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OFFON

AIR TRANSPORT SERVICES GROUP, INC.

(ATSG)
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AIR TRANSPORT SERVICES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

03/01/2021 | 05:43pm EDT
The following Management's Discussion and Analysis has been prepared with
reference to the historical financial condition and results of operations of Air
Transport Services Group, Inc., and its subsidiaries. It should be read in
conjunction with the accompanying consolidated financial statements and related
notes included in Item 8 of this report as well as Business Development
described in Item 1 and Risk Factors in Item 1A of this report.

INTRODUCTION

We lease aircraft and provide airline operations, aircraft modification and
maintenance services, ground services, and other support services to the air
transportation and logistics industries. Through the Company's subsidiaries, we
offer a range of complementary services to delivery companies, freight
forwarders, e-commerce operators, airlines and government customers. Our
principal subsidiaries include three independently certificated airlines (ABX,
ATI and OAI) and an aircraft leasing company (CAM).
The health and safety of our employees is paramount. Maintaining the health of
our employees during the /COVID-19 pandemic is essential for us to operate
safely and maintain our customers' networks. We have taken precautions to
prevent, detect and limit the spread of the COVID-19 virus in the workplace.
These practices include daily temperature checks, requiring face masks,
periodically sanitizing facilities, frequent cleaning of high touch surfaces,
supporting remote working, travel restrictions, promoting social distancing and
frequent hand washing, contact tracing, quarantining, and other practices
prescribed by the Centers for Disease Control and Prevention. Our airline
operations rely on flight crews, aircraft maintenance technicians, flight
support personnel and aircraft loading personnel. We rely on a skilled workforce
to perform aircraft maintenance. Similarly, we staff personnel near airports to
sort customer packages, load aircraft and maintain related equipment. We have
added extra precautions and redundancies related to crews reserves, employee
travel protocols, sanitation and other measures. We have not experienced a
wide-spread outbreak at any location. However, a COVID-19 outbreak among our
flight crews, at one of our maintenance facilities, at customer sorting centers
or an airport could result in workforce shortages, facility closures and
significant numbers of flight cancellations. In such event, flight delays and
additional costs could become significant. A COVID-19 outbreak at one of our
maintenance facilities, or at customer sorting centers could result in workforce
shortages and facility closures.
We have two reportable segments: CAM, which leases Boeing 777, 767, and 757
aircraft and aircraft engines, and ACMI Services, which includes the cargo and
passenger transportation operations of the three airlines. Our other business
operations, which primarily provide support services to the transportation
industry, include providing aircraft maintenance and modification services to
customers, load transfer and sorting services as well as related equipment
maintenance services. These operations do not constitute reportable segments. On
November 9, 2018, the Company acquired OAI, a passenger airline, along with
related entities (referred to collectively as "Omni"). Revenues and operating
expenses include the activities of Omni for periods since their acquisition by
the Company on November 9, 2018.
At December 31, 2020, we owned 100 Boeing aircraft that were in revenue service.
At December 31, 2020, CAM also owned eight Boeing 767-300 aircraft either
already undergoing or awaiting induction into the freighter conversion process.
In addition to these aircraft, we leased two freighter aircraft provided by a
customer and four passenger aircraft. Our largest customers are the U.S.
Department of Defense (DoD), ASI, which is a subsidiary of Amazon, and DHL.
The DoD comprised 31%, 34% and 15% of the Company's consolidated revenues during
the years ended December 31, 2020, 2019 and 2018, respectively. The Company's
airlines have been providing passenger and cargo airlift services to the U.S.DoD since the mid 1990's. Contracts with the USTC are typically for a one-year
period, however, the current passenger international charter contract has a
two-year term with option periods, at the election of the DoD, through September
2024 and the contract with ATI to provide combi aircraft operations, runs
through December 2021. Due to the acquisition of OAI, the DoD comprises a larger
portion of our 2020 and 2019 consolidated revenues compared to previous years.
Revenues from our commercial arrangements with ASI comprised approximately 30%,
23% and 27% of our consolidated revenues during the years ended December 31,
2020, 2019 and 2018, respectively. On March 8, 2016, we entered into an Air
Transportation Services Agreement (as amended, the "ATSA") with ASI pursuant to
which we lease Boeing 767 freighter aircraft to ASI, operate the aircraft via
our airline subsidiaries and provide ground
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handling services by our subsidiary, LGSTX. Under the ATSA, we operate aircraft
based on pre-defined fees scaled for the number of aircraft hours flown,
aircraft scheduled and flight crews provided to ASI for its network. The
operating term of the ATSA runs through March of 2024 and is thereafter subject
to renewal provisions. The aircraft lease terms range from 5 to 10 years. For
more information about the ATSA, including its amendments, see Item 1 of this
report.
The table below summarizes aircraft lease placements and commitments with Amazon
as of December 31, 2020.
                               Amazon                     Year of
                            # of Leases       Commencement         Expiration
Leased
      Boeing 767-200             12               2016                2023
      Boeing 767-300             2                2016                2026
      Boeing 767-300             6                2017                2027
      Boeing 767-300             6                2019                2029
      Boeing 767-300             5                2020                2030

Lease Commitments
      Boeing 767-300             11               2021                2031


In conjunction with the execution of the ATSA and its amendments, the Company
and Amazon entered into an Investment Agreement and a Stockholders Agreement on
March 8, 2016 (the 2016 Investment Agreement) and a second Investment Agreement
on December 20, 2018 (the 2018 Investment Agreement). Pursuant to these
Investment Agreements, the Company issued warrants to Amazon in conjunction with
aircraft leases. Through the 2016 and 2018 Investment Agreements and the
exercise of the warrants granted thereunder, Amazon could potentially own
approximately 39.9% of the Company if all the issued and issuable warrants vest
and are settled in full with cash.
Our accounting for the warrants issued to Amazon has been determined in
accordance with the financial reporting guidance for financial instruments. The
fair value of the warrants issued or issuable to Amazon are recorded as a lease
incentive asset and are amortized against revenues over the duration of the
aircraft leases. The warrants are accounted for as financial instruments, and
accordingly, the fair value of the outstanding warrants are measured and
classified in liabilities at the end of each reporting period. The Company's
earnings are impacted by the fair value re-measurement of the Amazon warrants
classified in liabilities at the end of each reporting period, customer
incentive amortization and the related income tax effects. For income tax
calculations, the value and timing of related tax deductions will differ from
the guidance described below for financial reporting.
For additional information about the warrants, see Note D to the accompanying
consolidated financial statements in this report.
DHL accounted for 12%, 14% and 26% of the Company's consolidated revenues,
excluding directly reimbursed revenues, during the years ended December 31,
2020, 2019 and 2018, respectively. Under a CMI agreement with DHL, ABX operates
and maintains aircraft based on pre-defined fees scaled for the number of
aircraft hours flown, aircraft scheduled and flight crews provided to DHL for
its network. Under the pricing structure of the CMI agreement, ABX is
responsible for complying with FAA airworthiness directives, the cost of Boeing
767 airframe maintenance and certain engine maintenance events for the aircraft
leased to DHL that it operates. As of December 31, 2020, the Company, through
CAM, leased 14 Boeing 767 aircraft to DHL comprised of seven Boeing 767-200
aircraft and seven Boeing 767-300 aircraft, expiring between 2021 and 2024.
Eight of the 14 Boeing 767 aircraft were being operated by the Company's
airlines for DHL. We also operated four CAM-owned Boeing 757 aircraft under
other operating arrangements with DHL during 2019 and the first half of 2020.
During 2020, DHL terminated operating agreements for three of the Boeing 757
aircraft. The decline in the percentage of revenues from DHL primarily reflects
the removal of the Boeing 757 operations and increased revenues from other
customers compared to last year.

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RESULTS OF OPERATIONS
Revenue and Earnings Summary
External customer revenues from continuing operations increased by $118.4
million, or 8%, to $1,570.6 million during 2020 compared to 2019. Customer
revenues increased in 2020 for contracted airline services, charter flights,
aircraft leasing and aviation fuel sales, compared to the previous year periods.
Beginning in late February 2020, our revenues were disrupted due to the COVID-19
pandemic. The DoD and other customers began canceling scheduled passenger
flights as a result of the pandemic. The decline in revenues from these
cancellations was offset by an increase in flying for our customers' package
delivery networks and charter flight operations during 2020. Revenues for 2018
were $892.3 million and included only a few weeks of revenue for OAI which was
acquired on November 9, 2018.
The consolidated net earnings from continuing operations were $25.1 million for
2020 compared to $60.0 million for 2019 and $67.9 million for 2018. The pre-tax
earnings from continuing operations were $41.4 million for 2020 compared to
$71.6 million for 2019 and $87.5 million for 2018. Earnings were affected by the
following specific events and certain adjustments that do not directly reflect
our underlying operations among the years presented.
On a pre-tax basis, earnings included net losses of $100.8 million and $12.3
million and net gains of $7.3 million for the years ended December 31, 2020,
2019 and 2018, respectively, for the re-measurement of financial instruments,
including warrant obligations granted to Amazon.
•Pre-tax earnings were also reduced by $20.7 million, $17.2 million and $16.9
million for the years ended December 31, 2020, 2019 and 2018, respectively, for
the amortization of customer incentives given to ASI in the form of warrants.
•Pre-tax earnings from continuing operations included expenses of $12.0 million,
gains of $9.4 million and expenses of $8.2 million for the years ended December
31, 2020, 2019 and 2018, respectively, for settlement charges, curtailments and
other non-service components of retiree benefit plans.
•Pre-tax earnings included losses of $13.6 million, $17.4 million and $10.5
million for the years ended December 31, 2020, 2019 and 2018, respectively, for
the Company's share of development costs for a joint venture and the partial
sale of an airline investment.
•Pre-tax earnings for the year ending December 31, 2020 were decreased by an
impairment charge of $39.1 million for our four Boeing 757 freighter aircraft
and related assets.
•During 2020, the Company recognized $47.2 million of government grants from the
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").
•Pre-tax earnings for 2019 and 2018 also included expense of $0.4 million and
$5.3 million, respectively, for acquisition fees incurred during the Company's
acquisition of Omni.
After removing the effects of these items, adjusted pre-tax earnings from
continuing operations, a non-GAAP measure (a definition and reconciliation of
adjusted pre-tax earnings from continuing operations follows), were $156.2
million for 2020 compared to $128.3 million for 2019 and $104.6 million for
2018.
Adjusted pre-tax earnings from continuing operations for 2020 improved by 21.8%
compared to 2019, driven by increased revenues primarily from CAM and the ACMI
Services segments. While improved, our results in 2020, particularly for
commercial passenger flying, DoD flying and aircraft maintenance services, were
detrimentally impacted by the COVID-19 pandemic. Adjusted pre-tax earnings from
continuing operations for 2019 improved by 22.6% compared to 2018, driven
primarily by additional revenues and the improved financial results of our
airline operations, including Omni, which we acquired in November 2018. Adjusted
pre-tax earnings for 2019 also improved due to additional aircraft leases and
the expansion of gateway ground operations for ASI. Pre-tax earnings for 2019
included additional interest expense of $37.8 million due to the acquisition of
Omni and the expansion of the fleet.

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A summary of our revenues and pre-tax earnings and adjusted pre-tax earnings from continuing operations is shown below (in thousands):

Years Ending December 31

                                                                 2020                 2019                 2018
Revenues from Continuing Operations:
CAM
Aircraft leasing and related services                       $   327,170$   301,984$   245,860
Lease incentive amortization                                    (18,509)             (16,708)             (16,904)
Total CAM                                                       308,661              285,276              228,956
ACMI Services                                                 1,147,279            1,078,288              548,839
Other Activities                                                334,300              314,014              286,579
Total Revenues                                                1,790,240            1,677,578            1,064,374
Eliminate internal revenues                                    (219,665)            (225,395)            (172,029)
Customer Revenues                                           $ 1,570,575

$ 1,452,183$ 892,345

Pre-Tax Earnings (Loss) from Continuing Operations: CAM, inclusive of interest expense

                          $    77,424$    68,643$    65,576
ACMI Services                                                    66,897               32,055               11,448
Other Activities                                                 (5,933)              13,422               11,170
Net unallocated interest expense                                 (2,825)              (3,024)                (460)
Government grants                                                47,231                    -                    -
Impairment of aircraft and related assets                       (39,075)                   -                    -
Net financial instrument re-measurement (loss) gain            (100,771)             (12,302)               7,296
Transaction fees                                                      -                 (373)              (5,264)

Other non-service components of retiree benefits costs, net 12,032

           (9,404)               8,180
Loss from non-consolidated affiliate                            (13,587)             (17,445)             (10,468)
Pre-Tax Earnings (Loss) from Continuing Operations               41,393               71,572               87,478

Add other non-service components of retiree benefit costs, net

                                                             (12,032)               9,404               (8,180)
Less government grants                                          (47,231)                   -                    -
Add impairment of aircraft and related assets                    39,075                    -                    -
Add charges for non-consolidated affiliates                      13,587               17,445               10,468
Add lease incentive amortization                                 20,671               17,178               16,904
Add transaction fees                                                  -                  373                5,264
Add net loss (gain) on financial instruments                    100,771               12,302               (7,296)

Adjusted Pre-Tax Earnings from Continuing Operations $ 156,234

$ 128,274$ 104,638



Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is
pre-tax earnings excluding the following: (i) settlement charges and other
non-service components of retiree benefit costs; (ii) gains and losses for the
fair value re-measurement of financial instruments; (iii) customer incentive
amortization; (iv) the transaction fees related to the acquisition of Omni; (v)
the start-up costs of a non-consolidated joint venture; (vi) the sale of an
airline investment and (vii) impairment charges for aircraft and related assets.
We exclude these items from adjusted pre-tax earnings because they are
distinctly different in their predictability or not closely related to our
on-going operating activities. We also excluded the recognition of government
grants from adjusted earnings to improve comparability between periods.
Management uses adjusted pre-tax earnings to compare the performance of core
operating results between periods. Presenting this measure provides investors
with a comparative metric of fundamental operations while highlighting changes
to certain items among periods. 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.
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Aircraft Fleet Summary
Our fleet of cargo and passenger aircraft is summarized in the following table
as of December 31, 2020, 2019 and 2018. Our CAM-owned operating aircraft fleet
has increased by 12 aircraft since the end of 2018, driven by customer demand
for the Boeing 767-300 converted freighter. Our freighters, converted from
passenger aircraft, utilize standard shipping containers and can be deployed
into regional cargo markets more economically than larger capacity aircraft,
newly built freighters or other competing alternatives. At December 31, 2020,
the Company owned eight Boeing 767-300 aircraft that were either already
undergoing or awaiting induction into the freighter conversion process.
Aircraft fleet activity during 2020 is summarized below:
•CAM completed the modification of seven Boeing 767-300 freighter aircraft
purchased in the previous year and began to lease six of these aircraft to
external customers under a multi-year lease. ATI operates two of these aircraft
for the customer. CAM leased the seventh aircraft to ATI.
•CAM completed the modification of two Boeing 767-300 freighter aircraft
purchased in 2020 and began to lease one of these aircraft to an external
customer under a multi-year lease. CAM leased the other aircraft to ATI.
•CAM leased two Boeing 767-300 freighter aircraft purchased during 2020 to an
external customer under a multi-year lease. ATI operates these aircraft for the
customer.
•CAM leased two Boeing 767-200 freighter aircraft to external customers under a
multi-year lease.
•CAM sold one Boeing 767-300 freighter aircraft to an external customer.
•An external customer returned one Boeing 737-400 freighter aircraft to CAM. CAM
sold the Boeing 737-400 aircraft to another external customer during the second
quarter of 2020.
•An external customer returned one Boeing 767-200 freighter aircraft to CAM.
This aircraft was leased to an external customer under a multi-year lease.
•CAM purchased two Boeing 767-300 freighter aircraft and nine Boeing 767-300
passenger aircraft for the purpose of converting the passenger aircraft into a
standard freighter configuration. Four of these aircraft were leased to
customers as noted above. The remaining aircraft are expected to be leased to
external customers during 2021.
•ABX returned two Boeing 767-200 freighter aircraft and one Boeing 767-300
freighter aircraft to CAM. CAM leased the Boeing 767-300 aircraft to an external
customer under a multi-year lease and the two Boeing 767-200 freighters were
retired.
•ATI returned three Boeing 757-200 freighter aircraft to CAM and the aircraft
were retired.
•ATI returned one Boeing 767-300 freighter aircraft to CAM. CAM leased the
Boeing 767-300 aircraft to an external customer under a multi-year lease. ATI
operates this aircraft for the customer.
•OAI began to lease two Boeing 767-300 passenger aircraft from an external
lessor.
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                                                   2020                                    2019                                    2018
                                         ACMI                                    ACMI                                    ACMI
                                       Services      CAM      Total            Services      CAM      Total            Services      CAM      Total
In-service aircraft
Aircraft owned
Boeing 767-200 Freighter                   5          28        33                 7          26        33                 5          29        34
Boeing 767-200 Passenger                   2           -         2                 2           -         2                 2           -         2
Boeing 767-300 Freighter                   5          45        50                 5          35        40                 5          28        33
Boeing 767-300 Passenger                   7           -         7                 7           -         7                 6           -         6
Boeing 777-200 Passenger                   3           -         3                 3           -         3                 3           -         3
Boeing 757-200 Freighter                   1           -         1                 4           -         4                 4           -         4
Boeing 757-200 Combi                       4           -         4                 4           -         4                 4           -         4
Boeing 737-400 Freighter                   -           -         -                 -           1         1                 -           2         2
Total                                     27          73       100                32          62        94                29          59        88
Operating lease
Boeing 767-200 Passenger                   1           -         1                 1           -         1                 1           -         1
Boeing 767-300 Passenger                   3           -         3                 1           -         1                 1           -         1
Boeing 767-300 Freighter                   2           -         2                 2           -         2                 -           -         -
Total                                      6           -         6                 4           -         4                 2           -         2
Other aircraft
Owned Boeing 767-300 under
modification                               -           8         8                 -           8         8                 -           5         5

Owned Boeing 767 available or              -           -         -                 -           2         2                 -           1         1

staging for lease



As of December 31, 2020, ABX, ATI and OAI were leasing 27 in-service aircraft
internally from CAM for use in ACMI Services. Of CAM's 28 externally leased
Boeing 767-200 freighter aircraft, 12 were leased to ASI and operated by ABX or
ATI, one was leased to DHL and operated by ABX, six were leased to DHL and were
being operated by a DHL-affiliated airline and nine were leased to other
external customers. Of the 45 Boeing 767-300 freighter aircraft, 19 were leased
to ASI and operated by ABX or ATI, seven were leased to DHL and operated by ABX,
and 19 were leased to other external customers, one of which was operated by
ATI. The carrying values of the total in-service fleet as of December 31, 2020,
2019 and 2018 were $1,535.3 million, $1,387.6 million and $1,334.9 million,
respectively.
The table above does not reflect one Boeing 767-200 passenger aircraft and three
Boeing 757 aircraft that are being marketed for sale.
2020 and 2019
CAM
CAM offers aircraft leasing and related services to external customers and also
leases aircraft internally to the Company's airlines. CAM acquires passenger
aircraft and manages the modification of the aircraft into freighters. The
follow-on aircraft leases normally cover a term of five to ten years.
As of December 31, 2020 and 2019, CAM had 73 and 62 aircraft under lease to
external customers, respectively. CAM's revenues grew by $23.4 million during
2020 compared to 2019, primarily as a result of additional aircraft leases.
Revenues from external customers totaled $205.0 million and $168.1 million for
2020 and 2019, respectively. CAM's revenues from the Company's airlines totaled
$103.6 million during 2020, compared to $117.2 million for 2019. CAM's aircraft
leasing and related services revenues, which exclude customer lease incentive
amortization, increased $25.2 million in 2020 compared to 2019, as a result of
new aircraft leases in 2020.
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During 2020, CAM added 11 Boeing 767-300 aircraft to its portfolio and placed 11
Boeing 767-300 aircraft to external customers under long-term leases.
CAM's pre-tax earnings, inclusive of internally allocated interest expense, were
$77.4 million and $68.6 million during 2020 and 2019, respectively. Increased
pre-tax earnings reflect the eleven aircraft placed into service in 2020, offset
by a $1.0 million increase in internally allocated interest expense due to
higher debt levels and a $13.5 million increase in depreciation expense driven
by the addition of eleven Boeing aircraft in 2020 compared to 2019.
In addition to the eight Boeing 767-300 aircraft which were in the modification
process at December 31, 2020, CAM has agreements to purchase five more Boeing
767-300 aircraft and expects to complete their modifications through 2021. CAM's
operating results will depend on its continuing ability to convert passenger
aircraft into freighters within planned costs and within the time frames
required by customers. We expect to lease at least twelve newly modified Boeing
767-300 freighters and re-deploy four Boeing 767-300 freighters during 2021,
comprising eleven to Amazon and five to other external customers. CAM's future
operating results will also depend on the timing and lease rates under which
aircraft are redeployed when leases expire. During 2021, three leases for Boeing
767-200 aircraft are expected to be returned. CAM's future operating results
will also be impacted by the additional amortization of warrant incentives as
incremental long-term aircraft leases to ASI commence.
ACMI Services
The ACMI Services segment provides airline operations to its customers,
typically under contracts providing for a combination of aircraft, crews,
maintenance, insurance and aviation fuel. Our customers are typically
responsible for supplying the necessary aviation fuel and cargo handling
services and reimbursing our airline for other operating expenses such as
landing fees, ramp expenses, certain aircraft maintenance expenses and fuel
procured directly by the airline. Aircraft charter agreements, including those
for the DoD, usually require the airline to provide full service, including fuel
and other operating expenses for a fixed, all-inclusive price.
Total revenues from ACMI Services increased $69.0 million during 2020 compared
with 2019 to $1,147.3 million. Improved revenues were driven by a 14% increase
in billable block hours during 2020. Increased revenues for 2020 included
additional aircraft operations for ASI and DHL, while block hours flown for the
DoD declined.
Revenues for the year ending December 31, 2020 were impacted by the COVID-19
pandemic. In late February 2020, the DoD began canceling combi aircraft flights
and in March, commercial customers began canceling scheduled passenger flights
as a result of the pandemic. Combined block hours flown for contracted
commercial passenger and combi flights declined 39% for the year ended December
31, 2020, compared to December 31, 2019 due to the pandemic. The decline in
revenues from these cancellations was mitigated by increased flying for customer
e-commerce networks and passenger charter flights for the DoD and other
governmental agencies, including flights to return people to the United States
who were stranded abroad as a result of the pandemic. Operations during the year
ending December 31, 2020 also included additional transoceanic flights to
replace cargo capacity normally serviced in the belly-hold of passenger
aircraft.
ACMI Services had pre-tax earnings of $66.9 million during 2020, compared to
$32.1 million for 2019 inclusive of internally allocated interest expense.
Improved pre-tax results in 2020 compared to 2019 were a result of expanded
revenues from ASI and DHL and ad hoc passenger charters. During 2020, we began
to operate five more CAM-owned Boeing 767-300 aircraft under the Amazon ATSA.
ACMI Services benefited from reduced travel costs including lower airfares
during 2020 compared to 2019. Internally allocated interest expense decreased to
$20.5 million for 2020 compared to $25.0 million for 2019.
As of December 31, 2020, ACMI Services included 73 in-service aircraft as
follows:
•Twelve passenger aircraft, four combi aircraft and eleven freighter aircraft
leased internally from CAM.
•Four passenger aircraft leased from an external lessor
•Eight CAM-owned freighter aircraft which are under lease to DHL and operated by
ABX under the DHL CMI agreement
•31 CAM-owned freighter aircraft which are under lease to ASI and operated by
ATI and ABX under the ATSA. Two ASI provided freighter aircraft operated by ATI
under the ATSA
•One CAM-owned freighter leased to a customer and operated by ATI
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Maintaining profitability in ACMI Services will depend on a number of factors,
including the impact of the COVID-19 pandemic, customer flight schedules,
crewmember productivity and pay, employee benefits, aircraft maintenance
schedules and the number of aircraft we operate. We expect our operating results
from commercial passenger and combi flights to continue to be detrimentally
impacted by the pandemic during 2021. The DoD has reduced normal personnel
movements while most of our other passenger service customers have suspended
their operations and demand for commercial passenger charters has significantly
declined. During 2020, the DoD and other government agencies contracted for
special airlift capacity and missions which may not continue to occur near the
same level in the months ahead. Similarly, customers may find alternatives for
the incremental e-commerce routes we operate. While it is difficult to predict,
we expect lower revenues from passenger operations during 2021 than we had in
2020. In December 2020, ABX and its pilots union amended the collective
bargaining agreement. While the changes in the amendment are expected to
positively impact productivity, we expect compensation costs to increase between
$7 million to $8 million for ABX pilots in 2021.
We expect Amazon to lease at least eleven additional Boeing 767-300 aircraft
from CAM in 2021 and contract the operation of those aircraft through our
existing ATSA. We also expect Amazon to contract with us to operate at least two
more Amazon-provided aircraft under the ATSA in 2021.
Other Activities
We provide other support services to our ACMI Services customers and other
airlines by leveraging our knowledge and capabilities developed for our own
operations over the years. Through our FAA certificated maintenance and repair
subsidiaries, we sell aircraft parts and provide aircraft maintenance and
modification services. We also arrange and perform logistical services and
package sorting services for certain ASI gateway locations in the U.S. We
provide maintenance for ground equipment, facilities and material handling
equipment and we resell aviation fuel in Wilmington, Ohio. Additionally, we
provide flight training services.
External customer revenues from all other activities increased $12.3 million in
2020 compared to 2019 primarily due to more aviation fuel sales as customer
operations at the Wilmington, Ohio air hub expanded. Revenues from ground
services increased due to the addition, since mid-2020, of operating contracts
for two new USPS mail facilities as well as increased volumes at two ASI package
gateways we service. Ground services revenues during 2020 included reductions
for equipment and facility maintenance revenues compared to 2019 as customers
chose to in-source some of these services. Revenues from aircraft maintenance
and part sales declined during 2020 as passenger airlines reduced their needs
for services during the pandemic. The pre-tax earnings from other activities
decreased by $19.4 million to a pretax loss of $5.9 million in 2020. Reduced
earnings for 2020 are a result of reductions in revenues from higher margin
ground maintenance and aircraft maintenance services. Additionally, we incurred
start-up costs for two USPS mail facility contracts we were awarded during 2020.
These reductions were partially offset by additional aviation fuel sales which
earn a lower margin.
Our customer base for aircraft maintenance revenues includes passenger airlines.
We expect the adverse impact on our aircraft maintenance business to continue in
the near term due to the COVID-19 pandemic.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $85.4 million, or 20% during 2020
compared to 2019 driven by higher employee headcount for flight operations,
maintenance operations and package sorting services. The total headcount
increased 20% as of December 31, 2020 compared to December 31, 2019. The
increases during 2020 include additional flight crewmembers, aircraft
maintenance technicians and other personnel to support increased block hours.
Depreciation and amortization expense increased $20.5 million during 2020
compared to 2019. The increase reflects incremental depreciation for eleven
Boeing 767-300 aircraft and additional aircraft engines added to the operating
fleet since the beginning of 2020, as well as capitalized heavy maintenance and
navigation technology upgrades. We expect depreciation expense to increase
during future periods in conjunction with our fleet expansion and capital
spending plans.
Maintenance, materials and repairs expense increased by $9.2 million during 2020
compared to 2019. Increased maintenance expense for 2020 was driven by increased
flight hours and higher costs for unscheduled engine repairs at our airlines.
The aircraft maintenance and material expenses can vary among periods due to the
number of maintenance events and the scope of airframe checks that are
performed.
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Fuel expense decreased by $6.7 million during 2020 compared to 2019. Fuel
expense includes the cost of fuel to operate DoD charters, fuel used to position
aircraft for service and for maintenance purposes, as well as the cost of fuel
sales. Fuel expense decreased during 2020 compared to 2019 due to lower prices
for aviation fuel during the pandemic.
Contracted ground and aviation services expense includes navigational services,
aircraft and cargo handling services, baggage handling services and other
airport services. Contracted ground and aviation services decreased $0.5 million
during 2020 compared to 2019. Since mid-2019, certain customers chose to
in-source some ground services that we had been performing on their behalf.
Travel expense decreased by $13.6 million during 2020 compared to 2019. The
decrease in travel expense was due to less employee travel and the lower costs
of air travel during the pandemic.
Landing and ramp expense, which includes the cost of deicing chemicals,
increased by $1.3 million during 2020 compared to 2019, driven by increased
block hours and network locations.
Rent expense increased by $3.3 million during 2020 compared to 2019 due to an
additional aircraft partially offset by lower facility rents during 2020.
Insurance expense increased by $2.6 million during 2020 compared to 2019.
Aircraft fleet insurance has increased due to additional aircraft operations and
higher insurance rates during 2020 compared to 2019.
Other operating expenses decreased by $4.0 million during 2020 compared to 2019.
Other operating expenses include professional fees, employee training,
utilities, commission expense to our CRAF team for DoD revenues and other
expenses.
Asset impairment charges were recorded during the second quarter of 2020, in
conjunction with management's decision to retire four Boeing 757 freighter
aircraft. Three of the 757 airframes have been removed from service and are
available for sale. One remains in service through the first quarter of 2021.
Impairment charges totaling $39.1 million were recorded, primarily reflecting
the fair value of these assets as well as other surplus engines and parts.
Operating results included a pre-tax contra expense of $47.2 million during 2020
to recognize grants received from the U.S. government under the CARES Act. For
additional information about the CARES Act grants, see Note I of the unaudited
condensed consolidated financial statements included in this report.
Non Operating Income, Adjustments and Expenses
Interest expense decreased by $3.8 million during 2020 compared to 2019.
Interest expense during 2020 decreased compared to the previous year due to
lower interest rates on our borrowings under the Senior Credit Agreement and
lower debt balances outstanding during the year.
The Company recorded unrealized pre-tax losses on financial instruments
re-measurements of $100.8 million during the year ended December 31, 2020,
compared to $12.3 million for 2019. The gains and losses include the results of
re-valuing, as of December 31, 2020 and 2019, the fair value of the stock
warrants granted to Amazon. Generally, the warrant value increases or decreases
with corresponding increases or decreases in the ATSG share price during the
measurement period. Warrant losses for 2020 reflect a 34% increase in the traded
price of ATSG shares. Additionally, the value of certain warrants depend
partially on the probability that warrants will vest upon the execution of
aircraft leases. Increases in the traded value of ATSG shares and increases in
the probability of vested warrants each result in an increase to the warrant
value and resulted in warrant losses recorded to financial instruments for 2020.
Non service components of retiree benefits were a net loss of $12.0 million for
2020 compared to a net gain of $9.4 million for 2019. The non service component
gain and losses of retiree benefits are actuarially determined and include the
amortization of unrecognized gain and loss stemming from changes in assumptions
regarding discount rates, expected investment returns and other retirement plan
assumptions. Non service components of retiree benefits can vary significantly
from one year to the next based on investment results and changes in discount
rates used to account for defined benefit retirement plans.
Income tax expense from earnings from continuing operations decreased $4.7
million for 2020 compared to 2019. Income taxes included deferred income tax
effects for the gains and losses from warrant re-measurements and the
amortization of the customer incentive. The income tax effects of the warrant
re-measurements and the
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amortization of the customer incentive are different than the book expenses and
benefits required by generally accepted accounting principles because for tax
purposes, the warrants are valued at a different time and under a different
valuation method. The recognition of discrete tax items, such as the conversion
of employee stock awards, the issuance of stock warrants and other items have an
impact on the effective rate during a period. The effective tax rate, before
including the warrant revaluations and incentive amortization, was 22% for 2020
compared to 19% for the year ended December 31, 2019. Income tax expense for
2019 reflects a tax benefit of $4.9 million to re-measure deferred state income
taxes using lower blended state tax rates than previously estimated.
The effective rate for 2021 will be impacted by a number of factors, including
the apportionment of income among taxing jurisdictions and the re-measurement of
the stock warrants at the end of each reporting period. As a result of the
warrant re-measurements and related income tax treatment, the overall effective
tax can vary significantly from period to period. We estimate that the Company's
effective tax rate for 2021, before applying the deductibility of the stock
warrant re-measurement and related incentive amortization and the benefit of the
stock compensation, will be approximately 23%.
As of December 31, 2020, the Company had operating loss carryforwards for U.S.
federal income tax purposes of approximately $316.5 million which do not expire
but the use of which is limited to 80% of taxable income in any given year. We
expect to utilize the loss carryforwards to offset federal income tax
liabilities in the future. As a result, we do not expect to pay federal income
taxes until 2024 or later. The Company may, however, be required to pay certain
federal minimum taxes and certain state and local income taxes before then. The
Company's taxable income earned from international flights is primarily sourced
to the United States under international aviation agreements and treaties. When
we operate in countries without such agreements, the Company could incur
additional foreign income taxes.
Discontinued Operations
The financial results of discontinued operations primarily reflect pension,
workers' compensation cost adjustments and other benefits for former employees
previously associated with ABX's former hub operations pursuant to which ABX
performed package sorting services for DHL. Pre-tax gains related to the former
sorting operations were $9.1 million for 2020 compared to $1.6 million for 2019.
Pre-tax earnings during 2020 and 2019 were a result of reductions in
self-insurance reserves for former employee claims and pension credits.

2019 compared to 2018
Fleet Summary 2019 & 2018
As of December 31, 2019, ABX, ATI and OAI were leasing 32 in-service aircraft
internally from CAM for use in ACMI Services. As of December 31, 2019, one of
CAM's 26 Boeing 767-200 freighter aircraft shown in the fleet table above and
seven of the 35 Boeing 767-300 freighter aircraft were leased to DHL and
operated by ABX. Additionally, 12 of CAM's 26 Boeing 767-200 freighter aircraft
and 14 of CAM's 35 Boeing 767-300 freighter aircraft were leased to ASI and
operated by ABX or ATI. CAM leased the other 13 Boeing 767-200 freighter
aircraft and 14 Boeing 767-300 aircraft to external customers, including six
Boeing 767-200 aircraft to DHL that were being operated by a DHL-affiliated
airline. The table above does not reflect one Boeing 767-200 passenger aircraft
owned by CAM that was not in service condition or the process of freighter
modification.
Aircraft fleet activity during 2019 is summarized below:
•CAM completed the modification of four Boeing 767-300 freighter aircraft
purchased in the previous year and three Boeing 767-300 freighter aircraft
purchased in 2019. After leasing one aircraft to ATI for a short period, CAM
began to lease that aircraft to an external customer under a multi-year lease.
CAM leased four other aircraft to an external customer under multi-year leases.
ATI operates all five of these aircraft for the customer. CAM leased the last
two aircraft to another external customer under multi-year leases.
•ATI returned one Boeing 767-300 freighter and CAM began to lease this aircraft
to an external customer under a multi-year lease. ATI operates the aircraft for
the customer.
•External customers returned three Boeing 767-200 freighter aircraft, one Boeing
767-300 freighter aircraft and one Boeing 737-400 freighter aircraft to CAM. CAM
leased two of the Boeing 767-200 aircraft to ABX and the Boeing 767-300 aircraft
to ATI. CAM sold the Boeing 737-400 aircraft to an external customer.
                                       39
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•ATI began to operate two Boeing 767-300 freighter aircraft provided by our
customer, ASI.
•CAM purchased ten Boeing 767-300 passenger aircraft and one Boeing 767-300
freighter aircraft for the purpose of converting nine of the passenger aircraft
into a standard freighter configuration. CAM leased one of these aircraft to
Omni as a passenger aircraft.
As of December 31, 2018, ABX, ATI and OAI were leasing 29 in-service aircraft
internally from CAM for use in ACMI Services. As of December 31, 2018, three of
CAM's 29 Boeing 767-200 aircraft shown in the aircraft fleet table above and
seven of the 28 Boeing 767-300 aircraft were leased to DHL and operated by ABX.
Additionally, 12 of CAM's 29 Boeing 767-200 aircraft and eight of CAM's 28
Boeing 767-300 aircraft were leased to ASI and operated by ABX or ATI. CAM
leased the other 14 Boeing 767-200 aircraft and 13 Boeing 767-300 aircraft to
external customers, including six Boeing 767-200 aircraft to DHL that were being
operated by a DHL-owned airline. The table above does not reflect one Boeing
767-200 passenger aircraft owned by CAM that was not in service condition or the
process of freighter modification.
Aircraft fleet activity during 2018 is summarized below:
•CAM completed the modification of nine Boeing 767-300 freighter aircraft, six
purchased in the previous year and three purchased in 2018. CAM began to lease
seven of those aircraft under multi-year leases to external customers. CAM began
to lease the other two aircraft to ATI.
•CAM completed the modification of one Boeing 737-400 freighter aircraft
purchased in the previous year and entered into a multi-year lease with an
external customer.
•With the Company's acquisition of Omni, CAM added two Boeing 767-200 passenger
aircraft, six Boeing 767-300 passenger aircraft and three Boeing 777-200
passenger aircraft. All eleven of these passenger aircraft are being leased to
OAI. Additionally, OAI leases two other Boeing 767 aircraft from third party
lessors.
•ABX returned one Boeing 767-300 and two Boeing 767-200 freighter aircraft to
CAM. The 767-300 aircraft was then leased to an external customer under a
multi-year lease and is being operated by ABX while the two 767-200 aircraft
were leased to different external customers under multi-year leases.
•CAM sold one Boeing 767-300 freighter aircraft, which was under lease to an
external customer.
•CAM purchased eight Boeing 767-300 passenger aircraft for the purpose of
converting the aircraft into standard freighter configuration.
•External lessees returned two Boeing 767-200 freighter aircraft to CAM. One of
these aircraft is being prepped for redeployment to another lessee while the
other aircraft was removed from service.
CAM
As of December 31, 2019 and 2018, CAM had 62 and 59 aircraft under lease to
external customers, respectively. CAM's revenues grew by $56.3 million during
2019 compared to 2018, primarily as a result of additional aircraft leases.
Revenues from external customers totaled $168.1 million and $156.5 million for
2019 and 2018, respectively. CAM's revenues from the Company's airlines totaled
$117.2 million during 2019, compared to $72.4 million for 2018, reflecting lease
revenues for the addition of the eleven passenger aircraft acquired with Omni in
November 2018. CAM's aircraft leasing and related services revenues, which
exclude customer lease incentive amortization, increased $56.1 million in 2019
compared to 2018, primarily as a result of the addition of the eleven passenger
aircraft acquired with Omni in November 2018 and new aircraft leases in 2019.
Since the beginning of 2019, CAM has added eight Boeing 767-300 aircraft to its
lease portfolio. CAM also added two Boeing 767-200 passenger aircraft, six
Boeing 767-300 passenger aircraft and three Boeing 777-200 passenger aircraft to
its lease portfolio after the Company's acquisition of Omni in November 2018.
CAM's pre-tax earnings, inclusive of internally allocated interest expense, were
$68.6 million and $65.6 million during 2019 and 2018, respectively. Increased
pre-tax earnings reflect the eleven passenger aircraft leased to Omni as well as
the eight aircraft placed into service in 2019, offset by a $16.5 million
increase in internally allocated interest expense due to higher debt levels and
$31.6 million more depreciation expense driven by the addition of eight Boeing
aircraft in 2019 compared to 2018.
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During 2019, CAM purchased ten Boeing 767-300 passenger aircraft for freighter
conversion and one Boeing 767-300 freighter aircraft. Three of the passenger
aircraft were converted to freighters and leased to external customers during
2019 and one of the passenger aircraft was leased internally as a passenger
aircraft. As of December 31, 2019 CAM had eight Boeing 767-300 aircraft being
modified from passenger to freighter configuration.
ACMI Services
As of December 31, 2019, ACMI Services included 71 in-service aircraft,
including 12 passenger aircraft and 20 freighter aircraft leased internally from
CAM, eight CAM-owned freighter aircraft which are under lease to DHL and
operated by ABX under a DHL CMI agreement, 26 CAM-owned freighter aircraft which
are under lease to ASI and operated by ATI and ABX under the ATSA, two freighter
aircraft from an external lessor under lease to ASI and operated by ATI under
the ATSA, another CAM-owned freighter leased to a customer and operated by ATI
and two passenger aircraft leased from an external lessor.
As of December 31, 2019, ACMI Services revenues included the operation of seven
more CAM-owned aircraft compared to December 13, 2018. Total revenues from ACMI
Services increased $529.4 million during 2019 compared with 2018 to $1,078.3
million. Improved revenues were driven by the acquisition of OAI and a 40%
increase in billable block hours. Increased revenues for 2019 included
additional aircraft operations for ASI and the DoD. On a combined basis, ACMI
Services revenues for the year ended December 31, 2019 would have been $980.6
million with the inclusion of OAI.
ACMI Services had pre-tax earnings of $32.1 million during 2019, compared to
$11.4 million for 2018 inclusive of internally allocated interest expense.
Improved pre-tax results in 2019 compared to 2018 were bolstered by expanded
revenues from the acquisition of OAI and the timing of scheduled airframe
maintenance events. Scheduled airframe maintenance expense decreased by $2.9
million during 2019 compared to 2018. Airframe maintenance expense varies
depending upon the number of C-checks and the scope of the checks required for
those airframes scheduled for maintenance. Internally allocated interest expense
increased to $25.0 million for 2019 compared to $6.3 million for 2018 as a
result of acquiring OAI. ACMI Services' results were negatively impacted by
unscheduled engine repairs and the training costs of new flight crew members to
keep pace with customers' expanding flight schedules. In March 2018, ATI began
to implement an amendment to the collective bargaining agreement with its
crewmembers. The amendment resulted in increased wages for the ATI crewmembers
beginning in the second quarter of 2018.
Other Activities
External customer revenues from all other activities increased $18.9 million in
2019. Declines in USPS revenue during 2019 were offset by additional facility
maintenance services, ground support services and fuel sales provided by ASI.
The pre-tax earnings from other activities increased by $2.3 million to $13.4
million in 2019, primarily due to additional ground services and fuel sales to
ASI.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $133.0 million during 2019
compared to 2018 driven by higher headcount for flight operations, maintenance
services and package sorting services. The increase in expense for 2019 included
$100.4 million for Omni, acquired in November 2018. The increase during 2019
also included higher flight crew wages in conjunction with an amendment to the
collective bargaining agreement with the ATI crewmembers, and additional
aircraft maintenance technician time to support increased block hours. Increases
in salaries, wages and benefits expense were partially offset by personnel
reductions due to the expiration of the USPS contracts.
Depreciation and amortization expense increased $78.6 million during 2019
compared to 2018. The increase in depreciation expense included $56.5 million
for Omni assets acquired in November 2018. The increase also reflects
incremental depreciation for 12 Boeing 767-300 aircraft and additional aircraft
engines added to the operating fleet since mid-2018, as well as capitalized
heavy maintenance and navigation technology upgrades.
Maintenance, materials and repairs expense increased by $23.5 million during
2019 compared to 2018. The increase in expense for 2019 included $15.6 million
for Omni, acquired in November 2018. Increased maintenance
                                       41
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expense for 2019 included unscheduled engine repairs and additional costs to
support increased block hours that were flown for cargo customers.
Fuel expense increased by $115.7 million during 2019 compared to 2018. Fuel
expense includes the cost of fuel to operate DoD charters, fuel used to position
aircraft for service and for maintenance purposes, as well as the cost of fuel
sales. The increase for 2019 included $95.8 million for Omni and $14.8 million
for increased fuel sales. The remainder of the increase was due to increased
fuel for more cargo block hours flown for the DoD in 2019.
Contracted ground and aviation services expense includes navigational services,
aircraft and cargo handling services, baggage handling services and other
airport services. Contracted ground and aviation services increased $47.4
million during 2019 compared to 2018. This increase included $45.7 million due
to the inclusion of Omni, since its acquisition in November of 2018.
Travel expense increased by $56.6 million during 2019 compared to 2018. The
increase for 2019 included $50.5 million for Omni.
Landing and ramp expense, which includes the cost of deicing chemicals,
increased by $5.2 million during 2019 compared to 2018. The increase included
$5.7 million for Omni.
Rent expense increased by $2.1 million during 2019 compared to 2018. This
increase included $5.1 million for Omni. This increase was partially offset by
decreases in building rent after the expiration of the contracts for the five
USPS facilities.
Insurance expense increased by $1.2 million during 2019 compared to 2018.
Aircraft fleet insurance has increased due to additional aircraft operations
during 2019 compared to 2018.
Other operating expenses increased by $35.4 million during 2019 compared to
2018. Other operating expenses include professional fees, employee training,
utilities, commission expense to our CRAF team for DoD revenues and other
expenses. The increase for 2019 included $27.4 million for Omni which was
acquired in November 2018 and over $6.5 million related to employee training for
additional flight crews necessary to support revenue growth.

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The following table provides pro forma operating expenses (in thousands) for the
Company after giving effect to the Omni acquisition. This information is based
on adjustments to the historical consolidated financial statements of Omni using
the purchase method of accounting for business combinations. The pro forma
adjustments do not include any of the cost savings and other synergies
anticipated to result from the acquisition. These pro forma expenses have been
prepared for comparative purposes only and do not purport to be indicative of
results that would have actually been reported as of the date or for the quarter
presented had the acquisition taken place on such date or at the beginning of
the quarter indicated, or to project the Company's financial position or results
of operations which may be reported in the future. The pro forma results exclude
non-recurring charges recorded by Omni that were directly related to the
acquisition by the Company.
                                                                            

Year Ended December 31, 2018

                                                                                                 Pro Forma              Pro Forma
                                                    Actual ATSG           Actual Omni           Adjustments              Results
Operating Expenses
Salaries, wages and benefits                      $    300,514          $   

85,316 $ (2,880)$ 382,950 Depreciation and amortization

                          178,895                54,118                  9,960               242,973
Maintenance, materials and repairs                     146,692                14,525                   (467)              160,750
Fuel                                                    39,293                89,653                      -               128,946
Contracted ground and aviation services                 16,640                44,898                      -                61,538
Travel                                                  34,443                39,101                      -                73,544
Landing and ramp                                         5,968                 6,171                      -                12,139
Rent                                                    13,899                 6,471                      -                20,370
Insurance                                                6,112                 1,724                      -                 7,836
Transaction fees                                         5,264                     -                 (5,264)                    -
Other operating expenses                                33,607                21,012                      -                54,619
Total Operating Expenses                          $    781,327          $   

362,989 $ 1,349$ 1,145,665



The following adjustments were made to the historical financial records to
create the unaudited pro forma information in the table above:
•Adjustments to eliminate transactions between the Company and Omni during the
year ended December 31, 2018.
•Adjustment to reflect estimated additional depreciation and amortization
expense of $10.0 million for the year ended December 31, 2018, resulting from
the fair value adjustments to Omni's intangible and tangible assets. Pro forma
combined depreciation expense for the periods presented reflect the increased
fair values of the aircraft acquired and longer useful lives of the aircraft,
indicative of the Company's polices and intent to modify certain aircraft to
freighters as an aircraft is removed from passenger service.
Non Operating Income, Adjustments and Expenses
Interest expense increased by $37.8 million during 2019 compared to 2018.
Interest expense increased due to a higher average debt level, including
additional financing under the Senior Credit Agreement of $675.0 million to
finance the acquisition of Omni and higher interest rates on the Company's
outstanding loans.
The Company recorded unrealized pre-tax losses on financial instrument
re-measurements of $12.3 million during the year ended December 31, 2019,
compared to unrealized pre-tax net gains of $7.3 million for 2018. The gains and
losses include the results of re-valuing, as of December 31, 2019 and 2018, the
fair value of the stock warrants granted to Amazon. Increases in the traded
value of ATSG shares and increases in the probability of vested warrants each
result in an increase to the warrant value and resulted in warrant losses
recorded to financial instruments for 2019. Warrant losses for 2019 were a
results of a 3% increase in the traded value of ATSG shares and an increase in
the probabilities of additional aircraft leases. The decrease in the fair value
of the warrant obligation between December 31, 2017 and December 31, 2018
corresponded to a decrease in the traded price of ATSG's shares and resulted in
a gain in 2018.
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Non service components of retiree benefits were a net loss of $9.4 million for
2019 compared to a net gain of $8.2 million for 2018. The non service component
gain and losses of retiree benefits are actuarially determined and include the
amortization of unrecognized gain and loss stemming from changes in assumptions
regarding discount rates, expected investment returns and other retirement plan
assumptions. Non service components of retiree benefits can vary significantly
from one year to the next based on investment results and changes in discount
rates used to account for defined benefit retirement plans.
Income tax expense from earnings from continuing operations decreased $8.0
million for 2019 compared to 2018. Income taxes included deferred income tax
effects for the gains and losses from warrant re-measurements and the
amortization of the customer incentive. The income tax effects of the warrant
re-measurements and the amortization of the customer incentive are different
than the book expenses and benefits required by generally accepted accounting
principles because for tax purposes, the warrants are valued at a different time
and under a different valuation method. The recognition of discrete tax items,
such as the conversion of employee stock awards, the issuance of stock warrants
and other items have an impact on the effective rate during a period. The
effective tax rate, before including the warrant revaluations and incentive
amortization was 19% for 2019 compared to 24% for the year ended December 31,
2018. The adjusted effective tax rate declined for 2019 compared to 2018 due to
a higher percentage of our revenues and earnings occurring in states and other
tax jurisdictions with lower tax rates than previously estimated for the
services and leases that we provide. Income tax expense for 2019 reflects a tax
benefit of $4.9 million to re-measure deferred state income taxes using lower
blended state tax rates than previously estimated.
Discontinued Operations
Pre-tax gains related to the former sorting operations were $1.6 million for
2019 compared to $1.8 million for 2018. Pre-tax earnings during 2019 and 2018
were a result of reductions in self-insurance reserves for former employee
claims and pension credits.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash generated from operating activities totaled $512.3 million, $396.9
million and $298.0 million in 2020, 2019 and 2018, respectively. Improved cash
flows generated from operating activities during 2020 and 2019 included
additional aircraft leases to customers and increased operating levels of the
ACMI Services segment. Operating cash flows for 2020 include the receipt of
$75.8 million of grant funds from the CARES Act. Cash outlays for pension
contributions were $10.8 million, $5.4 million and $22.2 million in 2020, 2019
and 2018, respectively.
Capital spending levels were primarily the result of aircraft modification costs
and the acquisition of aircraft for freighter modification. Cash payments for
capital expenditures were $510.4 million, $453.5 million and $292.9 million in
2020, 2019 and 2018, respectively. Capital expenditures in 2020 included $353.4
million for the acquisition of eleven Boeing 767-300 aircraft and freighter
modification costs; $76.0 million for required heavy maintenance; and $81.0
million for other equipment, including purchases of aircraft engines and
rotables. Capital expenditures in 2019 included $328.0 million for the
acquisition of eleven Boeing 767-300 aircraft and freighter modification costs;
$76.1 million for required heavy maintenance; and $49.4 million for other
equipment, including the purchases of aircraft engines and rotables. Our capital
expenditures in 2018 included $197.1 million for the acquisition of eight Boeing
767-300 aircraft and freighter modification costs; $61.7 million for required
heavy maintenance; and $34.1 million for other equipment, including purchases of
aircraft engines and rotables.
Cash proceeds of $24.6 million, $10.8 million and $17.6 million were received in
2020, 2019 and 2018, respectively, for the sale of aircraft engines and
airframes.
During 2020, 2019 and 2018, we spent $13.3 million, $24.4 million and $866.6
million, respectively, for acquisitions and investments in other businesses.
Spending in 2018 included $855.1 million for the acquisition of Omni, net of
cash acquired. During 2020, 2019 and 2018, we contributed $13.3 million, $12.3
million and $11.4 million, respectively, for entry and subsequent contributions
into a joint-venture with Precision Aircraft Solutions, LLC, to develop a
passenger-to-freighter conversion program for Airbus A321-200 aircraft. In 2019,
we acquired a group of companies that had been under common control referred to
as TriFactor, a material handling systems integrator.
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Net cash used in financing activities was $19.6 million in 2020 and net cash
provided by financing activities was $57.0 and $870.5 million in 2019 and 2018,
respectively. Our financing activities in 2020 included a debt offering of $500
million in senior unsecured notes (the "Senior Notes"). The net proceeds of
$500.0 million from the Senior Notes were used to pay down the revolving credit
facility. During 2020, we drew a total of $180.0 million from the revolving
credit facility. We made debt principal payments of $689.4 million including the
pay down of the revolving credit facility.
On November 9, 2018, in conjunction with the Omni acquisition, the Company
amended its Senior Credit Agreement to include a term loan of $675.0 million and
drew an additional $180.0 million from the revolving credit facility. In
addition to the acquisition of Omni, borrowing was required to purchase and
modify aircraft for deployment into air cargo markets.
During 2018, we spent $3.6 million to buy 157,000 shares of the Company's common
stock pursuant to a share repurchase plan authorized in 2014. The repurchase
plan, which originally authorized the Company to purchase up to $50.0 million of
common stock, was amended by the Board in May 2016 to increase such
authorization to up to $100 million and amended by the Board again in February
2018 to increase such authorization to up to $150 million.
Commitments
The table below summarizes the Company's contractual obligations and commercial
commitments (in thousands) as of December 31, 2020.
                                                                                       Payments Due By Year
Contractual Obligations                         Total                2021             2022 and 2023           2024 and 2025           2026 and after
Debt obligations, including interest
payments                                    $ 1,749,348$  53,882

$ 138,401$ 998,758$ 558,307 Facility leases

                                  33,558              9,525                  13,809                   9,128                    1,096
Aircraft and modification obligations           195,390            195,390                       -                       -                        -
Aircraft and other leases                        39,703              9,935                  15,316                  12,199                    2,253

Total contractual cash obligations $ 2,017,999$ 268,732

$ 167,526$ 1,020,085$ 561,656



The long-term debt bears interest at 1.125% to 4.75% per annum at December 31,
2020. For additional information about the Company's debt obligations, see Note
G of the accompanying financial statements in this report.
The Company provides defined benefit pension plans to certain employee groups.
The table above does not include cash contributions for pension funding, due to
the absence of scheduled maturities. The timing of pension and post-retirement
healthcare payments cannot be reasonably determined, except for $2.1 million
expected to be funded in 2021. For additional information about the Company's
pension obligations, see Note J of the accompanying financial statements in this
report.
As of December 31, 2020, the Company had eight aircraft that were in or awaiting
the modification process. Additionally, we placed non-refundable deposits to
purchase five more Boeing 767-300 passenger aircraft through 2021. We expect to
purchase additional aircraft for modification in 2021. We estimate that capital
expenditures for 2021 will total $500 million of which the majority will be
related to aircraft purchases and freighter modifications. Actual capital
spending for any future period will be impacted by aircraft acquisitions,
maintenance and modification processes. We expect to finance the capital
expenditures from current cash balances, future operating cash flows and the
Senior Credit Agreement. The Company outsources a significant portion of the
aircraft freighter modification process to a non-affiliated third party. The
modification primarily consists of the installation of a standard cargo door and
loading system. For additional information about the Company's aircraft
modification obligations, see Note I of the accompanying financial statements in
this report.
Since August 3, 2017, the Company has been part of a joint-venture with
Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter
conversion program for Airbus A321-200 aircraft. We anticipate approval of a
supplemental type certificate from the FAA in 2021. We expect to make
contributions equal to the Company's 49% ownership percentage of the program's
total costs during 2021.

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Liquidity

We have a Senior Credit Agreement with a consortium of banks that includes an
unsubordinated term loan of $612.2 million, net of debt issuance costs, and a
revolving credit facility from which the Company has drawn $140.0 million, net
of repayments, as of December 31, 2020. The Senior Credit Agreement expires in
November 2024 if certain liquidity measures are maintained during 2024 and
contains an incremental accordion capacity based on debt ratios. As of December
31, 2020, the unused revolving credit facility totaled $446.1 million and
additional permitted indebtedness under the Senior Credit Agreement subject to
compliance with other covenants, was limited to $250.0 million.
On January 28, 2020, we completed a debt offering of $500 million in senior
unsecured notes (the "Senior Notes"). The Senior Notes were sold only to
qualified institutional buyers in the United States pursuant to Rule 144A under
the Securities Act of 1933, as amended (the "Securities Act"), and certain
investors pursuant to Regulation S under the Securities Act. The Senior Notes
are senior unsecured obligations that bear interest at a rate of 4.75% per year,
payable semiannually in arrears on February 1 and August 1 of each year,
beginning on August 1, 2020. The Senior Notes will mature on February 1, 2028.
The Senior Notes contain customary events of default and covenants which are
generally no more restrictive than those set forth in the Senior Credit
Agreement.
The Senior Credit Agreement is collateralized by our fleet of Boeing 777, 767
and 757 freighter aircraft. Under the terms of the Senior Credit Agreement, we
are required to maintain collateral coverage equal to 115% of the outstanding
balances of the term loans and the total funded revolving credit facility. The
minimum collateral coverage which must be maintained is 50% of the outstanding
balance of the term loan plus the revolving credit facility commitment, which
was $600.0 million.
Under the Senior Credit Agreement, the Company is subject to covenants and
warranties that are usual and customary including, among other things,
limitations on certain additional indebtedness, guarantees of indebtedness, as
well as a total debt-to-EBITDA (earnings before interest, taxes, depreciation
and amortization expenses) ratio and a fixed charge coverage ratio. The Senior
Credit Agreement stipulates events of default including unspecified events that
may have a material adverse effect on the Company. If an event of default
occurs, the Company may be forced to repay, renegotiate or replace the Senior
Credit Agreement. The Senior Notes contain customary events of default and
covenants which are generally no more restrictive than those set forth in the
Senior Credit Agreement.
Additional debt or lower EBITDA may result in higher interest rates. Under the
Senior Credit Agreement, interest rates are adjusted quarterly based on the
prevailing LIBOR or prime rates and a ratio of the Company's outstanding debt
level to EBITDA. At the Company's current debt-to-EBITDA ratio, the
unsubordinated term loans, the Senior Notes and the revolving credit facility
bear variable interest rates of 1.4%, 4.75% and 1.4%, respectively.
At December 31, 2020, the Company had $39.7 million of cash balances. We believe
that the Company's current cash balances and forecasted cash flows provided from
its customer leases and operating agreements, combined with its Senior Credit
Agreement, will be sufficient to fund operations, capital spending, scheduled
debt payments and required pension funding for at least the next 12 months.
As described in Note D of the accompanying audited consolidated financial
statements in this report, the Company has issued warrants to Amazon. Vested
warrants for 14.9 million shares expiring on March 8, 2021, subject to extension
if required to obtain regulatory approvals, exemptions, authorizations, consents
or clearances (including the expiration or termination of any waiting periods),
have a cash purchase price of $145 million if Amazon elects to exercise these
warrants entirely in cash. Alternatively, Amazon may choose to settle the
warrants in a cashless exchange.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities ("SPEs"), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As of December 31, 2020 and 2019, we were not involved in any
material unconsolidated SPE transactions.
Certain of our operating leases and agreements contain indemnification
obligations to the lessor or one or more other parties that are considered usual
and customary (e.g. use, tax and environmental indemnifications), the terms of
which range in duration and are often limited. Such indemnification obligations
may continue after the expiration
                                       46
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of the respective lease or agreement. No amounts have been recognized in our financial statements for the underlying fair value of guarantees and indemnifications.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as certain disclosures included elsewhere in this report,
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to select
appropriate accounting policies and make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingencies. In certain cases, there are alternative policies
or estimation techniques which could be selected. On an ongoing basis, we
evaluate our selection of policies and the estimation techniques we use,
including those related to revenue recognition, post-retirement liabilities, bad
debts, self-insurance reserves, valuation of spare parts inventory, useful
lives, salvage values and impairment of property and equipment, income taxes,
contingencies and litigation. We base our estimates on historical experience,
current conditions and on various other assumptions that are believed to be
reasonable under the circumstances. Those factors form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources, as well as for identifying and assessing
our accounting treatment with respect to commitments and contingencies. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following significant and critical accounting
policies involve the more significant judgments and estimates used in preparing
the consolidated financial statements.
Revenue Recognition
Aircraft lease revenues are recognized as operating lease revenues on a
straight-line basis over the term of the applicable lease agreements. Revenues
generated from airline service agreements are typically recognized based on
hours flown or the amount of aircraft and crew resources provided during a
reporting period. Certain agreements include provisions for incentive payments
based upon on-time reliability. These incentives are typically measured on a
monthly basis and recorded to revenue in the corresponding month earned.
Revenues for operating expenses that are reimbursed through airline service
agreements, including consumption of aircraft fuel, are generally recognized as
the costs are incurred, on a net basis. Revenues from charter service agreements
are recognized on scheduled and non-scheduled flights when the specific flight
has been completed. Revenues from the sale of aircraft parts and engines are
recognized when the parts are delivered. The Company typically records revenues
and estimated earnings for its airframe maintenance and aircraft modification
contracts using the percentage-of-completion cost input method. Revenues derived
from sorting parcels are recognized in the reporting period in which the
services are performed.
Goodwill and Intangible Assets
We assess in the fourth quarter of each year whether the Company's goodwill
acquired in acquisitions is impaired in accordance with the Financial Accounting
Standards Board Accounting Standards Codification ("FASB ASC") Topic 350-20
Intangibles-Goodwill and Other. Additional assessments may be performed on an
interim basis whenever events or changes in circumstances indicate an impairment
may have occurred. Indefinite-lived intangible assets are not amortized but are
assessed for impairment annually, or more frequently if impairment indicators
occur. Finite-lived intangible assets are amortized over their estimated useful
economic lives and are periodically reviewed for impairment.
The goodwill impairment test requires significant judgment, including the
determination of the fair value of each reporting unit that has goodwill. We
estimate the fair value using a market approach and an income approach utilizing
discounted cash flows applied to a market-derived rate of return. The market
approach utilizes market multiples from comparable publicly traded companies.
The market multiples include revenues and EBITDA (earnings before interest,
taxes, depreciation and amortization). We derive cash flow assumptions from many
factors including recent market trends, expected revenues, cost structure,
aircraft maintenance schedules and long-term strategic plans for the deployment
of aircraft. Key assumptions under the discounted cash flow models include
projections for the number of aircraft in service, capital expenditures, long
term growth rates, operating cash flows and market-derived discount rates.
The performance of the goodwill impairment test is the comparison of the fair
value of the reporting unit to its respective carrying value. If the carrying
value of a reporting unit is less than its fair value no impairment exists. If
                                       47
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the carrying value of a reporting unit is higher than its fair value an
impairment loss is recorded for the difference and charged to operations. See
additional information about the goodwill impairment tests in Note C of the
accompanying consolidated financial statements.
Based on our analysis, the individual fair values of each reporting unit having
goodwill exceeded their respective carrying values as of December 31, 2020. We
have used the assistance of an independent business valuation firm in estimating
an expected market rate of return, and in the development of a market approach
for CAM and OAI separately, using multiples of EBITDA and revenues from
comparable publicly traded companies. Our key assumptions used for CAM's
goodwill testing include uncertainties, including the level of demand for cargo
aircraft by shippers, the DoD and freight forwarders and CAM's ability to lease
aircraft and the lease rates that will be realized. The demand for customer
airlift is projected based on input from customers, management's interface with
customer planning personnel and aircraft utilization trends. Our key assumptions
used for OAI's goodwill testing include the number of aircraft that OAI will
operate, the amount of revenues that the aircraft will generate, the number of
flight crews and cost of flight crews needed. We are assuming that demand for
commercial passenger flying will resume to pre-pandemic levels in 2023. Our key
assumptions used for Pemco's and TriFactor's goodwill testing includes the level
of revenues that customers will seek and the cost of labor, parts and contract
resources expected to be utilized. Certain events or changes in circumstances
could negatively impact our key assumptions. Customer preferences may be
impacted by changes in aviation fuel prices. Key customers, including DHL,
Amazon and the DoD may decide that they do not need as many aircraft as
projected or may find alternative providers.
Long-lived assets
Aircraft and other long-lived assets are tested for impairment whenever events
or changes in circumstances indicate the carrying value of the assets may not be
recoverable. Factors which may cause an impairment include termination of
aircraft from a customer's network, reduced demand due to an extended duration
of the pandemic, extended operating cash flow losses from the assets and
management's decisions regarding the future use of assets. To conduct impairment
testing, we group assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of cash flows of other assets
and liabilities. For assets that are to be held and used, impairment is
recognized when the estimated undiscounted cash flows associated with an asset
group is less than the carrying value. If impairment exists, an adjustment is
made to write the assets down to fair value, and a loss is recorded as the
difference between the carrying value and fair value. Fair values are determined
considering quoted market values, discounted cash flows or internal and external
appraisals, as applicable.
Depreciation
Depreciation of property and equipment is provided on a straight-line basis over
the lesser of an asset's useful life or lease term. We periodically evaluate the
estimated service lives and residual values used to depreciate our property and
equipment. The acceleration of depreciation expense or the recording of
significant impairment losses could result from changes in the estimated useful
lives of our assets. We may change the estimated useful lives due to a number of
reasons, such as the existence of excess capacity in our air networks, or
changes in regulations grounding or limiting the use of aircraft.
Self-Insurance
We self-insure certain claims related to workers' compensation, aircraft,
automobile, general liability and employee healthcare. We record a liability for
reported claims and an estimate for incurred claims that have not yet been
reported. Accruals for these claims are estimated utilizing historical paid
claims data and recent claims trends. Changes in claim severity and frequency
could result in actual claims being materially different than the costs provided
for in our results of operations. We maintain excess claims coverage with common
insurance carriers to mitigate our exposure to large claim losses.
Contingencies
We are involved in legal matters that have a degree of uncertainty associated
with them. We continually assess the likely outcomes of these matters and the
adequacy of amounts, if any, provided for these matters. There can be no
assurance that the ultimate outcome of these matters will not differ materially
from our assessment of them. There also can be no assurance that we know all
matters that may be brought against us at any point in time.
Income Taxes
We account for income taxes under the provisions of FASB ASC Topic 740-10 Income
Taxes. The objectives of accounting for income taxes are to recognize the amount
of taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in the
                                       48
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Company's financial statements or tax returns. Judgment is required in assessing
the future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Fluctuations in the actual outcome of
expected future tax consequences could materially impact the Company's financial
position or its results of operations.
The Company has significant deferred tax assets including net operating loss
carryforwards ("NOL CFs") for federal income tax purposes. Based upon
projections of taxable income, we determined that it was more likely than not
that the NOL CFs will be realized. Accordingly, we do not have an allowance
against these deferred tax assets at this time.
We recognize the impact of a tax position if that position is more likely than
not of being sustained on audit, based on the technical merits of the position.
Stock Warrants
The Company's accounting for warrants issued to a lessee is determined in
accordance with the financial reporting guidance for equity-based payments to
non-employees and for financial instruments. The warrants issued to lessees are
recorded as a lease incentive asset using their fair value at the time that the
lessee has met its performance obligation. The lease incentive is amortized
against revenues over the duration of related aircraft leases. The unexercised
warrants are classified in liabilities and re-measured to fair value at the end
of each reporting period, resulting in a non-operating gain or loss.
Post-retirement Obligations
The Company sponsors qualified defined benefit pension plans for ABX's flight
crewmembers and other eligible employees. The Company also sponsors
non-qualified, unfunded excess plans that provide benefits to executive
management and crewmembers that are in addition to amounts permitted to be paid
through our qualified plans under provisions of the tax laws. Employees are no
longer accruing benefits under any of the defined benefit pension plans. The
Company also sponsors unfunded post-retirement healthcare plans for ABX's flight
crewmembers.
The accounting and valuation for these post-retirement obligations are
determined by prescribed accounting and actuarial methods that consider a number
of assumptions and estimates. The selection of appropriate assumptions and
estimates is significant due to the long time period over which benefits will be
accrued and paid. The long term nature of these benefit payouts increases the
sensitivity of certain estimates on our post-retirement costs. In actuarially
valuing our pension obligations and determining related expense amounts, key
assumptions include discount rates, expected long term investment returns,
retirement ages and mortality. Actual results and future changes in these
assumptions could result in future costs that are materially different than
those recorded in our annual results of operations.
Our actuarial valuation includes an assumed long term rate of return on pension
plan assets of 5.75%. Our assumed rate of return is based on a targeted long
term investment allocation of 30% equity securities, 65% fixed income securities
and 5% cash. The actual asset allocation at December 31, 2020 was 30% equities,
69% fixed income and 1% cash. The pension trust includes $0.4 million of
investments (less than 1% of the plans' assets) whose fair values have been
estimated in the absence of readily determinable fair values. Such investments
include private equity, hedge fund investments and real estate funds.
Management's estimates are based on information provided by the fund managers or
general partners of those funds.
In evaluating our assumptions regarding expected long term investment returns on
plan assets, we consider a number of factors, including our historical plan
returns in connection with our asset allocation policies, assistance from
investment consultants hired to provide oversight over our actively managed
investment portfolio, and long term inflation assumptions. The selection of the
expected return rate materially affects our pension costs. Our expected long
term rate of return was 5.75% after analyzing expected returns on investment
vehicles and considering our long term asset allocation expectations.
Fluctuations in long-term interest rates can have an impact on the actual rate
of return. If we were to lower our long term rate of return assumption by a
hypothetical 100 basis points, expense in 2020 would be increased by
approximately $8.3 million. We use a market value of assets as of the
measurement date for determining pension expense.
In selecting the interest rate to discount estimated future benefit payments
that have been earned to date to their net present value (defined as the
projected benefit obligation), we match the plan's benefit payment streams to
high-quality bonds of similar maturities. The selection of the discount rate not
only affects the reported funded status information as of December 31 (as shown
in Note J to the accompanying consolidated financial statements in this
                                       49
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report), but also affects the succeeding year's pension and post-retirement
healthcare expense. The discount rates selected for December 31, 2020, based on
the method described above, were 2.55% for crewmembers and 2.75% for
non-crewmembers. If we were to lower our discount rates by a hypothetical 50
basis points, pension expense in 2020 would be increased by approximately $12.0
million.
Our mortality assumptions at December 31, 2020, reflect the most recent
projections released by the Actuaries Retirement Plans Experience Committee, a
committee within the Society of Actuaries, a professional association in North
America. The assumed future increase in salaries and wages is not a significant
estimate in determining pension costs because each defined benefit pension plan
was frozen during 2009 with respect to additional benefit accruals.
The following table illustrates the sensitivity of the aforementioned
assumptions on our pension expense, pension obligation and accumulated other
comprehensive income (in thousands):
                                                                            Effect of change
                                                                                      December 31, 2020
                                                                                                     Accumulated
                                                        2020                                            other
                                                       Pension                Pension               comprehensive
               Change in assumption                    expense              obligation             income (pre-tax)

100 basis point decrease in rate of return $ 8,263 $

           -          $               -
50 basis point decrease in discount rate                 11,993                 (56,337)                    56,337
Aggregate effect of all the above changes                20,256                 (56,337)                    56,337



New Accounting Pronouncements
For information regarding recently issued accounting pronouncements and the
expected impact on our annual statements, see Note A "SUMMARY OF FINANCIAL
STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES" in the accompanying
notes to Consolidated Financial Statements included in Part II, Item 8 of this
Form 10-K.

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