Air Transport Services Group

Company Profile

The timing of these postings are made at the discretion of Air Transport Services Group (ATSG). Readers should not assume that the information contained on this site has been updated or otherwise contains current information. ATSG does not review past postings to determine whether they remain accurate, and information contained in such postings may have been superseded.

ATSG is a leading provider of air cargo transportation and related services.

Air Transport Services Group, Inc. is a leading provider of aircraft leasing and air cargo transportation and related services to domestic and foreign air carriers and other companies that outsource their air cargo lift requirements. ATSG, through its leasing and airline subsidiaries, is the world's largest owner and operator of converted Boeing 767 freighter aircraft.

Through its principal subsidiaries, including two airlines with separate and distinct U.S. FAA Part 121 Air Carrier certificates, ATSG provides aircraft leasing, air cargo lift, aircraft maintenance services and airport ground services. ATSG's subsidiaries include ABX Air, Inc.; Airborne Global Solutions, Inc.; Air Transport International, Inc.; Cargo Aircraft Management, Inc.; and Airborne Maintenance and Engineering Services, Inc., including its division, PEMCO World Air Services, Inc.

MESSAGE FROM THE CEO

In 2016, ATSG achieved its best revenue growth under the business model we adopted in 2010, and one of the best growth years in our history. Revenues rose 24 percent, or $150 million, to $769 million as we substantially expanded our 767 fleet and placed more of them with key global companies. Revenue growth excluding fuel and other reimbursed expenses increased 18 percent.

That growth was spread across our principal business units. It stemmed largely from groundbreaking agreements we signed in March with our newest customer, Amazon Fulfillment Services. Our positive outlook for 2017 and 2018 is for more growth and an even more diversified revenue base. DHL and Amazon, our two largest customers, accounted for 34 and 29 percent, respectively, of our revenues in 2016.

Because of our unique positioning and key investments, we were ready when Amazon asked us to help create its own dedicated U.S. air express network in March 2016, which called for twenty Boeing 767 freighters we would lease to and operate for them. We supplied them with fourteen of the twenty leases by the end of 2016 and another in early January this year; we will complete deliveries for the remaining five by July.

In 2017, we expect to add a record eleven 767 converted freighters to our in-service fleet. Together with two Boeing 737s we will acquire, convert and lease to our joint-venture partner in China, we expect to have seventythree owned aircraft in service by year-end, of which fifty-four will be dry leased under multi-year terms.

Our Amazon agreements also included our commitment to issue them warrants for up to 19.9 percent of our common shares by September 2020 at an exercise price of $9.73 per share. We issued warrants for nearly 9 million shares in 2016, and will issue warrants for another 3.8 million shares this year. None have been exercised to date. But over time, Generally Accepted Accounting Principles (GAAP) require us to reflect their value in our financial statements and their potential issuance in our diluted share counts.

These warrant effects, which are non-cash, mask a significant portion of our operating earnings and cash generating strength. Consolidated net earnings from continuing operations in 2016 were $21.1 million, or 33 cents per share diluted, which were lower than in 2015. Those 2016 earnings, however, included a combined $16.5 million, or 25 cents per share in non-cash after-tax reductions for revaluations and lease incentive amortization related to the Amazon warrants. We expect those effects to have a significant but unpredictable impact on our GAAP earnings until the warrants expire or are exercised, because changes in our stock price account for a large portion of the warrant value variance. In our earnings releases and investor presentations, available on our website, atsginc.com, we will continue to provide adjusted non-GAAP results that exclude the warrant effects and other non-cash or non-recurring items, following our GAAP financials.

Other one-time or limited-term items affected 2016 results. They included $7 million, or seven cents per share in forfeited revenue related to a two-day walkout last November by pilots at our ABX Air subsidiary. Premium pay for our pilot workforce was significant in the second half, as it took longer than planned to hire, train and place the additional pilots that ABX Air added for the Amazon agreements.

Nearly all of that additional 2016 expense and lost revenue was captured in our ACMI Services segment results, which includes our airlines. That segment loss was $32 million pretax. Most of that loss was for items we do not expect to recur or will be substantially lower in 2017. For example, we expect normalized crew costs after the first quarter as we reach our pilot staffing targets. Also, pension and other post-retirement expenses will be lower this year. As a result, we are cautiously optimistic about a profitable 2017 in ACMI Services.

The outlook is very bright for CAM, our aircraft leasing subsidiary, as revenues rose $22 million to nearly $200 million, and pretax earnings rose $11 million to $69 million. CAM completed eighteen new 767 dry leases in all last year, including aircraft returned from other lessees. Forty-one of CAM’s fifty-two 767s were externally dry-leased for multi-year terms at the end of 2016. Ten 767s were in ACMI service with long-time customers at year-end, including some awaiting delivery of a 767-300 when more become available later this year.

CAM also received orders for 767s from customers besides Amazon last year. That meant they were very active scouting out good freighter feedstock prospects and booking conversion slots before prices adjusted to additional market demand. The freighter feedstock CAM has purchased and is converting is already spoken for. We will buy more in 2017 and expect to end the year with fifty-two of the 767s CAM has in service under external dry leases and six others undergoing cargo modification for anticipated 2018 deployments.

As we expand our fleet, however, we remain prudent investors of your capital. We will invest only in response to specific demand from companies with strong track records of their own. Some of this demand is from customers that would have already leased a converted 767-300 from us if we had one available today. Amazon’s huge appetite for 767s has filled the available conversion slots into 2018 and made them hard to find from any source. Due to our experience and relationships in the midsize aircraft conversion market, however, we can still secure high quality feedstock and conversion slots without compromising our returns on invested capital.

The businesses we collectively refer to as Other Activities contributed a large portion of our 2016 revenue gain. Their revenues were up more than $100 million from 2015 to $263 million. Pretax earnings from Other Activities increased by $8 million to $17 million for the year.

Our aircraft maintenance business, AMES, is now substantially larger with the addition of PEMCO World Air Services as a division. PEMCO’s conversion resources are focused on the 737 freighter market in China, where narrow-body freighters are still the preferred option for domestic air cargo networks.

PEMCO-converted aircraft make up more than 70 percent of China-based Boeing 737-300 and -400 fleets in service. The company has redelivered over fifty converted 737s to operators there since 2006, and received orders for three more in February. PEMCO will also convert two more 737s that CAM will acquire and lease to Okay Airways, CAM’s first of that type. China-based Okay will put them in its own fleet under customer contract pending transfer to a new cargo airline that we and other partners will own.

PEMCO’s heavy maintenance capabilities and hangar space in Tampa are good complements for those at AMES in Wilmington. They hold certificates for maintenance of both Boeing and Airbus types, and we expect to use their facilities to handle a sizeable share of our own expanding heavy maintenance requirements. We expect a significant positive contribution to our earnings from PEMCO this year.

LGSTX Services, our materials handling, sorting and ground support business, expanded in 2016 as it added cargo handling and refueling for Amazon in Wilmington. In 2017, Amazon will shift its main hub to new facilities at the Cincinnati regional airport in Kentucky, with some corresponding impact on LGSTX. A portion of that reduction at LGSTX will be replaced by results from PEMCO on our Other Activities line.

Taken together, these strong businesses and initiatives indicate a company with excellent growth potential backed by long-term agreements with customers. Maintaining that growth will require significant added capital investment this year, which we currently estimate will be about $355 million in total, and $285 million for growth. In addition to our strong cash flow, we will draw more from our revolving credit facility, which was expanded in 2016 and will expand again in 2017. It will add credit capacity and some additional flexibility, but we expect no change in our rate structure.

Even with additional borrowings, we expect our financial position to remain conservatively levered, with a debt ratio below three times EBITDA throughout 2017. Assuming a smaller fleet growth program in 2018, we anticipate more flexibility for allocating our increasing cash flow.

In addition to our capital spending and PEMCO purchase, we also spent $64 million last year to repurchase 4.8 million ATSG shares, including the 3.8 million shares purchased from an affiliate of Red Mountain Capital, our largest shareholder, in July. The Board of Directors increased our share repurchase authorization last May from $50 million to $100 million, and $25 million of that authorization remains. Our demand-driven fleet expansion will still permit us to allocate cash at our disposal prudently among investments, share buybacks and debt repayment.

Our growth phase is in its early stages, and potential lease customers are still calling us about their long-range needs. Keep in mind that in 2016, many of the leases CAM added were for our 767-200s. In 2017, all of the 767s we lease will be for larger 767-300s, with longer terms and higher monthly rates. Assuming interim extensions or replacements of expiring leases, it’s not hard to envision continued growth with solid margins into the next decade.

Our growth also speaks volumes about the talent and efforts of the employees of our ATSG businesses, and the commitment of your management team and Board of Directors to translate their efforts into stronger returns for you, the shareholders. Those of you who have supported our efforts over time have been well rewarded. Over the last one-, three- and five-year periods through 2016, our stock price increased at more than twice the rate of the major stock-market indexes and most of our peers, and remains on track so far in 2017.

Our task is to keep the momentum going, and execute our plans with the highest regard for the interests of all who invest with us.

Joseph C. Hete President & Chief Executive Officer
ATSG, Inc.

ATSG BOARD OF DIRECTORS

Randy D. Rademacher Chief Financial Officer for The Armor Group Rademacher has served as the Chief Financial Officer for Reading Rock, Inc., a privately owned manufacturer and distributor of concrete products and other building materials, since 2008. Rademacher was formerly the Chief Financial Officer for The Armor Group, a privately owned manufacturer of industrial and commercial products, from 2006 to 2008. Rademacher was the President of Dynus Corporation, a privately owned telecommunications company, from June 2005 to October 2005, and the President of Comair Holdings LLC, from 1999 to 2005. During his career at Comair Holdings LLC, Rademacher held a number of positions, including Senior Vice President and Chief Financial Officer from 1993 to 1999, Vice President of Finance from 1989 to 1993, Controller from 1986 to 1989, and Director of Corporate Finance from 1985 to 1986. Prior to that, Rademacher was a CPA for Arthur Andersen & Co. from 1979 to 1985. Mr. Rademacher has been a Director of the Company since December 2006 and Chairman of the Board since May 2015. He is the Chairman of the Nominating and Governance Committee and is a member of the Audit Committee.

Richard M. Baudouin Principal of Infinity Aviation Capital LLC Baudouin is one of three principals of Infinity Aviation Capital LLC, an investment firm involved in aircraft leasing. He has more than 30 years of experience in aircraft finance and leasing, including more than $7 billion in aircraft financing agreements via Infinity, Aircraft Capital Group, and GE Capital’s aircraft finance unit. In 1989, he co-founded Aviation Capital Group (ACG) and oversaw the marketing and capital markets units of the firm. ACG was acquired by Pacific Life Insurance Co. in 2005, and is now one of the world’s largest aircraft leasing companies, with more than 260 Airbus and Boeing passenger and freighter aircraft, leased to approximately 90 airlines in 40 countries. Mr. Baudouin has been a Director of the Company since January 2013 and is a member of both the Audit Committee and the Nominating and Governance Committee.

Joseph C. Hete President and Chief Executive Officer of ATSG, Inc. Hete has been President and Chief Executive Officer of ATSG, Inc., since September 2007 and Chief Executive Officer of ABX Air, Inc. since August 2003. He was the President of ABX Air, Inc., from January 2000 to February 2008 and the Chief Operating Officer of ABX Air, Inc. from January 2000 to August 2003. From 1997 until January 2000, he held the position of Senior Vice President and Chief Operating Officer of ABX Air, Inc. Hete served as Senior Vice President, Administration, of ABX Air, Inc. from 1991 to 1997, and Vice President, Administration, of ABX Air, Inc. from 1986 to 1991. Mr. Hete has been with the company since 1980.

J. Christopher Teets Partner of Red Mountain Capital Partners LLC Teets has served as a Partner of Red Mountain Capital Partners LLC, an investment management firm, since February 2005. Before joining Red Mountain Capital Partners LLC, Teets was an investment banker at Goldman, Sachs & Co. Teets joined Goldman, Sachs & Co. in 2000. Prior to Goldman Sachs, Teets worked in the investment banking division of Citigroup. Teets has served as a director of Encore Capital Group, Inc. since May 2007 and as a director of Marlin Business Services Corp. since May 2010, and previously served as a director of Affirmative Insurance Holdings, Inc. Mr. Teets has been a Director of the Company since February 2009. He is the Chairman of the Compensation Committee and a member of the Nominating and Governance Committee.

Jeffrey J. Vorholt Independent consultant and private investor Vorholt was most recently a full-time faculty member at Miami University (Ohio) and concurrently an Adjunct Professor of Accountancy at Xavier University (Ohio), from 2001 to 2006. Vorholt, a CPA and attorney, was the Chief Financial Officer of Structural Dynamics Research Corporation from 1994 until its acquisition by EDS in 2001. Previously, he served as the Senior Vice President of Accounting and Information Systems for Cincinnati Bell Telephone Company and the Senior Vice President, Chief Financial Officer and Director for Cincinnati Bell Information Systems, which is now Convergys Corporation. Vorholt is currently a Director and the Chairman of the Audit Committee for Softbrands, Inc., a global provider of enterprise-wide application software. Mr. Vorholt has been a Director of the Company since January 2004. He is the Chairman of the Audit Committee and is a member of the Compensation Committee.

Joe Hete President and Chief Executive Officer Joseph C. Hete is thepresident and chief executive officer of Air Transport Services Group, Inc. (ATSG), a $660 million company that is a leading provider of air cargo transportation and related services to domestic and foreign air carriers and other companies.

Hete is responsible for establishing the strategic planning for all the entities under the ATSG umbrella. He is a 30-year veteran of ABX Air. Hete joined ABX Air as an Accounting Manager in September of 1980 and held positions as Treasurer, Director of Strategic Planning, and Director of Administration from 1981 to 1985. He was promoted to Senior Director of Administration in 1985, to Vice President of Administration in 1986 and to Senior Vice President of Administration in 1991. In early 1997, he was named Chief Operating Officer, and he was named President and COO in December of 1999. He became CEO in August of 2003. In December 2007, Air Transport Services Group, Inc. (ATSG) was formed from the reorganization of ABX Air for the purpose of creating a holding company structure; Hete was name chief executive officer and president. On December 31, 2007, ATSG completed the acquisition of Cargo Holdings International. Prior to ABX Air, he held positions as General Accounting Supervisor and Staff Accountant at Anderson IBEC from 1977 to 1980.

Hete earned his bachelors of science degree in Accounting from the University of Akron.

Rich Corrado Chief Commercial Officer Richard F. Corrado joined ATSG as Chief Commercial Officer in April 2010. He is responsible for all aspects of the global commercial marketing strategy, including marketing, direct sales, advertising, external communications, brand strategy, service/product development and portfolio marketing. Additionally, he is also President of ATSG subsidiaries Cargo Aircraft Management, ATSG’s aircraft leasing company, and Airborne Global Solutions, ATSG’s consulting and marketing subsidiary responsible for selling the bundled solutions of the ATSG portfolio of companies.

Prior to joining ATSG, Corrado held leadership positions in the consulting and air express industry. He served as President of Transform Consulting Group (2006-2010). He served at DHL Express, as the Executive Vice President of Air Products & Services (2004-2006) and Executive Vice President of Business Development (2003-2004) after the DHL acquisition of Airborne Express. He was the only former Airborne executive named to the DHL US Management Board. At Airborne Express he held several positions over a 17 year period, most notably Senior Vice President of Marketing (2000-2003), and Vice President, Administration for ABX Air (1999-2000). Corrado also held the position of Senior Manager at Ernst & Young, LLP.

Corrado earned his Bachelor of Arts degree in Economics cum laude from Harvard University, and an MBA from Boston College.

Quint Turner Chief Financial Officer From December 2004 to February 2008, Mr. Turner served as Chief Financial Officer of ABX Air, Inc. Turner was Vice President of Administration of ABX Air, Inc. from February 2002 to December 2004. Turner was Corporate Director of Financial Planning and Accounting of ABX Air, Inc. from 1997 to 2002. Prior to 1997, Turner held positions of Manager of Planning and Director of Financial Planning of ABX Air, Inc. Turner joined ABX Air, Inc. in 1988 as a Staff Auditor.

Joe Payne Chief Legal Officer and Secretary W. Joseph Payne is the Chief Legal Officer and Secretary for ATSG. Payne is responsible for directing the Company’s legal and regulatory affairs, as well as overseeing corporate compliance, governance and security matters. He advises the Board of Directors and senior management on a variety of legal issues, including with respect to the development and implementation of strategic initiatives, business transactions, corporate governance and compliance matters, and litigation. Payne also retains and oversees the work of outside counsel.

Payne joined ABX Air as a Contract Manager in April 1995 and held positions as Assistant Corporate Secretary and Corporate Secretary/Counsel from July 1996 to January 2004. He was promoted to Vice President, General Counsel and Secretary of ABX Air in January 2004. In December 2007, ATSG was formed from the reorganization of ABX Air for the purpose of creating a holding company structure and Payne was named Senior Vice President, Corporate General Counsel and Secretary of ATSG. In May 2016, he was named Chief Legal Officer and Secretary.

Prior to joining ABX Air, Payne practiced law in the greater Cincinnati area from 1992 to 1995 and worked as an accountant for Hook-SuperX Drugs from 1987 to 1989, prior to attending law school.

Payne earned a Juris Doctor from the University of Dayton School of Law, and a Bachelor of Business Administration from the University of Cincinnati College of Business Administration, where he majored in accounting.

Matt Fedders Vice President, Corporate Controller Mr. Fedders was promoted to Vice President in May 2013. He has been Corporate Controller since June 2008. Prior to this he held the role of Director, Financial Reporting/Controller for ABX Air, Inc. since joining the company in October 2003.

Russ Smethwick Vice President, Corporate Development Mr. Smethwick was promoted to Vice President in March 2017. He has been Director of Strategic Planning since 2007. Prior to joining ATSG, Russ led the M&A program for FirstGroup PLC's North American services division. He also has worked in commercial banking for Provident Bank, Fifth Third, and National Bank of Canada. He holds a bachelor's degree in accounting from Ohio University, a master's degree in business administration from Xavier University, and is a Certified Public Accountant (CPA).

ATSG BOARD COMMITTEES

Air Transport Services Group (ATSG) is committed to strong corporate governance practices. The Board of Directors has a standing Audit Committee, Compensation Committee, and Nominating and Governance Committee. Each committee consists exclusively of non-employee directors.

In addition, ATSG has adopted the following policies and guidelines:

  • A Code of Ethics that sets forth the policies and business practices that apply to the Company's Chief Executive Officer, Chief Financial Officer, and Vice President of Administration.
  • Corporate Governance Guidelines that help the Board of Directors oversee the work of management in the conduct of the Company’s business and seek to serve the long-term interests of stockholders.
  • A Code of Conduct for Conducting Business that set forth the policies and business practices that apply to all of the Company’s employees.
  • A Corporate Compliance Plan to implement a program that promotes an organizational culture that encourages ethical conduct and a commitment to compliance. This plan incorporates immigration compliance.
  • An Insider Trading Policy that applies to the Company's directors, officers and employees, their family members, and specially designated outsiders who have access to the Company's material nonpublic information.

Audit Committee

The Audit Committee is generally charged with the appointment, compensation, retention, evaluation, and oversight of the work of the independent auditors; reviewing and discussing with management and the independent auditors the Company’s annual audited and quarterly financial statements; reviewing the internal audit function; overseeing the integrity, adequacy and effectiveness of the Company’s internal accounting and financial controls; and approving and monitoring the Company’s compliance with its codes of conduct.

Compensation Committee

The Compensation Committee is generally charged with reviewing, evaluating and making recommendations to the full Board with respect to the Company’s overall compensation policies, including bonuses and benefits; reviewing, evaluating and making recommendations to the full Board on matters relating to the CEO’s compensation; considering and approving the selection, retention and remuneration arrangements for other executive officers; reviewing and evaluating performance target goals for non-executive senior officers and employees; and establishing and reviewing the compensation for non-employee directors.

Nominating and Governance Committee

The Nominating and Governance Committee is generally charged with identifying individuals qualified to become members of the Board in accordance with the criteria approved by the Board; making recommendations to the full Board with respect to director nominees for each annual meeting of the stockholders; developing and recommending to the Board a set of corporate governance principles applicable to the Company; and overseeing the evaluation of the Board and management.

Code of Ethics

The Code of Ethics sets forth the policies and business practices that apply to the Company’s Chief Executive Officer, Chief Financial Officer and Vice President, Administration. The Code of Ethics addresses such topics as compliance with laws; full, fair, accurate and timely disclosure of financial results; professional, honest and ethical conduct; conflicts of interest; reporting procedures and accountability.

Corporate Governance Guidelines

The Corporate Governance Guidelines help the Board of Directors fulfill its responsibility to stockholders to oversee the work of management in the conduct of the Company’s business and to seek to serve the long-term interests of stockholders. These Guidelines are intended to ensure that the Board has the necessary authority and practices in place to review and evaluate the Company’s business operations as needed and to make decisions that are independent of the Company’s management.

Code of Conduct for Conducting Business

The Code of Conduct for Conducting Business sets forth the policies and business practices that apply to all of the Company’s employees. The Code of Conduct addresses such topics as compliance with laws; moral and ethical conduct; equal employment opportunity; promoting a work environment free from harassment or discrimination; and the protection of intellectual property and proprietary information.

Corporate Compliance Plan

The Corporate Compliance Plan has been designed to govern the development and implementation of a corporate compliance program that promotes an organizational culture that encourages ethical conduct and a commitment to compliance. This plan also reflects the Company's commitment both to hiring personnel who are lawfully permitted to work in the United States and to contracting with temporary agencies that provide lawfully-documented workers.

Insider Trading Policy

The Insider Trading Policy sets forth the policies and practices for preventing improper insider trading or tipping. The Policy applies to the Company's directors, officers and employees, their family members, and specially designated outsiders who have access to the Company's material nonpublic information.

Investor Relations Contact Information

Air Transport Services Group, Inc.
Attn: Investor Relations
145 Hunter Drive
Wilmington, OH 45177