Air Transport Services (ATSG) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's financial statements, management's analysis, market risk disclosures, and internal controls Financial Statements The unaudited condensed consolidated financial statements for Q2 and H1 2024 show decreased revenues and net earnings, with slight asset growth and liability reduction Unaudited Condensed Consolidated Balance Sheets As of June 30, 2024, total assets increased slightly to $3.94 billion, while total liabilities decreased to $2.47 billion, leading to higher stockholders' equity Condensed Consolidated Balance Sheet Data (in thousands) | Account | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $315,478 | $345,701 | | Property and equipment, net | $2,819,077 | $2,820,769 | | Total Assets | $3,939,485 | $3,882,090 | | Total Current Liabilities | $428,782 | $400,189 | | Long term debt | $1,577,328 | $1,707,572 | | Total Liabilities | $2,474,099 | $2,513,388 | | Total Stockholders' Equity | $1,465,386 | $1,368,702 | Unaudited Condensed Consolidated Statements of Operations Revenues and net earnings significantly declined in Q2 and H1 2024 compared to the prior year, with diluted EPS also decreasing Q2 and H1 2024 vs 2023 Performance (in thousands, except per share data) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $488,410 | $529,339 | $973,927 | $1,030,434 | | Operating Income | $31,321 | $69,741 | $64,325 | $117,164 | | Net Earnings | $7,428 | $38,022 | $16,047 | $58,163 | | Diluted EPS | $0.11 | $0.49 | $0.24 | $0.73 | Unaudited Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased in H1 2024, while investing activities used less cash, and financing activities shifted to a net cash outflow Six Months Ended June 30 Cash Flow Summary (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $263,521 | $408,576 | | Net Cash from Investing Activities | ($156,504) | ($403,280) | | Net Cash from Financing Activities | ($131,858) | $10,720 | | Net (Decrease) in Cash | ($24,841) | $16,016 | Notes to Unaudited Condensed Consolidated Financial Statements These notes detail accounting policies, significant customer concentrations, debt structure, and segment performance, including the Amazon agreement impact - The company operates two reportable segments: CAM (aircraft leasing) and ACMI Services (airline operations). Other services like maintenance and ground support are combined in 'All other'[118] H1 2024 vs H1 2023 Segment Revenues (in thousands) | Segment | H1 2024 Revenue | H1 2023 Revenue | | :--- | :--- | :--- | | CAM | $210,018 | $223,422 | | ACMI Services | $662,003 | $700,314 | | All other | $206,680 | $221,377 | | Total (before eliminations) | $1,078,701 | $1,145,113 | H1 2024 vs H1 2023 Segment Earnings (Loss) (in thousands) | Segment | H1 2024 Earnings (Loss) | H1 2023 Earnings (Loss) | | :--- | :--- | :--- | | CAM | $28,656 | $65,220 | | ACMI Services | ($10,561) | $21,643 | | All other | $5,280 | ($645) | - The company has significant revenue concentration with three customers: the Department of Defense (DoD), Amazon, and DHL[44] Significant Customer Revenue Concentration (H1) | Customer | H1 2024 % of Revenue | H1 2023 % of Revenue | | :--- | :--- | :--- | | DoD | 31% | 30% | | Amazon | 32% | 34% | | DHL | 13% | 13% | - On May 6, 2024, the company entered into a Third Amended and Restated Air Transportation Services Agreement (3rd A&R ATSA) with Amazon's subsidiary, ASI. Under this agreement, ATSG will operate 10 additional Boeing 767-300 aircraft provided by ASI, with an option for 10 more[54] - In conjunction with the 3rd A&R ATSA, ATSG issued new warrants to Amazon for up to 2.9 million shares and modified two existing vested warrants (totaling 21.8 million shares) by extending their expiration dates to December 2029. This modification resulted in a $66.8 million re-measurement recorded as a customer incentive asset[55][58][59] - As of June 30, 2024, the company has commitments of $300.8 million to acquire and convert aircraft (Boeing 767-300, Airbus A321, Airbus A330) into freighters[94] Management's Discussion and Analysis (MD&A) Management attributes H1 2024 revenue and earnings decline to lower 767-200 leases and reduced flying, expecting ACMI revenue growth in H2 - H1 2024 external customer revenues decreased by 5% ($56.5 million) YoY, primarily due to lower revenues from Boeing 767-200 aircraft leases and a related engine power program, as well as reduced flying for customer delivery networks[134] - Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, decreased to $32.5 million in H1 2024 from $95.7 million in H1 2023. The decline was driven by lower earnings from Boeing 767-200 operations, reduced airline operation earnings, and higher interest and depreciation expenses[138] - The CAM segment's pre-tax earnings fell to $28.7 million in H1 2024 from $65.2 million in H1 2023, impacted by reduced 767-200 lease revenue, increased depreciation from 14 new aircraft, and higher allocated interest expense[149] - The ACMI Services segment reported a pre-tax loss of $10.6 million in H1 2024, compared to a $21.6 million profit in H1 2023. This was caused by an 11% decrease in Q2 block hours for delivery networks, higher maintenance and travel costs, and increased customer incentive charges related to Amazon warrants[154][156] - Capital expenditures for 2024 are estimated to be approximately $390 million, with the majority for aircraft purchases and freighter modifications[175] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates and jet fuel prices, with fuel price risk largely mitigated by customer reimbursement agreements - The primary market risks are rising interest rates and jet fuel price fluctuations[181] - Jet fuel price risk is substantially mitigated as these costs are largely reimbursed by customers under service agreements[181] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal control over financial reporting - Management concluded that as of June 30, 2024, the company's disclosure controls and procedures were effective[180] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[181] PART II. OTHER INFORMATION This section covers legal proceedings, new risk factors, equity security sales, other information, and a list of exhibits Legal Proceedings The company is involved in various legal proceedings, but management does not expect a material impact on its financial condition or operations - The company is party to various legal proceedings but does not expect the outcomes to be material to its financial condition[182] Risk Factors New material risks include the failure to achieve anticipated benefits from amended Amazon agreements and the dilutive effect of Amazon warrants - A new risk factor relates to the amended agreements with Amazon. The company may not achieve the anticipated benefits (e.g., revenue growth, improved cash flows), which could adversely affect financial results[185] - Warrants issued to Amazon are expected to increase shares outstanding upon exercise, causing dilution to EPS and existing stockholders' ownership[185] - Future fluctuations in the fair value of the Amazon warrants may adversely impact the company's reported earnings[185] Unregistered Sales of Equity Securities and Use of Proceeds No common stock was repurchased in Q2 2024, with $103.5 million remaining under the 2022 Repurchase Program - No common stock was repurchased in Q2 2024[186] - As of June 30, 2024, $103.5 million remains authorized under the 2022 Repurchase Program[186] Other Information No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2024 - No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q2 2024[204] Exhibits This section lists exhibits filed, including material contracts related to the amended Amazon agreements and officer certifications - Exhibits filed include amendments to investment and stockholder agreements with Amazon.com, Inc. dated May 6, 2024[191][192][193] - Forms of the amended and restated warrants issued to Amazon are also included as exhibits[194][195][196]