ATSG - ATSG Reports Record 2021 Results

15 Freighter Leases Drive Operating Cash Flow Growth of 14%, Strong 2022 Outlook

Air Transport Services Group, Inc. (Nasdaq: ATSG), the leading provider of medium wide-body aircraft leasing, contracted air transportation, and related services, today reported consolidated financial results for the quarter ended December 31, 2021.

Fourth Quarter Results

• Revenues $482.4 million, up 21%
• GAAP EPS (basic) from Continuing Operations $0.60, up $0.56 on pretax earnings of $61 million
• Adjusted Pretax* earnings $56 million, up 63%
• Adjusted EPS* $0.52, up $0.16
• Adjusted EBITDA* $154.8 million, up 27%

Full Year 2021 Results

• Revenues $1.73 billion, up 10%
• GAAP EPS (basic) from Continuing Operations $3.33, up $2.91 on pretax earnings of $301 million
• Adjusted Pretax earnings * $173.9 million, up 11%
• Adjusted EPS* $1.66, up $0.06
• Adjusted EBITDA* $541.1 million, up 9%
• Operating Cash Flows $584 million and Adjusted Free Cash Flow* $400.5 million

Rich Corrado, president and chief executive officer of ATSG, said, "Our 2021 results demonstrate the powerful combination of having the right solutions for our customers, the right strategy for deploying our in-demand assets, and the right people to operate and support them. These results flow from investing to extend our lead as the largest lessor of freighter aircraft, and from delivering best-in-class air express service for the e-commerce customers who demand it. I am extremely proud of our people as they lay the foundation for even more exceptional results over the next several years. As we look to the immediate future in 2022, we expect even higher achievements, with our outlook for almost $100 million in additional Adjusted EBITDA over our record 2021 results."

2021 Operating Highlights

• A record fifteen additional customer leases of Boeing 767-300 freighters, plus three re-leases of Boeing 767-200s. Eleven of the fifteen 767-300 freighters are also being operated by ATSG’s airlines. Additionally, four more customer-provided 767 freighters were assigned to our airlines to operate on their behalf.
• FAA certification of our joint-venture’s design for passenger-to-freighter modification of Airbus A321-200 aircraft, and the conversion and delivery of our joint-venture’s first such freighter. CAM will add its first A321-200 freighter to its leased freighter fleet in late 2022.
• Commitment to convert twenty Airbus A330-300 passenger aircraft to freighters. The first induction will begin in 2023 with deliveries to lessees in 2024 through 2026. Like the 767-300, the A330-300 is well suited to support rapidly expanding regional air-express networks.
• Acquired feedstock aircraft and conversion slots for all of the eleven freighter aircraft CAM expects to lease in 2022 and the majority of those it expects to lease in 2023. (At year end, CAM held seventy passenger-to-freighter conversion slots for induction from 2022 through 2025, including thirty-five Boeing 767-300s, twenty Airbus A330-300s, and fifteen A321-200s.)
• Growing passenger air operations for the military and commercial customers , including Omni Air’s key role in America’s rescue of Afghanistan evacuees during the third quarter, and a stronger than anticipated recovery in ad-hoc commercial charter flying in the fourth quarter.
• 2021 negotiations with DHL led to February 2022 agreements to extend and expand our 18-year commercial relationship , including six-year extensions of the operating agreement and five freighter leases.

2021 Financial Highlights

• Double-digit growth yielding record Revenue, Adjusted EPS, and Operating Cash Flow. That included pretax earnings gains of more than 35 percent for each of ATSG’s reporting segments.
• Above-plan 2021 Adjusted EBITDA of $541 million, up $44 million from 2020. Adjusted EBITDA excludes , among other items:
  • $30 million in net gains from re-measurements of financial instrument values, including values of warrants to purchase ATSG shares, vs. $101 million in losses from such remeasurements in 2020.
  • Government grants of $112 million in 2021, compared with $47 million the prior year. The grants were made to mitigate ongoing pandemic effects on ATSG's passenger airline operations.
• Operating Cash Flows (GAAP) were up 14 percent to $583.6 million for 2021. That is $78.9 million more than ATSG’s total 2021 capital spending of $504.7 million.
• Sustaining capital expenditures to maintain ATSG’s current fleet, and for other non-aircraft assets, were $183.1 million in 2021. Deducting those expenditures from Operating Cash Flows yielded Adjusted Free Cash Flow* of $400.5 million. $321.6 million of that amount was spent to grow our converted freighter fleet through purchases of feedstock aircraft and conversion costs, and the remainder primarily on debt reduction.

* Adjusted Earnings per Share, Adjusted Pretax Earnings, Adjusted EBITDA and Adjusted Free Cash Flow are non-GAAP financial measures and are defined and reconciled to GAAP measures at the end of this release

4Q Segment Results

CAM

• Aircraft leasing and related revenues from external customers were up 31 percent for the fourth quarter and 33 percent for the year, reflecting fifteen more leases of Boeing 767-300 freighters during 2021, including four in the fourth quarter.
• CAM’s fourth-quarter pretax earnings increased 52 percent to $33.6 million versus the prior-year quarter, including contributions from pay-by-cycle engine arrangements with several 767-200 freighter lessees that began in October.
• CAM’s owned in-service fleet comprised 107 aircraft, seven more than a year ago. Thirteen more CAM-owned aircraft were in or awaiting conversion to freighters, five more than a year ago. The total includes twelve 767s and one Airbus A321 aircraft.
• Eighty-five CAM-owned 767 freighter aircraft were leased to external customers, twelve more than a year ago.

ACMI Services

• Fourth-quarter pretax earnings increased $8.6 million, or 33 percent, to $34.5 million, and by 39 percent to $158.7 million for the year.
• Revenue block hours for ATSG's airlines reflected the effect of nine more aircraft in CMI service than a year ago, including the addition of four customer-provided aircraft. Block hours increased 19 percent for the fourth quarter and 12 percent for 2021 over 2020.
• Block hours for total passenger and combi operations were up 14 percent for the fourth quarter and down 10 percent for the year.
• Block hours for air cargo operations, principally for express-network customers, increased 20 percent over the fourth quarter of 2020, and by 19 percent for the year.

2022 Outlook

ATSG expects its Adjusted EBITDA for 2022 to be $640 million, or nearly $100 million more than 2021 results. It also projects 2022 capital spending of $590 million, including $200 million in sustaining capex and $390 million for growth.

The forecast assumes:

• Leases of nine 767-300 and two A321-200 freighters.
• Contributions from seven 767 freighter aircraft to be added to customer CMI contracts during 2022, including five to be provided by customers.
• Continued moderation of pandemic effects on demand for ATSG’s passenger and Boeing 757 combi operations, as both revenues and margins for these flight operations continue to recover. 2022 results for passenger operations are expected to approximate pre-pandemic 2019 levels, reflecting more normalized support for both military and commercial passenger customers.

As noted on ATSG’s third quarter investor conference call in November, ATSG’s power-by-cycle contract with its maintenance provider for certain 767-200 freighter engines expired late last year. ATSG made the strategic decision to transition to providing lessees access to a pool of engines under new pay-by-cycle arrangements. The engine maintenance costs ATSG incurs under the arrangements will be classified as sustaining capital expenditures and depreciated over the engine cycle life. Accordingly, ATSG expects this new service offering to increase sustaining capital outlays for engine maintenance, as well as contribute $40-45 million to the 2022 projected growth in our Adjusted EBITDA.

The strong operating momentum in ATSG’s freighter leasing and airline businesses, together with the change in engine maintenance services for ATSG's 767-200s, will drive substantial increases in 2022 adjusted earnings as well as Adjusted EBITDA. In addition to the 18 percent increase in projected Adjusted EBITDA for 2022, ATSG also expects its Adjusted EPS to increase by 20 percent to $2.00 in 2022. The Adjusted EPS increase also reflects a change in accounting rules for convertible debt that took effect this year. The change increases the number of ATSG's adjusted shares outstanding by 8 million. 2022 Adjusted EPS guidance reflects the effect of that accounting change.

Corrado noted that demand for express-package air transport reached record levels throughout the fourth-quarter holiday season, in part due to exceptional e-commerce demand and continuing constraints on other transport modes. “Our customers tell us that they appreciate ATSG’s ability to sustain high levels of on-time performance despite adverse weather and pandemic conditions, including our ability to provide additional airlift on short notice when crew shortages or aircraft issues sideline other operators.”

ATSG has reserved significant passenger-to-freighter conversion capacity for Boeing 767 and Airbus A330 aircraft over the next several years, assuring its continued leadership in that steadily expanding midsize widebody space. Together with its investment in narrow-body A321 conversions best suited for smaller-volume express package and e-commerce destinations, ATSG expects to be a principal source of dedicated freighters for regional and trans-Atlantic airlift to express-package delivery networks anywhere in the world.

Corrado concluded, “We have customer commitments to lease all nine of the Boeing 767s we will deploy in 2022 and the majority of those we expect to lease in 2023. In addition, we already hold lease deposits for more than half of the A330 aircraft we intend to begin deploying in 2024,” he said. “We have also purchased or hold options to acquire more than half of the feedstock aircraft we will need to meet those commitments. I am very bullish that the strong demand and operating excellence of ATSG will persist and generate even stronger returns in the years to come.”

Non-GAAP Financial Measures

This release, including the attached tables, contains non-GAAP financial measures that management uses to evaluate historical results and project future results. Management believes that these non-GAAP measures assist in highlighting operational trends, facilitating period-over-period comparisons, and providing additional clarity about events and trends affecting core operating performance. Disclosing these non-GAAP measures provides insight to investors about additional metrics that management uses to evaluate past performance and prospects for future performance. Non-GAAP measures should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP.

The historical non-GAAP financial measures included in this release are reconciled to GAAP earnings in tables included later in this release. The Company does not provide a reconciliation of projected Adjusted EBITDA because it is unable to predict with reasonable accuracy the value of certain adjustments. Certain adjustments can be significantly impacted by the re-measurements of financial instruments including stock warrants issued to a customer. The Company’s earnings on a GAAP basis and the non-GAAP adjustments for gains and losses resulting from the re-measurement of stock warrants, will depend on the future prices of ATSG stock, interest rates, and other assumptions which are highly uncertain.

Conference Call

ATSG will host an investor conference call on February 25, 2022, at 10 a.m. Eastern time to review its financial results for the fourth quarter of 2021. Participants should dial (800) 708-4540 and international participants should dial (847) 619-6397 ten minutes before the scheduled start of the call and ask for conference passcode 50283284 . The call will also be webcast live (in listen-only mode) via a link at www.atsginc.com using the same passcode. The conference call also will be available on webcast replay via www.atsginc.com for 30 days.

About ATSG

ATSG 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 three airlines with separate and distinct U.S. FAA Part 121 Air Carrier certificates, ATSG provides aircraft leasing, air cargo lift, passenger ACMI and charter services, aircraft maintenance services and airport ground services. ATSG's subsidiaries include ABX Air, Inc.; Airborne Global Solutions, Inc.; Airborne Maintenance and Engineering Services, Inc., including its subsidiary, Pemco World Air Services, Inc.; Air Transport International, Inc.; Cargo Aircraft Management, Inc.; and Omni Air International, LLC. For more information, please see www.atsginc.com .

Except for historical information contained herein, the matters discussed in this release contain forward-looking statements that involve risks and uncertainties. A number of important factors could cause Air Transport Services Group, Inc.'s ("ATSG's") actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to the following, which relate to the current COVID-19 pandemic. The pandemic may (i) continue for a longer period, or its effect on commercial and military passenger flying may be more substantial than we currently expect; (ii) cause disruptions to our workforce and staffing capability, including through our compliance with federally mandated COVID-19 vaccination and testing requirements; (iii) cause disruptions in our ability to access airports and maintenance facilities; and (iv) adversely impact our customers' creditworthiness or the ability of our vendors and third-party service providers to maintain customary service levels. Other factors that could cause ATSG’s actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to: (i) unplanned changes in the market demand for our assets and services, including the loss of customers or a reduction in the level of services we perform for customers; (ii) our operating airlines' ability to maintain on-time service and control costs; (iii) the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration; (iv) fluctuations in ATSG'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 our aircraft deployments to customers; (vi) our ability to remain in compliance with key agreements with customers, lenders and government agencies; (vii) the impact of current supply chain constraints both within and outside the Unites States, which may be more severe or persist longer than we currently expect; (viii) the impact of a competitive labor market, which could restrict our ability to fill key positions; (ix) changes in general economic and/or industry-specific conditions; and (x) other factors that are contained from time to time in ATSG's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 10-K and quarterly reports on Form 10-Q. Readers should carefully review this release and should not place undue reliance on ATSG's forward-looking statements. These forward-looking statements were based on information, plans and estimates as of the date of this release. Except as may be required by applicable law, ATSG undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Adjusted Pretax Earnings excludes certain items included in GAAP based pretax earnings (loss) from continuing operations because they are distinctly different in their predictability among periods or not closely related to our operations. Presenting this measure provides investors with a comparative metric of fundamental operations, while highlighting changes to certain items among periods. Adjusted Pretax Earnings should not be considered an alternative to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP.

Management uses Adjusted EBITDA to assess the performance of its operating results among periods. It is a metric that facilitates the comparison of financial results of underlying operations. Additionally, these non-GAAP adjustments are similar to the adjustments used by lenders in the Company’s senior secured credit facility to assess financial performance and determine the cost of borrowed funds. The adjustments also remove the non-service cost components of retiree benefit plans because they are not closely related to ongoing operating activities. The adjustments also excluded the recognition of government grants from adjusted earnings to improve comparability between periods. Management presents EBITDA from Continuing Operations, a commonly referenced metric, as a subtotal toward computing Adjusted EBITDA.

EBITDA from Continuing Operations is defined as Earnings (Loss) from Continuing Operations Before Income Taxes plus net interest expense, depreciation, and amortization expense. Adjusted EBITDA is defined as EBITDA from Continuing Operations less financial instrument revaluation gains or losses, non-service components of retiree benefit costs including pension plan settlements, amortization of warrant-based customer incentive costs recorded in revenue, recognition of government grants, impairment of aircraft and related assets, charge off of debt issuance costs upon debt restructuring and costs from non-consolidated affiliates.

Sustaining capital expenditures includes cash outflows for planned aircraft maintenance, engine overhauls, information systems and other non-aircraft additions to property and equipment. It does not include expenditures for aircraft acquisitions and related passenger-to-freighter conversion costs.

For the three month period and year ended December 31, 2021 cash receipts from government payroll support programs decreased $0.3 million and increased $7.3 million, respectively, compared to the corresponding 2020 periods.

Adjusted Free Cash Flow (non-GAAP) includes cash flow from operations net of expenditures for planned aircraft maintenance, engine overhauls and other non-aircraft additions to property and equipment. Management believes that adjusting GAAP operating cash flows is useful for investors to evaluate the company's ability to generate adjusted free cash flow for growth initiatives, debt service, cash returns for shareholders or other discretionary allocations of capital.