOR or
prime rates. At the Company's current debt-to-EBITDA ratio, the LIBOR based financing for the unsubordinated term
loan and revolving credit facility bear variable interest rates of 3.675% and 3.649%, respectively.
The Senior Credit Agreement is collateralized by certain of the Company's Boeing 777, 767 and 757 aircraft. Under
the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 115% of
the outstanding balance of the term loan and the total funded revolving credit facility. The minimum collateral coverage
which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit facility
commitment of $750.0 million.
The Senior Credit Agreement limits the amount of dividends the Company can pay and the amount of common
stock it can repurchase to $100.0 million during any calendar year, provided the Company's total debt to earnings before
interest, taxes, depreciation and amortization expenses ("EBITDA") ratio is under 3.00 times, after giving effect to the
dividend or repurchase. The Senior Credit Agreement contains covenants, including a maximum permitted total
EBITDA to debt ratio, a fixed charge covenant ratio requirement, limitations on certain additional indebtedness, and
on guarantees of indebtedness. The Senior Credit Agreement stipulates events of default, including unspecified events
that may have material adverse effects on the Company. If an event of default occurs, the Company may be forced to
repay, renegotiate or replace the Senior Credit Agreement.
On January 28, 2020, the Company, through a subsidiary, completed a debt offering of $500.0 million in senior
unsecured notes (the “Senior Notes”). The Senior Notes were sold only to qualified institutional buyers in the United
States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and certain investors
pursuant to Regulation S under the Securities Act. The Senior Notes are senior unsecured obligations that bear interest
at a rate of 4.75% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on
August 1, 2020. The Senior Notes will mature on February 1, 2028. The Senior Notes contain customary events of
default and certain covenants which are generally no more restrictive than those set forth in the Senior Credit Agreement.
The net proceeds of $495.0 million from the Senior Notes were used to pay down the revolving credit facility. The
Senior Notes do not require principal payments in 2020.
In September 2017, the Company issued $258.8 million aggregate principal amount of 1.125% Convertible Senior
Notes due 2024 (" Convertible Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A
under the Securities Act. The Convertible Notes bear interest at a rate of 1.125% per year payable semi-annually in
arrears on April 15 and October 15 each year, beginning April 15, 2018. The Convertible Notes mature on October
15, 2024, unless repurchased or converted in accordance with their terms prior to such date. The Convertible Notes
are unsecured indebtedness, subordinated to the Company's existing and future secured indebtedness and other liabilities,
including trade payables. Conversion of the Convertible Notes can only occur upon satisfaction of certain conditions
and during certain periods, beginning any calendar quarter commencing after December 31, 2017 and thereafter, until
the close of business on the second scheduled trading day immediately preceding the maturity date. Upon the occurrence
of certain fundamental changes, holders of the Convertible Notes can require the Company to repurchase their notes
at the cash repurchase price equal to the principal amount of the notes, plus any accrued and unpaid interest.
The Convertible Notes may be settled in cash, the Company’s common shares or a combination of cash and the
Company’s common shares, at the Company’s election. The initial conversion rate is 31.3475 common shares per
$1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $31.90 per
common share). If a “make-whole fundamental change” (as defined in the offering circular with the Convertible Notes)
occurs, the Company will, in certain circumstances, increase the conversion rate for a specified period of time.
In conjunction with the Convertible Notes, the Company purchased convertible note hedges under privately
negotiated transactions for $56.1 million, having the same number of the Company's common shares, 8.1 million shares
and same strike price of $31.90, that underlie the Convertible Notes. The convertible note hedges are expected to
70
reduce the potential equity dilution with respect to the Company's common stock, and/or offset any cash payments in
excess of the principal amount due, as the case may be, upon conversion of the Convertible Notes. The Company's
current intent and policy is to settle all Note conversions through a combination settlement which satisfies the principal
amount of the Convertible Notes outstanding with cash. The Convertible Notes could have a dilutive effect on the
computation of earnings per share in accordance with accounting principles to the extent that the average traded market
price of the Company’s common shares for a reporting period exceeds the conversion price.
The conversion feature of the Convertible Notes required bifurcation from the principal amount under the applicable
accounting guidance. Settlement provisions of the Convertible Notes and the convertible note hedges required cash
settlement of these instruments until the Company's shareholders increased the number of authorized shares of common
stock to cover the full number of shares underlying the Convertible Notes. As a result, the conversion feature of the
Convertible Notes and the convertible note hedges were initially accounted for as liabilities and assets, respectively,
and marked to market at the end of each period. The fair value of the note conversion obligation at issuance was $57.4
million.
On May 10, 2018, the Company's shareholders increased the number of authorized shares of common stock to
cover the full number of shares underlying the Convertible Notes. The Company reevaluated the Convertible Notes
and convertible note hedges under the applicable accounting guidance including ASC 815, "Derivatives and Hedging,"
and determined that the instruments, which meet the definition of derivative and are indexed to the Company's own
stock, should be classified in shareholder's equity. On May 10, 2018, the fair value of the conversion feature of the
Convertible Notes and the convertible note hedges of $51.3 million and $50.6 million, respectively, were reclassified
to paid-in capital and are no longer remeasured to fair value.
The net proceeds from the issuance of the Convertible Notes was approximately $252.3 million, after deducting
initial issuance costs. These unamortized issuance costs and discount are being amortized to interest expense through
October 2024, using an effective interest rate of approximately 5.15%. The carrying value of the Company's convertible
debt is shown below.
Principal value, Convertible Senior Notes, due 2024
Unamortized issuance costs
Unamortized discount
Convertible debt
December 31,
December 31,
2019
2018
258,750
(4,864)
(40,425)
213,461
258,750
(5,799)
(48,105)
204,846
In conjunction with the offering of the Convertible Notes, the Company also sold warrants to the convertible note
hedge counterparties in separate, privately negotiated warrant transactions at a higher strike price and for the same
number of the Company’s common shares, subject to customary anti-dilution adjustments. The amount received for
these warrants and recorded in Stockholders' Equity in the Company’s consolidated balance sheets was $38.5 million.
These warrants could result in 8.1 million additional shares of the Company's common stock, if the Company's traded
market price exceeds the strike price which is $41.35 per share and is subject to certain adjustments under the terms
of the warrant transactions. The warrants could have a dilutive effect on the computation of earnings per share to the
extent that the average traded market price of the Company's common shares for a reporting periods exceed the strike
price.
71
The scheduled cash principal payments for the Company's debt obligations, as of December 31, 2019, for the next
five years are as follows (in thousands):
2020
2021
2022
2023
2024
2025 and beyond
Total principal cash payments
Less: unamortized issuance costs and discounts
Total debt obligations
NOTE H—DERIVATIVE INSTRUMENTS
Principal
Payments
16,481
16,491
32,378
32,389
1,432,050
8,607
1,538,396
(54,012)
1,484,384
$
$
The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for protection
from fluctuating interest rates, for at least twenty-five percent of the outstanding balance of the term loan issued in
November 2018. Accordingly, the Company entered into additional interest rate swaps in December 2018 and January
2019 having initial values of $150.0 million and $150.0 million, respectively, and forward start dates of December 31,
2018 and June 28, 2019. The table below provides information about the Company’s interest rate swaps (in thousands):
Expiration Date
May 5, 2021
May 30, 2021
December 31, 2021
March 31, 2022
March 31, 2022
March 31, 2023
December 31, 2019
December 31, 2018
Stated
Interest
Rate
Notional
Amount
Market
Value
(Liability)
Notional
Amount
Market
Value
(Liability)
1.090%
1.703%
2.706%
1.900%
1.950%
2.425%
20,625
20,625
146,250
50,000
75,000
148,125
111
(25)
(3,242)
(408)
(696)
(3,866)
28,125
28,125
150,000
50,000
75,000
—
650
366
(1,138)
829
1,126
—
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 a net loss on derivatives of $10.0 million and $8.0
thousand and net gains of $1.4 million for the years ending December 31, 2019, 2018 and 2017, respectively. The
liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.
The Company recorded a net loss before the effects of income taxes of $0.1 million and a net gain before the effects
of income taxes of $0.6 million during the years ended December 31, 2018 and 2017, respectively, for the revaluation
of the convertible note hedges and the note conversion obligations to fair value before these instruments were reclassified
to paid-in-capital.
72
NOTE I—COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases property, four aircraft, aircraft engines and other types of equipment under operating leases.
Property leases include hangars, warehouses, offices and other space at certain airports with fixed rent payments and
lease terms ranging from one month to seven years. The Company is obligated to pay the lessor for maintenance, real
estate taxes, insurance and other operating expenses on certain property leases. These expenses are variable and are
not included in the measurement of the lease asset or lease liability. These expenses are recognized as variable lease
expense when incurred and are not material. Equipment leases include ground support and industrial equipment as
well as computer hardware with fixed rent payments and terms of one month to five years.
The Company records the initial right-to-use asset and lease liability at the present value of lease payments scheduled
during the lease term. For the year ended December 31, 2019, non-cash transactions to recognize right-to-use assets
and corresponding liabilities for new leases were $17.0 million. Unless the rate implicit in the lease is readily
determinable, the Company discounts the lease payments using an estimated incremental borrowing rate at the time of
lease commencement. The Company estimates the incremental borrowing rate based on the information available at
the lease commencement date, including the rate the Company could borrow for a similar amount, over a similar lease
term with similar collateral. The Company's weighted-average discount rate for operating leases at December 31, 2019
was 4.7%. Leases often include rental escalation clauses, renewal options and/or termination options that are factored
into the determination of lease payments when appropriate. Although not material, the amount of such options is
reflected below in the maturity of operating lease liabilities table. Lease expense is recognized on a straight-line basis
over the lease term. Our weighted-average remaining lease term is 4.6 years.
For the year ended December 31, 2019, cash payments against operating lease liabilities were $19.7 million. As
of December 31, 2019, the maturities of operating lease liabilities are as follows (in thousands):
2020
2021
2022
2023
2024
2025 and beyond
Total undiscounted cash payments
Less: amount representing interest
Present value of future minimum lease payments
Less: current obligations under leases
Long-term lease obligation
Operating Leases
$
$
14,549
10,425
6,764
6,138
4,940
5,155
47,971
(4,780)
43,191
12,857
30,334
The Company expects to lease two additional passenger aircraft commencing in 2020 that are not reflected in the
table above.
73
The future minimum lease payments of the Company as of December 31, 2018 are scheduled below (in thousands):
2019
2020
2021
2022
2023
2024 and beyond
Total minimum lease payments
Purchase Commitments
Operating Leases
$
$
17,505
15,418
12,703
6,735
4,641
12,462
69,464
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. As of December 31, 2019, the Company had eight aircraft that were in or
awaiting the modification process. As of December 31, 2019, the Company had placed non-refundable deposits of
$23.2 million to purchase 15 more Boeing 767-300 passenger aircraft through 2021. As of December 31, 2019, the
Company's commitments to acquire and convert aircraft totaled $369.1 million through 2021.
Guarantees and Indemnifications
Certain leases and agreements of the Company contain guarantees and indemnification obligations to the lessor, or
one or more other parties that are considered reasonable and customary (e.g. use, tax and environmental
indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may
continue after expiration of the respective lease or agreement.
Other
In addition to the foregoing matters, the Company is also a party to legal proceedings in various federal and state
jurisdictions from time to time arising out of the operation of the Company's business. The amount of alleged liability,
if any, from these proceedings cannot be determined with certainty; however, the Company believes that its ultimate
liability, if any, arising from pending legal proceedings, as well as from asserted legal claims and known potential legal
claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be
material to our financial condition or results of operations.
Employees Under Collective Bargaining Agreements
As of December 31, 2019, the flight crewmember employees of ABX, ATI and Omni and flight attendant employees
of ATI and Omni were represented by the labor unions listed below:
Airline
ABX
ATI
OAI
ATI
OAI
Labor Agreement Unit
International Brotherhood of Teamsters
Air Line Pilots Association
International Brotherhood of Teamsters
Association of Flight Attendants
Association of Flight Attendants
Percentage of
the
Company’s
Employees
5.3%
8.3%
7.1%
0.9%
7.3%
74
NOTE J—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 crewmembers, which is unfunded. Benefits for covered individuals terminate
upon reaching age 65 under the post-retirement healthcare plans.
The accounting and valuation for these post-retirement obligations are determined by prescribed accounting and
actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and
estimates is significant due to the long time period over which benefits will be accrued and paid. The long term nature
of these benefit payouts increases the sensitivity of certain estimates of our post-retirement obligations. The assumptions
considered most sensitive in actuarially valuing ABX’s pension obligations and determining related expense amounts
are discount rates and expected long term investment returns on plan assets. Additionally, other assumptions concerning
retirement ages, mortality and employee turnover also affect the valuations. Actual results and future changes in these
assumptions could result in future costs significantly higher than those recorded in our results of operations.
ABX measures plan assets and benefit obligations as of December 31 of each year. Information regarding ABX’s
sponsored defined benefit pension plans and post-retirement healthcare plans follow below. The accumulated benefit
obligation reflects pension benefit obligations based on the actual earnings and service to-date of current employees.
On August 30, 2017, the Company transferred investment assets totaling $106.6 million from the pension plan trust
to purchase a group annuity contract from Mutual of America Life Insurance Company ("MUA"). The group annuity
contract transfers payment obligations for pension benefits owed to certain former, non-pilot retirees of ABX (or their
beneficiaries) to MUA. As a result of the transaction, the Company recognized pre-tax settlement charges of $5.3 million
to continued operations and $7.6 million to discontinued operations due to the reclassification of $12.9 million of pretax
losses from accumulated other comprehensive loss.
75
Funded Status (in thousands):
Accumulated benefit obligation
Change in benefit obligation
Obligation as of January 1
Service cost
Interest cost
Plan transfers
Benefits paid
Actuarial (gain) loss
Obligation as of December 31
Change in plan assets
Fair value as of January 1
Actual gain (loss) on plan assets
Plan transfers
Return of excess premiums
Employer contributions
Benefits paid
Fair value as of December 31
Funded status
Overfunded plans, net asset
Underfunded plans
Current liabilities
Non-current liabilities
$
$
$
$
$
$
$
$
Pension Plans
2019
779,031
690,729
—
31,299
3,313
(31,718)
85,408
779,031
625,646
144,108
3,313
—
5,414
(31,718)
746,763
4,996
$
$
$
$
$
$
2018
690,729
740,783
—
29,135
1,603
(29,439)
(51,353)
690,729
681,573
(51,274)
1,603
963
22,220
(29,439)
625,646
$
$
$
$
$
Post-retirement
Healthcare Plans
2019
2018
3,707
3,824
107
148
—
(365)
(7)
3,707
$
$
$
— $
—
—
—
365
(365)
— $
— $
— $
3,824
4,056
123
127
—
(365)
(117)
3,824
—
—
—
—
365
(365)
—
—
(3,796) $
(33,468) $
(3,971) $
(61,112) $
(431) $
(3,276) $
(451)
(3,373)
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, 2019, 2018 and 2017, 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
2019
2018
2017
2019
2018
2017
$
— $
— $
— $
31,299
29,135
33,585
(37,907)
(42,093)
(42,080)
—
—
—
—
15,528
3,547
12,923
—
7,778
$
8,920
$
(9,411) $
12,206
$
107
148
—
—
—
172
427
$
$
123
127
—
—
—
219
469
$
158
142
—
—
(51)
283
532
76
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
2019
2018
2019
2018
$
— $
— $
— $
89,871
126,192
1,031
—
1,210
Accumulated other comprehensive loss
$ 89,871
$ 126,192
$
1,031
$
1,210
The amounts of unrecognized net actuarial loss recorded in accumulated other comprehensive loss that is expected
to be recognized as components of net periodic benefit expense during 2020 is $3.8 million and $0.1 million for the
pension plans and the post-retirement healthcare plans, respectively.
Assumptions
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
2019
3.65%
3.70%
6.10%
Pension Plans
2018
4.65%
4.65%
6.20%
2017
4.00%
4.05%
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 2.60%, 4.10% and 3.30% for pilots
at December 31, 2019, 2018 and 2017, respectively. 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 affect the post-retirement healthcare obligations.
Plan Assets
The weighted-average asset allocations by asset category are as shown below:
Asset category
Cash
Equity securities
Fixed income securities
Composition of Plan Assets
as of December 31
2019
2018
—%
26%
74%
100%
1%
25%
74%
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%; cash – 0% to
10%. 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.
77
Cash Flows
In 2019 and 2018, the Company made contributions to its defined benefit plans of $5.4 million and $22.2 million,
respectively. The Company estimates that its contributions in 2020 will be approximately $10.9 million for its defined
benefit pension plans and $0.4 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):
2020
2021
2022
2023
2024
Years 2025 to 2029
Fair Value Measurements
Pension
Benefits
Post-retirement
Healthcare
Benefits
$
$
37,829
38,583
41,350
43,759
45,496
431
483
511
545
520
239,019
1,724
The pension plan assets are stated 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.
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.
78
The pension plan assets measured at fair value on a recurring basis were as follows (in thousands):
As of December 31, 2019
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, 2018
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
$
$
$
$
— $
14,553
59,710
—
$
3,467
442
117,067
549,441
74,263
$
670,417
$
$
3,467
14,995
176,777
549,441
744,680
2,083
746,763
Fair Value Measurement Using
Level 1
Level 2
Total
— $
3,961
$
13,142
48,645
2,065
63,852
$
—
91,085
462,149
557,195
$
$
3,961
13,142
139,730
464,214
621,047
4,599
625,646
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.
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.
79
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, 2019
Hedge Funds & Private Equity
Real Estate
Total investments measured at NAV
As of December 31, 2018
Hedge Funds & Private Equity
Real Estate
Total investments measured at NAV
$
$
$
$
2,083
—
2,083
4,599
—
4,599
(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
$12.6 million, $9.0 million and $7.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
NOTE K—INCOME TAXES
The Company's deferred income taxes reflect the value of its net operating loss carryforwards and the tax effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
their amounts used for income tax calculations. Federal legislation known as The Tax Cuts and Jobs Acts ("Tax Act")
was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from the previous rate of
35% to 21% effective January 1, 2018. The Tax Act also made broad and complex changes to the U.S. tax code,
including, but not limited to a onetime tax on earnings of certain foreign subsidiaries, limitations of net operating loss
carryforwards created in tax years beginning after December 31, 2017, bonus depreciation for full expensing of qualified
property, and limitations on the deductibility of certain executive compensation. At December 31, 2017, the Company
calculated the effects of the enactment of the Tax Act as written, and made an estimate of the effects on the existing
deferred tax balances. The re-measurement of deferred tax balances in 2017 using the lower federal rates enacted by
the Tax Act, resulted in a reduction in the Company's net deferred tax liability and the recognition of a deferred tax
benefit as depicted by the change in the federal statutory tax rate included below. The Company continues to analyze
and monitor the effects of the Tax Act on its operations.
At December 31, 2019, the Company had cumulative net operating loss carryforwards (“NOL CFs”) for federal
income tax purposes of approximately $172.5 million, which do not expire but whose use is limited to 80% of taxable
income in any given year. The deferred tax asset balance includes $3.4 million net of a $0.3 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 and cash contributions for
its defined benefit pension plans. At December 31, 2019 and 2018, the Company determined that, based upon projections
of taxable income, it was more likely than not that the NOL CF’s will be, accordingly, no allowance against these
deferred tax assets was recorded. The Company had alternative minimum tax credits of $3.1 million which will be
recovered over the next three years.
80
The significant components of the deferred income tax assets and liabilities as of December 31, 2019 and 2018 are
as follows (in thousands):
Deferred tax assets:
Net operating loss carryforward and federal credits
Lease Obligation
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
Operating lease assets
Goodwill
State taxes
Valuation allowance against deferred tax assets
Deferred tax liabilities
Net deferred tax (liability)
December 31
2019
2018
$
$
$
40,467
9,070
17,174
6,355
9,435
2,055
5,132
9,309
98,997
(192,651)
(6,088)
(9,051)
(4,916)
(12,355)
(1,412)
(226,473)
(127,476) $
55,760
—
7,314
13,777
8,751
2,374
4,389
5,333
97,698
(189,719)
(5,850)
—
(620)
(14,474)
(278)
(210,941)
(113,243)
The following summarizes the Company’s income tax provisions (benefits) (in thousands):
Years Ended December 31
2019
2018
2017
Current taxes:
Federal
Foreign
State
Deferred taxes:
Federal
Foreign
State
Change in federal statutory tax rates
Total deferred tax expense
Total income tax expense (benefit) from continuing operations $
Income tax expense (benefit) from discontinued operations
$
81
$
1,332
$
— $
1
138
14,155
—
(3,677)
—
10,478
11,589
360
$
$
—
1,043
15,642
(63)
2,973
—
18,552
19,595
434
$
$
9
48
590
27,625
—
3,396
(59,944)
(28,923)
(28,276)
(1,848)
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
Foreign income taxes
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
Change in federal and state tax laws
Change to state statutory tax rates
Other
Effective income tax rate
Years Ended December 31
2019
2018
2017
21.0 %
— %
1.4 %
(2.9)%
— %
1.7 %
— %
(5.4)%
0.4 %
16.2 %
21.0 %
(0.1)%
(0.2)%
(1.5)%
(0.8)%
0.8 %
— %
3.8 %
(0.6)%
22.4 %
35.0 %
(0.5)%
(39.7)%
(485.0)%
21.7 %
(19.6)%
917.2 %
— %
3.5 %
432.6 %
The income tax deductibility of the warrant expense is less than the expense required by GAAP because for tax
purposes, the warrants are valued at a different time and under a different valuation method.
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
Change in federal statutory tax rates
Effective income tax rate
Years Ended December 31
2018
2019
2017
21.0%
1.8%
—%
22.8%
21.0%
2.6%
—%
23.6%
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, 2019, 2018 and 2017, 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 2019, 2018 and 2017.
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. The returns for 2018, 2017 and 2016 related to the consolidated
group remain open to examination. The consolidated federal tax returns prior to 2016 remain open to federal examination
only to the extent of net operating loss carryforwards carried over from or utilized in those years. Pemco and Omni
filed returns on their own behalf prior to their acquisition by the Company. State and local returns filed for 2005 through
2018 are generally also open to examination by their respective jurisdictions, either in full or limited to net operating
losses. The Company files tax returns with the Republic of Ireland for its leasing operations based in Ireland.
82
NOTE L—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes the following items by components for the years ended
December 31, 2019, 2018 and 2017 (in thousands):
Defined
Benefit
Pension
(77,088)
Defined
Benefit Post-
Retirement
(1,301)
Foreign
Currency
Translation
(1,477)
3,116
—
12,923
7,778
—
(7,304)
16,513
(60,575)
(41,051)
—
3,547
9,037
(28,467)
(89,042)
20,793
—
—
15,528
(8,431)
27,890
(61,152)
63
—
283
(51)
(91)
204
(1,097)
117
—
219
(80)
256
(841)
7
—
—
172
(40)
139
(702)
Total
(79,866)
3,179
195
12,923
8,061
(51)
(7,461)
16,846
(63,020)
—
195
—
—
—
(66)
129
(1,348)
—
(171)
(40,934)
(171)
—
40
(131)
(1,479)
3,766
8,997
(28,342)
(91,362)
—
(18)
20,800
(18)
2,253
—
(768)
1,467
(12)
2,253
15,700
(9,239)
29,496
(61,866)
Balance as of January 1, 2017
Other comprehensive income (loss) before reclassifications:
Actuarial gain (loss) for retiree liabilities
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, 2017
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)
Income Tax (Expense) or Benefit
Other comprehensive income (loss), net of tax
Balance as of December 31, 2018
Other comprehensive income (loss) before reclassifications:
Actuarial gain (loss) for retiree liabilities
Foreign currency translation adjustment
Amounts reclassified from accumulated other comprehensive
income:
Foreign currency loss
Actuarial costs (reclassified to salaries, wages and benefits)
Income Tax (Expense) or Benefit
Other comprehensive income (loss), net of tax
Balance as of December 31, 2019
83
NOTE M—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 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
2019
2018
2017
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
969,928
$
Granted
Converted
Expired
Forfeited
Outstanding at end of period
Vested
302,596
(291,064)
(7,900)
(9,728)
963,832
476,389
$
$
15.89
23.22
17.14
23.78
23.37
17.67
11.11
873,849
$
304,795
(205,616)
(500)
(2,600)
969,928
463,422
$
$
12.30
24.18
12.74
28.38
26.76
15.89
10.25
1,040,569
$
243,940
(320,810)
(82,050)
(7,800)
873,849
441,424
$
$
9.97
17.52
9.47
9.22
13.55
12.30
7.61
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 $22.80, $25.15 and $16.72 for 2019, 2018 and 2017, 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 $24.75, $31.60 and $20.18 for 2019, 2018 and 2017, respectively. The market condition awards were
valued using a Monte Carlo simulation technique based on volatility over three years for the awards granted in 2019,
2018 and 2017 using daily stock prices and using the following variables:
Risk-free interest rate
Volatility
2019
2.5%
35.6%
2018
2.4%
33.8%
2017
1.7%
34.7%
For the years ended December 31, 2019, 2018 and 2017, the Company recorded expense of $7.0 million, $5.0
million and $3.6 million, respectively, for stock incentive awards. At December 31, 2019, there was $6.7 million of
unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average
period of 1.5 years. As of December 31, 2019, none of the awards were convertible, 337,060 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 1,198,507 additional outstanding shares of the Company’s common stock
depending on service, performance and market results through December 31, 2021.
84
NOTE N—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):
Numerator:
Earnings from continuing operations - basic
Gain from stock warrants revaluation, net of tax
Earnings from continuing operations - diluted
Denominator:
Weighted-average shares outstanding for basic earnings per share
Common equivalent shares:
Effect of stock-based compensation awards and warrants
Weighted-average shares outstanding assuming dilution
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
December 31
2019
2018
2017
59,983
$
67,883
$
21,740
(6,219)
(7,118)
—
53,764
$
60,765
$
21,740
58,899
58,765
58,907
10,449
69,348
9,591
68,356
1.02
$
0.78
1.16
0.89
$
$
779
59,686
0.37
0.36
$
$
$
$
Basic weighted average shares outstanding for purposes of basic earnings per share are less than the shares
outstanding due to 317,600 shares, 329,600 shares and 241,000 shares of restricted stock for 2019, 2018 and 2017,
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 D), if such warrants have an anti-dilutive effect on earnings per share. The
dilutive effect of the weighted-average diluted shares outstanding is calculated using the treasury method for periods
in which equivalent shares have a dilutive effect on earnings per share. Under this method, the number of diluted shares
is determined by dividing the assumed proceeds of the warrants recorded as a liability by the average stock price during
the period and comparing that amount with the number of corresponding warrants outstanding.
The underlying warrants recorded as a liability as of December 31, 2019 and 2018 would have resulted in 39.5
million and 14.8 million additional shares of the Company's common stock, respectively, if the warrants were settled
by tendering cash.
The number of equivalent shares that were not included in weighted average shares outstanding assuming dilution
because their effect would have been anti-dilutive, were 7.8 million for the year ended December 31, 2017.
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.
The Company repurchased common stock during 2017, including 380,637 shares on June 6, 2017 from an underwriter
in conjunction with an underwritten secondary offering by 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 $8.5 million. The share price of $22.42 was equal to the price per share paid by the underwriter to Red Mountain.
85
NOTE O—SEGMENT AND REVENUE INFORMATION
The Company operates in two reportable segments. The CAM segment consists of the Company's aircraft leasing
operations. The ACMI Services segment consists of the Company's airline operations, including CMI agreements as
well as ACMI, charter service and passenger service agreements that the Company has with its customers. The
Company's aircraft maintenance services, aircraft modification services, ground services and other services, are not
large enough to constitute reportable segments and are combined in All other. Intersegment revenues are valued at
arms-length market rates.
The Company's segment information from continuing operations is presented below (in thousands):
Year Ended December 31
2018
2017
2019
Total revenues:
CAM
ACMI Services
All other
Eliminate inter-segment revenues
Total
Customer revenues:
CAM
ACMI Services
All other
Total
$
$
$
$
285,276
$
228,956
$
1,078,288
314,014
(225,395)
548,839
286,579
209,213
614,741
433,208
(172,029)
(188,962)
1,452,183
$
892,345
$
1,068,200
168,106
$
156,516
$
1,078,143
205,934
548,804
187,025
140,434
614,721
313,045
1,452,183
$
892,345
$
1,068,200
ACMI Services revenues are generated from airline service agreements and are typically based on hours flown, the
amount of aircraft operated and crew resources provided during a month. ACMI Services revenues are recognized over
time using the invoice practical expedient as flight hours are performed for the customer. Certain agreements include
provisions for incentive payments based upon on-time reliability. These incentives are measured on a monthly basis
and recorded to revenue in the corresponding month earned. Under CMI agreements, the Company's airlines have an
obligation to provide integrated services including flight crews, aircraft maintenance and insurance for the customer's
cargo network. Under ACMI agreements, the Company's airlines are also obligated to provide aircraft. Under CMI
and ACMI agreements, customers are generally responsible for aviation fuel, landing fees, navigation fees and certain
other flight expenses. When functioning as the customers' agent for arranging such services, the Company records
amounts reimbursable from the customer as revenues net of the related expenses as the costs are incurred. Under charter
agreements, the Company's airline is obligated to provide full services for one or more flights having specific origins
and destinations. Under charter agreements in which the Company's airline is responsible for fuel, airport fees and all
flight services, the related costs are recorded in operating expenses. Any sales commissions paid for charter agreements
are generally expensed when incurred because the amortization period is less than one year. ACMI Services are invoiced
monthly or more frequently. (There are no customer rewards programs associated with services offered by the Company
nor does the Company sell passenger tickets or issue freight bills.)
The Company's revenues for customer contracts for airframe maintenance and aircraft modification services that
do not have an alternative use and for which the Company has an enforceable right to payment are generally recognized
over time based on the percentage of costs completed. Services for airframe maintenance and aircraft modifications
typically have project durations lasting a few weeks to a few months. Other revenues for aircraft part sales, component
repairs and line service are recognized at a point in time typically when the parts are delivered to the customer and the
services are completed. For airframe maintenance, aircraft modifications and aircraft component repairs, contracts
include assurance warranties that are not sold separately.
The Company records revenues and estimated earnings over time for its airframe maintenance and aircraft
modification contracts using the costs to costs input method. For such services, the Company estimates the earnings
on a contract as the difference between the expected revenue and estimated costs to complete a contract and recognizes
86
revenues and earnings based on the proportion of costs incurred compared to the total estimated costs. Unexpected or
abnormal costs that are not reflected in the price of a contract are excluded from calculations of progress toward contract
obligations. The Company's estimates consider the timing and extent of the services, including the amount and rates
of labor, materials and other resources required to perform the services. These production costs are specifically planned
and monitored for regulatory compliance. The expenditure of these costs closely reflect the progress made toward
completion of an airframe maintenance and aircraft modification project. The Company recognizes adjustments in
estimated earnings on a contract under the cumulative catch-up method in which the impact of the adjustment on
estimated earnings of a contract is recognized in the period the adjustment is identified.
The Company's ground services revenues include load transfer and sorting services, facility and equipment
maintenance services. These revenues are recognized as the services are performed for the customer over time. Revenues
from related facility and equipment maintenance services are recognized over time and at a point in time depending
on the nature of the customer contracts.
The Company's external customer revenues from other activities for the years ending December 31, 2019, 2018
and 2017 are presented below (in thousands):
Year Ended December 31,
2019
2018
2017
Aircraft maintenance, modifications and part sales
$
117,772
$
117,832
$
Ground services
Other, including aviation fuel sales
Total customer revenues
69,596
18,566
66,567
2,626
106,767
204,151
2,127
$
205,934
$
187,025
$
313,045
CAM's aircraft lease revenues are recognized as operating lease revenues on a straight-line basis over the term of
the applicable lease agreements. Customer payments for leased aircraft and equipment are typically paid monthly in
advance. CAM's leases do not contain residual guarantees. Approximately 10% of CAM's leases to external customers
contain purchase options at projected market values. As of December 31, 2019, minimum future payments from external
customers for leased aircraft and equipment were scheduled to be $186.8 million, $178.2 million, $152.0 million, $110.1
million and $75.5 million, respectively, for each of the next 5 years ending December 31, 2024 and $186.2 million
thereafter.
For customers that are not a governmental agency or department, the Company generally receives partial payment
in advance of services, otherwise customer balances are typically paid within 30 to 60 days of service. The Company
recognized $2.8 million of non lease revenue that was reported in deferred revenue at the beginning of the year, compared
to $9.3 million in 2018. Deferred revenue was $3.0 million and $3.1 million at December 31, 2019 and 2018, respectively,
for contracts with customers.
The Company had revenues of approximately $716.9 million, $231.8 million and $170.1 million for 2019, 2018
and 2017, respectively, derived primarily from aircraft leases in foreign countries, routes with flights departing from
or arriving in foreign countries or aircraft maintenance and modification services performed in foreign countries. All
revenues from the CMI agreement with DHL and the ATSA agreement with ASI are attributed to U.S. operations. As
of December 31, 2019 and 2018, the Company had 20 and 23 aircraft, respectively, deployed outside of the United
States.
87
Effective January 1, 2018, the Company adopted Topic 606 for revenue recognition using a modified retrospective
approach, under which financial statements are prepared under the revised guidance for the year of adoption, but not
for prior years. The effects of Topic 606 on the Company's customer revenues and earnings are summarized below for
the year of adoption:
Revenue
CAM
ACMI Services
All other
Total Revenue
Operating Expense
Earnings (Loss) from Continuing Operations before Income Taxes
Income Tax Benefit (Expense)
Income from Continuing Operations
For the year ended December 31, 2018
Increase
Without
(decrease)
Topic 606
As Reported
$
$
156,516
548,804
187,025
892,345
781,327
87,478
$
$
156,516
743,112
350,012
1,249,640
1,138,462
87,638
(19,595)
67,883
$
(19,559)
68,079
$
—
(194,308)
(162,987)
(357,295)
(357,135)
(160)
(36)
(196)
The Company's other segment information from continuing operations is presented below (in thousands):
Depreciation and amortization expense:
CAM
ACMI Services
All other
Total
Interest expense
CAM
ACMI Services
Segment earnings (loss):
CAM
ACMI Services
All other
Net unallocated interest expense
Net gain (loss) on financial instruments
Transaction fees
Other non-service components of retiree benefit costs, net
Loss from non-consolidated affiliate
Pre-tax earnings from continuing operations
Year Ended December 31,
2018
2017
2019
$
$
158,470
$
126,856
$
108,106
96,191
2,871
49,068
2,971
41,929
4,521
257,532
$
178,895
$
154,556
38,300
24,950
21,819
6,269
$
68,643
$
65,576
$
32,055
13,422
(3,024)
(12,302)
(373)
(9,404)
(17,445)
11,448
11,170
(460)
7,296
(5,264)
8,180
(10,468)
$
71,572
$
87,478
$
15,585
810
61,510
7,747
13,748
(512)
(79,789)
—
(6,105)
(3,135)
(6,536)
In previous years, the Company disclosed reportable segments for "Ground Services" and "MRO Services" which
included aircraft maintenance and modification businesses. Due to the relative size of these business units and
organizational changes, Ground Services and MRO Services and no longer reportable segments.
88
The Company's assets are presented below by segment (in thousands). Cash and cash equivalents are reflected in
Assets - All other.
Assets:
CAM
ACMI Services
Discontinued operations
All other
Total
2019
December 31
2018
2017
$
1,857,687
$
1,577,182
$
1,192,890
830,620
1,499
759,131
—
189,379
—
130,372
2,820,178
$
134,272
2,470,585
$
166,575
1,548,844
$
During 2019, the Company had capital expenditures for property and equipment of $87.2 million and $368.8 million
for the ACMI Services and CAM, respectively.
NOTE P—DISCONTINUED OPERATIONS
The Company's results of discontinued operations consist primarily of changes in liabilities related to benefits for
former employees previously associated with ABX's former hub operation for DHL. The Company may incur expenses
and cash outlays in the future related to pension obligations, self-insurance 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):
Assets
Pension assets, net of obligations
Total Assets
Liabilities
Employee compensation and benefits
Post-retirement
Total Liabilities
December 31
2019
2018
1,499
1,499
—
—
$
$
15,189
—
15,189
$
$
16,807
846
17,653
During 2019 and 2018, pre-tax earnings from discontinued operations were $1.6 million and $1.8 million,
respectively. Pre-tax results from discontinued operations were losses of $5.1 million during 2017.
NOTE Q—INVESTMENTS IN NON-CONSOLIDATED AFFILIATES (Unaudited)
As described in Note C, the Company had investments in two non-consolidated affiliates. While management
considers the Company's participation in these non-consolidated affiliates as potentially beneficial to future operating
results, such participation is not essential to the Company. The following table presents combined condensed information
from the statements of operations of the Company's non-consolidated affiliates (in thousands):
Revenues
Expenses
Income (Loss)
2019
Year Ended December 31,
2018
2017
$
$
$
114,265
(143,775)
(29,510) $
$
202,028
(228,169)
(26,141) $
172,526
(196,334)
(23,808)
89
The following table presents combined condensed balance sheet information for our unconsolidated affiliates (in
thousands):
Current assets
Non current assets
Current liabilities
Non current liabilities
Equity
December 31,
2019
2018
64,392
213,940
(155,451)
(123,837)
956
$
$
64,262
80,724
(38,938)
(102,657)
(3,391)
$
$
NOTE R—QUARTERLY RESULTS (Unaudited)
The following is a summary of quarterly results of operations (in thousands, except per share amounts):
2019 (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 (loss) per share from continuing operations
Basic
Diluted
2018 (2)
Revenues from continuing operations
Operating income from continuing operations
Net earnings (loss) from continuing operations
Net earnings (loss) from discontinued operations
Weighted average shares:
Basic
Diluted
Earnings (loss) per share from continuing operations
Basic
Diluted
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
$
348,183
$
334,576
$
366,073
$ 403,351
46,528
22,634
31
58,838
60,437
0.38
0.25
203,040
27,643
15,682
196
58,840
59,558
37,482
(26,632)
31
40,766
105,085
243
52,221
(41,104)
914
58,909
58,909
58,919
68,718
58,929
58,929
$
$
$
(0.45) $
(0.45) $
1.78
0.19
$
$
(0.70)
(0.70)
203,607
$
204,919
$ 280,779
23,898
24,464
170
58,739
68,363
26,827
32,933
170
58,739
68,323
32,650
(5,196)
866
58,740
58,740
0.27
0.26
$
$
0.42
0.21
$
$
0.56
0.24
$
$
(0.09)
(0.09)
$
$
$
$
$
1. During 2019, the Company recorded a $4.5 million gain, a $35.9 million loss, a $92.0 million gain and a $72.9 million
loss on the remeasurement of financial instruments, primarily related to the warrants issued to Amazon for the quarters
ended March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019, respectively.
2. During 2018, the Company recorded a $0.9 million loss, a $11.7 million gain, a $17.9 million gain and a $21.4 million
gain on the remeasurement of financial instruments, primarily related to the warrants issued to Amazon for the quarters
ended March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018, respectively.
90
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, 2019, 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 year
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, 2019. 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, 2019, the
Company’s internal control over financial reporting was effective.
The effectiveness of our internal controls over financial reporting as of December 31, 2019 has been audited by
our independent registered accounting firm as stated in its attestation report that follows this report.
March 2, 2020
91
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Air Transport Services Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Air Transport Services Group, Inc. and subsidiaries
(the “Company”) as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended
December 31, 2019, of the Company and our report dated March 2, 2020, expressed an unqualified opinion on those
consolidated financial statements and financial statement schedule and includes an explanatory paragraph regarding
the Company's adoption of new accounting standards and an emphasis of a matter paragraph regarding the Company's
three principal customers.
Basis for Opinion
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, included in the accompanying
Management's Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process 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. 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 2, 2020
92
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 2020 Annual
Meeting of Stockholders under the captions “Election of Directors,” “Beneficial Ownership of Common Shares --
Delinquent Section 16(a) Reports” 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
65
Quint O. Turner
57
Richard F. Corrado
60
Information
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
2004.
December
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.
President, Air Transport Services Group, Inc. since September 2019.
Chief Operating Officer, Air Transport Services Group, Inc., from
September 2017 to September 2019. President of Cargo Aircraft
Management Inc., since April 2010. President of Airborne Global
Solutions, Inc. since July 2010. Mr. Corrado was Chief Commercial
Officer, Air Transport Services Group, Inc., from April 2010 to
September 2017
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.
93
Edward J. Koharik
49
W. Joseph Payne
56
Michael L. Berger
58
Chief Operating Officer, Air Transport Services Group, Inc. since
September 2019. Before joining ATSG, Mr. Koharik served as Vice
President of FlightSafety International, a global provider of flight
training for commercial, business and military aviation professionals
and flight simulation equipment, from January 2019 to September
2019. He was the General Manager and Executive Director of
FlightSafety International Visual Systems from 2015 to 2018. He
served as the Enterprise Readiness Center Chief for the U.S.
Transportation Command from 2011 to 2015.
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.
Chief Commercial Officer, Air Transport Services Group, Inc. and
President of Airborne Global Solutions since February 2018. Before
joining ATSG, Mr. Berger was Chief Commercial Officer for Dicom
Transportation group of Canada from March 2017 through February
2018. Mr. Berger was Global Head of Sales for TNT Express based
in Amsterdam from September 2014 through February 2017.
Mr. Berger joined Airborne Express in 1986 and worked 28 years
for Airborne Express and its successor, DHL Express where he held
many roles including Head of Sales for the United States.
The executive officers of the Company are appointed annually at the Board of Directors meeting held in conjunction
with the annual meeting of stockholders and serve at the pleasure of the Board of Directors. 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 2020 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 2020
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 2020 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 2020 Annual
Meeting of Stockholders under the caption “Fees of the Independent Registered Public Accounting Firm.”
94
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
Description
Accounts receivable reserve:
Year ended:
December 31, 2019
December 31, 2018
December 31, 2017
Schedule II—Valuation and Qualifying Account
Balance at
beginning
of period
Additions
charged to
cost and expenses
Deductions
Balance at end
of period
$
$
1,443,805
2,445,310
1,264,211
$
2,277,217
596,000
1,184,099
$
2,746,140
1,597,505
3,000
974,882
1,443,805
2,445,310
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
3.3
Restated Certificate of Incorporation of Air Transport Services Group, Inc. (31)
First Amendment to Restated Certificate of Incorporation of Air Transport Services Group, Inc.
(34)
Amended and Restated Bylaws of Air Transport Services Group, Inc. (16)
95
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Instruments defining the rights of security holders
Indenture, dated September 29, 2017, by and between Air Transport Services Group, Inc. and
U.S. Bank National Association. (28)
Form of 1.125% Convertible Senior Note due 2024 (included in Exhibit 4.1). (28)
Description of Capital Stock registered under the Securities Exchange Act, filed herewith.
Indenture, dated January 28, 2020, by and among Cargo Aircraft Management, Inc., Air
Transport Services Group, Inc., the guarantors named therein and Regions Bank, as trustee (37)
Form of 4.750% Senior Notes due 2028 (included in Exhibit 4.4). (37)
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)
Form of Performance-Based Stock Unit Award Agreement under Air Transport Services Group,
Inc. 2005 Amended and Restated Long-Term Incentive Plan. (9)
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)
96
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
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)
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)
97
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
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)
First Amendment to the Amended and Restated Credit Agreement, dated as of March 31, 2017,
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. (26)
Underwriting Agreement, dated May 31, 2017, by and among Air Transport Services Group,
Inc., Red Mountain Partners, L.P. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (27)
Second Amendment to the Amended and Restated Credit Agreement, entered into on September
25, 2017, by and among Air Transport Services Group, Inc., Cargo Aircraft Management, Inc.,
as borrower, the guarantors party thereto, the lenders party thereto and SunTrust Bank, as
Administrative Agent. (29)
Purchase Agreement, dated September 25, 2017, by and among Air Transport Services Group,
Inc. and Goldman Sachs & Co. LLC and SunTrust Robinson Humphrey, Inc., as representatives
of the initial purchasers named therein. (28)
Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport
Services Group, Inc., and Goldman Sachs & Co. LLC. (28)
Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport
Services Group, Inc., and Bank of America, N.A. (28)
Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport
Services Group, Inc., and JPMorgan Chase Bank, National Association, London Branch. (28)
Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport
Services Group, Inc., and Bank of Montreal. (28)
98
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air
Transport Services Group, Inc., and Goldman Sachs & Co. LLC. (28)
Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air
Transport Services Group, Inc., and Bank of America, N.A. (28)
Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air
Transport Services Group, Inc., and JPMorgan Chase Bank, National Association, London
Branch. (28)
Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air
Transport Services Group, Inc., and Bank of Montreal. (28)
Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group,
Inc., and Goldman Sachs & Co. LLC. (28)
Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group,
Inc., and Bank of America, N.A. (28)
Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group,
Inc., and JPMorgan Chase Bank, National Association, London Branch. (28)
Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group,
Inc., and Bank of Montreal. (28)
Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services
Group, Inc., and Goldman Sachs & Co. LLC. (28)
Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services
Group, Inc., and Bank of America, N.A. (28)
Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services
Group, Inc., and JPMorgan Chase Bank, National Association, London Branch. (28)
Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services
Group, Inc., and Bank of Montreal. (28)
Air Transport Services Group, Inc. Severance Plan for Senior Management. (30)
Confirmation Agreement, dated August 23, 2017, between Mutual of America Life Insurance
Company and ABX Air, Inc., relating to the ABX Air Retirement Income Plan. (30)
Second Amended and Restated Credit Agreement, dated as of November 9, 2018, 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; Bank of America, N.A. and
PNC Bank, National Association, as Co-Syndication Agents; and Regions Bank, JPMorgan
Chase Bank, N.A. and Branch Banking and Trust Company, as Co-Documentation Agents. (32)
Second Amended and Restated 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 November 9, 2018. (32)
Purchase and Sale Agreement, by and among Air Transport Services Group, Inc. and the Sellers
and the Sellers' Representative Named Herein, dated as of October 1, 2018. Pursuant to Item
601(b)(2) of Regulation S-K, certain exhibits and schedules have been omitted from this filing.
The registrant agrees to furnish the Commission on a supplemental basis a copy of any omitted
exhibit or schedule. (32)
Investment Agreement, dated as of December 20, 2018, 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. (32)
99
10.66
10.67
10.68
10.69
10.70
10.71
14.1
21.1
23.1
31.1
31.2
32.1
32.2
Warrant to Purchase Common Stock, issued December 20, 2018, by and between Air Transport
Services Group, Inc. and Amazon.com, Inc. 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. (32)
Amended and Restated Stockholders Agreement, dated as of December 20, 2018, 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. (33)
First Amendment to Second Amended and Restated Credit Agreement, dated as of February 13,
2019, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services
Group, Inc.; each of the Guarantors party hereto; each of the financial institutions party hereto
as "Lenders"; and SunTrust Bank, in its capacity as Administrative Agent. (35)
Second Amendment to Second Amended and Restated Credit Agreement, dated as of May 24,
2019, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services
Group, Inc.; each of the financial institutions party hereto as "Lenders"; and SunTrust Bank, in
its capacity as Administrative Agent. (35)
Third Amendment to Second Amended and Restated Credit Agreement, dated as of November
4, 2019, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services
Group, Inc.; each of the financial institutions party hereto as "Lenders"; and SunTrust Bank, in
its capacity as Administrative Agent. (36)
Fourth Amendment to Second Amended and Restated Credit Agreement, dated as of January 28,
2020, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services
Group, Inc.; each of the financial institutions party thereto as Lenders; and SunTrust Bank, in its
capacity as Administrative Agent. (37)
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
100
____________________
(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 November 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 2019 Annual Meeting of Stockholders,
Corporate Governance and Board Matters, filed March 29, 2019 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.
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 Form 8-K filed with the Securities and Exchange Commission
on May 10, 2019.
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.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
101
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
(37)
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 8, 2017.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on June 2, 2017.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on September 29, 2017.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on September 25, 2017.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 9, 2017.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 8, 2018.
Incorporated by reference to the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 1, 2019.
Incorporated by reference to the Company's Annual Report on Form 10-K/A filed with the Securities and
Exchange Commission on March 29, 2019.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 6, 2019.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on May 29, 2019.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on November 6, 2019.
Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission
on January 28, 2020.
ITEM 16. FORM 10-K SUMMARY
None.
102
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
Title
Date
/S/ JOSEPH C. HETE
Joseph C. Hete
Chief Executive Officer (Principal Executive
Officer)
March 2, 2020
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 2, 2020
Title
Date
/S/ RICHARD M. BAUDOUIN
Richard M. Baudouin
Director
/S/ JOSEPH C. HETE
Joseph C. Hete
/S/ RAYMOND E. JOHNS JR.
Raymond E. Johns, Jr.
/S/ LAURA J. PETERSON
Laura J. Peterson
/S/ J. CHRISTOPHER TEETS
J. Christopher Teets
/S/ JEFFREY J. VORHOLT
Jeffrey J. Vorholt
/S/ QUINT O. TURNER
Quint O. Turner
Director and Chief Executive Officer (Principal
Executive Officer)
Director
Director
Director
Director
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
March 2, 2020
103
Exhibit 4.3
DESCRIPTION OF CAPITAL STOCK
The following description summarizes information about the common stock, par value $0.01 per share, of Air
Transport Services Group, Inc. (the “Company”). Such common stock is the only class of securities which the
Company has registered under Section 12 of the Securities Exchange Act of 1934, as amended. The following
summary is subject to , and qualified in its entirety by reference to the Company’s Restated Certificate of
Incorporation, as amended (the “Certificate of Incorporation”) and the Company’s Amended and Restated Bylaws,
as amended (the “Bylaws”), copies of which have been filed by the Company as exhibits to the Company’s annual
report on Form 10-K, as well as the Delaware General Corporation Law.
Authorized Capital Stock
The Company’s authorized capital stock consists of 170,000,000 shares, of which 150,000,000 shares are
common stock, par value $.01 per share and 20,000,000 shares are preferred stock, par value $.01 per share. As of
March 2, 2020, 59,329,431 shares of common stock were issued and outstanding, and no shares of preferred stock
were issued or outstanding. The Certificate of Incorporation authorizes the issuance of 75,000 Series A Junior
Participating Preferred Stock, none of which have been issued.
Common Stock
Each share of common stock entitles its holder of record to one vote on all matters voted on by stockholders.
The Certificate of Incorporation does not provide for cumulative voting in the election of directors. Accordingly,
holders of a majority of the outstanding shares of common stock voting in the election of directors are able to elect
all of the directors, if they choose to do so, subject to any rights of the holders of any preferred stock to elect
directors. Subject to any preferential or other rights of any outstanding series of preferred stock that may be
established by the Board of Directors, the holders of common stock are entitled to (i) such dividends as the
Company’s Board of Directors may declare from time to time from legally available funds and (ii), upon the
Company’s dissolution, will be entitled to receive pro rata all of the assets of the Company available for distribution
to stockholders, except that such rights upon dissolution of non-U.S. citizens are limited as described below under
“Limitations on Foreign Ownership.”
Holders of common stock have no preemptive rights, conversion rights or other subscription rights. The
rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock that the Company may designate and issue in the
future. A description of the preferred shares follows.
Preferred Stock
The Certificate of Incorporation authorizes the Board of Directors, without action by the Company’s
stockholders, to provide for the issuance of shares of preferred stock in one or more classes or series, and to fix for
each such class or series the voting powers, designations, preferences, limitations, and restrictions. The rights of any
class or series of preferred stock may be greater than the rights attached to the common stock. It is not possible to
state the actual effect of the issuance of any class or series of preferred stock on the rights of holders of common
stock until the Board of Directors of the Company determines the specific rights attached to that preferred stock. The
effects of issuing preferred stock could include one or more of the following:
•
•
•
restricting dividends on the common stock;
diluting the voting power of the common stock;
impairing the liquidation rights of the common stock; and
•
delaying or preventing a change of control of the Company.
Limitation on Voting by Foreign Owners
In furtherance of the Company’s stock ownership restrictions which are described below, a transfer of shares
of any class of the Company’s capital stock to an Alien will not be valid, except between the parties to the transfer,
until the transfer is recorded on the Company’s foreign stock record, which is a record maintained by the Company
which records the date of a transfer to an Alien, the parties to the transfer and the number and description of the
shares of stock transferred to an Alien. The Certificate of Incorporation defines “Alien” as: (i) any person who is not
a citizen of the United States (“U.S. Citizens”) as defined in 49 U.S.C. Section 40102(a)(15), or any nominee of
such person; (ii) any foreign government or representative thereof; (iii) any corporation organized under the laws of
any foreign government; or (iv) any corporation, partnership, trust, association, or other entity which is an Affiliate
of an Alien or Aliens. “Affiliate” has the meaning set forth in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Beneficial Ownership Inquiry
The Company may by written notice (including by proxy or ballot) require a person who is the record holder
of the Company’s capital stock or a person with beneficial ownership of such stock to certify that, to the knowledge
of such person:
•
•
all stock of the Company which such person has record ownership or beneficial ownership are owned and
controlled only by U.S. Citizens; or
the number and class or series of stock of the Company owned of record or beneficially owned by such
person that are owned or controlled by Aliens.
“Beneficial ownership” and “beneficially owned” refer to beneficial ownership as defined in Rule 13d-3
(without regard to the 60-day provision in paragraph (d)(l)(i) thereof) under the Exchange Act.
With respect to any equity securities identified by such person in response to the beneficial ownership inquiry,
the Company may require such person to provide further information as the Company may reasonably require in
order to implement the provisions restricting ownership.
If a person fails to provide the certificate or other information to which the Company is entitled, the Company
will presume that the equity securities in question are owned or controlled by Aliens.
Limitations on Foreign Ownership
The Certificate of Incorporation restricts ownership or control of the Company by non-U.S. Citizens.
Ownership or control of (1) twenty-five percent (25%) (the “Maximum Voting Percentage”) or more of the issued
and outstanding Voting Stock (as defined below) of the Company or (2) shares of capital stock of the Company
entitled to receive fifty percent (50%) (the “Maximum Economic Percentage”) or more of the Company’s dividends,
distributions or proceeds upon liquidation, by persons who are not U.S. Citizens is prohibited; provided, however,
that the Maximum Voting Percentage shall be deemed to be automatically increased or decreased from time to time
to that percentage of ownership which is then permissible by persons who are not U.S. Citizens under applicable
Foreign Ownership Restrictions; provided, further, that the Board of Directors, by a majority vote of the independent
directors, may increase or decrease the Maximum Economic Percentage if the Board of Directors in good faith, and
upon advice of independent counsel, determines that such increase or decrease is permitted by applicable Foreign
Ownership Restrictions. As used in the Certificate of Incorporation, “Voting Stock” means common stock, and any
other classes of stock issued by the Company that are entitled to vote on matters generally referred to the
stockholders for a vote. “Foreign Ownership Restrictions” means United States statutory and United States
Department of Transportation regulatory or interpretive restrictions on foreign ownership or control of the Company,
the breach of which would result in the loss of any operating certificate or authority of the Company or any of its
subsidiaries, including any successor provisions or regulations thereto.
2
A transfer of shares of any class of stock of the Company to an Alien will not be valid, except between the
parties to the transfer, until the transfer shall have been recorded on the foreign stock record of the Company. At no
time shall ownership or control of shares representing more than the lesser of (i) the Maximum Voting Percentage of
the issued and outstanding Voting Stock, or (ii) the Maximum Economic Percentage of all shares of stock of the
Company, be registered on the foreign stock record. If at any time the Company determines that shares of stock are
purportedly owned or controlled by one or more Aliens who are not registered on the Foreign Stock Record, the
registration of such shares shall, subject to the limitation in the preceding sentence, be made in chronological order
in the foreign stock record, based on the date of the Company’s finding of ownership or control of such shares by an
Alien. If at any time the Company determines that the number of shares of Voting Stock registered on the foreign
stock record exceeds the Maximum Voting Percentage, or that the number of shares of stock of the Company
registered on the foreign stock record exceeds the Maximum Economic Percentage, sufficient shares shall be
removed from the foreign stock record in reverse chronological order so that the number of shares of Voting Stock
registered on the foreign stock record does not exceed the Maximum Voting Percentage and so that the number of
shares of stock of the Company registered on the foreign stock record does not exceed the Maximum Economic
Percentage. Shares of stock of the Company known by the Company to be held of record or controlled by Aliens and
not registered on the foreign stock record are at no time entitled to vote or to receive dividends, distributions or other
benefits of ownership.
Anti-Takeover Effects of Provisions of the Company’s Certificate of Incorporation and Bylaws
Some provisions of the Certificate of Incorporation and Bylaws, including the following, could have the effect
of making it more difficult for a third party, or discouraging a third party from attempting, to acquire control of the
Company without the approval of the Company’s Board of Directors:
Stockholder Action
The Certificate of Incorporation provides that any action required or permitted to be taken by the Company’s
stockholders must be taken at a duly called annual or special meeting of stockholders and may not be taken by
written consent. These provisions may have the effect of delaying approval of a stockholder proposal until the next
annual meeting or until a special meeting could be convened.
Advance Notice Procedures
The Bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or
to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely notice in
writing, subject to the exception noted below under “Board of Directors.” To be timely, a stockholder’s notice must
be delivered to or mailed and received at the principal executive offices of the Company not less than
90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of
stockholders. The Bylaws also specify requirements as to the form and content of a stockholder’s notice. These
provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from
making nominations for directors at an annual meeting of stockholders. The Bylaws include different requirements
for stockholders who call special meetings of stockholders.
Board of Directors
The Certificate of Incorporation provides that the number of directors of the Company shall be not less than
three nor more than twleve, with the exact number being fixed from time to time, within such limits, by the Board of
Directors. Each nominee for director stands for election to a one-year term expiring at the next annual meeting of
stockholders and until his or her successor is duly elected and qualified, subject to such director’s earlier death,
resignation, retirement or removal from service
The Bylaws provide that, in an uncontested election, each director will be elected by a majority of the votes
cast. A “majority of the votes cast” means that the number of shares voted “For” a nominee exceeds the number of
shares voted “Against” that nominee. The Bylaws include a director resignation policy providing that, in any
uncontested election, in order for any person to become a nominee for the Board, that person must submit an
3
irrevocable resignation from the Board, which will become effective if that nominee does not receive a majority of
the votes cast and the Board determines to accept such resignation.
The majority voting standard does not apply, however, in a contested election of directors. An election is
deemed to be a contested election if the number of nominees for election as directors at the meeting in question
nominated by (i) the Board, (ii) any stockholder, or (iii) a combination thereof exceeds the number of directors to be
elected. In such circumstances, directors are instead elected by a plurality of the votes cast, meaning that the
nominees receiving the most votes are elected. The determination as to whether an election is a contested election is
made as of the record date for the meeting in question. Once an election is determined to be a contested election, the
plurality standard shall remain in effect through the completion of the meeting, regardless of whether the election
ceases to be a contested election after the record date but prior to the meeting.
Under the Certificate of Incorporation, at least two-thirds of the directors of the Company must be U.S.
Citizens. The Bylaws provide generally that vacancies on the Board of Directors, including those resulting from an
increase in the number of directors, may be filled only by the remaining directors, and not by stockholders. Any
director elected to fill a vacancy will have the same remaining term as his or her predecessor. Accordingly, the Board
of Directors could temporarily prevent any stockholder from enlarging the Board of Directors and filling the new
directorships with that stockholder’s own nominees.
Anti-Takeover Effects of Section 203 of the Delaware General Corporation Law
The Company is subject to Section 203 of the Delaware General Corporation Law. Section 203 provides that,
subject to certain exceptions, a corporation shall not engage in any business combination with any “interested
stockholder” for a three-year period following the time that such stockholder becomes an interested stockholder
unless:
•
•
•
prior to such time, the board of directors of the corporation approved either the business combination or
the transaction which resulted in the stockholder becoming an interested stockholder; or
upon consummation of the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares); or
at or subsequent to such time, the business combination is approved by the board of directors of the
corporation and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not
owned by the interested stockholder.
Except as specified in Section 203, an interested stockholder is generally defined as:
•
any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an
affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation, at any time within the three-year period immediately prior to the relevant date; and
•
the affiliates and associates of any such person.
Section 203 may make it more difficult for a person who would be an “interested stockholder” to effect
various business combinations with a corporation for a three-year period. The Company has not elected to be
exempt from the restrictions imposed under Section 203. The provisions of Section 203 may encourage persons
interested in acquiring the Company to negotiate in advance with the board of directors, since the stockholder
approval requirement would be avoided if a majority of the directors then in office approves either the business
combination or the transaction which results in any such person becoming an interested stockholder. Such provisions
also may have the effect of preventing changes in the Company’s management. It is possible that such provisions
could make it more difficult to accomplish transactions which the Company stockholders may otherwise deem to be
in their best interests.
Authorized but Unissued Shares
4
The Company’s authorized but unissued shares of common stock and preferred stock are available for future
issuance without stockholder approval. These additional shares may be used for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued shares of common stock and preferred stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a proxy contest, tender offer, merger or
otherwise.
Transfer Agent and Registrar
Computershare, P.O. Box 43078, Providence, RI 02940, is the transfer agent and registrar for the Company’s
common stock.
Shares in Book-Entry Form
Certificates representing the Company’s common stock are not issued unless requested in writing as described
below. Holders of record of the Company common stock have credited to a book-entry account established and
maintained for them by the transfer agent and registrar the number of shares of Company common stock owned of
record by them. Stockholders may request the issuance of a certificate representing shares of Company Common
Stock owned of record by them by writing to the transfer agent and registrar.
5
Air Transport Services Group, Inc.
List of Significant Subsidiaries
December 31, 2019
Exhibit 21.1
1. ABX Air, Inc., a Delaware Corporation
2. Airborne Global Solutions, Inc., a Delaware Corporation
3. Airborne Maintenance and Engineering Services, Inc., a Delaware Corporation
4. Air Transport International, Inc., a Delaware Corporation
5. Air Transport International Limited Liability Company, a Nevada Limited Liability Company
6. AMES Material Services, Inc., an Ohio Corporation
7. Cargo Aircraft Management, Inc., a Florida Corporation
8. LGSTX Cargo Services, Inc., an Delaware Corporation
9. LGSTX Services, Inc., a Delaware Corporation
10. Pemco World Air Services Inc., a Delaware Corporation
11. ATSG West Leasing Limited, an Irish Limited Company
12. Omni Air International, LLC, a Nevada Limited Liability Company
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in Post-Effective Amendment No. 1 to Registration Statement No. 333-125679
on Form S-8, Registration Statement No. 333-167253 on Form S-8, Registration Statement No. 333-209664 on Form S-8, and
Registration Statement No. 333-218367 on Form S-3ASR of our reports dated March 2, 2020, relating to the financial statements
of Air Transport Services Group, Inc. and the effectiveness of Air Transport Services Group, Inc.'s internal control over financial
reporting appearing in this Annual Report on Form 10-K for the year ended December 31, 2019.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
March 2, 2020
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph C. Hete, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Air Transport Services Group, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: March 2, 2020
/s/ JOSEPH C. HETE
Joseph C. Hete
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Quint O. Turner, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Air Transport Services Group, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: March 2, 2020
/s/ QUINT O. TURNER
Quint O. Turner
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Air Transport Services Group, Inc. (the “Company”) on Form 10-K for the
year ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Joseph C. Hete, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
enacted by § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to Air Transport Services
Group, Inc. and will be retained by Air Transport Services Group, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
/S/ JOSEPH C. HETE
Joseph C. Hete
Chief Executive Officer
Date: March 2, 2020
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Air Transport Services Group, Inc. (the “Company”) on Form 10-K for the
year ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Quint O. Turner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
enacted by § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to Air Transport Services
Group, Inc. and will be retained by Air Transport Services Group, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
/s/ QUINT O. TURNER
Quint O. Turner
Chief Financial Officer
Date: March 2, 2020
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QuickFactsannual reportHighlightsBLOCKHOUR 40% INCREASE YOY2019 23% AMAZON 14%DHL 34%DOD 29%OTHER Revenue by CustomerBILLION$1.45 Revenues $452MILLIONADJ. EBITDA*$60MILLIONGAAP Earnings *Adjusted EBITDA is a non-GAAP measure. For an explanation and a reconciliation to GAAP measures, see our 8-K filed on March 2,20202019 Results Continued strong growth in revenues, earnings and operating cash flow Revenues up 63% to $1.45 billion Eight more Boeing 767-300 freighter deployments and one passenger deployment for a total of nineOwned aircraft portfolio focused on mid-size freighterLong-term leases and operating contracts with blue-chip customer baseLargest global lessor of freighter aircraft Business model minimally exposed to trade disruptions or business cycleIN SERVICEFLEET COUNT777-200 - 3767-200 - 36767-300 - 50757-200 - 8737-400 - 198 TOTALAIRCRAFT 12-31-2019 ATSG Advantage /ATSGinc/air-transport-services-group/atsgincDifferentiated business model providing bundled services to our Lessees including A/CMI, maintenance, and logistics servicesAdj. EBITDA* up 45% to $452 millionOperating cash flow up 33% to $397 million Randy D. RademacherSenior Vice President-Strategy & Acquisitions at Reading Rock, Inc.Richard M. BaudouinSenior Advisor for Infinity TransportationRaymond E. Johns, Jr. United States Air Force General, RetiredLaura PetersonFormer Vice President, China Business Development, Boeing Commercial Airplanes Fellow, Stanford Distinguished Careers InstituteJ. Christopher TeetsPartner of Red Mountain Capital Partners LLCJeffrey J. VorholtIndependent Consultant and Private InvestorJoseph C. Hete Chief Executive Officer of ATSG, Inc.InvestorinformationStock InformationNASDAQ: ATSG Company documents electronically filed with the SEC also may be found at www.atsginc.comRegistrar and Transfer AgentComputershare Investor Services877.581.5548 or 781.575.2879www.computershare.com/investorP.O.Box 505000462 South 4th Street, Ste 1600Louisville, KY 40233-5000Independent AuditorsDeloitte & Touche LLPCincinnati, OHAnnual MeetingThe annual meeting of stockholders will be May 7, 2020 at 11 a.m. edt.via a live audio webcast atwww.virtualshareholdermeeting.com/ATSG2020. Investor RelationsInquires may be directed to investor.relations@atsginc.com©2020 Air Transport Services Group, Inc. 2019
annual report
Air Transport Services Group, Inc.
145 Hunter Drive
Wilmington, OH 45177
www.atsginc.com