Air Transport Services (ATSG) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Air Transport Services Group, Inc. as of September 30, 2024, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes Unaudited Condensed Consolidated Balance Sheets As of September 30, 2024, total assets slightly increased to $3.884 billion, total liabilities decreased to $2.416 billion, and total stockholders' equity increased to $1.468 billion Condensed Consolidated Balance Sheet Data (in thousands) | Account | September 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $311,072 | $345,701 | | Property and equipment, net | $2,771,568 | $2,820,769 | | Total Assets | $3,884,323 | $3,882,090 | | Total Current Liabilities | $381,913 | $400,189 | | Long term debt | $1,561,874 | $1,707,572 | | Total Liabilities | $2,416,084 | $2,513,388 | | Total Stockholders' Equity | $1,468,239 | $1,368,702 | Unaudited Condensed Consolidated Statements of Operations The company reported a net loss of $3.3 million for Q3 2024 and net earnings of $12.7 million for the nine months ended September 30, 2024, driven by lower revenues and higher operating expenses Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $471,253 | $523,137 | $1,445,180 | $1,553,571 | | Operating Income | $21,681 | $46,030 | $86,006 | $163,194 | | Net Earnings (Loss) | $(3,327) | $17,172 | $12,720 | $75,335 | | Diluted EPS | $(0.05) | $0.24 | $0.20 | $0.98 | Unaudited Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $399.1 million for the nine months ended September 30, 2024, while net cash used in investing activities significantly decreased, and net cash used in financing activities increased due to higher debt repayments Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $399,076 | $526,093 | | Net Cash (Used in) Investing Activities | $(205,665) | $(572,424) | | Net Cash (Used in) Provided by Financing Activities | $(202,093) | $69,782 | | Net (Decrease) Increase in Cash | $(8,682) | $23,451 | | Cash at End of Period | $44,873 | $50,585 | Notes to Unaudited Condensed Consolidated Financial Statements This section details accounting policies and financial data, including significant customer revenue concentration, debt obligations, aircraft commitments, segment performance, and the pending merger agreement with Stonepeak - The company's primary business involves leasing aircraft (CAM) and providing contracted airline operations (ACMI Services) to the air transportation, e-commerce, and package delivery industries[21][22] Revenue Concentration by Major Customer | Customer | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | | Amazon | 33% | 34% | | DoD | 29% | 31% | | DHL | 14% | 13% | - On May 6, 2024, the company entered into a Third Amended and Restated Air Transportation Services Agreement with Amazon's subsidiary (ASI) to operate 10 additional Boeing 767-300 aircraft provided by ASI, issuing new warrants to Amazon and modifying existing ones[46] - On November 3, 2024, ATSG entered into a merger agreement with affiliates of Stonepeak, under which it will be acquired for $22.50 per share in cash and become a privately held company, subject to stockholder and regulatory approvals[110] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a decline in revenue and earnings for the first nine months of 2024 due to lower flight operations, reduced aircraft lease revenue, and higher expenses, detailing segment performance, capital expenditures, liquidity, and the impact of recent agreements Results of Operations Consolidated revenues for the nine months ended September 30, 2024, decreased by 7% to $1.45 billion, with net income falling sharply to $12.7 million, primarily due to lower revenues from passenger flight operations and certain aircraft leases, alongside higher expenses Adjusted Pre-Tax Earnings Reconciliation (Non-GAAP, in thousands) | Description | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Pre-Tax Earnings from Continuing Operations | $17,997 | $99,830 | | Add: Non-service retiree benefit costs | $3,256 | $9,654 | | Add: Charges for non-consolidated affiliates | $2,202 | $4,398 | | Add: Contra-revenue from customer incentive | $19,875 | $14,777 | | Add: Net loss (gain) on financial instruments | $(134) | $(1,856) | | Adjusted Pre-Tax Earnings (non-GAAP) | $43,196 | $126,874 | - CAM segment pre-tax earnings for the first nine months of 2024 fell to $46.9 million from $88.5 million year-over-year, impacted by reduced 767-200 lease revenues, higher depreciation ($25.1 million increase), and higher allocated interest expense ($11.5 million increase)[148] - ACMI Services segment revenues for the first nine months of 2024 decreased by $81.6 million year-over-year, with block hours for customers' delivery networks falling 7% and passenger service block hours dropping 15%, leading to a pre-tax loss of $25.0 million compared to a $34.1 million profit in the prior year[154][156] Liquidity and Capital Resources As of September 30, 2024, the company had $44.9 million in cash and $458.3 million available under its revolving credit facility, with operating cash flow decreasing and capital expenditures significantly lower, while projecting sufficient liquidity for the next twelve months - Operating cash flow for the first nine months of 2024 was $399.1 million, down from $526.1 million in the prior year, due to lower operating results and less favorable working capital changes[171] - Capital expenditures for the first nine months of 2024 were $221.0 million, a sharp decrease from $581.3 million in the same period of 2023[172] - Total liquidity at September 30, 2024, stood at $503.2 million, comprising $44.9 million in cash and $458.3 million in available credit[178] Quantitative and Qualitative Disclosures About Market Risk The company's exposure to market risks, primarily from fluctuating interest rates and jet fuel prices, has not materially changed from its 2023 Form 10-K disclosures, with jet fuel price risk largely mitigated through customer agreements - The company's market risks, related to interest rates and jet fuel prices, have not materially changed since the 2023 Form 10-K[182] Controls and Procedures As of September 30, 2024, the company's Principal Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures are effective, with no material changes to internal control over financial reporting during the third quarter of 2024 - Management concluded that as of September 30, 2024, the company's disclosure controls and procedures were effective[183] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, its internal control[184] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings arising from its business operations, but management believes the ultimate liability will not be material to its financial condition or results of operations - The company does not expect pending legal proceedings to have a material impact on its financial condition or results of operations[184] Risk Factors This section highlights new and updated risks, including those associated with amended Amazon agreements, such as potential failure to achieve anticipated benefits and dilutive effects of warrants, and significant risks related to the proposed merger with Stonepeak - Risks related to the amended Amazon agreements include not fully realizing expected benefits and the dilutive effect on EPS from warrants issued to Amazon[187] - There is a risk that the proposed merger with Stonepeak may not be completed due to failure to satisfy closing conditions, which could adversely affect the stock price and business operations[188] - The merger announcement could negatively impact business relationships with customers and partners and affect the company's ability to retain key personnel[190] - The Merger Agreement contains provisions, including a termination fee of up to $55.3 million, that may limit the company's ability to pursue alternative acquisition proposals[194] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during Q3 2024, with $103.5 million remaining available under the 2022 Repurchase Program and $1.5 million under the 2023 program, restricted for 2017 Convertible Notes repurchase - No common stock was repurchased during the third quarter of 2024[197] - As of September 30, 2024, $103.5 million remains authorized for repurchase under the 2022 program[197] Other Information During the third quarter of 2024, no director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No director or officer adopted or terminated any pre-arranged trading plans during the quarter ended September 30, 2024[199] Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, material contracts with Amazon, and certifications from the CEO and CFO - Exhibits filed include corporate governance documents, material contracts with Amazon, and required SOX certifications[200]