SM 2017 Annual Report - atsginc.com

1 SM. 2017 Annual Report Air Transport Services Group 2017 Annual Report To Our Shareholders Your company ended 2017 with substantial the warrants, was $ million in 2017. The other increases in revenues and earnings on the strength principal item affecting our GAAP results was a of very good performances by all of our businesses. $ million tax benefit from the tax-law changes On a consolidated basis, fourth-quarter enacted in December. revenues increased by more than $100 million 2017's solid performance was aided by to $323 million, and by nearly $300 million across-the-board growth in each of our businesses for the year to $ billion. Those are record totals and a solid peak season of airline service for our for us since our business model changed in 2010. customers. In August, we completed our We earned $ million, or 36 cents per share commitment to supply Amazon with twenty diluted in 2017, up from $ million, or 33 cents leased 767s to serve as the backbone of its new per share diluted in 2016, as recorded under air network, plus the flight crews, maintenance, Generally Accepted Accounting Principles.

2 And logistics to support them. As a result, Amazon Two non-cash items, however, had a major effect became our largest customer in 2017, accounting on those GAAP results. The largest was a net loss for 44 percent of our total revenues. DHL revenues for the year from revaluation of warrants we have were 24 percent, and the Military 7 percent issued to Amazon incrementally under commercial of our total revenues. agreements we signed with them in 2016. These The principal factor for the airlines was expanded revaluations occur quarterly, and reflect changes in flying during a busy peak, which included operations the size of our warrant liability from share-price for our principal customers, DHL and Amazon, changes and additional vested warrants. Unrealized as well as some peak season flying for other losses tied to increases in that liability are in part customers. Taken together, our block hours exceeded good news for shareholders, as losses are driven the prior year by 22 percent.

3 Also contributing to mainly by increases in our stock price. our airlines improved performance was a reduction The Amazon warrant revaluation loss, plus non- in year-over-year expense associated with scheduled cash amortization of the lease incentives also tied to airframe inspections. Air Transport Services Group 2017 Annual Report CAM, our leasing business, had a good year, reporting structure for 2018. Under the new rules, despite lower margins. Additional earnings from a revenues related to costs of aircraft fuel and certain larger leased fleet were offset by higher lease other aviation-related expenses that are directly incentives to Amazon, depreciation, and increased reimbursed to ATSG and controlled by the customer interest expense as CAM's portfolio of aircraft will be reported net of the corresponding expenses. expanded to meet the strong demand for leased Had those rules been in effect for 2017, our revenue 767s. CAM also absorbed a $2 million non-cash would have been approximately $290 million lower charge to its share of our interest expense tied than the $ billion we reported, with no changes to the convertible feature of debt we issued in to earnings or cash flows.

4 Late September. Our aircraft maintenance and conversion 2018 is off to a great start. In March 2018, the operations will now be reported in a new segment pilot employees of our subsidiary Air Transport called MRO Services. Other Activities will include International, Inc. ratified an amendment to the our ground services, equipment leasing, and postal collective bargaining agreement between ATI and center services, plus corporate and other customer their representative, the Air Line Pilots Association. support operations. The amended agreement extends four years from its We also took steps last year to de-risk our balance ratification and will support ATI's continued growth sheet, while preserving our long-term access to and superior service to customers. attractive low-cost growth capital. In March, we We are targeting $300 million in capital amended our secured revolving credit facility to add expenditures, roughly what we spent in 2017, $120 million in borrowing capacity.

5 In August, we mainly to deliver ten more converted Boeing 767 offloaded a portion of our pension liability to an freighters this year, and place them with customers annuity underwriter. And in September, we issued under multi-year dry leases. Two of those will be $259 million in convertible notes. from a group of three additional feedstock 767-300s As of January 1, 2018, nearly 80 percent of our we are acquiring in 2018. We may buy more if our $575 million in debt principal was fixed rate, with demand projections prove out. an average coupon rate of under 3 percent. We We have adopted the FASB's new revenue entered 2018 with $291 million available under recognition standard, and revised our segment our revolving credit facility. Our cash flow from Air Transport Services Group 2017 Annual Report operations, which rose 22 percent in 2017, Airbus A321, an aircraft with a great record of should continue to grow as our fleet expands, reliability and efficiency for passenger airlines even as we continue to maintain a conservative around the world.

6 It combines the operating debt leverage profile. efficiency of a smaller narrow-body like the Our additional 767 aircraft purchases and Boeing 737, but with the cubic capacity of the planned deployments in 2018 are the best way larger narrow-body Boeing 757s we operate today. we can tell you that we are very positive about Once approved, we intend for CAM to invest in the economy in general, and the express-network A321s and convert them to freighters to support portion of the air cargo business that we serve customers eager for the cost-efficient capacity directly. We expect all of our 2018 aircraft they can provide. deployments to be straight external dry leases Our strategy remains to maximize cash flow that the customer will operate. Most are already and invest it where we can find the highest return. committed to customers, and most will use some For now, that's primarily to invest in the very same or all of our maintenance capabilities. attractive aircraft assets that have made us so A significant part of the market opportunity successful thus far and have delivered the we serve is driven by increases in e-commerce substantial shareholder returns we all have fulfillment demand, which is driving the growth of enjoyed the last few years.

7 Express networks providing same- and second-day service to points throughout the and around the world. Our goal is to remain the No. 1 source of dedicated midsize freighters that are essential elements of those networks. With that goal in mind, we are expanding our aircraft type offerings within the midsize niche to offer models that can efficiently extend those networks into smaller markets. Joseph C. Hete We teamed with Precision Conversions last year President & Chief Executive Officer to develop a converted freighter variant of the Air Transport Services Group, Inc. A321-200 PCF FEATURES. 1. Class A Flight Deck and vestibule 5. Class E main deck cargo compartment 9. L4/R4 doors deactivated as basic configuration 6. Class C lower deck cargo 10. Reinforced floor structure 2. 9G rigid barrier / smoke barrier compartment unchanged 11. L2/R2 door deleted 3. Main deck cargo door 142 x 86 7. Installation of main deck cargo 12. clearance for CFM-56. 4. MDCD hydraulically actuated and loading system and for V2500.

8 Electronically sequenced (self-contained) 8. Window plugs installed 13. L3/R3 doors deleted UNITED STATES. SECURITIES AND EXCHANGE COMMISSION. Washington, 20549. _____. FORM 10-K. Annual Report PURSUANT TO SECTION 13 OR 15(D). OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2017. Commission file number 000-50368. _____. (Exact name of registrant as specified in its charter). _____. Delaware 26-1631624. (State of Incorporation) ( Employer Identification No.). 145 Hunter Drive, Wilmington, OH 45177. (Address of principal executive offices). 937-382-5591. (Registrant's telephone number, including area code). _____. Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $.01 per share (Title of class). Name of each exchange on which registered: NASDAQ Stock Market LLC. Securities registered pursuant to Section 12(g) of the Act: None _____. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

9 YES NO. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO. Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T ( of this chapter) during the preceding 12. months (or for such shorter period that the registrant was required to submit and post such files). YES NO. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

10 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant's most recently completed second fiscal quarter: $1,260,495,219. As of March 1, 2018, 59,067,276 shares of the registrant's common stock, par value $ , were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Proxy Statement for the Annual Meeting of Stockholders scheduled to be held May 10, 2018 are incorporated by reference into Parts II and III.