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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
| | For the quarterly period ended September 30, 2024 |
| | |
| ☐ | 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 | 26-1631624 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 145 Hunter Drive, Wilmington, OH | 45177 |
| (Address of principal executive offices) | (Zip Code) |
937-382-5591
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | ATSG | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation 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.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Smaller reporting company | ☐ |
| Non-accelerated filer | ☐ | 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 Exchange Act). Yes ☐ No ☒
As of November 8, 2024, there were 65,759,904 shares of the registrant’s common stock outstanding.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
The financial information, including the financial statements, included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 (the “Form 10-Q”) should be read in conjunction with the audited consolidated financial statements and notes thereto of Air Transport Services Group, Inc. (“ATSG”) and its subsidiaries (collectively the "Company") included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (“SEC”) on February 29, 2024 (“2023 Form 10-K”).
The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding the Company at www.sec.gov. Additionally, ATSG’s filings with the 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. The Company wishes to take advantage of the safe harbor provisions of the Act.
This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part I, Item 2, contains forward-looking statements, within the meaning of the Act. Except for historical information contained in this Form 10-Q, the matters discussed herein contain forward-looking statements that involve inherent risks and uncertainties. Such statements are provided under the “safe harbor” protection of the Act.
Forward-looking statements include, but are not limited to, statements regarding anticipated operating results, prospects and levels of assets under management, technological developments, economic trends, expected transactions and similar matters. The words “may,” “believe,” “expect,” “anticipate,” “target,” “goal,” “project,” “estimate,” “guidance,” “forecast,” “outlook,” “will,” “continue,” “likely,” “should,” “hope,” “seek,” “plan,” “intend” and variations of such words and similar expressions identify forward-looking statements. Similarly, descriptions of the Company’s objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements are susceptible to a number of risks, uncertainties and other factors. This includes the impact of the risks related to our proposed merger with affiliates of Stonepeak (as further discussed below). While the Company believes that the assumptions underlying its forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, the Company’s actual results and experiences could differ materially from the anticipated results or other expectations expressed in its forward-looking statements.
A number of important factors may cause the Company’s actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to: (i) unplanned changes in the market demand for the assets and services of the Company, including the loss of customers or a reduction in the level of services it performs for customers; (ii) its operating airlines’ ability to maintain on-time service and control costs; (iii) the cost and timing with respect to which it is able to purchase and modify aircraft to a cargo configuration; (iv) fluctuations in the Company’s traded share price and in interest rates, which may result in mark-to-market charges on certain financial instruments; (v) the number, timing, and scheduled routes of its aircraft deployments to customers; (vi) its ability to remain in compliance with key agreements with customers, lenders and government agencies; (vii) the impact of supply chain constraints both within and outside the United States, which may be more severe or persist longer than it currently expects; (viii) the impact of the current competitive labor market, which could restrict its ability to fill key positions; (ix) changes in general economic and/or industry-specific conditions, including inflation and regulatory changes; and (x) other uncontrollable factors such as geopolitical tensions or conflicts, cybersecurity threats and human health crises. Other factors that could cause the Company’s actual results to differ materially from those indicated by such forward-looking statements are discussed in “Risk Factors” in Item 1A of Part II of this Form 10-Q and in Item 1A to the 2023 Form 10-K and are contained from time to time in the Company’s other filings with the SEC, including its annual reports on Form 10-K and quarterly reports on Form 10-Q.
ATSG recently entered into an Agreement and Plan of Merger with Stonepeak Nile Parent LLC and Stonepeak Nile MergerCo Inc. (the “Merger”), as discussed in Note O to the condensed consolidated financial statements included with this Form 10-Q. Statements regarding the Merger, including the expected time period to consummate the Merger, the anticipated benefits (including synergies) of the Merger and integration and transition plans, opportunities, anticipated future performance, expected share buyback programs and expected dividends, are also provided under the “safe harbor” protection in the Act. Key factors that could cause actual results to differ materially include, but are not limited to, the expected timing and likelihood of completion of the Merger, including the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the Merger; the occurrence of any event, change or other circumstances that could give rise to the termination of the definitive agreement; the possibility that ATSG’s stockholders may not approve the Merger; the risk that the anticipated tax treatment of the Transaction is not obtained; the risk that the parties may not be able to satisfy the conditions to the Merger in a timely manner or at all; risks related to disruption of management time from ongoing business operations due to the Merger; the risk that any announcements relating to the Merger could have adverse effects on the market price of ATSG’s common stock; the risk that the Merger and its announcement could have an adverse effect on the parties’ business relationships and business generally, including the ability of ATSG to retain customers and retain and hire key personnel and maintain relationships with their suppliers and customers, and on their operating results and businesses generally; the risk of unforeseen or unknown liabilities; customer, shareholder, regulatory and other stakeholder approvals and support; the risk of unexpected future capital expenditures; the risk of potential litigation relating to the Transaction that could be instituted against ATSG or its directors and/or officers; the risk associated with third party contracts containing material consent, anti-assignment, transfer or other provisions that may be related to the Merger which are not waived or otherwise satisfactorily resolved; the risk of rating agency actions and ATSG’s ability to access short- and long-term debt markets on a timely and affordable basis; and the risks resulting from other effects of industry, market, economic, legal or legislative, political or regulatory conditions outside of the Company’s control.
Readers should carefully review this Form 10-Q and should not place undue reliance on the Company’s forward-looking statements. The forward-looking statements were based on information, plans and estimates as of the date of this Form 10-Q. New risks and uncertainties arise from time to time, and factors that the Company currently deems immaterial may become material, and it is impossible for the Company to predict these events or how they may affect it. Except as may be required by applicable law, the Company undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. The Company does not endorse any projections regarding future performance that may be made by third parties.
CERTAIN DEFINED TERMS IN THIS FORM 10-Q
ATSG and its subsidiaries may sometimes be referred to in this Form 10-Q collectively as the “Company,” “we,” “our,” or “us.” ATSG’s outstanding common stock, par value $0.01 per share, is referred to in this Form 10-Q as “common stock,” “common shares,” “stock” or “shares.”
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| | | September 30, 2024 | | | December 31, 2023 | |
| ASSETS | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | |
| Cash, cash equivalents and restricted cash | | $ | 44,873 | | | $ | 53,555 | |
| Accounts receivable, net of allowance of $846 in 2024 and $1,065 in 2023 | | | 185,251 | | | | 215,581 | |
| Inventory | | | 49,690 | | | | 49,939 | |
| Prepaid supplies and other | | | 31,258 | | | | 26,626 | |
| TOTAL CURRENT ASSETS | | | 311,072 | | | | 345,701 | |
| Property and equipment, net | | | 2,771,568 | | | | 2,820,769 | |
| Customer incentive | | | 133,234 | | | | 60,961 | |
| Goodwill and acquired intangibles | | | 473,425 | | | | 482,427 | |
| Operating lease assets | | | 60,797 | | | | 54,060 | |
| Other assets | | | 134,227 | | | | 118,172 | |
| TOTAL ASSETS | | $ | 3,884,323 | | | $ | 3,882,090 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable | | $ | 248,647 | | | $ | 227,652 | |
| Accrued salaries, wages and benefits | | | 62,126 | | | | 56,650 | |
| Accrued expenses | | | 11,817 | | | | 10,784 | |
| Current portion of debt obligations | | | 658 | | | | 54,710 | |
| Current portion of lease obligations | | | 20,234 | | | | 20,167 | |
| Unearned revenue | | | 38,431 | | | | 30,226 | |
| TOTAL CURRENT LIABILITIES | | | 381,913 | | | | 400,189 | |
| Long term debt | | | 1,561,874 | | | | 1,707,572 | |
| Stock obligations | | | 18,671 | | | | 1,729 | |
| Post-retirement obligations | | | 14,890 | | | | 19,368 | |
| Long term lease obligations | | | 41,806 | | | | 34,990 | |
| Other liabilities | | | 110,143 | | | | 64,292 | |
| Deferred income taxes | | | 286,787 | | | | 285,248 | |
| TOTAL LIABILITIES | | | 2,416,084 | | | | 2,513,388 | |
| Commitments and contingencies (Note H) | | | | | | | | |
| 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; 150,000,000 shares authorized; 65,759,904 and 65,240,961 shares issued and outstanding in 2024 and 2023, respectively | | | 658 | | | | 652 | |
| Additional paid-in capital | | | 917,181 | | | | 836,270 | |
| Retained earnings | | | 601,929 | | | | 589,209 | |
| Accumulated other comprehensive loss | | | (51,529 | ) | | | (57,429 | ) |
| TOTAL STOCKHOLDERS’ EQUITY | | | 1,468,239 | | | | 1,368,702 | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 3,884,323 | | | $ | 3,882,090 | |
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
| REVENUES |
|
$ |
471,253 |
|
|
$ |
523,137 |
|
|
$ |
1,445,180 |
|
|
$ |
1,553,571 |
|
| OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Salaries, wages and benefits |
|
|
170,102 |
|
|
|
165,110 |
|
|
|
505,663 |
|
|
|
512,283 |
|
| Depreciation and amortization |
|
|
98,995 |
|
|
|
86,252 |
|
|
|
281,254 |
|
|
|
253,671 |
|
| Maintenance, materials and repairs |
|
|
46,573 |
|
|
|
54,569 |
|
|
|
143,183 |
|
|
|
148,838 |
|
| Fuel |
|
|
52,307 |
|
|
|
79,020 |
|
|
|
181,429 |
|
|
|
213,046 |
|
| Contracted ground and aviation services |
|
|
18,362 |
|
|
|
18,353 |
|
|
|
55,794 |
|
|
|
55,823 |
|
| Travel |
|
|
30,633 |
|
|
|
36,223 |
|
|
|
93,259 |
|
|
|
96,998 |
|
| Landing and ramp |
|
|
3,732 |
|
|
|
4,271 |
|
|
|
12,267 |
|
|
|
13,139 |
|
| Rent |
|
|
8,001 |
|
|
|
7,811 |
|
|
|
23,231 |
|
|
|
24,197 |
|
| Insurance |
|
|
3,121 |
|
|
|
3,055 |
|
|
|
8,414 |
|
|
|
8,287 |
|
| Other operating expenses |
|
|
17,746 |
|
|
|
22,443 |
|
|
|
54,680 |
|
|
|
64,095 |
|
| |
|
|
449,572 |
|
|
|
477,107 |
|
|
|
1,359,174 |
|
|
|
1,390,377 |
|
| OPERATING INCOME |
|
|
21,681 |
|
|
|
46,030 |
|
|
|
86,006 |
|
|
|
163,194 |
|
| OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
|
352 |
|
|
|
190 |
|
|
|
809 |
|
|
|
585 |
|
| Non-service component of retiree benefit costs |
|
|
(1,085 |
) |
|
|
(3,218 |
) |
|
|
(3,256 |
) |
|
|
(9,654 |
) |
| Net (loss) gain on financial instruments |
|
|
(5,167 |
) |
|
|
1,778 |
|
|
|
134 |
|
|
|
1,856 |
|
| Loss from non-consolidated affiliate |
|
|
(869 |
) |
|
|
(1,885 |
) |
|
|
(2,202 |
) |
|
|
(4,398 |
) |
| Interest expense |
|
|
(20,103 |
) |
|
|
(19,376 |
) |
|
|
(63,494 |
) |
|
|
(51,753 |
) |
| |
|
|
(26,872 |
) |
|
|
(22,511 |
) |
|
|
(68,009 |
) |
|
|
(63,364 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
|
(5,191 |
) |
|
|
23,519 |
|
|
|
17,997 |
|
|
|
99,830 |
|
| INCOME TAX BENEFIT (EXPENSE) |
|
|
1,864 |
|
|
|
(6,347 |
) |
|
|
(5,277 |
) |
|
|
(24,495 |
) |
| EARNINGS (LOSS) FROM CONTINUING OPERATIONS |
|
|
(3,327 |
) |
|
|
17,172 |
|
|
|
12,720 |
|
|
|
75,335 |
|
| EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| NET EARNINGS (LOSS) |
|
$ |
(3,327 |
) |
|
$ |
17,172 |
|
|
$ |
12,720 |
|
|
$ |
75,335 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BASIC EARNINGS (LOSS) PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Continuing operations |
|
$ |
(0.05 |
) |
|
$ |
0.26 |
|
|
$ |
0.20 |
|
|
$ |
1.08 |
|
| Discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| TOTAL BASIC EARNINGS (LOSS) PER SHARE |
|
$ |
(0.05 |
) |
|
$ |
0.26 |
|
|
$ |
0.20 |
|
|
$ |
1.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| DILUTED EARNINGS (LOSS) PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Continuing operations |
|
$ |
(0.05 |
) |
|
$ |
0.24 |
|
|
$ |
0.20 |
|
|
$ |
0.98 |
|
| Discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| TOTAL DILUTED EARNINGS (LOSS) PER SHARE |
|
$ |
(0.05 |
) |
|
$ |
0.24 |
|
|
$ |
0.20 |
|
|
$ |
0.98 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| WEIGHTED AVERAGE SHARES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
65,036 |
|
|
|
67,253 |
|
|
|
65,012 |
|
|
|
69,909 |
|
| Diluted |
|
|
65,036 |
|
|
|
72,672 |
|
|
|
67,471 |
|
|
|
78,427 |
|
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
| NET EARNINGS (LOSS) |
|
$ |
(3,327 |
) |
|
$ |
17,172 |
|
|
$ |
12,720 |
|
|
$ |
75,335 |
|
| OTHER COMPREHENSIVE INCOME (LOSS): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Defined Benefit Pension |
|
|
1,984 |
|
|
|
3,685 |
|
|
|
5,952 |
|
|
|
11,055 |
|
| Defined Benefit Post-Retirement |
|
|
(17 |
) |
|
|
— |
|
|
|
(52 |
) |
|
|
— |
|
| Foreign Currency Translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| TOTAL COMPREHENSIVE INCOME (LOSS), net of tax |
|
$ |
(1,360 |
) |
|
$ |
20,857 |
|
|
$ |
18,620 |
|
|
$ |
86,410 |
|
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
|
|
|
| |
|
Common Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
|
|
|
| |
|
Number |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
| BALANCE AT JUNE 30, 2023 |
|
|
70,761,243 |
|
|
$ |
708 |
|
|
$ |
951,463 |
|
|
$ |
587,045 |
|
|
$ |
(96,012 |
) |
|
$ |
1,443,204 |
|
| Stock-based compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Grant of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
| Issuance of common shares, net of withholdings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
| Forfeited restricted stock |
|
|
(10,400 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
| Purchase of common stock |
|
|
(5,435,777 |
) |
|
|
(54 |
) |
|
|
(119,606 |
) |
|
|
|
|
|
|
|
|
|
|
(119,660 |
) |
| Settlement of convertible note hedges and warrants |
|
|
|
|
|
|
|
|
|
|
1,270 |
|
|
|
|
|
|
|
|
|
|
|
1,270 |
|
| Amortization of stock awards and restricted stock |
|
|
|
|
|
|
|
|
|
|
2,503 |
|
|
|
|
|
|
|
|
|
|
|
2,503 |
|
| Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,172 |
|
|
|
3,685 |
|
|
|
20,857 |
|
| BALANCE AT SEPTEMBER 30, 2023 |
|
|
65,315,066 |
|
|
$ |
653 |
|
|
$ |
835,630 |
|
|
$ |
604,217 |
|
|
$ |
(92,327 |
) |
|
$ |
1,348,173 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE AT DECEMBER 31, 2022 |
|
|
72,327,758 |
|
|
$ |
723 |
|
|
$ |
986,303 |
|
|
$ |
528,882 |
|
|
$ |
(103,402 |
) |
|
$ |
1,412,506 |
|
| Stock-based compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Grant of restricted stock |
|
|
265,361 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
| Issuance of common shares, net of withholdings |
|
|
122,724 |
|
|
|
2 |
|
|
|
(1,580 |
) |
|
|
|
|
|
|
|
|
|
|
(1,578 |
) |
| Forfeited restricted stock |
|
|
(15,000 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
| Purchase of common stock |
|
|
(7,385,777 |
) |
|
|
(74 |
) |
|
|
(156,829 |
) |
|
|
|
|
|
|
|
|
|
|
(156,903 |
) |
| Settlement of convertible note hedges and warrants |
|
|
|
|
|
|
|
|
|
|
1,270 |
|
|
|
|
|
|
|
|
|
|
|
1,270 |
|
| Amortization of stock awards and restricted stock |
|
|
|
|
|
|
|
|
|
|
6,469 |
|
|
|
|
|
|
|
|
|
|
|
6,469 |
|
| Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,335 |
|
|
|
11,075 |
|
|
|
86,410 |
|
| BALANCE AT SEPTEMBER 30, 2023 |
|
|
65,315,066 |
|
|
$ |
653 |
|
|
$ |
835,630 |
|
|
$ |
604,217 |
|
|
$ |
(92,327 |
) |
|
$ |
1,348,173 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
| |
|
Common Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
|
|
|
| |
|
Number |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
| BALANCE AT JUNE 30, 2024 |
|
|
65,761,436 |
|
|
$ |
658 |
|
|
$ |
912,968 |
|
|
$ |
605,256 |
|
|
$ |
(53,496 |
) |
|
$ |
1,465,386 |
|
| Stock-based compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Grant of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
| Issuance of common shares, net of withholdings |
|
|
(1,532 |
) |
|
|
— |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
| Forfeited restricted stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
| Amortization of stock awards and restricted stock |
|
|
|
|
|
|
|
|
|
|
2,967 |
|
|
|
|
|
|
|
|
|
|
|
2,967 |
|
| Modification of warrants |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
| Grant of warrants |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
| Amortization of warrants |
|
|
|
|
|
|
|
|
|
|
1,261 |
|
|
|
|
|
|
|
|
|
|
|
1,261 |
|
| Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,327 |
) |
|
|
1,967 |
|
|
|
(1,360 |
) |
| BALANCE AT SEPTEMBER 30, 2024 |
|
|
65,759,904 |
|
|
$ |
658 |
|
|
$ |
917,181 |
|
|
$ |
601,929 |
|
|
$ |
(51,529 |
) |
|
$ |
1,468,239 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE AT DECEMBER 31, 2023 |
|
|
65,240,961 |
|
|
$ |
652 |
|
|
$ |
836,270 |
|
|
$ |
589,209 |
|
|
$ |
(57,429 |
) |
|
$ |
1,368,702 |
|
| Stock-based compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Grant of restricted stock |
|
|
470,783 |
|
|
|
5 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
| Issuance of common shares, net of withholdings |
|
|
52,960 |
|
|
|
1 |
|
|
|
(551 |
) |
|
|
|
|
|
|
|
|
|
|
(550 |
) |
| Forfeited restricted stock |
|
|
(4,800 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
| Amortization of stock awards and restricted stock |
|
|
|
|
|
|
|
|
|
|
7,504 |
|
|
|
|
|
|
|
|
|
|
|
7,504 |
|
| Modification of warrants |
|
|
|
|
|
|
|
|
|
|
66,819 |
|
|
|
|
|
|
|
|
|
|
|
66,819 |
|
| Grant of warrants |
|
|
|
|
|
|
|
|
|
|
5,043 |
|
|
|
|
|
|
|
|
|
|
|
5,043 |
|
| Amortization of warrants |
|
|
|
|
|
|
|
|
|
|
2,101 |
|
|
|
|
|
|
|
|
|
|
|
2,101 |
|
| Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,720 |
|
|
|
5,900 |
|
|
|
18,620 |
|
| BALANCE AT SEPTEMBER 30, 2024 |
|
|
65,759,904 |
|
|
$ |
658 |
|
|
$ |
917,181 |
|
|
$ |
601,929 |
|
|
$ |
(51,529 |
) |
|
$ |
1,468,239 |
|
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
Nine Months Ended |
|
| |
|
September 30, |
|
| |
|
2024 |
|
|
2023 |
|
| OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
| Net earnings from continuing operations |
|
$ |
12,720 |
|
|
$ |
75,335 |
|
| Net earnings from discontinued operations |
|
$ |
— |
|
|
$ |
— |
|
| Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
303,150 |
|
|
|
269,705 |
|
| Pension and post-retirement |
|
|
7,711 |
|
|
|
14,235 |
|
| Deferred income taxes |
|
|
64 |
|
|
|
21,418 |
|
| Amortization of stock-based compensation |
|
|
7,504 |
|
|
|
6,469 |
|
| Loss from non-consolidated affiliates |
|
|
2,202 |
|
|
|
4,398 |
|
| Net gain on financial instruments |
|
|
(134 |
) |
|
|
(1,856 |
) |
| Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
33,301 |
|
|
|
73,443 |
|
| Inventory and prepaid supplies |
|
|
(16,289 |
) |
|
|
10,854 |
|
| Accounts payable |
|
|
100 |
|
|
|
50,881 |
|
| Unearned revenue |
|
|
6,967 |
|
|
|
7,325 |
|
| Accrued expenses, salaries, wages, benefits and other liabilities |
|
|
52,411 |
|
|
|
(671 |
) |
| Pension and post-retirement balances |
|
|
(6,195 |
) |
|
|
(6,308 |
) |
| Other |
|
|
(4,436 |
) |
|
|
865 |
|
| NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
399,076 |
|
|
|
526,093 |
|
| INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
| Expenditures for property and equipment |
|
|
(221,003 |
) |
|
|
(581,340 |
) |
| Proceeds from property and equipment |
|
|
35,183 |
|
|
|
10,516 |
|
| Acquisitions and investments in businesses |
|
|
(19,845 |
) |
|
|
(1,600 |
) |
| NET CASH (USED IN) INVESTING ACTIVITIES |
|
|
(205,665 |
) |
|
|
(572,424 |
) |
| FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
| Principal payments on long term obligations |
|
|
(626,542 |
) |
|
|
(180,534 |
) |
| Proceeds from revolving credit facilities |
|
|
425,000 |
|
|
|
220,000 |
|
| Payments for financing costs |
|
|
— |
|
|
|
(10,779 |
) |
| Proceeds from convertible note issuance |
|
|
— |
|
|
|
400,000 |
|
| Repurchase of convertible notes |
|
|
— |
|
|
|
(203,247 |
) |
| Purchase of common stock |
|
|
— |
|
|
|
(155,349 |
) |
| Withholding taxes paid for conversion of employee stock awards |
|
|
(551 |
) |
|
|
(1,578 |
) |
| Other financing related proceeds |
|
|
— |
|
|
|
1,269 |
|
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
|
|
(202,093 |
) |
|
|
69,782 |
|
| |
|
|
|
|
|
|
|
|
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(8,682 |
) |
|
|
23,451 |
|
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
|
|
53,555 |
|
|
|
27,134 |
|
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
44,873 |
|
|
$ |
50,585 |
|
| |
|
|
|
|
|
|
|
|
| SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
| Interest paid, net of amount capitalized |
|
$ |
73,246 |
|
|
$ |
42,544 |
|
| Federal and state income taxes paid |
|
$ |
6,298 |
|
|
$ |
6,543 |
|
| Restricted balance of cash |
|
$ |
5,954 |
|
|
$ |
8,468 |
|
| SUPPLEMENTAL NON-CASH INFORMATION: |
|
|
|
|
|
|
|
|
| Accrued expenditures for property and equipment |
|
$ |
62,007 |
|
|
$ |
84,866 |
|
See notes to the unaudited condensed consolidated financial statements.
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
ATSG is a holding company whose subsidiaries lease aircraft and provide contracted airline operations as well as other support services mainly to the air transportation, e-commerce and package delivery industries.
The Company’s primary 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 a combination of aircraft, crews, maintenance and insurance services for its customers’ transportation network through crew, maintenance and insurance (“CMI”) agreements and aircraft, crew, maintenance and insurance (“ACMI”) agreements and through charter contracts in which aircraft fuel is also included. The Company’s subsidiary LGSTX Services, Inc. (“LGSTX”) provides for the management of aircraft ground services.
In addition to its aircraft leasing and airline services, the Company offers a range of complementary services to delivery companies, freight forwarders, airlines and government customers. These include aircraft maintenance and modification services, aircraft parts supply, equipment maintenance services and load transfer and package sorting services.
Basis of Presentation
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with GAAP and such principles are applied on a basis consistent with the financial statements reflected in our 2023 Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the air cargo industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year or any interim period. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. The accounting estimates reflect the best judgment of the management, but actual results could differ materially from those estimates.
The accompanying unaudited condensed consolidated financial statements include the accounts of ATSG and its wholly-owned subsidiaries. Inter-company balances and transactions are eliminated. 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 non-consolidated 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.
Accounting Standards Updates
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This standard requires disclosure of significant segment expenses and other segment items by reportable segment. This ASU becomes effective for annual periods beginning in 2024 and interim periods in 2025. The Company is assessing the impact of this ASU and upon adoption expects that any impact would be limited to additional segment expense disclosures in the footnotes to its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This standard enhances disclosures related to income taxes, including the rate reconciliation and information on income taxes paid. This ASU becomes effective January 1, 2025. The Company is assessing the impact of this ASU and upon adoption expects to include certain additional disclosures in the footnotes to its consolidated financial statements.
NOTE B—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS
The carrying amounts of goodwill by reportable segment were as follows (in thousands):
| |
|
CAM |
|
|
ACMI Services |
|
|
All Other |
|
|
Total |
|
| Carrying value as of December 31, 2023 |
|
$ |
153,290 |
|
|
$ |
234,571 |
|
|
$ |
8,113 |
|
|
$ |
395,974 |
|
| Carrying value as of September 30, 2024 |
|
$ |
153,290 |
|
|
$ |
234,571 |
|
|
$ |
8,113 |
|
|
$ |
395,974 |
|
The Company’s acquired intangible assets were as follows (in thousands):
| |
|
Airline |
|
|
Amortizing |
|
|
|
|
|
| |
|
Certificates |
|
|
Intangibles |
|
|
Total |
|
| Carrying value as of December 31, 2023 |
|
$ |
9,000 |
|
|
$ |
77,453 |
|
|
$ |
86,453 |
|
| Amortization |
|
|
— |
|
|
|
(9,002 |
) |
|
|
(9,002 |
) |
| Carrying value as of September 30, 2024 |
|
$ |
9,000 |
|
|
$ |
68,451 |
|
|
$ |
77,451 |
|
The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangible assets, including customer relationship and Supplemental Type Certificates (“STC”) intangibles, over 1 to 15 remaining years.
Warrants granted to Amazon.com, Inc. (“Amazon”) as an incentive to lease aircraft from the Company and warrants granted to Amazon as an incentive to contract aircraft operations from the Company are reflected as a customer incentive asset. For additional information see Note C to the accompanying unaudited condensed consolidated financial statements. Customer incentive asset activity is summarized as follows (in thousands):
| |
|
Customer |
|
| |
|
Incentive |
|
| Carrying value as of December 31, 2023 |
|
$ |
60,961 |
|
| Amortization |
|
|
(17,774 |
) |
| Warrants modified for operating incentive |
|
|
66,820 |
|
| Grants for lease incentive |
|
|
18,184 |
|
| Grants for operating incentive |
|
|
5,043 |
|
| Carrying value as of September 30, 2024 |
|
$ |
133,234 |
|
The amortization of the customer incentive asset is reflected as a reduction to revenues. In addition to the incentive amortization, revenue is also reduced to reflect the value of warrants recorded in paid in capital as they vest. See the statement of equity for more information.
The Company has a 49% ownership in a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. In April 2022, the Company acquired a 40% ownership interest in the joint-venture company GA Telesis Engine Services, LLC to provide engine tear-down services to harvest and sell engine parts. The Company accounts for its investment in these joint ventures 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.
The carrying value of the joint ventures totaled $40.3 million and $22.7 million at September 30, 2024 and December 31, 2023, 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 C—SIGNIFICANT CUSTOMERS
Three customers each account for a significant portion of the Company’s consolidated revenues. The percentage of the Company’s revenues for the Company’s three largest customers, for the three and nine month periods ended September 30, 2024 and 2023 are as follows:
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| Customer | | Percentage of Revenue | | | Percentage of Revenue | |
| Amazon | | | 34 | % | | | 33 | % | | | 33 | % | | | 34 | % |
| DoD | | | 26 | % | | | 34 | % | | | 29 | % | | | 31 | % |
| DHL | | | 14 | % | | | 12 | % | | | 14 | % | | | 13 | % |
The accounts receivable from the Company’s three largest customers as of September 30, 2024 and December 31, 2023 are as follows (in thousands):
| | | September 30, 2024 | | | December 31, 2023 | |
| Customer | | Accounts Receivable | |
| Amazon | | $ | 80,697 | | | $ | 74,509 | |
| DoD | | | 42,886 | | | | 56,848 | |
| DHL | | | 6,955 | | | | 8,040 | |
DoD
The Company is a provider of cargo and passenger airlift services to the U.S. Department of Defense (“DoD”). The Company’s airlines are eligible to bid for military charter operations for passenger and cargo transportation through contracts awarded by the DoD. The airlines draw from the Company’s fleet of Boeing 757 combi, Boeing 777 passenger, Boeing 767 passenger and Boeing 767 freighter aircraft for the DoD operations. The DoD awards flights to U.S. certificated airlines through annual contracts and through temporary “expansion” routes.
DHL
The Company has had long-term contracts with DHL Network Operations (USA), Inc. and its affiliates (collectively, “DHL”) since August 2003. The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under a separate 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. As of September 30, 2024, the Company leased 14 Boeing 767 freighter aircraft to DHL comprising one Boeing 767-200 aircraft and 13 Boeing 767-300 aircraft, with expirations between 2025 and 2031. Further, the Company operates four Boeing 767 aircraft provided by DHL under an additional CMI agreement which currently runs through August 2027.
Amazon
The Company has been providing freighter aircraft, airline operations and services for cargo handling and logistical support for Amazon.com Services, LLC, (“ASI”) a subsidiary of 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 Boeing 767 freighter aircraft to ASI. The ATSA also provides for the operation of aircraft by the Company’s airline subsidiaries, and the management of ground services by LGSTX. As of September 30, 2024, the Company leased 30 Boeing 767 freighter aircraft to ASI with lease expirations between 2026 and 2031. Additionally, under the ATSA, the Company operated 18 Boeing 767 freighter aircraft provided by ASI as of September 30, 2024.
Amazon Investment Agreement
On December 22, 2018, the Company entered into an Amended and Restated Air Transportation Services Agreement (“A&R ATSA”) with ASI, pursuant to which the Company, through CAM and its airline subsidiaries, agreed to (1) lease and operate ten additional Boeing 767-300 aircraft for ASI under the A&R ATSA, (2) extend the term of the 12 Boeing 767-200 aircraft then 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 leased all 10 of the 767-300 aircraft in 2020. In conjunction with the commitment to lease 10 additional Boeing 767-300 aircraft, extend the duration of 20 existing Boeing 767 aircraft leases and the ATSA, Amazon and ATSG entered into an Investment Agreement on December 20, 2018 (as amended, the “2018 Investment Agreement”). Pursuant to the 2018 Investment Agreement, ATSG issued to Amazon warrants for 14.8 million common shares of ATSG, all of which have vested. The warrants have an exercise price of $21.53 per share. On May 6, 2024, this group of warrants was modified to extend their expiration date from December 2025 to December of 2029 in conjunction with the 3rd A&R ATSA described below.
On May 29, 2020, the Company entered into a Second Amended and Restated Air Transportation Services Agreement (the “2nd A&R ATSA”) with ASI, pursuant to which the Company agreed to lease 12 more Boeing 767-300 aircraft to ASI for operation by the Company’s airline subsidiaries. The first of these leases began in the second quarter of 2020 with the remaining 11 delivered in 2021. All 12 of these aircraft leases were for 10-year terms. Pursuant to the 2018 Investment Agreement, as a result of leasing 12 aircraft, Amazon was issued warrants for 7.0 million common shares, all of which have vested. The exercise price of these warrants is $20.40 per share. On May 6, 2024, this group of warrants was modified to extend their expiration date from December 2025 to December of 2029 in conjunction with the 3rd A&R ATSA.
Prior to May 6, 2024 Amazon could earn additional warrants for up to 2.9 million common shares under the 2018 Investment Agreement by leasing up to five more cargo aircraft from the Company before January 2026. Incremental warrants granted for ASI’s commitment to any such future aircraft leases would have had an exercise price based on the volume-weighted average price of the Company’s common shares during the 30 trading days immediately preceding the contractual commitment for each lease. This right to earn warrants was replaced on May 6, 2024 as noted below.
On May 6, 2024, the Company entered into a Third Amended and Restated Air Transportation Services Agreement with ASI (the “3rd A&R ATSA”) pursuant to which the Company, through its subsidiary air carriers, will sublease and operate 10 additional Boeing 767-300 freighter aircraft to be provided by ASI, with the potential to add up to 10 additional Boeing 767-300 freighter aircraft. The Company’s subsidiary air carriers began operating seven of the initial group of ten aircraft by September 30, 2024 and the remaining three aircraft entered operations by November 2024. The initial term of the 3rd A&R ATSA runs through May 6, 2029, and may be extended by the parties for an additional five years subject to mutual agreement. In conjunction with the execution of the 3rd A&R ATSA, the Company issued warrants to Amazon.
The first of the warrants issued on May 6, 2024 was for up to 2.9 million common shares of ATSG (the “2024 Subsequent Warrant”). The 2024 Subsequent Warrant vests in four equal tranches of 728,750 shares of ATSG common stock on its issue date and each of the first three anniversaries thereof; provided that, for each of the second, third and fourth tranches, Amazon has compensated ATSG for a certain number of flight hours in a specified period immediately preceding such anniversary. The 2024 Subsequent Warrant has a term of seven years, and the exercise price is $12.9658 per share of ATSG common stock. As partial consideration for the 3rd A&R ATSA, the 2024 Subsequent Warrant was issued to replace Amazon’s prior warrant right under the 2018 Investment Agreement to earn up to 2.9 million common shares related to aircraft leases commitments described above.
Also on May 6, 2024, in conjunction with the execution of the 3rd A&R ATSA, the Company and Amazon agreed upon the form of the warrant to be issued to purchase up to 2.9 million additional common shares (the “Third Subsequent Warrant”). The Third Subsequent Warrant was scheduled to be issued by the Company upon the earlier of the first anniversary of the 3rd A&R ATSA and the date upon which the Company begins providing services to Amazon with the tenth aircraft to be placed into service by Amazon pursuant to the 3rd A&R ATSA, which occurred the first week of November 2024. The Third Subsequent Warrant will vest in (i) one tranche of 291,500 shares of ATSG common stock upon Amazon’s entry into each aircraft lease extension with ATSG of at least three years in duration, and (ii) four equal tranches of 72,875 shares of ATSG common stock upon each placement by Amazon of additional aircraft into service with ATSG (i.e., aircraft beyond the tenth initial aircraft, up to a maximum of 10 additional aircraft), with the first tranche vesting with the placement of the aircraft into service and the remaining tranches vesting on each of the first three anniversaries thereof; provided that, for each of the second, third and fourth tranches, Amazon has compensated ATSG for a certain number of flight hours in a specified period immediately preceding such anniversary plus a certain number of flight hours per additional aircraft placed into service during such specified period. The Third Subsequent Warrant will have a term of seven years and the exercise price per share of ATSG common stock will be the volume weighted average price of ATSG common stock for the 30 trading days preceding the warrant issue date.
Additionally, on May 6, 2024, the expiration dates for the two existing vested warrants totaling 21.8 million shares (the warrants issued on December 20, 2018 for 14.8 million shares (the "Warrant-C") and the warrants issued on May 29, 2020, for 7.0 million shares (the "2020 Subsequent Warrant") issued pursuant to the 2018 Investment Agreement, were extended from December 2025 to December of 2029.
The Company’s accounting for warrants granted to a customer is determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments. Warrants conditionally promised to a customer related to the lease of aircraft and lease extensions were recorded as an incentive asset using their fair value at the projected time of issuance if they are probable of vesting at the time of grant. The incentive is amortized against revenues over the duration of the related lease term. The warrants granted in conjunction with aircraft lease incentives were recorded as liabilities at the time of grant and will be reclassified to additional paid in capital at the time of the last vesting event. Warrants classified as liabilities are re-measured to fair value at the end of each reporting period. The vested warrants issued as an incentive for aircraft services were recorded as an incentive asset and are being amortized over the service contract period. The unvested warrants issued for aircraft services are recognized as additional paid in capital and contra revenue during their related vesting period. The extension of expiration dates from December 2025 to December 2029 that took place on May 6, 2024, for 21.8 million vested warrants resulted in a value re-measurement of $66.8 million which was recorded as a customer incentive asset and is being amortized to May 2029, the end of the initial term of the 3rd A&R ATSA. The Company’s earnings in future periods will be impacted by the vesting of additional warrants, the re-measurements of warrant fair values, amortizations of the incentive and the related income tax effects. For income tax calculations, the value and timing of related tax deductions may differ from that used for financial reporting.
During the three and nine month periods ended September 30, 2024, the remeasurements of warrants and sale options to fair value resulted in pre-tax losses of $1.6 million and pre-tax gains of $1.2 million, respectively, compared to losses of $0.1 million and $1.1 million in the corresponding periods in 2023.
Warrant grants for common shares, in millions, are summarized below as of September 30, 2024:
| | | Vested | | | Unvested | |
| | | | | | | | | |
| December 31, 2023 | | | 21.8 | | | | 2.9 | |
| New grants | | | 0.7 | | | | 2.2 | |
| September 30, 2024 | | | 22.5 | | | | 5.1 | |
For all outstanding warrants vested, Amazon may select a cashless conversion option. If the per share price of ATSG common stock at the time of conversion is greater than the warrant exercise price and Amazon elects the cashless conversion option, Amazon would receive common shares equal to the full number of shares underlying the exercised warrant less the number of common shares having a market value equal to the aggregate exercise price. Unvested warrants may be impacted by the Merger, as described in Note O.
Amazon is required to vote shares of ATSG it owns in excess of 14.9% of the outstanding shares in accordance with the recommendations of the ATSG Board of Directors (the "Board").
ATSG resumed repurchases of its own shares during October 2022 in conjunction with the expiration of certain government restrictions stemming from the Coronavirus Aid, Relief and Economic Security Act. Pursuant to the Investment Agreement, dated March 8, 2016, between Amazon and ATSG (as amended, the “2016 Investment Agreement”), if ATSG repurchases its own common shares, Amazon has the option to sell shares of ATSG common stock to ATSG to maintain its ownership percentage of less than 19.9% of ATSG's outstanding common shares. Pursuant to such terms, on August 14, 2023, Amazon sold 1,177,000 shares of ATSG common stock back to ATSG for cash of $22.9 million. An option for Amazon to sell a certain number of shares to ATSG under certain conditions at a firm price was modified with the May 6, 2024 amendment to the 2016 Investment Agreement in favor an agreement that the sale price shall be the volume weighted average price of ATSG’s common stock for the 30 trading days preceding ATSG’s notice to Amazon of a repurchase program. Any sale election by Amazon that creates an obligation for ATSG to purchase the shares of ATSG’s common stock designated by Amazon is limited to the volume of ATSG common stock that would reduce Amazon’s beneficial ownership of ATSG common stock to 19.5% of the then issued and outstanding amount.
NOTE D—FAIR VALUE MEASUREMENTS
The Company’s money market funds and interest rate swaps are reported on the Company’s consolidated balance sheets at fair values based on market values from comparable transactions. The fair value of the Company’s money market funds, Convertible Notes (as defined in Note F), convertible note hedges and interest rate swaps are based on observable inputs (Level 2) from comparable market transactions.
The fair values of the stock warrant obligations to Amazon were determined using a Black-Scholes pricing model which considers various assumptions, including ATSG common stock price, the volatility of ATSG 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 vesting events will occur (Level 3 inputs). The fair value of the sale option for Amazon to sell back shares to the Company under certain conditions was determined based on future share repurchase scenarios. Judgment was applied to determine the number of shares that would be repurchased by the Company at a certain price and the probability of each scenario (Level 3 inputs).
The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
| As of September 30, 2024 |
|
Fair Value Measurement Using |
|
|
|
|
|
| |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
| Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash equivalents—money market |
|
$ |
— |
|
|
$ |
21,392 |
|
|
$ |
— |
|
|
$ |
21,392 |
|
| Total Assets |
|
$ |
— |
|
|
$ |
21,392 |
|
|
$ |
— |
|
|
$ |
21,392 |
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest rate swap |
|
|
— |
|
|
|
(1,637 |
) |
|
|
— |
|
|
|
(1,637 |
) |
| Stock warrant obligations |
|
|
— |
|
|
|
— |
|
|
|
(18,671 |
) |
|
|
(18,671 |
) |
| Total Liabilities |
|
$ |
— |
|
|
$ |
(1,637 |
) |
|
$ |
(18,671 |
) |
|
$ |
(20,308 |
) |
| As of December 31, 2023 |
|
Fair Value Measurement Using |
|
|
|
|
|
| |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
| Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash equivalents—money market |
|
$ |
— |
|
|
$ |
1,248 |
|
|
$ |
— |
|
|
$ |
1,248 |
|
| Total Assets |
|
$ |
— |
|
|
$ |
1,248 |
|
|
$ |
— |
|
|
$ |
1,248 |
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest rate swap |
|
|
— |
|
|
|
(529 |
) |
|
|
— |
|
|
|
(529 |
) |
| Sale Option |
|
|
— |
|
|
|
— |
|
|
|
(1,258 |
) |
|
|
(1,258 |
) |
| Stock warrant obligations |
|
|
— |
|
|
|
— |
|
|
|
(471 |
) |
|
|
(471 |
) |
| Total Liabilities |
|
$ |
— |
|
|
$ |
(529 |
) |
|
$ |
(1,729 |
) |
|
$ |
(2,258 |
) |
As a result of higher 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 $51.2 million less than the carrying value, which was $1,562.5 million at September 30, 2024. As of December 31, 2023, the fair value of the Company’s debt obligations was approximately $97.6 million less than the carrying value, which was $1,762.3 million. The non-financial assets, including goodwill, intangible assets and property and equipment are measured at fair value on a non-recurring basis.
NOTE E—PROPERTY AND EQUIPMENT
The Company’s property and equipment consists primarily of cargo aircraft, aircraft engines and other flight equipment. Property and equipment, to be held and used, is summarized as follows (in thousands):
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2024 |
|
|
2023 |
|
| Flight equipment |
|
$ |
4,101,307 |
|
|
$ |
3,865,049 |
|
| Ground equipment |
|
|
68,227 |