ATSG Reports Strong Third Quarter Results

WILMINGTON, Ohio--(BUSINESS WIRE)--

Air Transport Services Group, Inc. 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 September 30, 2014.

For the third quarter of 2014:

• Pre-tax earnings from continuing operations increased 25 percent to $15.6 million driven by a $7.0 million improvement in airline profitability compared with a year ago.
• Net earnings from continuing operations increased 23 percent to $9.6 million, or 15 cents per share, from $7.8 million, or 12 cents per share in the third quarter of 2013. Operating loss carryforwards for U.S. federal income tax purposes offset much of the company's federal tax liabilities. ATSG does not expect to pay significant federal income taxes until 2016 or later.
• Revenues were $138.4 million, 2 percent lower than a year ago. Excluding revenues from reimbursable expenses, revenues decreased $4.8 million, or 4 percent. Loss of revenues from Mideast operations offset additional revenues from aircraft dry leases.
• Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, also adjusted for the effect of derivative transactions) increased by 11 percent to $44.6 million. Adjusted EBITDA is a non-GAAP financial measure, defined and reconciled to comparable GAAP results in separate tables at the end of this release.

ATSG also said it has reached an agreement in principle with DHL, setting a framework for multi-year commercial agreements covering 767 freighter leases and operating services that ATSG's businesses currently provide in support of DHL's U.S. network.

The framework anticipates that DHL will extend the leases for 13 Boeing 767 freighters, and execute new leases for at least two more freighters that currently support DHL under short-term arrangements. The new leases will commence next year on or before March 31, 2015, and all of the freighter leases with DHL will run through March 2019. Also, ATSG's businesses will operate and maintain those aircraft through March 2019 under an amendment to the current CMI (Crew, Maintenance and Insurance) Agreement that would otherwise expire in March 2015. Management expects to execute definitive agreements before the end of 2014.

Joe Hete, President and Chief Executive Officer of ATSG, said, “After many months of discussions, I'm pleased to say that both we and DHL have completed the outline for a relationship that preserves our role as DHL's principal source of airlift in North America for another four years. Overall, our work for DHL will continue much as it does today, with 767 freighters leased from our Cargo Aircraft Management subsidiary, operated by ABX Air crews and maintained by AMES technicians, supporting the majority of the air freight that moves through DHL's North American network each day. We look forward to providing more details on this important extension of our eleven-year relationship with DHL when final agreements are completed.”

Hete also said that ATSG's third-quarter results show early returns from deploying more midsize cargo aircraft with dry-lease customers, and continued progress in restoring the profitability of ATSG's airlines.

“We have entered the fourth quarter with positive momentum, both from deployments under dry lease agreements we completed in May, and contracts for expanded ad-hoc operations during the holiday season in the fourth quarter. We expect all of our available freighter aircraft to be deployed with key customers during the holiday shipping peak. Looking out into 2015, we find our customers and prospects are now more confident about addressing their needs for additional freighter capacity next year, both for multi-year dry leases as well as shorter-term ACMI arrangements.”

For the first nine months of 2014, ATSG earned $25.4 million, or $0.39 per share diluted from continuing operations, up 9 percent from the first nine months of 2013. Revenues increased 2 percent to $431.7 million. Adjusted EBITDA for the first nine months of 2014 was $128.7 million, up 14 percent from the same period in 2013.

Capital spending for the first nine months of 2014 was $90.9 million, including $57.8 million to acquire and modify aircraft. ATSG purchased two 767-300 freighters in September that it had previously leased from a third party. Capital spending for the full year of 2014 is projected to be approximately $95 million.

Segment Results

CAM (Aircraft Leasing)

CAM					Third Quarter
($ in thousands)					2014				2013
Revenues					$	40,226			$	40,089
Pre-Tax Earnings					13,574				15,893

Significant Developments:

• CAM's third-quarter revenues from external customers increased $2.9 million versus a year ago. Pre-tax earnings reflect the benefit of those additional revenues, offset by a $3.0 million increase in depreciation from additional and newer aircraft placed in service since the end of the third quarter last year and by costs to prepare aircraft for redeployment to lessees.
• At September 30, 2014, CAM owned 53 Boeing cargo aircraft in serviceable condition, including two 767-300 freighters purchased at the end of the quarter. One CAM-owned 757 combi and one other 767-300 freighter were added in the first quarter. A table reflecting cargo aircraft in service is included at the end of this release.

• CAM delivered three 767 freighters to dry-lease customers Amerijet and Cargojet during the third quarter under agreements signed with each company in May. The three are in addition to one 767 freighter delivered to Cargojet in June. One other 767 freighter now operating in Europe is expected to be converted to a dry lease in 2015.

ACMI Services

ACMI Services					Third Quarter
($ in thousands)					2014					2013
Revenues
Airline services					$	84,172				$	93,116
Reimbursables					18,681					16,313
Total ACMI Services Revenues					102,853					109,429
Pre-Tax Earnings (Loss)					(126		)			(7,113		)

Significant Developments:

• 2013 revenues from airline services included revenues for operating three 767 aircraft and related crews in DHL's network in the Mideast. That assignment ended in February 2014. Third-quarter revenues from combi operations for the U.S. Military exceeded year-ago levels.
• Pre-tax profitability improved sharply because third-quarter airline operating expenses, excluding reimbursable expense, declined $15.9 million. Principal factors were reductions in employee wages and benefit costs due to workforce reductions and lower pension expense, lower employee travel costs and aircraft landing fees, and lower costs for newer 757 combi aircraft, plus lower unreimbursed maintenance expense.
• Since May, DHL has ended short-term lease agreements with ABX Air for three CAM-owned 767s that ABX Air had been operating in DHL's U.S. market. Two other DHL-owned 767s that ABX Air has leased and operated for DHL in the U.S. will be returned to DHL near the end of the year. An additional two DHL-owned 767s will be returned during the first quarter of 2015.
• Third-quarter ACMI block hours were flat with a year ago, excluding those from Mideast operations in the prior-year period.
• Two CAM freighters leased to ATSG's airlines are underutilized, compared with four a year ago and five at the end of the first quarter this year. All available aircraft are expected to be in operation for customers during the fourth-quarter peak holiday season, which is expected to yield a pre-tax profit for the segment for the 2014 fourth quarter and second half.

Other Activities

Other Activities					Third Quarter
($ in thousands)					2014				2013
Revenues					$	42,055			$	30,037
Pre-Tax Earnings					2,010				4,400

Significant Developments:

• Revenues from external customers were $15.4 million, up 9 percent. Pre-tax earnings declined primarily because of higher personnel costs, including more ramp-up costs for the expanded Wilmington hangar facilities and higher post-retirement benefits.

Outlook

ATSG now projects that its Adjusted EBITDA from Continuing Operations for 2014 will be approximately $175 million. Final results for the year will reflect ATSG's ability to deploy and operate all of its available aircraft efficiently during peak season, and to support customers with additional logistical and technical services.

President and CEO Joe Hete also noted that the agreement in principle with DHL is non-binding, and is subject to the negotiation and execution of definitive agreements. In current form, the framework will slightly reduce monthly lease rates per aircraft to ATSG while expanding the number of 767 freighters that DHL leases from CAM and extending all lease terms through March 2019.

Hete added that the proposed changes to the DHL leases and CMI agreement beginning in April 2015 would negatively impact Adjusted EBITDA from Continuing Operations by $5 million to $10 million on an annualized basis. ATSG's preliminary projections for 2015, however, indicate that its Adjusted EBITDA from Continuing Operations will increase versus 2014.

Hete said, “This new framework with DHL would provide us with a four-year customer commitment for more than a third of our 767 fleet, while providing us with opportunities to improve our ACMI Services margins through greater efficiency and even better performance. It also would preserve and extend our position as DHL's principal air network provider in the United States, and could open more opportunities to support DHL's networks elsewhere in the world.”

Conference Call

ATSG will host a conference call on Nov. 6, 2014, at 10:00 a.m. Eastern time to review its financial results for the third quarter of 2014. Participants should dial (888) 895-5479 and international participants should dial (847) 619-6250 ten minutes before the scheduled start of the call and ask for conference pass code 38393602. 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 Nov. 6, 2014, beginning at 2:00 p.m. and continuing through Nov. 13, 2014, at (888) 843-7419 (international callers (630) 652-3042); use pass code 38393602#. 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. 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, the company's execution of definitive agreements on substantially the terms outlined in the non-binding agreement in principle with DHL, changes in market demand for our assets and services, the number and timing of deployments of our aircraft, our operating airlines' ability to maintain on-time service and control costs, 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.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)
					Three Months Ended									Nine Months Ended
					September 30,									September 30,
					2014				2013					2014				2013
REVENUES					$	138,443			$	140,877				$	431,654			$	423,060
OPERATING EXPENSES
Salaries, wages and benefits					39,096				41,498					123,056				126,771
Maintenance, materials and repairs					17,082				24,644					65,129				71,783
Depreciation and amortization					26,307				23,392					78,428				66,077
Fuel					14,059				11,356					40,333				38,157
Rent					6,689				6,958					20,923				20,528
Travel					4,189				4,409					13,181				13,908
Landing and ramp					2,450				2,227					7,764				8,264
Insurance					1,109				1,559					3,887				4,466
Other operating expenses					9,175				8,224					28,713				25,914
					120,156				124,267					381,414				375,868
OPERATING INCOME					18,287				16,610					50,240				47,192
OTHER INCOME (EXPENSE)
Interest income					23				17					66				56
Interest expense					(3,309		)		(3,814		)			(10,613		)		(10,500		)
Net gain on derivative instruments					639				(317		)			969				425
					(2,647		)		(4,114		)			(9,578		)		(10,019		)
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES					15,640				12,496					40,662				37,173
INCOME TAX EXPENSE					(6,045		)		(4,697		)			(15,247		)		(13,958		)
EARNINGS FROM CONTINUING OPERATIONS					9,595				7,799					25,415				23,215
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX					312				—					734				(2		)
NET EARNINGS					$	9,907			$	7,799				$	26,149			$	23,213
EARNINGS PER SHARE - Basic
Continuing operations					$	0.15			$	0.12				$	0.40			$	0.36
Discontinued operations					—				—					0.01				—
NET EARNINGS PER SHARE					$	0.15			$	0.12				$	0.41			$	0.36
EARNINGS PER SHARE - Diluted
Continuing operations					$	0.15			$	0.12				$	0.39			$	0.36
Discontinued operations					—				—					0.01				—
NET EARNINGS PER SHARE					$	0.15			$	0.12				$	0.40			$	0.36
WEIGHTED AVERAGE SHARES
Basic					64,286				64,052					64,240				63,972
Diluted					65,271				65,036					65,207				64,807

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
					September 30,					December 31,
					2014					2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents					$	33,442				$	31,699
Accounts receivable, net of allowance of $843 in 2014 and $717 in 2013					36,392					52,247
Inventory					11,936					9,050
Prepaid supplies and other					12,023					9,730
Deferred income taxes					13,957					13,957
Aircraft and engines held for sale					923					2,995
TOTAL CURRENT ASSETS					108,673					119,678
Property and equipment, net					850,715					838,172
Other assets					29,288					21,143
Pension assets, net of obligations					20,895					14,855
Intangibles					4,685					4,896
Goodwill					34,395					34,395
TOTAL ASSETS					$	1,048,651				$	1,033,139
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable					$	29,803				$	34,818
Accrued salaries, wages and benefits					26,219					23,163
Accrued expenses					9,390					9,695
Current portion of debt obligations					24,184					23,721
Unearned revenue					11,692					8,733
TOTAL CURRENT LIABILITIES					101,288					100,130
Long term debt					347,447					360,794
Post-retirement obligations					24,833					30,638
Other liabilities					56,653					62,740
Deferred income taxes					123,890					109,869
STOCKHOLDERS' EQUITY:
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock					—					—
Common stock, par value $0.01 per share; 75,000,000 shares authorized; 64,939,895 and 64,618,305 shares issued and outstanding in 2014 and 2013, respectively					649					646
Additional paid-in capital					526,845					524,953
Accumulated deficit					(100,664		)			(126,813		)
Accumulated other comprehensive loss					(32,290		)			(29,818		)
TOTAL STOCKHOLDERS' EQUITY					394,540					368,968
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY					$	1,048,651				$	1,033,139

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES PRE-TAX EARNINGS AND ADJUSTED PRE-TAX EARNINGS SUMMARY FROM CONTINUING OPERATIONS NON-GAAP RECONCILIATION (In thousands)
					Three Months Ended									Nine Months Ended
					September 30,									September 30,
					2014				2013					2014				2013
Revenues
CAM					$	40,226			$	40,089				$	121,451			$	118,420
ACMI Services
Airline services					84,172				93,116					260,336				276,193
Reimbursables					18,681				16,313					62,417				51,156
Total ACMI Services					102,853				109,429					322,753				327,349
Other Activities					42,055				30,037					105,356				83,242
Total Revenues					185,134				179,555					549,560				529,011
Eliminate internal revenues					(46,691		)		(38,678		)			(117,906		)		(105,951		)
Customer Revenues					$	138,443			$	140,877				$	431,654			$	423,060
Pre-tax Earnings from Continuing Operations
CAM, inclusive of interest expense					13,574				15,893					38,681				49,980
ACMI Services					(126		)		(7,113		)			(6,863		)		(21,610		)
Other Activities					2,010				4,400					9,135				9,188
Net, unallocated interest expense					(457		)		(367		)			(1,260		)		(810		)
Net gain (loss) on derivative instruments					639				(317		)			969				425
Total Pre-tax Earnings					$	15,640			$	12,496				$	40,662			$	37,173
Adjustments to Pre-tax Earnings
Less net (gain) loss on derivative instruments					(639		)		317					(969		)		(425		)
Adjusted Pre-tax Earnings					$	15,001			$	12,813				$	39,693			$	36,748

Adjusted Pre-tax Earnings is defined as Earnings from Continuing Operations Before Income Taxes less derivative gains or losses. Management uses Adjusted Pre-tax Earnings from Continuing Operations to assess the performance of its operating results among periods. Adjusted Pre-tax earnings from Continuing Operations is a non-GAAP financial measure and should not be considered an alternative to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES UNAUDITED ADJUSTED EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION NON-GAAP RECONCILIATION (In thousands)
					Three Months Ended									Nine Months Ended
					September 30,									September 30,
					2014				2013					2014				2013
Earnings from Continuing Operations Before Income Taxes					$	15,640			$	12,496				$	40,662			$	37,173
Interest Income					(23		)		(17		)			(66		)		(56		)
Interest Expense					3,309				3,814					10,613				10,500
Depreciation and Amortization					26,307				23,392					78,428				66,077
EBITDA from Continuing Operations					$	45,233			$	39,685				$	129,637			$	113,694
Less net (gain) loss on derivative instruments					(639		)		317					(969		)		(425		)
Adjusted EBITDA from Continuing Operations					$	44,594			$	40,002				$	128,668			$	113,269

EBITDA and Adjusted 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.

EBITDA from Continuing Operations is defined as Earnings from Continuing Operations Before Income Taxes plus net interest expense, depreciation, and amortization expense. Adjusted EBITDA from Continuing Operations is defined as EBITDA from Continuing Operations less derivative gains or losses.

Management uses EBITDA from Continuing Operations as an indicator of the cash-generating performance of the operations of the Company. Management uses Adjusted EBITDA from Continuing Operations to assess the performance of its operating results among periods. EBITDA and Adjusted 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.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES IN-SERVICE CARGO AIRCRAFT FLEET
Aircraft Types
					December 31,							September 30,							December 31,
					2013							2014							2014 Projected
									Operating							Operating							Operating
					Total		Owned		Lease			Total		Owned		Lease			Total		Owned		Lease
B767-200					40		36		4			40		36		4			38		36		2
B767-300					8		6		2			9		9		—			10		9		1
B757-200					4		4		—			4		4		—			4		4		—
B757 Combi					3		3		—			4		4		—			4		4		—
Total Aircraft In-Service					55		49		6			57		53		4			56		53		3
Owned Aircraft In Serviceable Condition
					December 31,							September 30,							December 31,
					2013							2014							2014 Projected
ATSG airlines							29							28							27-28
External customers							20							24							24-25
Staging/Unassigned							—							1							1
							49							53							53