ATSG Revenues, Earnings Up Sharply in 2017

Air Transport Services Group, Inc. (Nasdaq: ATSG), the leading provider of medium wide-body aircraft leasing, air cargo transportation and related services, today reported consolidated financial results for the quarter ended December 31, 2017.

Joe Hete, President and Chief Executive Officer of ATSG, said, “Our 2017 results reflect substantial gains in the operational effectiveness and expanded flight schedules of our airlines during peak season, strong contributions from our other businesses, and growth in our leased freighter fleet, including external leases covering fifty of our sixty-one Boeing 767s. We also assured our access to low-cost capital with a $120 million increase in our credit facility and a $259 million offering of convertible senior notes. With our attractive asset mix expanding into the narrow-body sector, strong cash-flow generation, and lower federal tax rates, we are well positioned for continued growth in the future.”

Business Developments

CAM to Acquire Additional 767s for Freighter Conversion

ATSG's Cargo Aircraft Management subsidiary has secured purchase commitments for three more 767-300 aircraft this year for freighter conversion. These are in addition to the eight already slated for conversion and deployment during 2018. Based on ATSG's rights to conversion slots, it expects to complete modification of two of the three additional 767s by year-end 2018.

“We continue to see robust global demand for our expanding fleet of 767 freighters, and are confident we will have customers waiting for these as they emerge from our pipeline,” Hete said. "Eighty-seven percent of our 767 fleet will be under multi-year dry leases by the end of 2018. We expect strong returns from these fleet investments, thanks to our experience in acquiring, converting, and deploying midsize freighters, our unique array of support services, and e-commerce trends driving worldwide investments in regional express networks.”

ATSG Board Increases Share Repurchase Authorization

Directors of ATSG recently approved the expansion of ATSG’s authorized share repurchase program from $100 million to $150 million. At the end of 2017, ATSG’s cumulative share repurchases under the program were $85.1 million, including $11.2 million repurchased in 2017.

Segment Results

Significant Developments:

• CAM's fourth quarter revenues increased $4.0 million, or 8 percent, to $53.6 million. Those revenues were reduced by $4.2 million of non-cash amortization of warrant-related Amazon lease incentives, approximately twice as much as during the year-earlier quarter. CAM’s full-year 2017 revenues increased 7 percent, and 12 percent excluding warrant-related lease incentives.
• CAM was leasing fifty 767s to external customers as of Dec. 31, 2017, nine more than a year earlier, and one 737-400 freighter. Three 767s and one 737 were deployed during the fourth quarter. CAM’s pre-tax earnings declined for the fourth quarter and full year 2017 from year-ago levels. Higher earnings from additional leased aircraft in service were offset by an increase in warrant-related lease incentives, higher interest expense that included non-cash amortization related to ATSG's September 2017 convertible offering, and increased depreciation from its larger fleet.
• CAM expects to deliver ten 767s and one 737 to lease customers by the end of 2018. The first of the 767s was delivered to Northern Aviation Services in January under a multi-year lease commitment. One other 767 and the remaining 737 in modification are expected to be delivered to customers before the end of the first quarter of 2018.

Significant Developments:

• Airline services revenues increased 21 percent to $127.2 million in the fourth quarter and 12 percent to $459.3 million for the year. Pre-tax earnings improved substantially to $11.3 million for the quarter and $2.5 million for the year, versus losses in the related 2016 periods.
• Principal factors contributing to the profitability gains were increased revenues from additional CMI customer flying, lower scheduled airframe maintenance expense, reductions in premium pilot pay and training from year-ago levels, and improved efficiency and on-time service performance. 2017 pre-tax earnings included a $5.3 million charge for transferring ATSG's employee pension obligations via a third-party annuity contract.
• ATSG’s airlines were operating five more CAM-owned aircraft at the end of 2017 vs. 2016. Billable block hours increased 26 percent for the fourth quarter and 22 percent for 2017.
• In February 2018, ATI reached a tentative agreement with the union representing its pilot group for amendments to their collective bargaining agreement that would extend the agreement for four years. The tentative agreement is subject to ratification by the pilots, the voting for which is to be held by the end of March.

Ground Services/Other Activities

ATSG created Ground Services, a new reportable segment effective for the fourth quarter, that includes the results of its operations providing gateway services, postal center management services, and maintenance of ground and material handling equipment. The results of ATSG’s remaining activities previously included under Other Activities, including its aircraft maintenance services and conversion services businesses, and corporate expenses, are reflected below under Other.

Significant Developments:

• Total revenues from all ground services in the fourth quarter were $72.1 million, up 62 percent. External customer revenues increased by 63 percent versus the fourth quarter of last year to $71.5 million, and by 78 percent to $204.2 million for the year. Material handling services provided at gateways for Amazon were the single largest contributor to revenue growth in Ground Services.
• Earnings decreased $1.2 million for the year, principally reflecting the termination of hub services for Amazon in Wilmington in May 2017.

Significant Developments:

• Total revenues from other activities in the fourth quarter were $61.6 million. External customer revenues from other activities increased $25.7 million to $36.8 million for the fourth quarter and increased $65.3 million to $108.9 million for the year. Pemco, acquired in December 2016, accounted for $79.5 million of the group’s revenues of $227.2 million during 2017.
• The fourth-quarter pre-tax loss of $371 thousand compared with a profit of $1.8 million a year ago. Additional earnings from expanded aircraft maintenance and modification services were offset by reduced aviation fuel sales, higher administrative expenses and ATSG’s share of losses from its minority investment in a European airline.

Outlook

ATSG expects that its Adjusted EBITDA from Continuing Operations for 2018 will be approximately $310 million, or a 16 percent increase from 2017, as ten 767-300 freighters enter service during the year. One 737-400 freighter will enter service in March.

"Our outlook for 2018 is very positive," Hete said. "We have firm customer commitments for all six of the 767 freighters we expect to deploy in the first half, and strong interest from customers for the others. We expect that as e-commerce retailers come to rely even more on air express networks to satisfy their customers’ need for speed, demand for the unique blend of aircraft assets and services that ATSG provides will remain strong."

ATSG projects 2018 capital expenditures of $300 million, roughly equivalent to what was spent in 2017, principally for purchases of additional 767 aircraft and related freighter modification costs.

ATSG will also continue to invest in the design and certification of new narrow-body freighter variants of the Next Gen Boeing 737-700, and via a joint venture, the Airbus 321-200. The first converted A321 is targeted to be re-delivered to its launch customer in 2019.

ATSG's loss carryforwards, along with accelerated tax depreciation associated with our capital investments will be used to offset and reduce future federal income tax liabilities. ATSG does not expect to pay significant federal income taxes until 2023 or later. The Company estimates its effective tax rate for 2018, excluding the effects of the stock warrant re-measurement, related incentive amortization, and the benefit of the stock compensation, will decline to approximately 24 percent due to the lower federal corporate tax rates.

Revenue Recognition

Beginning in 2018, revenues related to the cost of aircraft fuel, certain contracted aviation services and airport related expenses that are directly reimbursed to ATSG and controlled by the customer will be reported net of the corresponding expenses. ACMI Services revenues included $155.5 million of such revenues in 2017. Similarly, revenues from contracts that ATSG arranges for cargo handling and related services will also be reported net of the corresponding expenses. The Ground Services segment included $134.0 million of such revenues in 2017.

Segment Reporting

For the fourth quarter of 2017, ATSG reported its results in three reportable segments - Cargo Aircraft Management (CAM), ACMI Services, and Ground Services, plus Other businesses. As a result of the effects of the revenue recognition changes described above, and other factors, the company’s reportable segments will change again in 2018. First-quarter 2018 results will be reported in three segments, CAM, ACMI Services, and MRO Services, the latter consisting primarily of results of the company’s aircraft maintenance and conversion businesses. Businesses that were included in the Ground Services segment in the fourth quarter of 2018 will be reported as Other Activities in 2018.

Conference Call

ATSG will host a conference call on February 28, 2018, at 10 a.m. Eastern time to review its financial results for the fourth quarter and full year 2017. Participants should dial 800-708-4540 and international participants should dial 847-619-6397 ten minutes before the scheduled start of the call and ask for conference pass code 46504139. The call will also be webcast live (listen-only mode) via www.atsginc.com.

A replay of the conference call will be available by phone on February 28, 2018, beginning at 2 p.m. and continuing through March 7, 2018, at (888) 843-7419 (international callers (630) 652-3042); use pass code 46504139#. The webcast replay will remain available via www.atsginc.com for 30 days.

About ATSG

ATSG is a leading provider of aircraft leasing and air cargo transportation and related services to domestic and foreign air carriers and other companies that outsource their air cargo lift requirements. ATSG, through its leasing and airline subsidiaries, is the world's largest owner and operator of converted Boeing 767 freighter aircraft. Through its principal subsidiaries, including two airlines with separate and distinct U.S. FAA Part 121 Air Carrier certificates, ATSG provides aircraft leasing, air cargo lift, aircraft maintenance services and airport ground services. ATSG's subsidiaries include ABX Air, Inc.; Airborne Global Solutions, Inc.; Air Transport International, Inc.; Cargo Aircraft Management, Inc.; and Airborne Maintenance and Engineering Services, Inc. including its division, Pemco World Air Services, Inc. For more information, please see www.atsginc.com.

Except for historical information contained herein, the matters discussed in this release contain forward-looking statements that involve risks and uncertainties. There are a number of important factors that could cause Air Transport Services Group's (ATSG's) actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, changes in market demand for our assets and services; our operating airlines' ability to maintain on-time service and control costs; the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration; fluctuations in ATSG's traded share price, which may result in mark-to-market charges on certain financial instruments; the number, timing and scheduled routes of our aircraft deployments to customers; and other factors that are contained from time to time in ATSG's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Readers should carefully review this release and should not place undue reliance on ATSG's forward-looking statements. These forward-looking statements were based on information, plans and estimates as of the date of this release. ATSG undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Revenues and operating expenses include the activities of PEMCO World Air Services, Inc., a wholly owned subsidiary, for periods since its acquisition by ATSG on December 30, 2016. Certain historical expenses have been reclassified to conform to the presentation above.

*For additional information about the calculation of diluted earnings per share, see accompanying schedule.

Non-GAAP financial measures: This report contains non-GAAP financial measures that management uses to evaluate the Company’s historical results. Management believes that these non-GAAP measures assist in highlighting operational trends, facilitate period-over-period comparisons and provide additional clarity about events and trends impacting core operating performance. Disclosing these non-GAAP measures provides insight to investors about additional metrics that the Company’s management uses to evaluate past performance and prospects for future performance.

Adjusted Pre-tax Earnings excludes certain items included in GAAP based pre-tax earnings (loss) from continuing operations because they are distinctly different in their predictability among periods or not closely related to our operations. 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 an alternative to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP.

Management uses Adjusted EBITDA to assess the performance of its operating results among periods. It is a metric that facilitates the comparison of financial results of underlying operations. Additionally, these non-GAAP adjustments are similar to the adjustments used by lenders in the Company’s Senior Credit Agreement to assess financial performance and determine the cost of borrowed funds. The adjustments also exclude the non-service cost components of retiree benefit plans because they are not closely related to on-going operating activities. Management presents EBITDA from Continuing Operations, a commonly referenced metric, as a subtotal toward computing Adjusted EBITDA.

EBITDA from Continuing Operations is defined as Earnings (Loss) from Continuing Operations Before Income Taxes plus net interest expense, depreciation, and amortization expense. Adjusted EBITDA is defined as EBITDA from Continuing Operations less financial instrument revaluation gains or losses, non-service components of retiree benefit costs including pension plan settlements, amortization of lease incentive costs recorded in revenue and costs from non-consolidated affiliates.

Adjusted EBITDA and EBITDA from Continuing Operations are non-GAAP financial measures and should not be considered as alternatives to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP. Adjusted EBITDA and EBITDA from Continuing Operations should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, or as an alternative measure of liquidity.

Adjusted Earnings from Continuing Operations, Adjusted Shares and Adjusted Earnings per Share from Continuing Operations are non-GAAP financial measures and should not be considered as alternatives to Earnings from Continuing Operations, Weighted Average Shares - diluted or Earnings per Share from Continuing Operations or any other performance measure derived in accordance with GAAP. Adjusted Earnings and Adjusted Earnings per Share from Continuing Operations should not be considered in isolation or as a substitute for analysis of the company's results as reported under GAAP.

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