Air Transport Services Group's Q1 earnings rise 32.2% to US$8.5M as revenues fall 1.5% to US$143.3M; CEO says business remains strong despite challenging operating conditions

Cindy Allen

WILMINGTON, Ohio , May 10, 2013 (press release) – Air Transport Services Group, Inc. (ATSG), a leading provider of aircraft leasing and air cargo transportation and related services, today reported consolidated financial results for the quarter ended March 31, 2013.

"We made a major investment in our combi business with the U.S. military, placed more of our Boeing 767 and 757 freighters with DHL, and completed the merger of two of our airlines during the first quarter,” said Joe Hete, President and Chief Executive Officer of ATSG. “The results were significant increases in our net income and in our Adjusted EBITDA, compared with the year-earlier quarter. Our baseline business remains solid, and we are moving quickly to capture the rest of the $5 to $6 million in merger synergies we projected a few months ago.”

For the first quarter of 2013, compared with first quarter 2012:

• Revenues were $143.3 million, a decrease of 1.5%.
• Total operating expenses were $126.9 million, down 3.7%, including a $3.8 million reduction in salaries, wages and benefits expense due in large part to reductions in airline related costs prior to the merger of Air Transport International and Capital Cargo International Airlines in March 2013.
• Pre-tax income was $13.6 million, an increase of 26.5%.
• Net earnings from continuing operations increased 27.6% to $8.5 million, or $0.13 per fully diluted share. Net earnings include a non-cash federal income tax provision. The company does not expect to pay significant federal income taxes until 2015.
• First-quarter Adjusted EBITDAwas $37.3 million, a 9.5% increase from $34.1 million in the same period of the prior year. This non-GAAP financial measure is defined and reconciled to comparable GAAP results in a table at the end of this release.
• Capital expenditures totaled $59.4 million for the quarter, including the purchase of two 757-200 combi aircraft.

Segment Results

CAM (Aircraft Leasing)

Fleet Developments:

• On March 31, 2013, ATSG owned 47 aircraft in serviceable condition - 20 leased to external customers and 27 leased to ATSG affiliate airlines.
  • The in-service fleet consisted of forty-one 767 freighters, three 757 freighters and three DC-8 combis. A table reflecting aircraft in service is included at the end of this release.
• On March 31, 2012, CAM owned 51 in-service aircraft, including thirty-nine 767s, three 757s, six DC-8s (two freighters, four combis) and three 727 freighters. All of the 727 and DC-8 freighters, one DC-8 combi and one 767 passenger aircraft have since been removed from service.
• Three other aircraft - two 767-300s and one 757-200 - were undergoing passenger-to-freighter conversion as of March 31, 2013.
• Four 757-200 combi aircraft, including one modified in 2012, one purchased in December 2012 and two purchased in January 2013, are completing certification requirements. They will enter service for the U.S. military as replacements for the three remaining DC-8 combis starting later this quarter.

ACMI Services

Significant Developments:

• Signed agreements with DHL in January for four additional freighters, including one 757 and three 767s, to replace the 727 freighters the company operated in DHL's U.S. domestic network.
• Extended agreements for three 767s operating in DHL's network in the Mideast.
• Airline-related headcount in the first quarter decreased approximately 26% compared with the beginning of 2012, principally as a result of combining ATI and CCIA operations prior to their merger in March.
• Four 767 freighters leased from CAM were underutilized during the quarter.

Other Activities

• Improved first quarter pre-tax earnings were driven by greater efficiencies and higher volumes at the U.S. Postal Service facilities we operate.

Outlook

For 2013, Adjusted EBITDA from continuing operations is expected to be in the range of $175 to $180 million, reflecting the deployment of ATSG's current fleet and related ACMI services and other activities. Capital expenditures for 2013, including two 757-200 combis purchased in January, are currently projected at $110 million, of which approximately $20 million is maintenance-related. Any remaining free cash flow will be invested opportunistically in new aircraft at acceptable returns, or will be used to retire debt or return capital to shareholders to the extent permissible in the context of the company's credit agreements.

Commenting on the outlook for the rest of the year, Hete stated, “While the air cargo marketplace continues to be challenged, the unique characteristics of our fleet, the quality of our customers, our operating efficiencies and the long-term nature of our leases differentiate our business model. We expect to continue to grow our Adjusted EBITDA returns in 2013 as we replace our DC-8 combis with 757 combis, and deploy two newly converted 767-300s and one 757-200. Even under current conditions, our business remains strong.”

Conference Call

ATSG will host a conference call on Thursday, May 9, 2013, at 10:00 a.m. Eastern time to review its financial results for the first quarter of 2013. Participants should dial 888-895-5479 and international participants should dial 847-619-6250 ten minutes before the scheduled start of the call and ask for conference pass code 34725954. The call will also be webcast live (listen-only mode) via www.atsginc.com and www.earnings.com for individual investors, and via www.streetevents.com for institutional investors.

A replay of the conference call will be available by phone on Thursday, May 9, 2013, beginning at 2:00 p.m. and continuing through noon on Thursday, May 16, 2013, at 888-843-7419 (international callers 630-652-3042); use pass code 34725954#. The webcast replay will remain available via www.atsginc.com and www.earnings.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 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. 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. There are a number of important factors that could cause Air Transport Services Group's ("ATSG's") actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, changes in market demand for our assets and services, the costs and timing associated with the modification and certification testing of Boeing 767 and Boeing 757 aircraft, the timing associated with the deployment of aircraft among customers, and 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. 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 Pre-tax Earnings is defined as Earnings from Continuing Operations Before Income Taxes less derivative gains. Management uses Adjusted Pre-tax Earnings from Continuing Operations to assess the performance of its operating results among periods. Adjusted Pre-tax earnings from Continuing Operations is a non-GAAP financial measure and should not be considered an alternative to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP.

EBITDA and Adjusted EBITDA from Continuing Operations are non-GAAP financial measures and should not be considered as alternatives to Earnings from Continuing Operations Before Income Taxes or any other performance measure derived in accordance with GAAP.

EBITDA from Continuing Operations is defined as Earnings from Continuing Operations Before Income Taxes plus net interest expense, depreciation, and amortization expense. Adjusted EBITDA from Continuing Operations is defined as EBITDA from Continuing Operations less derivative gains.

Management uses EBITDA from Continuing Operations as an indicator of the cash-generating performance of the operations of the Company. Management uses Adjusted EBITDA and Adjusted Pre-tax Earnings from Continuing Operations to assess the performance of its operating results among periods. EBITDA and Adjusted EBITDA from Continuing Operations, and Adjusted Pre-tax Earnings should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, or as an alternative measure of liquidity.

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