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Air Transport Services Group, Inc. is a leading provider of air cargo transportation and related services to domestic and foreign air carriers and other companies that outsource their air cargo lift requirements.
Through its principal subsidiaries, including two airlines with separate and distinct U.S. FAA Part 121 Air Carrier certificates, ATSG provides air cargo lift, aircraft leasing, aircraft maintenance services, and airport ground services.
2015 included a number of major achievements for your company, including financial results that were among the best we have ever recorded, and some of the best new-business developments in our history.
Our financial results show that we are back in a growth mode, at a time when much of the air cargo industry has been flat. That’s a testament to our strong commitment to midsize cargo aircraft, especially the medium wide-body Boeing 767 freighter now regarded the world over as the premier freighter for regional express and e-commerce networks. Our differentiated business model, focused on the 767, adds significant advantages. It includes leasing, ACMI operating capability, maintenance, and ancillary services we can leverage to deliver solutions that are difficult to match in today’s marketplace.
We had forty-seven 767 freighters in service at the end of 2015, more than any other provider offering them on a dedicated basis. We are adding more of them this year and next to meet growing demand from customers who recognize the model's efficiency and flexibility.
We added $30 million in revenues last year versus 2014, for a total of $619 million. We delivered strong net earnings from continuing operations of $39 million, or $0.60 per share, and set a record with operating cash flow of $174 million. The key to those financial results was more freighter aircraft in service, including thirty of our 767 freighters under multi-year dry-lease arrangements by year-end. We also kept the aircraft we operate – forty-one at peak last year – in the air and serving our customers.
Cargo Aircraft Management, our leasing business, was again the principal driver of our strong earnings progress in 2015, and is poised for improved results in 2016. CAM deployed six more 767 freighters in 2015 to external lease customers. We expect double-digit growth in its dry lease portfolio over the next two years, based on demand from customers in the U.S., Europe and Asia.
Our ACMI Services segment sharply improved its performance in 2015. Our airlines, ABX Air and Air Transport International, delivered exceptional service to both new and continuing customers during the peak holiday season. We expect both to add to their operating fleets as the year progresses.
We invested $159 million in our business last year, more than half to buy and modify four more 767s, and the remainder for capitalized maintenance and other equipment. All four were acquired with dry-lease customers ready to take them when ready, and three have eight-year lease commitments.
The year also included several strategic accomplishments that will generate strong cash flow streams across all of our businesses for years to come.
2015 began with a four-year extension of our relationship with DHL, our largest customer, for whom we remain the principal provider of U.S. air network support. The extensions to our agreements to lease and operate aircraft on DHL’s behalf took effect in April 2015 and had the effect of doubling the number of contracted months for our dry-leased 767s in DHL’s network, and included continued operating support from ABX Air for fifteen aircraft. Our DHL-leased fleet has grown significantly since April 2015, and includes five 767-300 freighters.
We also signed a new multi-year heavy maintenance agreement with Delta Air Lines for its fleet of more than eighty Boeing 717 passenger aircraft. That agreement, which began last October, validates both the 2014 expansion of our hangar capacity in Wilmington and our decades of experience servicing similar DC-9 airframes.
We have expanded our customer relationships abroad. We deployed one 767 with Raya Airways in Asia and another with a carrier in Europe. We also added dry leases with Sweden’s West Atlantic, where we are a significant investor. Three of our 767s now operate in West Atlantic’s European regional fleet.
Our expanded global footprint included a pathway into the China market through a joint venture. We have partnered there with a regional airline, Okay Airways, the e-commerce retailer Vipshop, and other investors in China to establish a regional air cargo airline that will be based in Tianjin, a major port and industrial center in the northeast. We expect the venture to launch intra-China cargo service in the second half of this year, initially with Boeing 737 cargo aircraft. We anticipate that as it grows, it will add 767 freighters, leveraging our expertise and resources.
Perhaps our most exciting development in 2015 was the initiation of dedicated U.S. cargo service for Amazon, the world’s largest e-commerce company. The trial air operation we launched last August–-less than a month after concept approval–-quickly expanded to five of our 767-200 freighters with significant logistics support during the holiday season, and continues currently.
After proving the concept, we executed agreements in March 2016 with Amazon for the lease and airline operation of twenty 767s, to operate within a North American network. The aircraft will include twelve of our current 767-200s, plus eight more 767-300s that we will acquire, convert to freighter configuration, and deploy through mid-year 2017. The five-year operating agreement covers our flight crews, maintenance and insurance on the aircraft, plus logistical services in multiple sites.
We know that our available 767s, and our access to more, are compelling reasons to partner with us for developing a major air network. But we also regard our supplemental services, including maintenance, freight handling, and network management as equally important elements of our solution set. The decades of experience our employees have operating efficiently within an air express network doesn’t show up on our balance sheet, but it is an attribute that is not lost on any of our customers who want to utilize our aircraft and operating capabilities in that environment.
The Amazon agreements include a key element that demonstrates Amazon’s confidence in our business, and their commitment to the air network they intend to develop with our support.
We will issue warrants to Amazon for the purchase of up to 19.9 percent of ATSG’s common shares, through a series of issuances and vesting periods over the next five years. This component of our long-term relationship with Amazon will require your vote in favor of a proposal on our 2016 proxy ballot to increase the number of shares we can issue. This increase is essential to accommodate the warrants, and for other corporate purposes. We have provided more information about it in the proxy materials we are providing for our 2016 annual meeting of shareholders.
In 2016, we expect to place six more 767s in service while investing about $290 million overall, with most of that spending allocated to the 767-300s we will deliver to Amazon this year and next. These investments are well within the scope of our current cash flow outlook and credit availability, thanks to our conservative debt leverage.
We expect our fleet investments, and new lease agreements for current 767s, to increase our externally leased 767 aircraft portfolio by fourteen this year to forty-four, representing more than 80 percent of our fifty-three operating 767s at the end of 2016. Our airlines could separately be contracted to operate as many as thirty-one of those externally leased 767s.
Even as fleet investments continue, we will continue to create value through an array of capital allocation options, including the share repurchase program we launched last year. We spent $10.3 million to acquire 1.1 million of our shares in 2015, and we are setting an increased pace of repurchases thus far in 2016. We expect that our conservative balance sheet, and the predictable cash flow associated with long-term customer contracts, will support a volume of share repurchases that significantly mitigates the dilutive effect of increasing the share count to accommodate Amazon’s future exercise of warrants.
The Amazon relationship is important to us, and represents major progress toward diversifying our revenue base. We also expect some synergies to develop through our coverage of two major U.S. air networks. As we ramp up support for Amazon, however, we will make sure to maintain excellent service to DHL, the U.S. Military, and all of our other customers.
2015 was a very good year, and 2016 is shaping up to be an even better one. Our converted 767 freighters are in high demand, and we intend to acquire and deploy more of them. Our more than 2,200 dedicated team members in Ohio and around the world are already applying their experience and skill sets to help customers achieve their business goals. As we execute the plans we have prepared, we appreciate your continued support, and hope to share more good news about our progress as the year unfolds.
Joseph C. Hete
President & Chief Executive Officer
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.
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.
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.
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.
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:
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.
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.