UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

________________________________________________________________
FORM 10-Q


x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20182019
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________


Commission file number 000-50368

atsglogocolora251.jpgAir Transport Services Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware 26-1631624
(State of Incorporation) (I.R.S. Employer Identification No.)
145 Hunter Drive, Wilmington, OH45177
(Address of Principal Executive Offices)(Zip Code)

145 Hunter Drive, Wilmington, OH45177
937-382-5591(Address of principal executive offices)
937-382-5591
(Registrant’s telephone number, including area code)

________________________________________________________________


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO oYes ☒No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO oYes ☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-acceleratedLarge Accelerated Filer
☒Accelerated filero (Do not check if a smaller reporting company)☐
Smaller reporting companyo
☐
Non-accelerated filer
☐Emerging growth companyo☐  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO  xYes ☐No  ☒
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareATSGNASDAQ Stock Market LLC
As of November 2, 2018, 59,080,3877, 2019, 59,371,805 shares of the registrant’s common stock, par value $0.01, were outstanding.

     









AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
    
    Page
PART I. FINANCIAL INFORMATION
Item 1.  
Financial Statements
4
   
Unaudited Condensed Consolidated Statements of OperationsBalance Sheets
4
   
Unaudited Condensed Consolidated Statements of Comprehensive IncomeOperations
5
   
Unaudited Condensed Consolidated Balance SheetsStatements of Comprehensive Income
6
  
Unaudited Condensed Consolidated Statements of Cash FlowsStockholders' Equity
7
   
Unaudited Condensed Consolidated Statements of Cash Flows
9
Notes to Unaudited Condensed Consolidated Financial Statements
810
Item 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2730
Item 3.  
Quantitative and Qualitative Disclosures About Market Risk
3842
Item 4.  
Controls and Procedures
3842
   
PART II. OTHER INFORMATION
Item 1.  
Legal Proceedings
3943
Item 1A.  
Risk Factors
3943
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
3943
Item 5. 
Other Information
3943
Item 6.  
Exhibits
4044
SIGNATURES
4145








FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
The financial information, including the financial statements, included in the Quarterly Report on Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the Securities and Exchange Commission on March 1, 2018.2019.
The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements and other information regarding Air Transport Services Group, Inc. at www.sec.gov. Additionally, our filings with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, are available free of charge from our website at www.atsginc.com as soon as reasonably practicable after filing with the SEC.


FORWARD LOOKING STATEMENTS
Statements contained in this Quarterly report on Form 10-Q that are not historical facts are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). Words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms and expressions are intended to identify forward-looking statements. These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described in this report and in our 20172018 Annual Report filed on Form 10-K with the Securities and Exchange Commission.







PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 September 30, December 31,
 2019 2018
ASSETS   
CURRENT ASSETS:   
Cash, cash equivalents and restricted cash$46,833
 $59,322
Accounts receivable, net of allowance of $2,793 in 2019 and $1,444 in 2018135,907
 147,755
Inventory32,776
 33,536
Prepaid supplies and other18,018
 18,608
TOTAL CURRENT ASSETS233,534
 259,221
Property and equipment, net1,707,332
 1,555,005
Customer incentive151,271
 63,780
Goodwill and acquired intangibles530,512
 535,359
Operating lease assets54,473
 —
Other assets67,711
 57,220
TOTAL ASSETS$2,744,833
 $2,470,585
LIABILITIES AND STOCKHOLDERS’ EQUITY   
CURRENT LIABILITIES:   
Accounts payable$132,508
 $109,843
Accrued salaries, wages and benefits50,080
 50,932
Accrued expenses15,656
 19,623
Current portion of debt obligations43,451
 29,654
Current portion of lease obligations14,794
 —
Unearned revenue20,153
 19,082
TOTAL CURRENT LIABILITIES276,642
 229,134
Long term debt1,408,086
 1,371,598
Stock warrant obligations308,074
 203,782
Post-retirement obligations54,066
 64,485
Long term lease obligations38,541
 —
Other liabilities53,410
 51,905
Deferred income taxes125,018
 113,243
TOTAL LIABILITIES2,263,837
 2,034,147
Commitments and contingencies (Note H)

 

STOCKHOLDERS’ EQUITY:   
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock—
 —
Common stock, par value $0.01 per share; 150,000,000 shares authorized; 59,368,570 and 59,134,173 shares issued and outstanding in 2019 and 2018, respectively594
 591
Additional paid-in capital474,915
 471,158
Retained earnings86,085
 56,051
Accumulated other comprehensive loss(80,598) (91,362)
TOTAL STOCKHOLDERS’ EQUITY480,996
 436,438
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,744,833
 $2,470,585
    
See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, September 30,September 30, September 30,
2018 2017 2018 20172019 2018 2019 2018
REVENUES$204,919
 $254,101
 $611,566
 $745,229
$366,073
 $204,919
 $1,048,832
 $611,566
OPERATING EXPENSES              
Salaries, wages and benefits71,341
 61,177
 216,173
 199,496
110,706
 71,341
 307,897
 216,173
Depreciation and amortization43,201
 37,605
 124,825
 111,828
64,149
 43,201
 190,052
 124,825
Maintenance, materials and repairs33,469
 33,100
 107,152
 100,970
41,496
 33,469
 125,501
 107,152
Fuel5,981
 34,035
 17,682
 101,134
41,193
 5,981
 110,311
 17,682
Contracted ground and aviation services2,636
 40,445
 7,464
 93,283
17,190
 2,636
 47,319
 7,464
Travel6,903
 6,357
 20,823
 20,543
25,366
 6,903
 66,401
 20,823
Landing and ramp1,211
 4,682
 3,670
 14,338
2,539
 1,211
 7,978
 3,670
Rent3,274
 3,052
 10,264
 10,091
4,123
 3,274
 11,860
 10,264
Insurance1,696
 1,234
 4,473
 3,451
1,833
 1,696
 5,601
 4,473
Transaction fees—
 —
 373
 —
Other operating expenses8,380
 7,962
 20,672
 24,588
16,712
 8,380
 50,763
 20,672
178,092
 229,649
 533,198
 679,722
325,307
 178,092
 924,056
 533,198
OPERATING INCOME26,827
 24,452
 78,368
 65,507
40,766
 26,827
 124,776
 78,368
OTHER INCOME (EXPENSE)              
Interest income67
 37
 144
 85
78
 67
 255
 144
Non-service component of retiree benefit costs2,045
 (5,529) 6,135
 (5,883)
Net gain (loss) on financial instruments17,895
 (34,433) 28,707
 (100,213)
Loss from non-consolidated affiliate(2,647) (945) (7,600) (945)
Non-service component of retiree benefit (costs) credits(2,351) 2,045
 (7,053) 6,135
Net gain on financial instruments91,952
 17,895
 60,566
 28,707
Loss from non-consolidated affiliates(2,645) (2,647) (12,459) (7,600)
Interest expense(5,608) (4,351) (16,336) (11,658)(16,712) (5,608) (50,906) (16,336)
11,752
 (45,221) 11,050
 (118,614)70,322
 11,752
 (9,597) 11,050
              
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES38,579
 (20,769) 89,418
 (53,107)
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES111,088
 38,579
 115,179
 89,418
INCOME TAX EXPENSE(5,646) (7,460) (16,339) (19,244)(6,003) (5,646) (14,092) (16,339)
EARNINGS (LOSS) FROM CONTINUING OPERATIONS32,933
 (28,229) 73,079
 (72,351)
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES170
 (4,655) 536
 (4,271)
NET EARNINGS (LOSS)$33,103
 $(32,884) $73,615
 $(76,622)
EARNINGS FROM CONTINUING OPERATIONS105,085
 32,933
 101,087
 73,079
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES243
 170
 305
 536
NET EARNINGS$105,328
 $33,103
 $101,392
 $73,615
              
BASIC EARNINGS (LOSS) PER SHARE       
BASIC EARNINGS PER SHARE       
Continuing operations$0.56
 $(0.48) $1.24
 $(1.23)$1.78
 $0.56
 $1.72
 $1.24
Discontinued operations—
 (0.08) 0.01
 (0.07)0.01
 —
 —
 0.01
TOTAL BASIC EARNINGS (LOSS) PER SHARE$0.56
 $(0.56) $1.25
 $(1.30)
TOTAL BASIC EARNINGS PER SHARE$1.79
 $0.56
 $1.72
 $1.25
              
DILUTED EARNINGS (LOSS) PER SHARE       
DILUTED EARNINGS PER SHARE       
Continuing operations$0.24
 $(0.48) $0.71
 $(1.23)$0.19
 $0.24
 $0.43
 $0.71
Discontinued operations—
 (0.08) 0.01
 (0.07)0.01
 —
 —
 0.01
TOTAL DILUTED EARNINGS (LOSS) PER SHARE$0.24
 $(0.56) $0.72
 $(1.30)
TOTAL DILUTED EARNINGS PER SHARE$0.20
 $0.24
 $0.43
 $0.72
              
WEIGHTED AVERAGE SHARES              
Basic58,739
 58,733
 58,773
 58,965
58,919
 58,739
 58,889
 58,773
Diluted68,323
 58,733
 68,629
 58,965
68,718
 68,323
 69,382
 68,629


See notes to condensed consolidated financial statements.


AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 30, September 30,September 30, September 30,
2018 2017 2018 20172019 2018 2019 2018
NET EARNINGS (LOSS)$33,103
 $(32,884) $73,615
 $(76,622)
NET EARNINGS$105,328
 $33,103
 $101,392
 $73,615
OTHER COMPREHENSIVE INCOME (LOSS):              
Defined Benefit Pension687
 5,763
 2,061
 8,232
2,965
 687
 9,189
 2,061
Defined Benefit Post-Retirement43
 37
 127
 111
33
 43
 102
 127
Foreign Currency Translation22
 (15) (117) 121
(1) 22
 1,473
 (117)
              
TOTAL COMPREHENSIVE INCOME (LOSS), net of tax$33,855
 $(27,099) $75,686
 $(68,158)
TOTAL COMPREHENSIVE INCOME, net of tax$108,325
 $33,855
 $112,156
 $75,686


See notes to condensed consolidated financial statements.




AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
 September 30, December 31,
 2018 2017
ASSETS   
CURRENT ASSETS:   
Cash and cash equivalents$43,462
 $32,699
Accounts receivable, net of allowance of $1,014 in 2018 and $2,445 in 201793,662
 109,114
Inventory24,412
 22,169
Prepaid supplies and other15,698
 20,521
TOTAL CURRENT ASSETS177,234
 184,503
Property and equipment, net1,226,500
 1,159,962
Lease incentive68,006
 80,684
Goodwill and acquired intangibles43,710
 44,577
Convertible note hedges—
 53,683
Other assets37,618
 25,435
TOTAL ASSETS$1,553,068
 $1,548,844
LIABILITIES AND STOCKHOLDERS’ EQUITY   
CURRENT LIABILITIES:   
Accounts payable$101,205
 $99,728
Accrued salaries, wages and benefits31,416
 40,127
Accrued expenses11,387
 10,455
Current portion of debt obligations14,860
 18,512
Unearned revenue15,204
 15,850
TOTAL CURRENT LIABILITIES174,072
 184,672
Long term debt527,226
 497,246
Convertible note obligations—
 54,359
Stock warrant obligations186,093
 211,136
Post-retirement obligations29,355
 61,355
Other liabilities46,334
 45,353
Deferred income taxes119,289
 99,444
TOTAL LIABILITIES1,082,369
 1,153,565
Commitments and contingencies (Note H)
 
STOCKHOLDERS’ EQUITY:   
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock—
 —
Common stock, par value $0.01 per share; 110,000,000 shares authorized; 59,080,387 and 59,057,195 shares issued and outstanding in 2018 and 2017, respectively591
 591
Additional paid-in capital470,676
 471,456
Retained earnings (accumulated deficit)60,381
 (13,748)
Accumulated other comprehensive loss(60,949) (63,020)
TOTAL STOCKHOLDERS’ EQUITY470,699
 395,279
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,553,068
 $1,548,844
    
 Common Stock 
Additional
Paid-in
Capital
 Accumulated Earnings (Deficit) 
Accumulated
Other
Comprehensive
Income (Loss)
 Total
 Number Amount 
BALANCE AT JUNE 30, 201859,080,387
 $591
 $469,412
 $27,278
 $(61,701) $435,580
Stock-based compensation plans           
Amortization of stock awards and restricted stock    1,264
     1,264
Total comprehensive income      33,103
 752
 33,855
BALANCE AT SEPTEMBER 30, 201859,080,387
 $591
 $470,676
 $60,381
 $(60,949) $470,699
            
BALANCE AT JANUARY 1, 201859,057,195
 $591
 $471,456
 $(13,748) $(63,020) $395,279
Stock-based compensation plans           
Grant of restricted stock101,400
 1
 (1)     —
Issuance of common shares, net of withholdings80,092
 1
 (1,333)     (1,332)
Forfeited restricted stock(1,300) —
 —
     —
Purchase of common stock(157,000) (2) (3,578)     (3,580)
Reclassification of bond hedge, net of taxes    (50,435)     (50,435)
Reclassification of note conversion obligation, net of taxes    50,999
     50,999
Cumulative effect in change in accounting principle      514
   514
Amortization of stock awards and restricted stock    3,568
     3,568
Total comprehensive income      73,615
 2,071
 75,686
BALANCE AT SEPTEMBER 30, 201859,080,387
 $591
 $470,676
 $60,381
 $(60,949) $470,699
            

See notes to condensed consolidated financial statements.


AIR TRANSPORT SERVICES GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, cont.
(In thousands, except share data)

 Common Stock Additional
Paid-in
Capital		 Accumulated Earnings (Deficit) Accumulated
Other
Comprehensive
Income (Loss)		 Total
 Number Amount 
BALANCE AT JUNE 30, 201959,363,839
 $594
 $473,053
 $(19,243) $(83,595) $370,809
Stock-based compensation plans           
Grant of restricted stock7,500
 —
 —
     —
Issuance of common shares, net of withholdings(1,069) —
 (25)     (25)
Forfeited restricted stock(1,700) —
 —
     —
Amortization of stock awards and restricted stock    1,887
     1,887
Total comprehensive income (loss)      105,328
 2,997
 108,325
BALANCE AT SEPTEMBER 30, 201959,368,570
 $594
 $474,915
 $86,085
 $(80,598) $480,996
            
BALANCE AT JANUARY 1, 201959,134,173
 $591
 $471,158
 $56,051
 $(91,362) $436,438
Stock-based compensation plans           
Grant of restricted stock151,300
 2
 (2)     —
Issuance of common shares, net of withholdings86,097
 1
 (1,522)     (1,521)
Forfeited restricted stock(3,000) —
 —
     —
Cumulative effect in change in accounting principle      (71,358)   (71,358)
Amortization of stock awards and restricted stock    5,281
     5,281
Total comprehensive income      101,392
 10,764
 112,156
BALANCE AT SEPTEMBER 30, 201959,368,570
 $594
 $474,915
 $86,085
 $(80,598) $480,996
            

See notes to condensed consolidated financial statements.



AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months EndedNine Months Ended
September 30September 30,
2018 20172019 2018
OPERATING ACTIVITIES:      
Net earnings (loss) from continuing operations$73,079
 $(72,351)
Net earnings (loss) from discontinued operations536
 (4,271)
Net earnings from continuing operations$101,087
 $73,079
Net earnings from discontinued operations305
 536
Adjustments to reconcile net earnings to net cash provided by operating activities:      
Depreciation and amortization143,471
 121,589
210,641
 143,471
Pension and post-retirement2,826
 18,916
11,775
 2,826
Deferred income taxes15,972
 15,986
14,036
 15,972
Amortization of stock-based compensation3,568
 2,648
5,281
 3,568
Loss from non-consolidated affiliates12,458
 7,600
Net (gain) loss on financial instruments(28,707) 100,213
(60,566) (28,707)
Changes in assets and liabilities:      
Accounts receivable18,159
 11,770
13,842
 18,159
Inventory and prepaid supplies477
 (2,661)14
 477
Accounts payable1,097
 11,698
(2,410) 1,097
Unearned revenue(1,412) 6,995
2,830
 (1,412)
Accrued expenses, salaries, wages, benefits and other liabilities(4,618) (7,357)5,129
 (4,618)
Pension and post-retirement assets(32,000) (10,658)(10,419) (32,000)
Other8,365
 (1,244)3,135
 765
NET CASH PROVIDED BY OPERATING ACTIVITIES200,813
 191,273
307,138
 200,813
INVESTING ACTIVITIES:      
Capital expenditures(214,025) (218,759)
Expenditures for property and equipment(336,944) (214,025)
Proceeds from property and equipment17,473
 9
11,087
 17,473
Acquisitions and investments in businesses(8,285) (6,900)
Redemption of long term deposits—
 9,975
Acquisitions and investments in businesses, net of cash acquired(21,762) (8,285)
NET CASH (USED IN) INVESTING ACTIVITIES(204,837) (215,675)(347,619) (204,837)
FINANCING ACTIVITIES:      
Principal payments on long term obligations(39,889) (250,131)(38,906) (39,889)
Other financing payments(500) —
Proceeds from borrowings60,000
 90,000
70,000
 60,000
Proceeds from convertible notes—
 258,750
Payments for financing costs(414) (6,469)(1,081) (414)
Purchase convertible note hedges—
 (56,097)
Proceeds from issuance of warrants—
 38,502
Purchase of common stock(3,581) (11,184)—
 (3,581)
Withholding taxes paid for conversion of employee stock awards(1,329) (1,436)(1,521) (1,329)
NET CASH PROVIDED BY FINANCING ACTIVITIES14,787
 61,935
27,992
 14,787
      
NET INCREASE IN CASH AND CASH EQUIVALENTS10,763
 37,533
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR32,699
 16,358
CASH AND CASH EQUIVALENTS AT END OF PERIOD$43,462
 $53,891
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:   
INCREASE (DECREASE)(12,489) 10,763
BEGINNING OF YEAR59,322
 32,699
END OF PERIOD$46,833
 $43,462
      
SUPPLEMENTAL CASH FLOW INFORMATION:      
Interest paid, net of amount capitalized$9,087
 $11,229
$45,399
 $9,087
Federal alternative minimum and state income taxes paid$1,212
 $1,285
Income taxes paid$533
 $1,212
SUPPLEMENTAL NON-CASH INFORMATION:      
Accrued capital expenditures$23,775
 $12,561
Accrued expenditures for property and equipment$35,528
 $23,775
See notes to condensed consolidated financial statements.


AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE A—SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES


Nature of Operations
Air Transport Services Group, Inc. is a holding company whose subsidiaries primarily operate within the airfreight and logistics industry. The Company leaseslease aircraft, and providesprovide contracted airline operations, ground services, aircraft modification and maintenance services and other support services.services mainly to the air transportation, e-commerce and package delivery industries. The Company's subsidiaries offer a range of complementary services to delivery companies, freight forwarders, airlines and government customers.
The Company's leasing subsidiary, Cargo Aircraft Management, Inc. (“CAM”), leases aircraft to each of the Company's airlines as well as to non-affiliated airlines and other lessees. The airlines, ABX Air, Inc. (“ABX”) and, Air Transport International, Inc. (“ATI”), and Omni Air International LLC ("OAI" ) each have the authority, through their separate U.S. Department of Transportation ("DOT") and Federal Aviation Administration ("FAA") certificates, to transport cargo worldwide. The Company's airlines provideCompany provides air transportation services to a concentrated base of customers. The Company provides a combination of aircraft, crews, maintenance and insurance services for a customer's transportation network through customer "CMI" and "ACMI" agreements and through charter contracts in which aviationaircraft fuel is also included. ATI provides passenger transportation, primarilyIn addition to the U.S. Military, using "combi"its aircraft which are certified to carry passengers as well as cargo on the main deck. Through its subsidiary Airborne Maintenanceleasing and Engineering Services, Inc. ("AMES"),airline services the Company sells aircraft parts, provides aircraft maintenance and modification services. In addition, the Company provides groundservices, equipment maintenance services and operates mailarranges load transfer and package sorting facilities.services for customers.
Basis of Presentation
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and such principles are applied on a basis consistent with the financial statements reflected in our Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the air cargo industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year or any interim period. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. The accounting estimates reflect the best judgment of management, but actual results could differ materially from those estimates.
The accompanying condensed consolidated financial statements include the accounts of Air Transport Services Group, Inc. and its wholly-owned subsidiaries. Investments in affiliates in which the Company has significant influence but does not exercise control are accounted for using the equity method of accounting. UsingUnder the equity method, the Company’s share of the nonconsolidated affiliates'affiliate's income or loss is recognized in the consolidated statement of earnings and cumulative post-acquisition changes in the investment are adjusted against the carrying amount of the investment. Investments in affiliates in which the Company does not exercise control or have significant influence are reflected at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Inter-company balances and transactions are eliminated.
On November 9, 2018, the Company acquired OAI, a passenger airline, along with related entities Advanced Flight Services, LLC; Omni Aviation Leasing, LLC; and T7 Aviation Leasing, LLC (referred to collectively herein as "Omni"). OAI is a leading provider of contracted passenger airlift for the U.S. Department of Defense ("DoD") via the Civil Reserve Air Fleet ("CRAF") program, and a provider of full-service passenger charter and ACMI services. OAI carries passengers worldwide for a variety of private sector customers and other government services agencies. Revenues and

operating expenses include the activities of Omni for periods since their acquisition by the Company on November 9, 2018.
On February 1, 2019, the Company acquired a group of companies that had been under common control, including TriFactor Solutions, LLC, (referred to as "Trifactor"). Trifactor resells material handling equipment and provides engineering design solutions for warehousing, retail distribution and e-commerce operations. Revenues and operating expenses include the activities of TriFactor for periods since its acquisition by the Company. The acquisition of TriFactor did not have a significant impact on the Company's financial statements or results of operations.
Accounting Standards Updates
Effective January 1, 2018, the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("Topic 606”) which superseded previous revenue recognition guidance. Topic 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The Company's lease revenues within the scope of ASCAccounting Standards Codification 840, Leases, ("Topic 840") are specifically excluded from Topic 606.

The Company adopted the standard using a modified retrospective approach, under which financial statements are prepared under the revised guidance for the year of adoption, but not for prior years. Under this method, entities recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for open contract performance at that time. The Company's adoption efforts included the identification of revenue within the scope of the standard, the evaluation of customer contracts in conjunction with new guidance and an assessment of the qualitative and quantitative impacts of the new standard on its financial statements. The evaluation included the application of each of the five steps identified in the Topic 606 revenue recognition model.
The Company determined that under Topic 606, it is an agent for aviation fuel and certain other costs reimbursed by customers under its ACMI and CMI contracts and for certain cargo handling services that it arranges for a customer. Under the new revenue standard, such reimbursed amounts are reported net of the corresponding expenses beginning in 2018. This application of Topic 606 did not have a material impact on the Company's reported earnings in any period. Additionally under Topic 606, the Company is required to record revenue over time, instead of at the time of completion, for certain customer contracts for airframe and modification services that do not have an alternative use and for which the Company has an enforceable right to payment during the service cycle. The Company adopted the provisions of this new standard using the modified retrospective method which requires the Company to record a one timeone-time adjustment to retained deficit for the cumulative effect that the standard has on open contracts at the time of adoption. UponIn conjunction with the adoption of the new standard, the Company accelerated $3.6 million of revenue resulting in an immaterial adjustment to its January 1, 2018 retained deficit for open airframe and modification services contracts.
In January 2017, the FASB issued ASU "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" (“ASU 2017-04”). This new standard eliminates Step 2 from the goodwill impairment test and requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for any annual or interim goodwill impairment tests in the fiscal years beginning after December 15, 2019 and must be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates afterEffective January 1, 2017.2019 the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update No. 2016-02, “Leases (Topic 842)” which superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease model that requires a company to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The Company adopted this new accounting guidance in Januarythe standard using the modified retrospective approach that does not require the restatement of 2018.prior year financial statements. The adoption of Topic 842 did not have ana material impact on the Company’s consolidated statement of operations and consolidated statement of cash flows. The adoption of Topic 842 resulted in the recognition of ROU assets and corresponding lease liabilities as of January 1, 2019 in the amount of $52.6 million for leases classified as operating leases. Topic 842 also applies to the Company's aircraft lease revenues, however, the adoption of Topic 842 did not have a significant impact on the Company's financial position, results of operations, or cash flows.accounting for its customer lease agreements.
In March 2017, the FASB issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost "(ASU 2017-07"). ASU 2017-07 requires an employer to report the service cost component of retiree benefits in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. The Company adopted ASU 2017-07 on January 1, 2018, retrospectivelythe package of practical expedients and transition provisions available for expired or existing contracts, which allowed the Company to all periods presented. As a result, retiree benefit plan interest expense, investment returns, settlementscarryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification and other non-service cost3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of retiree benefit expenses are excluded fromleases as a single lease component. The Company also elected the Company's operating income subtotal as reported inhindsight practical expedient to determine the Company's Consolidated Statement of Operations, but remain included in earnings before income taxes. Information about retiree benefit plans' interest expense, investment returns and other components of retiree benefit expenses can be found in Note I.
In February 2016,reasonably certain lease term for existing leases. Further, the FASB issued ASU "Leases (Topic 842)" ("ASU 2016-02"), which will requireCompany elected the short-term lease exception policy, permitting it to exclude the recognition of right to-use-assets and lease liabilitiesrequirements for leases previously classified as operating leases by lessees. The standard will take effectwith terms of 12 months or less. See Note H for annual reporting periods beginning after December 15, 2018, including interim reporting periods. Early application will be permitted for all entities. In addition, the FASB has decided to require a lessee to apply a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements (the date of initial application). The modified retrospective approach would not require any transition accounting for leases that expired before the date of initial application. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.

additional information about leases.
In February 2018, the FASB issued ASU No. 2018-02 “Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income" ("ASU 2018-02"). ASU 2018-02 amends ASC 220, Income Statement —- Reporting Comprehensive Income, to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. federal tax legislation known as the Tax Cuts and Jobs Act. In addition, under the ASU 2018-02, a Company will be required to provide certain disclosures regarding stranded tax effects. ASU 2018-02 is effective for years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.elected to retain stranded tax effects in accumulated other comprehensive income.
In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-based Payment Accounting" ("ASU 2018-07"). ASU 2018-07 amends ASC 718, "Compensation - Stock Compensation" ("ASC 718"), to simplifywith the accounting for share-based payments granted to non-employees for goods and services. ASU 2018-07 supersedes ASC 505-50, "Equity-Based Payments to Non-employees" ("ASC 505-50"). ASU 2018-07 aligns muchintent of simplifying the accounting for share-based payments granted to non-employees for goods and services and aligning the accounting for share-based payments granted to non-employees with the accounting for share-based payments granted to employees. The Company adopted ASU 2018-07 on January 1, 2019 using the modified

retrospective approach as required. ASU 2018-07 replaced ASC 505-50, "Equity-Based Payments to Non-employees" ("ASC 505-50") which was previously applied by the Company for warrants granted to Amazon.com, Inc. ("Amazon") as customer incentives. As a result of ASU 2018-07, the Company applied accounting guidance for financial instruments to the unvested warrants conditionally granted to Amazon in conjunction with an investment agreement reached with Amazon on December 22, 2018. Applying ASU 2018-07 as of January 1, 2019, through the modified retrospective approach, resulted in the recognition of $176.9 million for unvested warrant liabilities, $100.1 million for customer incentive assets and cumulative-effect adjustments of $71.4 million to reduce retained earnings for customer incentives that were not probable of being realized.
The adoption of ASU 2018-07 on January 1, 2019 did not have an impact on the accounting for vested warrants.

NOTE B—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS
The changes in the carrying amount of goodwill, by operating segment, are as follows:
  CAM ACMI Services All Other Total
Carrying value as of December 31, 2018 $153,290
 $234,571
 $2,884
 $390,745
Acquisition of TriFactor —
 —
 5,229
 5,229
Carrying value as of September 30, 2019 $153,290
 $234,571
 $8,113
 $395,974

Changes in the carrying amount of acquired intangible assets are as follows (in thousands):
  Airline Amortizing  
  Certificates Intangibles Total
Carrying value as of December 31, 2018 $9,000
 $135,614
 $144,614
Amortization —
 (8,576) (8,576)
Right of use asset —
 (1,500) (1,500)
Carrying value as of September 30, 2019 $9,000
 $125,538
 $134,538

The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangibles assets, including customer relationship and STC intangibles, over 4 to 20 years.
The acquisition of Omni by the Company is effective for years beginning after December 15, 2018,reported in accordance with Accounting Standards Codification 805, Business Combinations, in which the total purchase price is allocated to Omni’s tangible and interim periods within those fiscal years. Early adoption is permitted. Companies will apply the new guidance to equity-classified non-employee awards for which a measurement date has not been establishedintangible assets acquired and liability-classified non-employee awards that have not been settledliabilities assumed based on their estimated fair values as of the date of adoption by recognizing a cumulative-effect adjustmentthe acquisition. The excess of the purchase price over the estimated fair value of net assets acquired was recorded as goodwill. The purchase price exceeded the fair value of the net assets acquired due to retained earningsthe strategic opportunities and expected benefits associated with adding Omni's capabilities to the Company's existing offerings in the market. The allocation of the purchase price to specific assets and liabilities is based, in part, upon preliminary valuations from internal estimates and independent appraisals.
The following table provides pro forma condensed combined financial information (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 results 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 annual periodquarter indicated, or to project the Company’s financial position or results of adoption.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. Combined results for Air Transport Services Group and Omni for the three and nine month periods ended September 30, 2018 were adjusted for the following in order to create the unaudited pro forma results in the table:
  Three Months Ended Nine Months Ended
  September 30, 2018 September 30, 2018
Pro forma revenues $328,412
 $962,069
Pro forma net earnings from continuing operations 32,144
 86,273

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 three and nine month periods ended September 30, 2018.
Adjustment to reflect estimated additional depreciation and amortization expense of $2.6 million and $7.9 million for the three and nine month periods ended September 30, 2018, resulting primarily from the fair value adjustments to Omni’s intangible 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 policies and intent to modify certain aircraft to freighters as an aircraft is removed from passenger service.
Adjustment to reflect additional interest expense and amortization of debt issuance costs for the three and nine month periods ended September 30, 2018, related to the combined $855 million from an unsubordinated term loan and revolving facility draws using the prevailing rates of 4.57%.
In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden ("West"). In April 2019, West issued additional shares to a new investor in conjunction with a capital investment and purchase agreement which reduced the Company's ownership to approximately 10% and reduced the Company's influence over West. West, through its two airlines, Atlantic Airlines Ltd. and West Air Sweden AB, operates a fleet of aircraft on behalf of European regional mail carriers and express logistics providers. The airlines operate a combined fleet of British Aerospace ATPs, Bombardier CRJ-200-PFs, and Boeing 767 and 737 aircraft. West leases three Boeing 767 aircraft and one Boeing 737 from the Company.
On August 3, 2017, the Company entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The Company is currently evaluatinganticipates approval of a supplemental type certificate from the impactFAA in 2020. The Company expects to make contributions equal to its 49% ownership percentage of the standard onprogram's total costs over the next year. During the nine month periods ending September 30, 2019 and 2018, the Company contributed $9.8 million and $8.3 million to the joint venture, respectively.
The carrying value of West and the joint venture totaled $13.3 million and $12.5 million at September 30, 2019 and December 31, 2018, respectively, and are reflected in “Other Assets” in the Company’s consolidated balance sheets. The Company monitors its financial statementsaffiliates for indications that the fair value of an investment may have declined, which could result in the recognition of an impairment loss if the carrying value is greater than the estimated fair value of that investment.
Stock warrants issued to a customer (see Note C) as an incentive are recorded as an asset using their fair value at the time that the customer has met its performance obligation and disclosures.are amortized against revenues over the duration of the related customer contract. The Company's incentives granted to customers were as follows (in thousands):

  Customer
  Incentive
Carrying value as of December 31, 2018 $63,780
Warrants granted 100,076
Amortization (12,585)
Carrying value as of September 30, 2019 $151,271




NOTE B—C—SIGNIFICANT CUSTOMERS
DHL
The Company has had long term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. Revenues from aircraft leases and related services performed for DHL were approximately 27%13% and 27%14% of the Company's consolidated revenues from continuing operations for the three and nine month periods ending September 30, 2018,2019, respectively, compared to 25%27% and 25%27% for the corresponding periods of 2017. Revenues excluding directly reimbursed expenses from continuing operations performed for DHL comprised approximately 32% and 31% of the Company's consolidated revenues from continuing operations for the three and nine month periods ending September 30, 2017.2018. The Company’s balance sheets include accounts receivable with DHL of $12.3$12.0 million and $15.7$13.4 million as of September 30, 20182019 and December 31, 2017,2018, respectively.
The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Leases for eleven Boeing 767 aircraft expire in March and April 2022, leases for two aircraft expire in 2023 and another aircraft lease expires in 2024. Under a separate crew, maintenance and insurance (“CMI”)CMI agreement, the Company operates Boeing 767 aircraft that DHL leases from the Company. Pricing for services provided through the CMI agreement is based on pre-defined fees, scaled for the number of aircraft operated and the number of flight crews provided to DHL for its U.S. network. The Company provides DHL with scheduled maintenance services for aircraft that DHL leases. The Company also provides Boeing 767 and Boeing 757 air cargo transportation services for DHL through additional ACMI agreements in which the Company provides the aircraft, crews, maintenance and insurance under a single contract. Revenues generated from the ACMI agreements are typically based on hours flown. The Company also provides ground equipment, such as power units, air starts and related maintenance services to DHL under separate agreements.
Amazon
The Company has been providing freighter aircraft and services for cargo handling and logistical support for Amazon.com Services, Inc. ("ASI"), successor to Amazon Fulfillment Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon"), since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with ASI, pursuant to which CAM leases 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200 freighter aircraft for aan original term of five years and eight Boeing 767-300 freighter aircraft for aan original term of seven years. The ATSA also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the management of ground services at certain locations by the Company's subsidiary LGSTX Services Inc. ("LGSTX"). The ATSA became effective on April 1, 2016 and has ahad an original term of five years. CAM owns all 20 of the Boeing 767 aircraft that are leased and operated under the ATSA.

Revenues from continuing operations performed for Amazon comprised approximately 31% and 29% of the Company's consolidated revenues from continuing operations for the three and nine month periods ending September 30, 2018, respectively, compared to 45% and 42% for the corresponding periods of 2017. Revenues excluding directly reimbursed expenses from continuing operations performed for Amazon comprised approximately 27% and 27% of the Company's consolidated revenues from continuing operations for the three and nine month period ending September 30, 2017. The Company’s balance sheets include accounts receivable with Amazon of $37.3 million and $44.2 million as of September 30, 2018 and December 31, 2017, respectively.
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants in three tranches which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common shares as described below. The first tranche of warrants, issued upon the execution of the Investment Agreement and all of which are now fully vested, granted Amazon the right to purchase approximately 12.81 million ATSG common shares, with the first 7.69 million common shares vesting upon issuance on March 8, 2016, and the remaining 5.12 million common shares vesting as the Company delivered additional aircraft leased under the ATSA. The second tranche of warrants, which were issued and vested on March 8, 2018, grants Amazon the right to purchase approximately 1.59 million ATSG common shares. The third tranche of warrants will be issued and vest on September 8, 2020, and will grant Amazon the right to purchase such additional number of ATSG common shares as is necessary to bring Amazon’s ownership to 19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company following the date of the Investment Agreement and after giving effect to the warrants granted. The exercise price of the warrants is $9.73 per share, which represents the closing price of ATSG’s common shares on February 9, 2016. Each of the three tranches of warrants are exercisable in accordance with its terms through March 8, 2021. The
On December 22, 2018 the Company anticipates making availableannounced agreements with Amazon to 1) lease and operate ten additional Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing 767-200 aircraft currently leased to ASI by two years to 2023 with an option for three more years, 3) extend the term of the eight Boeing 767-300 aircraft currently leased to ASI by three years to 2026 and 2027 with an option for three more years and 4) amend and extend the ATSA by five years through March 2026, with an option to extend for an additional three years. Of the ten additional Boeing 767-300 aircraft leases, four commenced by September 30, 2019, two are planned for the fourth quarter of 2019 and the remainder in 2020. All ten of these aircraft leases will be for ten years.

In conjunction with the commitment for ten additional Boeing 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and the ATSA described above, Amazon and the Company entered another Investment Agreement on December 20, 2018. Pursuant to the 2018 Investment Agreement, Amazon will be issued warrants for up to14.8 million common shares requiredwhich could expand its potential ownership in the Company to approximately 33.2%, including the warrants described above for the underlying2016 agreements.  These new warrants throughwill vest as existing leases are extended and additional aircraft leases are executed and added to the ATSA operations. These new warrants will expire if not exercised within seven years from their issuance date. They have an exercise price of $21.53 per share, based on the volume-weighted average price of the Company's shares over the 30 trading days immediately preceding execution of a combinationnon-binding term sheet by the parties on October 29, 2018.
Additionally, Amazon will be able to earn incremental warrant rights, increasing its potential ownership from 33.2% up to approximately 39.9% of share repurchasesthe Company, by leasing up to seventeen more cargo aircraft from the Company before January 2026. Incremental warrants granted for Amazon’s commitment to any such future aircraft leases will have an exercise price based on the volume-weighted average price of the Company’s shares during the 30 trading days immediately preceding the contractual commitment for each lease.
The warrants potentially issuable under these new agreements with Amazon required an increase in the number of authorized common shares of the Company. Management submitted proposals for shareholder consideration at the Company’s annual meeting of shareholders on May 9, 2019 calling for an increase in the number of authorized common shares and approval of the issuancewarrants as required under the rules of additional shares.the Nasdaq Global Select Market. Both proposals were approved by shareholders on May 9, 2019.
The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance for equity-based payments to non-employees and for financial instruments. The warrants issuedWarrants obligations are marked to Amazon as of March 8, 2016, were recorded to stockholders equity, having a fair value at the end of $4.89 per share. At that time, the faireach reporting period. The value of the 7.69 million vested warrants issued to Amazon wasis recorded as a leasecustomer incentive asset andif it is beingprobable of vesting. Upon a warrant vesting event, the customer incentive asset is amortized against revenuesas a reduction of revenue over the duration of the aircraft leases. On May 12, 2016, the Company’s stockholders approved an amendment to the Certificate of Incorporation of the Company at the annual meeting of stockholders to increase the number of authorized common sharesrelated revenue contract and to approve the warrantsfurther changes in full as required under the rules of the Nasdaq Global Select Market. The stockholders' approval enabled features of the warrants that required the vested warrants of the first tranche and the warrants of the second and third tranches to be classified as financial instruments as of May 12, 2016. Accordingly, the fair value of those warrants was measured and classified in liabilities on that date. Since May 12, 2016, 5.12 million additional warrants in the first tranche vested in conjunction with the execution of eight aircraft leases. warrant obligations are recorded to earnings.
As of September 30, 2018,2019, the Company's liabilities reflected 14.83 million warrants from the 2016 Investment Agreement having a fair value of $12.55 per share. The re-measurements of$172.1 million and 24.7 million warrants from the warrants to2018 Amazon agreements having a fair value resulted in non-operating gains before the effect of income taxes of $17.3 million and $25.0 million for$135.9 million. During the three and nine month periods ended September 30, 2018,2019, the re-measurements of all the warrants to fair value resulted in a net non-operating gains of $93.4 million and $72.7 million before the effect of income taxes, respectively, compared to non-operating lossesgains of $35.0$17.3 million and $100.6$25.0 million for the corresponding periods of 2017.2018.
Revenues from continuing operations performed for Amazon comprised approximately 26% and 21% of the Company's consolidated revenues from continuing operations for the three and nine month periods ending September 30, 2019, respectively, compared to 31% and 29% for the corresponding periods of 2018. The Company’s balance sheets include accounts receivable with Amazon of $36.6 million and $29.2 million as of September 30, 2019 and December 31, 2018, respectively.
The Company's earnings in future periods will be impacted by the number of warrants granted, the re-measurements of warrant fair value, amortizationsamortization of the leasecustomer incentive asset and the related income tax effects. For income tax calculations, the value and timing of related tax deductions will differ from the guidance described above for financial reporting.

DoD
U.S. Military
A substantial portionThe Company is a provider of cargo and passenger airlift services to the DoD. The Company's revenues is also derived fromairlines have been providing services to the U.S. Military.DoD since the 1990's. The U.S. MilitaryDoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from services performed for the U.S. MilitaryDoD were approximately 9%34% and 10% of the Company's total revenues from continuing operations for the three and nine month periods ending September 30, 2018, respectively, compared to 7% and 7% for the corresponding periods of 2017. Revenues excluding directly reimbursed expenses from continuing operations performed for the U.S. Military comprised approximately 10% and 10%36% of the Company's consolidated revenues from continuing operations for the three and nine month periods ending September 30, 2017.2019, respectively, compared to 9% and 10% for the corresponding periods of 2018. The Company's balance sheets included accounts receivable with the U.S. MilitaryDoD of 4.0$41.0 million and 6.7$50.5 million as of September 30, 20182019 and December 31, 2017,2018, respectively.


NOTE C—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS
The Company's assets for CAM and the MRO Services segments each include goodwill. An annual impairment test was performed for each, respectively, at December, 31, 2017 using industry market multiples and discounted cash flows utilizing a market-derived rate of return (level 3 fair value inputs). Goodwill was not impaired.
The carrying amounts of goodwill are as follows (in thousands):
  CAM MRO Services Total
Carrying value as of December 31, 2017 $34,395
 $2,884
 $37,279
Carrying value as of September 30, 2018 $34,395
 $2,884
 $37,279
The Company's acquired intangible assets are as follows (in thousands):
  Airline Amortizing  
  Certificates Intangibles Total
Carrying value as of December 31, 2017 $3,000
 $4,298
 $7,298
Amortization —
 (867) (867)
Carrying value as of September 30, 2018 $3,000
 $3,431
 $6,431
The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangibles assets, including customer relationship and STC intangibles, over 4 to 7 years.
Stock warrants issued to a lessee (see Note B) as an incentive are recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligation and amortized against revenues over the duration of related aircraft leases. The Company's lease incentive granted to the lessee was as follows (in thousands):
  Lease
  Incentive
Carrying value as of December 31, 2017 $80,684
Amortization (12,678)
Carrying value as of September 30, 2018 $68,006
The lease incentive began to amortize in April 2016, with the commencement of certain aircraft leases over the duration of the related leases.
In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden ("West") and in December 2017, the Company entered into a preferred equity instrument. West, through its two airlines, Atlantic Airlines Ltd. and West Air Sweden AB, operates a fleet of aircraft on behalf of European regional mail carriers and express logistics providers. The airlines operate a combined fleet of British Aerospace ATPs, Bombardier CRJ-200-PFs, and Boeing 767 and 737 aircraft. West leases three Boeing 767 aircraft and two Boeing 737 from the Company. The Company’s carrying value of West was $6.6 million and $7.1 million at September 30, 2018 and December 31,


2017, respectively, including $5.5 million of excess purchase price over the Company's fair value of West's net assets in January of 2014. The Company's equity interest and the preferred equity instrument are reflected in “Other Assets” in the Company’s consolidated balance sheets as of September 30, 2018 and December 31, 2017.
On August 3, 2017 the Company entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The Company anticipates approval of a supplemental type certificate from the FAA in 2019. The Company expects to make contributions equal to its 49% ownership percentage of the program's total costs over the next two years. The Company accounts for its investment in the joint venture under the equity method of accounting, in which the carrying value of the investment is reduced for the Company's share of the joint ventures operating losses. The carrying value of the joint venture, reflected in “Other Assets” in the Company’s consolidated balance sheets, was $6.3 million and $5.6 million at September 30, 2018 and December 31, 2017.


NOTE D—FAIR VALUE MEASUREMENTS
The Company’s money market funds and interest rate swaps are reported on the Company’s consolidated balance sheets at fair values based on market values from identical or comparable transactions. The fair value of the Company’s money market funds, stock warrant obligations convertible note, convertible note hedges and interest rate swaps are based on observable inputs (Level 2) from comparable market transactions. The fair value of the stock warrant obligations (Level 2) were determined using a Black-Scholes pricing model which considers the Company’s common stock price and various assumptions, such as the volatility of the Company’s common stock, the expected dividend yield, and the risk-free interest rate. The fair value of the note conversion obligations and the convertible note hedges were estimated using a Black-Scholes pricing model and incorporate the terms and conditions of the underlying financial instruments. The valuations are, among other things, subject to changes in both the Company's credit worthiness and the counter-partiesAdditionally, certain warrants related to the instruments as well as change in general market conditions. While the change in fair value2018 investment agreement (see Note C) require inputs of the note conversion obligationsestimated warrant strike price and the convertible note hedges are generally expected to move in opposite directions, the net change in any given period may be material.other assumptions (Level 3).
The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
As of September 30, 2018Fair Value Measurement Using Total
As of September 30, 2019Fair Value Measurement Using Total
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 
Assets             
Cash equivalents—money market$—
 $31,899
 $—
 $31,899
$—
 $11,656
 $—
 $11,656
Interest rate swap—
 5,555
 —
 5,555
—
 133
 —
 133
Total Assets$—
 $37,454
 $—
 $37,454
$—
 $11,789
 $—
 $11,789
Liabilities              
Interest rate swap$—
 $(10,392) $—
 $(10,392)
Stock warrant obligations—
 (186,093) —
 (186,093)—
 (281,098) (26,976) (308,074)
Total Liabilities$—
 $(186,093) $—
 $(186,093)$—
 $(291,490) $(26,976) $(318,466)
As of December 31, 2018Fair Value Measurement Using Total
 Level 1 Level 2 Level 3 
Assets       
Cash equivalents—money market$—
 $17,986
 $—
 $17,986
Interest rate swap—
 2,971
 —
 2,971
Total Assets$—
 $20,957
 $—
 $20,957
Liabilities       
Interest rate swap$—
 $(1,138) $—
 $(1,138)
Stock warrant obligation—
 (203,782) —
 (203,782)
Total Liabilities$—
 $(204,920) $—
 $(204,920)

As of December 31, 2017Fair Value Measurement Using Total
 Level 1 Level 2 Level 3 
Assets       
Cash equivalents—money market$—
 $1,326
 $—
 $1,326
Interest rate swap—
 1,840
 —
 1,840
Convertible note hedges—
 53,683
 —
 53,683
Total Assets$—
 $56,849
 $—
 $56,849
Liabilities       
Note conversion obligations—
 (54,359) —
 (54,359)
Stock warrant obligation—
 (211,136) —
 (211,136)
Total Liabilities$—
 $(265,495) $—
 $(265,495)
As a result of higher market interest rates compared to the stated interest rates of the Company’s fixed rate debt obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was approximately $7.5$5.0 million less than the carrying value, which was $542.1$1,451.5 million at September 30, 2018.2019. As of December 31, 2017,2018, the fair value of the Company’s debt obligations was approximately $9.1$6.0 million moreless than the carrying value, which was $515.8$1,401.3 million. The non-financial assets, including goodwill, intangible assets and property and equipment are measured at fair value on a non-recurring basis.



NOTE E—PROPERTY AND EQUIPMENT
The Company's property and equipment consists primarily of cargo aircraft, aircraft engines and other flight equipment. Property and equipment, to be held and used, is summarized as follows (in thousands):
 
 September 30,
2019		 December 31,
2018
Flight equipment$2,465,193
 $2,340,840
Ground equipment59,291
 57,455
Leasehold improvements, facilities and office equipment32,207
 28,745
Aircraft modifications and projects in progress244,614
 74,449
 2,801,305
 2,501,489
Accumulated depreciation(1,093,973) (946,484)
Property and equipment, net$1,707,332
 $1,555,005

 September 30,
2018		 December 31,
2017
Flight equipment$1,927,864
 $1,801,808
Ground equipment55,548
 53,523
Leasehold improvements, facilities and office equipment28,609
 26,897
Aircraft modifications and projects in progress152,202
 121,760
 2,164,223
 2,003,988
Accumulated depreciation(937,723) (844,026)
Property and equipment, net$1,226,500
 $1,159,962
CAM owned aircraft with a carrying value of $733.6$804.8 million and $697.4$803.7 million that were under leases to external customers as of September 30, 20182019 and December 31, 2017,2018, respectively.
The Company’s accounting policy for major airframe and engine maintenance varies by subsidiary and aircraft type. The costs of airframe maintenance for Boeing 767-200 operated by ABX are expensed as they are incurred. The costs of major airframe maintenance for the Company's other aircraft are capitalized and amortized over the useful life of the overhaul. Many of the Company's General Electric CF6 engines that power the Boeing 767-200 aircraft are maintained under “power by the hour” and "power by the cycle" agreements with an engine maintenance provider. Further, in May 2017, the Company entered into similar maintenance agreements for certain General Electric CF6 engines that power many of the Company's Boeing 767-300 aircraft. Under these agreements, the engines are maintained by the service provider for a fixed fee per cycle and/or flight hour. As a result, the cost of maintenance for these engines is generally expensed as flights occur. During their term, these maintenance agreements contain provisions for a minimum level of flight activity. Maintenance for the airlines’ other aircraft engines, including those powering Boeing 757 aircraft, are typically contracted to service providers on a time and material basis and the costs of those engine overhauls are capitalized and amortized over the useful life of the overhaul.


NOTE F—DEBT OBLIGATIONS
Debt obligations consisted of the following (in thousands):
 
 September 30, December 31,
 2019 2018
Unsubordinated term loans$698,418
 $721,406
Revolving credit facility530,000
 475,000
Convertible debt211,278
 204,846
Other financing arrangements11,841
 —
Total debt obligations1,451,537
 1,401,252
Less: current portion(43,451) (29,654)
Total long term obligations, net$1,408,086
 $1,371,598
 September 30, December 31,
 2018 2017
Unsubordinated term loan$59,346
 $70,568
Revolving credit facility280,000
 245,000
Aircraft loans—
 3,640
Convertible debt202,740
 196,550
Total debt obligations542,086
 515,758
Less: current portion(14,860) (18,512)
Total long term obligations, net$527,226
 $497,246

The Company executed a syndicated credit agreement ("Senior Credit Agreement") in May 2011 which includes an unsubordinated term loanloans and a revolving credit facility. Effective November 9, 2018, in conjunction with the acquisition of Omni, the Senior Credit Agreement was amended. The amendment continued the secured revolving credit facility which hasand the existing secured term loan while securing a second term loan of $675.0 million. Effective May 28, 2019, the Senior Credit Agreement was amended to extend its the expiration to May 30, 2024. This amendment also increased the capacity of $545.0the revolving credit facility to $645.0 million and set the accordion feature such that the Company can draw up to an additional $300.0 million subject to the lenders' consent. As of September 30, 2019, the unused revolving credit facility totaled $100.8 million, net of draws of $530.0 million and outstanding letters of credit of $14.2 million. The Senior Credit Agreement expires May 30, 2023. Each year, through May 6, 2019, the Company may request a one year extension of the final maturity date, subject to the lenders' consent. The Senior Credit Agreement permitspermitted additional indebtedness of up to $300.0$500.0 million of which $258.8 million has been utilized for the issuance of convertible notes as of September 30, 2019.
The balance of the unsubordinated term loans is net of debt issuance costs of $8.9 million and $9.8 million for the convertible debt. periods ended September 30, 2019 and December 31, 2018, respectively. Under the terms of the Senior Credit Agreement, interest rates are adjusted at least quarterly based on the Company's EBITDA, its outstanding debt level and prevailing LIBOR or prime rates. At the Company's current debt-to-EBITDA ratio, the LIBOR based financing for the unsubordinated term loans and revolving credit facility bear variable interest rates of 4.3%, 4.3% and 4.3%, respectively.
The Senior Credit Agreement is collateralized by certain of the Company's Boeing 777, 767 and 757 aircraft. Under the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 102% of

the outstanding balance 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 $645.0 million.
The Senior Credit Agreement limits the amount of dividends the Company can pay and the amount of common stock it can repurchase to $100.0 million during any calendercalendar year, provided the Company's total secured debt to earnings before interest, taxes, depreciation and amortization expenses ("EBITDA") ratio is under 3.00 times, after giving effect to the dividend or repurchase. As of September 30, 2018, the unused revolving credit facility totaled $254.9 million, net of draws of $280.0 million and outstanding letters of credit of $10.1 million. Additionally, the Senior Credit Agreement includes an accordion feature such that the Company can now draw up to an additional $100.0 million subject to the lenders' consent.
The Senior Credit Agreement is collateralized by certain of the Company's Boeing 767 and 757 aircraft that are not collateralized under aircraft loans. Under the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 125% of the outstanding balance of the term loan and the maximum capacity of revolving credit facility or 150% of the outstanding balance of the term loan and the total funded revolving credit facility, whichever is less. 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 $545.0 million.
The balance of the unsubordinated term loan is net of debt issuance costs of $0.7 million and $0.7 million for the periods ending September 30, 2018 and December 31, 2017, respectively. Under the terms of the Senior Credit Agreement, interest rates are adjusted quarterly based on the Company's EBITDA, its outstanding debt level and prevailing LIBOR or prime rates. At the Company's current debt-to-EBITDA ratio, the LIBOR based financing for the unsubordinated term loan and revolving credit facility bear a variable interest rate of 3.75% and 3.75%, respectively. The aircraft loan was paid off by the Company in January 2018.
The Senior Credit Agreement contains covenants including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt to EBITDA ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default, including unspecified events that may have material adverse effects on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement.
In November 2019, the Senior Credit Agreement was amended. This amendment includes an increase to the maximum revolver capacity from $645.0 million to $750.0 million, combines the two terms loans into one loan and reduces the interest rate spread of the LIBOR based financing at the current debt-to-EBITDA ratio. This amendment extends the agreement six months to November 2024 if certain liquidity measures are maintained during 2024 and adds incremental accordion capacity based on debt ratios.
In September 2017, the Company issued $258.8 million aggregate principal amount of 1.125% Convertible Senior Notes due 2024 ("Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Notes bear interest at a rate of 1.125% per year payable semi-annually in arrears on April 15 and October 15 each year, beginning April 15, 2018. The Notes mature on October 15, 2024, unless repurchased or converted in accordance with their terms prior to such date. The Notes are unsecured indebtedness, subordinated to the Company's existing and future secured indebtedness and other liabilities, including trade payables. Conversion of the Notes can only occur upon satisfaction of certain conditions and during certain periods, beginning in any calendar quarter commencing after December 31, 2017 and thereafter, until the close of business on the second scheduled trading day

immediately preceding the maturity date. Upon the occurrence of certain fundamental changes, holders of the Notes can require the Company to repurchase their notes at the cash repurchase price equal to the principal amount of the notes, plus any accrued and unpaid interest.
The Notes may be settled in cash, the Company’s common shares or a combination of cash and the Company’s common shares, at the Company’s election. The initial conversion rate is 31.3475 common shares per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $31.90 per common share). If a “make-whole fundamental change” (as defined in the offering circular with the Notes) occurs, the Company will, in certain circumstances, increase the conversion rate for a specified period of time.
In conjunction with the Notes, the Company purchased convertible note hedges under privately negotiated transactions for $56.1 million, having the same number of the Company’sCompany's common shares, 8.1 million shares, and same strike price of $31.90, that underlie the Notes. The convertible note hedges are expected to reduce the potential equity dilution with respect to the Company's common stock, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the Notes. The Company's current intent and policy is to settle all Note conversions through a combination settlement which satisfies the principal amount of the Notes outstanding with cash. The Notes could have a dilutive effect on the computation of earnings per share in accordance with accounting principles to the extent that the average traded market price of the Company’s common shares for a reporting period exceeds the conversion price.
The conversion feature of the Notes required bifurcation from the principal amount under the applicable accounting guidance. Settlement provisions of the Notes and the convertible note hedges required cash settlement of these instruments until the Company's shareholders increased the number of authorized shares of common stock toto cover the full number of shares underlying the Notes. As a result, the conversion feature of the Notes and the convertible note hedges were initially accounted for as liabilities and assets, respectively, and marked to market at the end of each period. The fair value of the note conversion obligation at issuance was $57.4 million.
On May 10, 2018, the Company's shareholders increased the number of authorized shares of common stock to cover the full number of shares underlying the Notes. The Company reevaluated the Notes and convertible note hedges under the applicable accounting guidance including ASC 815, "Derivatives and Hedging," and determined that the instruments, which meet the definition of derivative and are indexed to the Company's own stock, should be classified

in shareholder'sshareholders' equity. The fair value of the the conversion feature of the Notes and the convertible note hedges of $51.3 million and $50.6 million, respectively on May 10, 2018 were reclassified to paid-in capital.
The net proceeds from the issuance of the Notes were approximately $252.3 million, after deducting initial issuance costs. These unamortized issuance costs and discount are being amortized to interest expense through October 2024, using an effective interest rate of approximately 5.15%. The carrying value of the Company's Convertible debt is shown below:below.
  September 30, December 31,
  2019 2018
Principal value, Convertible Senior Notes, due 2024 258,750
 258,750
Unamortized issuance costs (5,101) (5,799)
Unamortized discount (42,371) (48,105)
Convertible debt 211,278
 204,846
  September 30, December 31,
  2018 2017
Principal value, Convertible Senior Notes, due 2024 258,750
 258,750
Unamortized issuance costs (6,028) (6,685)
Unamortized discount (49,982) (55,515)
Convertible debt 202,740
 196,550

In conjunction with the offering of the Notes, the Company also sold warrants to the convertible note hedge counterparties in separate, privately negotiated warrant transactions at a higher strike price and for the same number of the Company’s common shares, subject to customary anti-dilution adjustments. The amount received for these warrants and recorded in paid-in capital onStockholders' Equity in the Company’s consolidated balance sheets was $38.5 million. These warrants could result in 8.1 million additional shares of the Company's common stock, if the Company's traded market price exceeds the strike price which is $41.35 per share and is subject to certain adjustments under the terms of the warrant transactions. The warrants could have a dilutive effect on the computation of earnings per share to the extent that the average traded market price of the Company’sCompany's common shares for a reporting period exceedsexceed the strike price.



NOTE G—DERIVATIVE INSTRUMENTS
The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for protection from fluctuating interest rates, for at least fifty percent of the outstanding balance of the original term loan.loan and twenty-five percent of the outstanding balance of the second term loan issued in November 2018. Accordingly, the Company entered into additional interest rate swaps.swaps in December 2018 and January 2019 having initial values of $150.0 million and $150.0 million, respectively, and forward start dates of December 31, 2018 and June 28, 2019. The table below provides information about the Company’s interest rate swaps (in thousands):
   September 30, 2019 December 31, 2018
Expiration Date
Stated
Interest
Rate
 
Notional
Amount
 
Market
Value
(Liability)
 
Notional
Amount
 
Market
Value
(Liability)
May 5, 20211.090% 22,500
 133
 28,125
 650
May 30, 20211.703% 22,500
 (40) 28,125
 366
December 31, 20212.706% 147,188
 (3,934) 150,000
 (1,138)
March 31, 20221.900% 50,000
 (578) 50,000
 829
March 31, 20221.950% 75,000
 (963) 75,000
 1,126
March 31, 20232.425% 149,063
 (4,877) —
 —
   September 30, 2018 December 31, 2017
Expiration Date
Stated
Interest
Rate
 
Notional
Amount
 
Market
Value
(Liability)
 
Notional
Amount
 
Market
Value
(Liability)
May 5, 20211.090% 30,000
 929
 35,625
 719
May 30, 20211.703% 30,000
 606
 35,625
 240
March 31, 20221.900% 50,000
 1,657
 50,000
 416
March 31, 20221.950% 75,000
 2,363
 75,000
 465

The outstanding interest rate swaps are not designated as hedges for accounting purposes. The effects of future fluctuations in LIBOR interest rates on derivatives held by the Company will result in the recording of unrealized gains and losses into the statement of operations. The Company recorded pre-tax gainsa net loss on derivatives of $3.7$1.4 million and pre-tax losses of $0.2$12.1 million for the three and nine month periods ending September 30, 20182019, respectively, compared to net gains of $0.6 million and 2017, respectively.$3.7 million for the corresponding periods of 2018. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.

The Company recorded a net loss before the effects of income taxes of $0.1$0.2 million during the ninethree month periods ending September 30,period ended March 31, 2018 for the revaluation of the convertible note hedges and the note conversion obligations to fair value before these instruments were reclassified to paid-in capital.paid-in-capital.


NOTE H—COMMITMENTS AND CONTINGENCIES
Lease CommitmentsLeases
The Company leases portionsproperty, two aircraft, aircraft engines and other types of equipment under operating leases. Property leases include hangars, warehouses, offices and other space at certain airports with fixed rent payments and lease terms ranging from one month to seven years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of the air park in Wilmington, Ohio, under lease agreementsasset or lease liability. These expenses are recognized as variable lease expense when incurred and are not material. Equipment leases include ground support and industrial equipment as well as computer hardware with a regional port authority, thefixed rent payments and terms of which expire in May of 2019one month to five years.
The Company records the initial lease asset and June of 2036 with options to extend the leases. The leased facilities include corporate offices, 310,000 square feet of maintenance hangars and a 100,000 square foot component repair shoplease liability at the air park. ABX also haspresent value of lease payments scheduled during the non-exclusive right to use the airport, which includes one active runway, taxi ways and ramp space.lease term. The Company also leases and operates a 311,500 square foot, two hangar aircraft maintenance complex in Tampa, Florida. Additionally,typically do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount the present value of lease payments. The Company’s average discount rate for operating leases certain equipment and airport facilities, office space, and maintenance facilities at other locations. September 30, 2019 was 4.74%. Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Although not material, the amount of such options is reflected below in the maturity of operating lease liabilities table. Lease expense is recognized on a straight-line basis over the lease term. Our weighted-average remaining lease term is 4.6 years.
As of September 30, 2018 and2019, the maturities of operating leases liabilities are as follows (in thousands):
  Operating Leases
Remaining 2019 $4,668
2020 15,706
2021 12,475
2022 8,883
2023 7,563
2024 and beyond 10,053
Total 59,348
Less: amount representing interest (6,013)
Present value of future minimum lease payments 53,335
Less: current obligations under leases 14,794
Long-term lease obligations $38,541

The Company expects to lease two additional passenger aircraft commencing in 2020 that are not reflected in the table above.

As of December 31, 2017,2018, the Company did not lease any aircraft from lessors.cash flows of operating leases over the next five years were as follows (in thousands):
  Operating Leases
2019 $16,674
2020 14,586
2021 11,875
2022 5,906
2023 3,813
2024 and beyond 2,001
Total minimum lease payments $54,855

Purchase Commitments
The Company has agreements with Israel Aerospace Industries Ltd. ("IAI") for the conversion of Boeing 767 passenger aircraft into a standard configured freighter aircraft. The conversions primarily consist of the installation of a standard cargo door and loading system. At September 30, 2018, the Company was committed to acquire and modify additional Boeing 767-300 passenger aircraft into standard freighter aircraft. In addition to six aircraft that were in the modification process at September 30, 2018, the Company is committed to induct one more aircraft into the freighter modification process through 2019, including commitments to purchase one more Boeing 767-300 passenger aircraft during the fourth quarter of 2018. As of September 30, 2018, the Company's commitments to complete the conversions of aircraft it owns or has the contracts to purchase totaled $50.5 million. Additionally, theThe Company could incur a cancellation fee with IAI for unused modification part kits for any aircraft that is not inducted into conversion at IAI.

kits. At September 30, 2019, the Company had non-refundable deposits of $25.8 million to purchase 17 Boeing 767-300 aircraft.
Guarantees and Indemnifications
Certain leases and agreements of the Company contain guarantees and indemnification obligations to the lessor, or one or more other parties that are considered reasonable 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 expiration of the respective lease or agreement.
Other
In addition to the foregoing matters, the Company is also a party to legal proceedings in various federal and state jurisdictions from time to time arising out of the operation of the Company's business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, the Company believes that its ultimate liability, if any, arising from pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to our financial condition or results of operations.
Employees Under Collective Bargaining Agreements
As of September 30, 2018,2019, the flight crewmember employees of ABX, ATI and ATIOAI and flight attendant employees of ATI and OAI were represented by the labor unions listed below:
AirlineLabor Agreement Unit
Percentage of
the Company’s
Employees
ABXInternational Brotherhood of Teamsters7.6%5.7%
ATIAir Line Pilots Association7.5%8.2%
OAIInternational Brotherhood of Teamsters7.0%
ATIAssociation of Flight Attendants1.1%0.9%
OAIAssociation of Flight Attendants7.2%




NOTE I—PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Defined Benefit and Post-retirementPost-Retirement Healthcare Plans
ABX sponsors a qualified defined benefit pension plan for ABX crewmembers and a qualified defined benefit pension plan for a major portion of its other ABX employees that meet minimum eligibility requirements. ABX also sponsors non-qualified defined benefit pension plans for certain employees. These non-qualified plans are unfunded. Employees are no longer accruing benefits under any of the defined benefit pension plans. ABX also sponsors a post-retirement healthcare plan for its ABX employees,crewmembers, which is unfunded. Benefits for covered individuals terminate upon reaching age 65 under the post-retirement healthcare plans.
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 of our post-retirement costs. The assumptions considered most sensitive in actuarially valuing ABX’s pension obligations and determining related expense amounts are discount rates and expected long term investment returns on plan assets. Additionally, other assumptions concerning retirement ages, mortality and employee turnover also affect the valuations. Actual results and future changes in these assumptions could result in future costs significantly higher than those recorded in our results of operations.
ABX measures plan assets and benefit obligations as of December 31 of each year. Information regarding ABX’s sponsored defined benefit pension plans and post-retirement healthcare plans follow below. The accumulated benefit obligation reflects pension benefit obligations based on the actual earnings and service to-date of current employees.

The Company’sCompany's net periodic benefit costs for its defined benefit pension plans and post-retirement healthcare plans for both continuing and discontinued operations are as follows (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 Pension Plans Post-Retirement Healthcare Plan Pension Plans Post-Retirement Healthcare Plan
 2019 2018 2019 2018 2019 2018 2019 2018
Service cost$—
 $—
 $27
 $30
 $—
 $—
 $81
 $90
Interest cost7,825
 7,284
 37
 32
 23,474
 21,852
 111
 96
Expected return on plan assets(9,477) (10,523) —
 —
 (28,431) (31,569) —
 —
Amortization of net loss3,882
 887
 43
 55
 11,646
 2,661
 129
 165
Net periodic benefit cost (income)$2,230
 $(2,352) $107
 $117
 $6,689
 $(7,056) $321
 $351

 Three Months Ended September 30, Nine Months Ended September 30,
 Pension Plans Post-Retirement Healthcare Plan Pension Plans Post-Retirement Healthcare Plan
 2018 2017 2018 2017 2018 2017 2018 2017
Service cost$—
 $—
 $30
 $39
 $—
 $—
 $90
 $117
Interest cost7,284
 8,396
 32
 36
 21,852
 25,946
 96
 108
Expected return on plan assets(10,523) (10,520) —
 —
 (31,569) (32,379) —
 —
Settlement charge—
 12,923
 —
 —
 —
 12,923
 —
 —
Amortization of prior service cost—
 —
 —
 (13) —
 —
 —
 (39)
Amortization of net (gain) loss887
 1,944
 55
 71
 2,661
 5,819
 165
 213
Net periodic benefit cost (income)$(2,352) $12,743
 $117
 $133
 $(7,056) $12,309
 $351
 $399
During the nine month period ending September 30, 2018,2019, the Company contributed $22.2$5.4 million to the pension plans. The Company expects to contribute an additional $0.2$2.7 million during the remainder of 2018.2019.


NOTE J—INCOME TAXES
The provision for income taxes for interim periods is based on management's best estimate of the effective income tax rate expected to be applicable for the current year, plus any adjustments arising from changes in the estimated amount of taxable income related to prior periods. Federal legislation known as the The Tax Cuts and Jobs Acts ("Tax Act") was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from the previous rate of 35% to 21% effective January 1, 2018. The Tax Act also makes broad and complex changes to the U.S. tax code, including, but not limited to a one time tax on earnings of certain foreign subsidiaries, limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, bonus depreciation for full expensing of qualified property, and limitations on the deductibility of certain executive compensation. The Company will continue to refine the calculations as additional analysis is completed and the Company gains a more thorough understanding of the Tax Act, including the tax law related to the deductibility of purchased assets, state tax treatment, and amounts related to employee compensation.
Income tax expensetaxes recorded through September 30, 2018 utilized2019 have been estimated utilizing a 27% rate based upon year-to-date income and projected annualized 24.4%results for the full year. 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 applied to year-to-date income. Additionally,during a period.
During 2019, the Company recorded discrete tax items for the conversion of employee stock awards duringand gains and losses on warrant revaluations which were not subject to tax. During 2019, the first quarterCompany recorded a valuation allowance against a deferred tax benefit related to a foreign investment. As a result of 2018, resultingthese differences in anwhich expenses and benefits for tax purposes are different than required by generally accepted accounting principals, the Company's effective tax rate for the first nine months of 18.3%2019 was 12%. The final effective tax rate applied to 2018for the year 2019 will depend on the actual amount of pre-tax book results by the Company for the full year, the additional conversions of employee stock awards, issuance of stock warrantswarrant valuations, executive compensation and other items.

The Company has operating loss carryforwards for U.S. federal income tax purposes. Management expects to utilize the loss carryforwards to offset federal income tax liabilities in the future. Due to the Company's deferred tax assets, including its loss carryforwards, management does not expect to pay federal income taxes until 2023 or later. The Company may, however, be required to pay some federal tax due to loss carryforward usage limitations and certain state and local income taxes before then.



NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes the following items by components for the three and nine month periods ending September 30, 20182019 and 20172018 (in thousands):
  Defined Benefit Pension Defined Benefit Post-Retirement Foreign Currency Translation Total
Balance as of June 30, 2017 (74,619) (1,227) (1,341) (77,187)
Other comprehensive income (loss) before reclassifications:        
Actuarial loss for retiree liabilities (5,821) —
 —
 (5,821)
Foreign currency translation adjustment —
 —
 (24) (24)
Amounts reclassified from accumulated other comprehensive income:        
Pension settlement (reclassified to salaries, wages and benefits) 12,923
 —
 —
 12,923
Actuarial costs (reclassified to non-service costs) 1,944
 71
 —
 2,015
Negative prior service cost —
 (13) —
 (13)
Income Tax (Expense) or Benefit (3,283) (21) 9
 (3,295)
Other comprehensive income (loss), net of tax 5,763
 37
 (15) 5,785
Balance as of September 30, 2017 (68,856) (1,190) (1,356) (71,402)
         
  Defined Benefit Pension Defined Benefit Post-Retirement Foreign Currency Translation Total
Balance as of December 31, 2016 (77,088) (1,301) (1,477) (79,866)
Other comprehensive income (loss) before reclassifications:        
Actuarial loss for retiree liabilities (5,821) —
 —
 (5,821)
Foreign currency translation adjustment —
 —
 186
 186
Amounts reclassified from accumulated other comprehensive income:        
Pension settlement (reclassified to salaries, wages and benefits) 12,923
 —
 —
 12,923
Actuarial costs (reclassified to non-service costs) 5,819
 213
 —
 6,032
Negative prior service cost —
 (39) —
 (39)
Income Tax (Expense) or Benefit (4,689) (63) (65) (4,817)
Other comprehensive income (loss), net of tax 8,232
 111
 121
 8,464
Balance as of September 30, 2017 (68,856) (1,190) (1,356) (71,402)
  Defined Benefit Pension Defined Benefit Post-Retirement Foreign Currency Translation Total
Balance as of June 30, 2018 $(59,201) $(1,013) $(1,487) $(61,701)
Other comprehensive income (loss) before reclassifications:        
Foreign currency translation adjustment —
 —
 33
 33
Amounts reclassified from accumulated other comprehensive income:        
Actuarial costs (reclassified to salaries, wages and benefits) 887
 55
 —
 942
Income Tax (Expense) or Benefit (200) (12) (11) (223)
Other comprehensive income (loss), net of tax 687
 43
 22
 752
Balance as of September 30, 2018 $(58,514) $(970) $(1,465) $(60,949)
         
Balance as of January 1, 2018 $(60,575) $(1,097) $(1,348) $(63,020)
Other comprehensive income (loss) before reclassifications:        
Foreign currency translation adjustment —
 —
 (178) (178)
Amounts reclassified from accumulated other comprehensive income:        
Actuarial costs (reclassified to salaries, wages and benefits) 2,661
 165
 —
 2,826
Income Tax (Expense) or Benefit (600) (38) 61
 (577)
Other comprehensive income (loss), net of tax 2,061
 127
 (117) 2,071
Balance as of September 30, 2018 $(58,514) $(970) $(1,465) $(60,949)


  Defined Benefit Pension Defined Benefit Post-Retirement Foreign Currency Translation Total
Balance as of June 30, 2019 $(82,818) $(772) $(5) $(83,595)
Other comprehensive income (loss) before reclassifications:        
Foreign currency translation adjustment —
 —
 (1) (1)
Amounts reclassified from accumulated other comprehensive income:        
Actuarial costs (reclassified to salaries, wages and benefits) 3,882
 43
 —
 3,925
Income Tax (Expense) or Benefit (917) (10) —
 (927)
Other comprehensive income (loss), net of tax 2,965
 33
 (1) 2,997
Balance as of September 30, 2019 $(79,853) $(739) $(6) $(80,598)
         
Balance as of January 1, 2019 $(89,042) $(841) $(1,479) $(91,362)
Other comprehensive income (loss) before reclassifications:        
Foreign currency translation adjustment —
 —
 (12) (12)
Amounts reclassified from accumulated other comprehensive income:        
Foreign currency loss —
 —
 2,253
 2,253
Actuarial costs (reclassified to salaries, wages and benefits) 11,646
 129
 —
 11,775
Income Tax (Expense) or Benefit (2,457) (27) (768) (3,252)
Other comprehensive income (loss), net of tax 9,189
 102
 1,473
 10,764
Balance as of September 30, 2019 $(79,853) $(739) $(6) $(80,598)

  Defined Benefit Pension Defined Benefit Post-Retirement Foreign Currency Translation Total
Balance as of June 30, 2018 (59,201) (1,013) (1,487) (61,701)
Other comprehensive income (loss) before reclassifications:        
Foreign currency translation adjustment —
 —
 33
 33
Amounts reclassified from accumulated other comprehensive income:        
Actuarial costs (reclassified to non-service costs) 887
 55
 —
 942
Income Tax (Expense) or Benefit (200) (12) (11) (223)
Other comprehensive income (loss), net of tax 687
 43
 22
 752
Balance as of September 30, 2018 (58,514) (970) (1,465) (60,949)
         
  Defined Benefit Pension Defined Benefit Post-Retirement Foreign Currency Translation Total
Balance as of December 31, 2017 (60,575) (1,097) (1,348) (63,020)
Other comprehensive income (loss) before reclassifications:        
Foreign currency translation adjustment —
 —
 (178) (178)
Amounts reclassified from accumulated other comprehensive income:        
Actuarial costs (reclassified to non-service costs) 2,661
 165
 —
 2,826
Income Tax (Expense) or Benefit (600) (38) 61
 (577)
Other comprehensive income (loss), net of tax 2,061
 127
 (117) 2,071
Balance as of September 30, 2018 (58,514) (970) (1,465) (60,949)



NOTE L—STOCK-BASED COMPENSATION
The Company's Board of Directors has granted stock incentive awards to certain employees and board members pursuant to a long term incentive plan which was approved by the Company's stockholders in May 2005 and in May 2015. Employees have been awarded non-vested stock units with performance conditions, non-vested stock units with market conditions and non-vested restricted stock. The restrictions on the non-vested restricted stock awards lapse at the end of a specified service period, which is typically three years from the date of grant. Restrictions could lapse sooner upon a business combination, death, disability or after an employee qualifies for retirement. The non-vested stock units will be converted into a number of shares of Company stock depending on performance and market conditions at the end of a specified service period, lasting approximately three years. years. The performance condition awards will be converted into a number of shares of Company stock based on the Company's average return on invested capital during the service period. Similarly, the market condition awards will be converted into a number of shares depending on the appreciation of the Company's stock compared to the NASDAQ Transportation Index. Board members were granted time-based awards with vesting periods of approximately six or twelve months. The Company expects to settle all of the stock unit awards by issuing new shares of stock. The table below summarizes award activity.
 Nine Months Ended
 September 30, 2019 September 30, 2018
 
Number of
Awards
 
Weighted
average
grant-date
fair value
 
Number of
Awards
 
Weighted
average
grant-date
fair value
Outstanding at beginning of period969,928
 $15.89
 873,849
 $12.30
Granted302,596
 23.22
 207,295
 26.50
Converted(164,864) 17.48
 (96,616) 10.89
Expired(7,500) 23.78
 (500) 28.38
Forfeited(6,000) 23.73
 (2,600) 26.76
Outstanding at end of period1,094,160
 $17.58
 981,428
 $15.39
Vested337,060
 $8.04
 326,928
 $7.18

 Nine Months Ended
 September 30, 2018 September 30, 2017
 
Number of
Awards
 
Weighted
average
grant-date
fair value
 
Number of
Awards
 
Weighted
average
grant-date
fair value
Outstanding at beginning of period873,849
 $12.30
 1,040,569
 $9.97
Granted207,295
 26.50
 243,940
 17.52
Converted(96,616) 10.89
 (173,210) 9.69
Expired(500) 28.38
 —
 —
Forfeited(2,600) 26.76
 (3,800) 13.66
Outstanding at end of period981,428
 $15.39
 1,107,499
 $11.66
Vested326,928
 $7.18
 324,599
 $6.39
The average grant-date fair value of each performance condition award, non-vested restricted stock award and time-based award granted by the Company in 20182019 was $25.15,$22.80, the fair value of the Company’s stock on the date of grant. The average grant-date fair value of each market condition award granted in 20182019 was $31.60.$24.75. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 2.4%2.5% and a volatility of 33.8%35.6% based on volatility over three years using daily stock prices.
For the nine month periods ending September 30, 20182019 and 2017,2018, the Company recorded expense of $3.6$5.3 million and $2.6$3.6 million,, respectively, for stock incentive awards. At September 30, 2018,2019, there was $5.9$8.4 million of unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average period of 1.3 years. As of September 30, 2018,2019, none of the awards were convertible, 326,928337,060 units of the Board membersmembers' time-based awards had vested and none of the outstanding shares of the restricted stock had vested. These awards could result in a maximum number of 1,216,4781,329,135 additional outstanding shares of the Company’s common stock depending on service, performance and market results through December 31, 2020.2021.




NOTE M—COMMON STOCK AND EARNINGS PER SHARE
Earnings per Share
The calculation of basic and diluted earnings per common share are as follows (in thousands, except per share amounts):
 Three Months Ending Nine Months Ending
 September 30, September 30,
 2019 2018 2019 2018
Numerator:       
Earnings (loss) from continuing operations - basic$105,085
 $32,933
 $101,087
 $73,079
Gain from stock warrants revaluation, net of tax(91,849) (16,801) (71,319) (24,274)
Earnings (loss) from continuing operations - diluted$13,236
 $16,132
 $29,768
 $48,805
        
Denominator:       
Weighted-average shares outstanding for basic earnings per share58,919
 58,739
 58,889
 58,773
Common equivalent shares:       
Effect of stock-based compensation awards and warrants9,799
 9,584
 10,493
 9,856
Weighted-average shares outstanding assuming dilution68,718
 68,323
 69,382
 68,629
Basic earnings (loss) per share from continuing operations$1.78
 $0.56
 $1.72
 $1.24
Diluted earnings (loss) per share from continuing operations$0.19
 $0.24
 $0.43
 $0.71
 Three Months Ending Nine Months Ending
 September 30, September 30,
 2018 2017 2018 2017
Numerator:       
Earnings (loss) from continuing operations - basic$32,933
 $(28,229) $73,079
 $(72,351)
Gain from stock warrants revaluation, net of tax(16,801) —
 (24,274) —
Earnings (loss) from continuing operations - diluted$16,132
 $(28,229) $48,805
 $(72,351)
        
Denominator:       
Weighted-average shares outstanding for basic earnings per share58,739
 58,733
 58,773
 58,965
Common equivalent shares:       
Effect of stock-based compensation awards and warrants9,584
 —
 9,856
 —
Weighted-average shares outstanding assuming dilution68,323
 58,733
 68,629
 58,965
Basic earnings per share from continuing operations$0.56
 $(0.48) $1.24
 $(1.23)
Diluted earnings per share from continuing operations$0.24
 $(0.48) $0.71
 $(1.23)

The determination of diluted earnings per share requires the exclusion of the fair value re-measurement of the stock warrants recorded as a liability (see Note B)C), if such warrants have aan anti-dilutive effect on earnings per share. The dilutive effect of the weighted-average diluted shares outstanding is calculated using the treasury method for periods in which equivalent shares have a dilutive effect on earnings per share. Under this method, the number of diluted shares is determined by dividing the assumed proceeds of the warrants recorded as a liability by the average stock price during the period and comparing that amount with the number of corresponding warrants outstanding.
The underlying warrants recorded as a liability as of September 30, 2019 and 2018 and 2017, could resultwould have resulted in 14.839.5 million and 14.914.8 million additional shares of the Company's common stock, respectively, if the warrants arewere settled by tendering cash, respectively.cash.
The number of equivalent shares that were not included in weighted average shares outstanding assuming dilution, because their effect would have been anti-dilutive, were 9.9 million and 8.1 million for the three and nine month periods ended September 30, 2017, respectively.


NOTE N—SEGMENT AND REVENUE INFORMATION
The Company operates in three2 reportable segments. The CAM segment consists of the Company's aircraft leasing operations and its segment earnings include an allocation of interest expense. Thewhile the ACMI Services segment consists of the Company's airline operations, including CMI agreements as well as ACMI, charter service and charterpassenger service agreements that the Company has with its customers. The MRO Services segment provides airframeCompany's aircraft maintenance services, aircraft modifications and other maintenance services. The MRO Services became reportable during 2018 due to the size of its revenues. Prior periods presented below have been prepared by separating MRO Services from "All other" for comparative purposes. The Company'smodification services, ground services and other activities which include the mail and package sorting services, maintenance services for ground equipment, facilities and material handling equipment, the sales of aviation fuel and other services, are not large enough to constitute reportable segments and are combined in All other. Inter-segment revenues are valued at arms-length market rates. Cash and cash equivalents are reflected in Assets - All other below.
The Company's segmentRevenue information for revenue from continuing operations is presented below (in thousands):
 Three Months Ending Nine Months Ending
 September 30, September 30,
 2019 2018 2019 2018
Total revenues:       
CAM$71,004
 $58,786
 $210,610
 $165,539
ACMI Services272,188
 116,224
 785,082
 355,204
All other87,762
 69,477
 226,228
 206,736
Eliminate inter-segment revenues(64,881) (39,568) (173,088) (115,913)
Total$366,073
 $204,919
 $1,048,832
 $611,566
Customer revenues:       
CAM$42,007
 $41,366
 $123,569
 $115,270
ACMI Services272,171
 116,209
 784,993
 355,172
All other51,895
 47,344
 140,270
 141,124
Total$366,073
 $204,919
 $1,048,832
 $611,566
 Three Months Ending Nine Months Ending
 September 30, September 30,
 2018 2017 2018 2017
Total revenues:       
CAM$58,786
 $58,465
 $165,539
 $155,973
ACMI Services116,224
 146,943
 355,204
 436,391
MRO Services46,879
 39,928
 145,125
 146,602
All other22,598
 54,542
 61,611
 153,582
Eliminate inter-segment revenues(39,568) (45,777) (115,913) (147,319)
Total$204,919
 $254,101
 $611,566
 $745,229
Customer revenues:       
CAM$41,366
 $40,940
 $115,270
 $104,102
ACMI Services116,209
 146,938
 355,172
 436,386
MRO Services27,227
 13,916
 87,236
 70,492
All other20,117
 52,307
 53,888
 134,249
Total$204,919
 $254,101
 $611,566
 $745,229
The Company adopted Topic 606 for revenue recognition using a modified retrospective approach, under which financial statements are prepared under the revised guidance for the year of adoption, but not for prior years. The effects of Topic 606 on the Company's customer revenues are summarized below:
  For the three months ending For the nine months ending
  September 30, 2018 September 30, 2018
  Revenue Revenue
  As Reported Without Topic 606 Increase (decrease) As Reported Without Topic 606 Increase (decrease)
ACMI Services $116,209
 $163,866
 $(47,657) $355,172
 $500,139
 $(144,967)
MRO Services 27,227
 25,319
 1,908
 87,236
 80,237
 6,999
Other (ground services) 20,117
 60,953
 (40,836) 53,888
 191,820
 (137,932)


ACMI Services revenues are generated from airline service agreements and are typically based on hours flown, the amount of aircraft operated and crew resources provided during a month. ACMI Services revenues are recognized over time using the invoice practical expedient as flight hours are performed for the customer. Certain agreements include provisions for incentive payments

based upon on-time reliability. These incentives are measured on a monthly basis and recorded to revenue in the corresponding month earned. Under CMI agreements, the Company's airlines have an obligation to provide integrated services including flight crews, aircraft maintenance and insurance for the customer's cargo network. Under ACMI agreements, the Company's airlines are also obligated to provide aircraft. Under CMI and ACMI agreements, customers are generally responsible for aviation fuel, landing fees, navigation fees and certain other flight expenses. When functioning as the customers' agent for arranging such services, the Company records amounts reimbursable from the customer as revenues net of the related expenses as the costs are incurred. Under charter agreements, the Company's airline is obligated to provide full services for one or more flights having specific origins and destinations. Under charter agreements in which the Company's airline is responsible for fuel, airport fees and all flight services, the related costs are recorded in operating expenses. ACMI Services are invoiced monthly or more frequently. (There are no customer rewards programs associated with services offered by the Company nor does the Company sell passenger tickets or issue freight bills.)
MRO ServicesThe Company's revenues for customer contracts for airframe maintenance and aircraft modification services that do not have an alternative use and for which the Company has an enforceable right to payment are generally recognized over time based on the percentage of costs completed. Services for airframe maintenance and aircraft modifications typically have project durations lasting a few weeks to a few months. Other MRO Services revenues for aircraft part sales, component repairs and line service are recognized at a point in time typically when the parts are delivered to the customer and the the services are completed. For airframe maintenance, aircraft modifications and aircraft component repairs, contracts include assurance warranties that are not sold separately.
Effective January 1, 2018 theThe Company records revenues and estimated earnings over time for its airframe maintenance and aircraft modification contracts using the percentage-of-completion cost-to-costcosts to costs input method. For such services, the Company estimates the earnings on a contract as the difference between the expected revenue and estimated costs to complete a contract and recognizes

revenues and earnings based on the proportion of costs incurred compared to the total estimated costs. Unexpected or abnormal costs that are not reflected in the price of a contract are excluded from calculations of progress toward contract obligations. The Company's estimates consider the timing and extent of the services, including the amount and rates of labor, materials and other resources required to perform the services. These production costs are specifically planned and monitored for regulatory compliance. The expenditure of these costs closely reflect the progress made toward completion of an airframe maintenance and aircraft modification project. The Company recognizes adjustments in estimated earnings on a contract under the cumulative catch-up method in which the impact of the adjustment on estimated earnings of a contract is recognized in the period the adjustment is identified.
The Company's external customerground services revenues for providing mailinclude load transfer and package sorting services and related facility and equipment maintenance for the three and nine month periods ending September 30, 2018 were $19.5 million and $51.9 million, respectively, compared to $51.7 million and $132.7 million for the corresponding periods in 2017. During the three and nine month periods ended September 30, 2018, the Company netted $40.8 million and $137.9 million of customer reimbursable revenues against the related expenses when functioning as the customers' agent for arranging ground services, respectively.services. These revenues are reported in All other. The Company's external customer revenues from providing mail and package sorting services are recognized as the services are performed for the customer over time. Revenues from related facility and equipment maintenance services are recognized over time and at a point in time depending on the nature of the customer contracts.
Revenue is not recognized until collectibility ofThe Company's external customer payment is probable. For customers that are not a governmental agency or department, the Company generally receives partial payment in advance of services, otherwise customer balances are typically paid within 30 to 60 days of service. Forrevenues from other activities for the three and nine month periods ended September 30, 2019 and 2018 the Company recognized $4.8 million and $8.8 million of non lease revenue that was reported in deferred revenue at the beginning of the respective period.are presented below (in thousands):
  Three Months Ended Nine Months Ended
  September 30, 2019 September 30, 2019
  2019 2018 2019 2018
Aircraft maintenance, modifications and part sales $24,745
 $27,228
 $82,029
 $87,236
Ground services 20,728
 19,540
 50,441
 51,853
Other 6,422
 576
 7,800
 2,035
Total customer revenues $51,895
 $47,344
 $140,270
 $141,124

CAM's aircraft lease revenues are recognized as operating lease revenues on a straight-line basis over the term of the applicable lease agreements. Customer payments for leased aircraft and equipment are typically paid monthly in advance. CAM's leases do not contain residual guarantees. Approximately 7% of CAM's leases to external customers contain purchase options at projected market values. As of September 30, 2019, minimum future payments from external customers for leased aircraft and equipment were scheduled to be $45.9 million for the remainder of 2019, $169.6 million, $163.7 million, $137.5 million and $94.4 million respectively for each of the next 4 years ending December 31, 2023 and $196.4 million thereafter. Minimum future payments from external customers for leased aircraft and equipment as of December 31, 2018 was scheduled to be $142.3 million, $127.1 million, $124.3 million, $121.2 million and $87.1 million, respectively, for each of the next five years ending December 31, 2023 and $119.8 million thereafter.

For customers that are not a governmental agency or department, the Company generally receives partial payment in advance of services, otherwise customer balances are typically paid within 30 to 60 days of service. During the three and nine month periods ending September 30, 2019, the Company recognized $0.5 million and $2.8 million of non-lease revenue that was reported in deferred revenue at the beginning of the respective period, respectively, compared to $4.8 million and $8.8 million in the corresponding periods of 2018. Deferred revenue was $2.9 million and $3.1 million at September 30, 2019 and December 31, 2018, respectively, for contracts with customers.



The Company's otherAdditional segment information from continuing operations is presented below (in thousands):
 Three Months Ending Nine Months Ending
 September 30, September 30,
 2019 2018 2019 2018
Depreciation and amortization expense:       
CAM$39,269
 $31,590
 $116,787
 $91,055
ACMI Services24,171
 10,950
 71,131
 31,502
All other709
 661
 2,134
 2,268
Total$64,149
 $43,201
 $190,052
 $124,825
Interest expense:       
CAM9,494
 4,681
 28,838
 13,675
ACMI Services6,530
 402
 19,520
 1,419
Segment earnings (loss):       
CAM$17,428
 $19,034
 $50,285
 $49,892
ACMI Services4,375
 (341) 17,658
 3,574
     All other2,939
 3,051
 8,848
 9,808
Net unallocated interest expense(610) (458) (2,293) (1,098)
Net gain on financial instruments91,952
 17,895
 60,566
 28,707
Transaction fees—
 —
 (373) —
Other non-service components of retiree benefit (costs) credits, net(2,351) 2,045
 (7,053) 6,135
Loss from non-consolidated affiliate(2,645) (2,647) (12,459) (7,600)
Pre-tax earnings from continuing operations$111,088
 $38,579
 $115,179
 $89,418
 Three Months Ending Nine Months Ending
 September 30, September 30,
 2018 2017 2018 2017
Depreciation and amortization expense:       
CAM$31,590
 $26,829
 $91,055
 $77,383
ACMI Services10,950
 9,805
 31,502
 31,368
MRO Services840
 680
 2,520
 2,039
All other(179) 291
 (252) 1,038
Total$43,201
 $37,605
 $124,825
 $111,828
Segment earnings (loss):       
CAM$19,034
 $19,445
 $49,892
 $45,570
ACMI Services61
 300
 4,993
 (2,976)
MRO Services2,332
 2,514
 8,115
 16,805
     All other3,139
 1,432
 8,469
 5,295
Inter-segment earnings eliminated(2,420) (3,285) (6,776) (10,105)
Net unallocated interest expense(860) (268) (2,517) (655)
Net gain (loss) on financial instruments17,895
 (34,433) 28,707
 (100,213)
Other non-service components of retiree benefit costs, net2,045
 (5,529) 6,135
 (5,883)
Loss from non-consolidated affiliate(2,647) (945) (7,600) (945)
Pre-tax earnings from continuing operations$38,579
 $(20,769) $89,418
 $(53,107)
Interest expense allocated to CAM was $4.7 million and $13.7 million for the three and nine month periods ending September 30, 2018, respectively, compared to $4.0 million and $10.9 million for the corresponding periods of 2017.
The Company's assets are presented below by segment (in thousands):. Cash and cash equivalents are reflected in Assets - All other.
 September 30, December 31,
 2019 2018
Assets:   
CAM$1,810,351
 $1,577,182
ACMI Services778,031
 759,131
All other156,451
 134,272
Total$2,744,833
 $2,470,585

 September 30, December 31
 2018 2017
Assets:   
CAM$1,246,833
 $1,192,890
ACMI Services180,382
 189,379
MRO Services96,277
 87,177
All other29,576
 79,398
Total$1,553,068
 $1,548,844


NOTE O—SUBSEQUENT EVENT
On October 2, 2018, the Company announced that it has agreed to acquire Omni Air International LLC (Omni Air), a passenger ACMI and charter services airline with significant experience serving U.S. and allied foreign governments and commercial customers, for $845 million, subject to customary adjustments. Omni Air’s fleet includes seven Boeing 767-300ER, three 767-200ER and three 777-200ER passenger aircraft. The combination with Omni Air is anticipated to add over $430 million in annualized revenues to the Company. The acquisition of Omni Air is expected to diversify ATSG’s customer base, add significant presence in the growing government passenger services market, and broaden the Company's operating capabilities to include Boeing 777-200 extended range aircraft.  The acquisition will position the Company to meet customers’ global cargo needs with the longer-range 777 platform.
The Company plans to fund the all-cash acquisition of Omni Air by expanding its existing Senior Credit Agreement. The acquisition is expected to close during the fourth quarter of 2018, subject to regulatory approvals and the satisfaction of customary closing conditions. In conjunction with the close of the acquisition, the Company will have significant fees and estimates that deal expenses for the fourth quarter of 2018 will be $5.5 million in addition to financing fees.



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Air Transport Services Group, Inc. and its subsidiaries may hereinafter individually and collectively be referred to as "the Company", "we", "our" or "us" from time to time. The following discussion and analysis describes the principal factors affecting the results of operations, financial condition, cash flows, liquidity and capital resources. It should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") contained in this report and our Annual Report on Form 10-K for the year ended December 31, 2017.2018.


INTRODUCTION
The Company leasesWe lease aircraft provides air cargo transportation and performsprovide airline operations, aircraft modification and maintenance services, ground services, and other support services primarily to the air cargo transportation and package deliverylogistics industries. Through the Company's subsidiaries, we offer a range of complementary services to delivery companies, freight forwarders, e-commerce operators,businesses, airlines and government customers. Our principal subsidiaries include ABX Air, Inc. (“ABX”), Air Transport International, Inc. (“ATI”), Cargo Aircraft Management, Inc. (“CAM”) and Airborne Maintenance and Engineering Services, Inc. ("AMES"). ABX and ATI are twothree independently certificated airlines.airlines (ABX, ATI and OAI) and an aircraft leasing company (CAM ). CAM provides competitive aircraft lease rates by converting passenger aircraft into cargo freighters and offering them to customers under long-term leases. AMES provides aircraft maintenance and modification services.
We have threetwo reportable segments: CAM, which leases Boeing 777, 767, Boeing 757 and Boeing 737 aircraft and aircraft engines and ACMI Services, which primarily includes the aircargo and passenger transportation operations of the two airlines, and MRO Services, which provides aircraft maintenance and modification services to customers.three airlines. Our other business operations, which primarily provide support services to the transportation industry, include mailproviding aircraft maintenance and packagemodification services to customers, load transfer and sorting services as well as related equipment maintenance services. These operations do not constitute reportable segments duesegments. 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 size.acquisition by the Company on November 9, 2018.
Our largest customers are DHL Network Operations (USA), Inc. and its affiliates ("DHL"), Amazon.com Services, Inc. ("ASI"), successor to Amazon Fulfillment Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon"), and the U.S. Military.Department of Defense ("DoD").
DHL
The Company has had long-term contracts with DHL since August 2003. DHL accounted for 14% and 27% of the Company's consolidated revenues forduring the first nine months of 2019 and 2018, compared with 31% of the Company's consolidated revenues excluding directly reimbursed revenues in the corresponding period in 2017.respectively. As of September 30, 2018,2019, the Company, through CAM, leased 1614 Boeing 767 cargo aircraft to DHL comprised of seven Boeing 767-200 aircraft and seven Boeing 767-300 aircraft expiring between 2022 and 2024. Eight of the 14 Boeing 767 aircraft to DHL, 11 of which were being operated for DHL by the Company's airlines for DHL under a crew, maintenance and insurance agreement and five aircraft which are operated by a DHL-affiliated

airline in the Middle East. Additionally, ATIairlines. We also operated four CAM-owned Boeing 757 aircraft under other operating arrangements with DHL.
Amazon
The Company has been providing freighter aircraft operating flightand services and arrangingfor cargo handling and logistical support for ASI since September 2015. Revenues from our commercial arrangements with ASI comprised approximately 21% and 29% of our consolidated revenues during the first nine months of 2019 and 2018, respectively. On March 8, 2016, the Companywe entered into an Air Transportation Services Agreement (the “ATSA”) with ASI pursuant to which CAM agreed to leaseleased 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. CAM owns allThe ATSA also provides for the operation of those aircraft by our airline subsidiaries and the performance of ground handling services by our subsidiary, LGSTX Services Inc. ("LGSTX"). In December 2018, the Company announced agreements with Amazon to 1) lease and operate ten additional Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing 767767-200 aircraft that arecurrently leased and operated underto ASI by two years to 2023 with an option for three more years, 3) extend the ATSA. The ATSA became effective on April 1, 2016. Revenues from continuing operations performed for ASI comprised approximately 29%term of the Company's consolidated revenues from continuing operationseight Boeing 767-300 aircraft currently leased to ASI by three years to 2026 and 2027 with an option for three more years and 4) amend and extend the ATSA by five years through March 2026, with an option to extend for an additional three years. During January, 2019, amendments to extend the terms of aircraft leases were executed. By September 30, 2019, we executed leases with

ASI for four of the ten Boeing 767-300 aircraft. We plan to deliver two more of the 767-300 aircraft in the fourth quarter of 2019 and the remainder in 2020. All ten of these aircraft leases will be for ten years. Under the ATSA, we operate the aircraft based on pre-defined fees scaled for the first nine monthsnumber of 2018, compared with 27% of revenues, excluding directly reimbursed revenues, during the corresponding period in 2017.aircraft hours flown, aircraft scheduled and flight crews provided to ASI for its network.
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants in three tranches which grant Amazon the right to acquire up to 19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company following the date of the Investment Agreement and after giving effect to the warrants granted. The exercise priceIn conjunction with the December 22, 2018 agreement for the ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and additional aircraft operations under the ATSA, Amazon may vest additional warrants totaling 14.8 million common shares which could expand its potential ownership in the Company to approximately 33.2%, including the warrants described above for the 2016 agreements. On January 22, 2019, 5.5 million warrants vested in conjunction with the execution of the 20 aircraft lease extensions and through the third quarter of 2019 3.7 million warrants is $9.73 per share, which representsvested in conjunction with the closing priceexecution of four Boeing 767 aircraft leases. Additional warrants will vest as additional aircraft leases are executed and added to the ATSA operations. Additionally, Amazon can earn incremental warrant rights, increasing its potential ownership from 33.2% up to approximately 39.9% of the Company’s common shares on February 9, 2016. Each ofCompany, by leasing up to seventeen more cargo aircraft from the three tranches of warrants will be exercisable in accordance with its terms through March 8, 2021.Company before January 2026.
Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting guidance for equity-based payments to non-employees and 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 warrants at the end of each reporting period, lease 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 above for financial reporting. For additional information about the accounting for the warrants, see Note BC to the accompanying unaudited condensed consolidated financial statements.
DoD
The U.S. MilitaryCompany's airlines have been providing services to the DoD since the 1990's. The DoD comprised 36% and 10% of the Company's consolidated revenues excluding directly reimbursed revenues during both the first nine month periods ending September 30,months of 2019 and 2018, and 2017, respectively. The Company's airlines contract theirprovide passenger and cargo airlift services to the Air Mobility Command ("AMC"), throughU.S. DoD. Due to the U.S. Transportation Command ("USTC"), bothacquisition of which are organized underOAI in November 2018, the U.S. Military.DoD comprises a larger portion of our 2019 consolidated revenues compared to previous periods.
Aircraft Fleet Summary 2018
AsOur fleet of cargo and passenger aircraft is summarized in the following table as of September 30, 2018, the combined operating fleet2019 and December 31, 2018. Our freighters, most of owned freighterwhich were converted from passenger aircraft, consisted of 34 Boeing 767-200utilize standard shipping containers and can be deployed into regional cargo markets more economically than larger capacity aircraft, 29 Boeing 767-300 aircraft, four Boeing 757-200 aircraft, four Boeing 757 "combi" aircraft and two Boeing 737-400 aircraft. The Boeing 757 combi aircraft are capable of simultaneously carrying passengers and cargo containers on the main flight deck.newly built freighters or other competing alternatives. At September 30, 2018,2019, the Company owned sixten Boeing 767-300 aircraft that were either already undergoing, or awaiting induction into the freighter conversion process.

Aircraft fleet activity during the first nine months of 20182019 is summarized below:
- CAM completed the modification of fivethree Boeing 767-300 freighter aircraft purchased in the previous year and beganyear. After leasing one aircraft to lease four of those aircraft under multi-year leases to external customers.ATI for a short period, CAM began to lease the fifththat aircraft to ATI.
- CAM completed the modification of one 737-400 freighter aircraft purchased the previous year and entered into a multi-year lease with an external customer.
- ABX returned one Boeing 767-300 freighter aircraft to CAM. That aircraft was then leased to an external customer under a multi-year lease and is being operated by ABX.lease. CAM leased the other two aircraft to an external customer under multi-year leases. ATI operates all three aircraft for the customer.
- ATI returned one Boeing 767-300 freighter and CAM soldbegan 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 which was under leaseand 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, to that same external customer.

- CAM purchased fiveeight Boeing 767-300 passenger aircraft and one Boeing 767-300 freighter aircraft for the purpose of converting seven of the passenger aircraft into a standard freighter configuration.
- External lessees returned two Boeing 767-200 freighter aircraft to CAM. Both CAM leased one of these aircraft are being prepped for redeployment to other lessees.

Omni as a passenger aircraft.
September 30, 2018 December 31, 2017September 30, 2019 December 31, 2018
ACMI
Services
CAMTotal ACMI
Services		CAMTotal
ACMI
Services
CAMTotal ACMI
Services		CAMTotal
In-service aircraft      
Aircraft owned      
Boeing 767-2007
27
34
 7
29
36
Boeing 767-3004
25
29
 4
21
25
Boeing 757-2004
—
4
 4
—
4
Boeing 767-200 Freighter7
26
33
 5
29
34
Boeing 767-200 Passenger2
—
2
 2
—
2
Boeing 767-300 Freighter5
31
36
 5
28
33
Boeing 767-300 Passenger7
—
7
 6
—
6
Boeing 777-200 Passenger3
—
3
 3
—
3
Boeing 757-200 Freighter4
—
4
 4
—
4
Boeing 757-200 Combi4
—
4
 4
—
4
4
—
4
 4
—
4
Boeing 737-400—
2
2
 —
1
1
Boeing 737-400 Freighter—
1
1
 —
2
2
Total32
58
90
 29
59
88
Operating lease   
Boeing 767-200 Passenger1
—
1
 1
—
1
Boeing 767-300 Passenger1
—
1
 1
—
1
Total19
54
73
 19
51
70
2
—
2
 2
—
2
Other aircraft      
Owned Boeing 767-300 under modification—
6
6
 —
6
6
—
10
10
 —
5
5
Owned Boeing 737-400 under modification—
—
—
 —
1
1
Owned Boeing 767 available or staging for lease—
2
2
 —
—
—
—
2
2
 —
1
1
As of September 30, 2018,2019, ABX, ATI and ATIOAI were leasing 1932 in-service aircraft internally from CAM for use in ACMI Services. As of September 30, 2018, four of CAM's 27 Boeing 767-200 aircraft and seven2019, 33 of the 25 Boeing 767-30058 aircraft shown in the aircraft fleet table above were leased to DHL and operated by ABX. Additionally, 12 of CAM's 27 Boeing 767-200 aircraft and eight of CAM's 25 Boeing 767-300 aircraft were leased to ASI and operated by ABX or ATI. The other 11 Boeing 767-200 aircraftCAM leased to external customers include five Boeing 767-200 aircraft leased to DHL andwere operated by a DHL-owned airline. One of the other 10 Boeing 767-300 aircraft leased to external customers was operated by ATI.Company airline under CMI agreements. The carrying values of the total in-service fleet as of September 30, 20182019 and December 31, 20172018 were $982.2$1,309.8 million and $955.2$1,334.9 million, respectively. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM.CAM that is not in service condition or in the process of freighter modification.



RESULTS OF OPERATIONS
Summary
External customer revenues from continuing operations decreasedincreased by $49.2$161.2 million to $204.9$366.1 million and decreased by $133.7$437.3 million to $611.6$1,048.8 million for the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017. Effective January 1, 2018,2018. Revenues in 2019 grew due to additional passenger transportation services provided to the DoD after the Company adopted Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("Topic 606”). As a resultcompleted the acquisition of adopting Topic 606 beginning January 1, 2018, the Company reported certain revenues net of related expenses that are directly reimbursed by customers. Corresponding 2017 revenues include such expense reimbursements. Excluding revenues directly reimbursedOAI in 2017, customer revenuesNovember 2018. Revenues also increased $23.0 million, or 13% and $53.9 million, or 10% during the three and nine month periods ended September 30, 2018, respectively, compared with the corresponding periods of 2017. External customer revenues increased primarily due to additional aircraft leases andfrom CAM's leasing operations, expanded CMI, services.aviation fuel sales and logistics services for ASI.
The consolidated net earnings from continuing operations were $105.1 million and $101.1 million for the three and nine months periods ended September 30, 2019, respectively, compared to $32.9 million and $73.1 million for the corresponding periods of 2018. The Company had pre-tax earnings from continuing operations of $111.1 million and $115.2 million for the three and nine month periods ended September 30, 2018,2019, respectively, compared to net losses of $28.2 million and $72.4 million for the corresponding periods of 2017. The pre-tax earnings from continuing operations were $38.6 million and $89.4 million for the three and nine month periods ended September 30, 2018, respectively, compared to pre-tax losses of $20.8 million and $53.1 million for the corresponding periods of 2017.2018. Earnings were affected by specific events and

certain adjustments that do not directly reflect our underlying operations among the years presented. Net earnings from continuing operations for 2018 benefited from a lower effective tax rate due to The Tax Cuts and Jobs Acts ("Tax Act") which was enacted on December 22, 2017. On a pre-tax basis, earnings included pre-tax gains of $17.9$92.0 million and $28.7$60.6 million for the three and nine monthsmonth periods ended September 30, 2018,2019, respectively, for the re-measurement of financial instruments, including the warrant obligations granted to Amazon. This compares to pre-tax lossesgains for re-measurement of such financial instruments of $34.4$17.9 million and $100.2$28.7 million for the corresponding periods of 2017. Pre-tax2018. Additionally, pre-tax earnings were also reduced by $4.2from continuing operations included losses of $2.4 million and $12.7$7.1 million for the three and nine month periods ended September 30, 2018,2019, respectively, for the non-service components of retiree benefit plans compared to gains of $2.0 million and $6.1 million for the corresponding periods of 2018. Pre-tax earnings for the three and nine month periods ended September 30, 2019 included losses of $2.6 million and $12.5 million, respectively, for the Company's share of development costs for a joint venture and losses from a non-consolidated affiliate, compared to $2.6 million and $7.6 million for the corresponding periods of 2018. Pre-tax earnings were also reduced by $4.3 million and $12.6 million for the three and nine month periods ended September 30, 2019, respectively, for the amortization of leasecustomer incentives given to ASI in the form of warrants, compared to $3.9$4.2 million and $9.8$12.7 million for the corresponding periods of 2017. Additionally, pre-tax earnings from continuing operations included gains of $2.0 million and $6.1 million for the three and nine month periods ended September 30, 2018, respectively, for the non-service components of retiree benefit plans, compared to losses of $5.5 million and $5.9 million for the corresponding periods of 2017.2018. Pre-tax earnings for the three andfirst nine month periods ending September 30, 2018months of 2019 also included lossesexpense of $2.6$0.4 million and $7.6 million, respectively,for acquisition fees incurred for the Company's share2018 acquisition of development costs for a new joint venture.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) increased $1.5 million to $25.5were $28.5 million and $11.2 million to $74.9$87.1 million for the three and nine month periods ended September 30, 2018, respectively,2019 compared to 2017. Results$25.5 million and $74.9 million for the corresponding periods of 2018.
Adjusted pre-tax earnings from continuing operations for 2019 improved for the first nine months of 2019 compared to 2018, driven primarily by additional revenues and the improved financial results of our airline operations, including Omni. We experienced additional revenues and earnings due to the acquisition of Omni in November 2018. Adjusted pre-tax earnings from continuing operations also improved due to additional aircraft leases and the expansion of gateway ground operations for ASI. Increased revenues were partially offset by additional costs necessary to support the growing flight operations, higher costs for flight crews and higher depreciation expense. Pre-tax earnings for 2019 included additional interest expense due to the acquisition of Omni and the expansion of CAM's fleet of $11.1 million and $34.6 million for the three and nine month periods ended September 30, 2019. Pre-tax earnings for 2018 included an additional pre-tax interest expense of $2.1 million and $6.2 million, respectively,contributions from the Company's former USPS contracts for the amortization of convertible debt discount and issuance costs.parcel sorting which expired in September 2018.
Adjusted pre-tax earnings from continuing operations for the first nine months of 2018 improved compared to 2017, driven primarily by additional aircraft lease revenues and the improved financial results of our airline operations. The pre-tax results included reduced earnings from MRO Services due to a mix of lower margin services compared to 2017. Adjusted pre-tax earnings from continuing operations for the three months ended September of 2018 improved compared to 2017, primarily due to increased support services for USPS facilities and ASI gateways. Adjusted pre-tax earnings from continuing operations for the three months ended September of 2018 reflects fewer spare engine leases, less engine maintenance services revenues and additional lease incentive amortization compared to 2017.


A summary of our revenues and pre-tax earnings and adjusted pre-tax earnings from continuing operations is shown below (in thousands):
Three Months Ending Nine Months EndingThree Months Ending Nine Month Ending
September 30, September 30,September 30, September 30,
2018 2017 2018 20172019 2018 2019 2018
Revenues from Continuing Operations:              
CAM              
Aircraft leasing and related services$63,012
 $62,351
 178,217
 165,733
$75,160
 $63,012
 $223,017
 $178,217
Lease incentive amortization(4,226) (3,886) (12,678) (9,760)(4,156) (4,226) (12,407) (12,678)
Total CAM58,786
 58,465
 165,539
 155,973
71,004
 58,786
 210,610
 165,539
ACMI Services116,224
 112,203
 355,204
 332,120
272,188
 116,224
 785,082
 355,204
MRO Services46,879
 39,928
 145,125
 146,602
Other Activities22,598
 17,141
 61,611
 70,245
87,762
 69,477
 226,228
 206,736
Total Revenues244,487
 227,737
 727,479
 704,940
430,954
 244,487
 1,221,920
 727,479
Eliminate internal revenues(39,568) (45,777) (115,913) (147,319)(64,881) (39,568) (173,088) (115,913)
Customer Revenues - non reimbursed$204,919
 $181,960
 $611,566
 $557,621
Revenues for reimbursed expenses—
 72,141
 —
 187,608
Customer Revenues$204,919
 $254,101
 $611,566
 $745,229
$366,073
 $204,919
 $1,048,832
 $611,566
              
       
Pre-Tax Earnings (Loss) from Continuing Operations:       
Pre-Tax Earnings from Continuing Operations:       
CAM, inclusive of interest expense$19,034
 $19,445
 49,892
 45,570
$17,428
 $19,034
 $50,285
 $49,892
ACMI Services61
 300
 4,993
 (2,976)
MRO Services2,332
 2,514
 8,115
 16,805
ACMI Services, inclusive of interest expense4,375
 (341) 17,658
 3,574
Other Activities3,139
 1,432
 8,469
 5,295
2,939
 3,051
 8,848
 9,808
Inter-segment earnings eliminated(2,420) (3,285) (6,776) (10,105)
Net unallocated interest expense(860) (268) (2,517) (655)(610) (458) (2,293) (1,098)
Net financial instrument re-measurement (loss) gain17,895
 (34,433) 28,707
 (100,213)
Other non-service components of retiree benefit costs, net2,045
 (5,529) 6,135
 (5,883)
Loss from non-consolidated affiliate(2,647) (945) (7,600) (945)
Pre-Tax Earnings (Loss) from Continuing Operations38,579
 (20,769) 89,418
 (53,107)
Add other non-service components of retiree benefit costs, net(2,045) 5,529
 (6,135) 5,883
Add charges for non-consolidated affiliate2,647
 945
 7,600
 945
Add lease incentive amortization4,226
 3,886
 12,678
 9,760
Add net loss (gain) on financial instruments(17,895) 34,433
 (28,707) 100,213
Net financial instrument re-measurement gain (loss)91,952
 17,895
 60,566
 28,707
Transaction fees—
 —
 (373) —
Other non-service components of retiree benefits (credits) costs, net(2,351) 2,045
 (7,053) 6,135
Loss from non-consolidated affiliates(2,645) (2,647) (12,459) (7,600)
Pre-Tax Earnings from Continuing Operations111,088
 38,579
 115,179
 89,418
Add other non-service components of retiree benefit costs (credits), net2,351
 (2,045) 7,053
 (6,135)
Add charges for non-consolidated affiliates2,645
 2,647
 12,459
 7,600
Add customer incentive amortization4,334
 4,226
 12,585
 12,678
Add transaction fees—
 —
 373
 —
Add gain on financial instruments(91,952) (17,895) (60,566) (28,707)
Adjusted Pre-Tax Earnings from Continuing Operations$25,512
 $24,024
 $74,854
 $63,694
$28,466
 $25,512
 $87,083
 $74,854
Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding settlement charges and other non-service components of retiree benefit costs, gains and losses for the fair value re-measurement of financial instruments, lease incentive amortizationsamortization, the transaction fees related to the acquisition of Omni and the start-up costs of a non-consolidated joint venture. 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. 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.
Effective January 1, 2018, we adopted Topic 606 using a modified retrospective approach, under which financial statements are prepared under the revised guidance for the year of adoption, but not for prior years. We determined

that under Topic 606, the Company is an agent for aircraft fuel and certain other costs reimbursed under its ACMI and CMI contracts and for certain ground services that it arranges for ASI. Under the new standard, such reimbursed amounts are reported net of the corresponding expenses beginning in 2018. Revenues for the three and nine month periods ended September 30, 2017 included $72.1 million and $187.6 million for reimbursable revenues under its ACMI and CMI contracts and for directly reimbursed ground services, which, under the new standard, have been reported net of the related expenses in 2018.
CAM Segment
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 eightten years.
As of September 30, 2018 and 2017, CAM had 54 and 47 aircraft under lease to external customers, respectively. CAM's revenues increasedgrew by $0.3$12.2 million and $9.6$45.1 million for the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017. CAM's revenues2018, primarily as a result of additional aircraft leases. Revenues from aircraft leases increased, while revenues for engine leases and engine maintenance services declined during the third quarter of 2018 compared to 2017. CAM's revenues, excluding customer lease incentive amortization, increased $0.7external customers totaled $42.0 million and $12.5$123.6 million duringfor the three and nine month periods ended

September 30, 2018,2019, respectively, compared to $41.4 million and $115.3 million for the corresponding periods of 2017, primarily as a result2018. As of newSeptember 30, 2019 and 2018, CAM had 58 and 54 aircraft leases. Since October 1, 2017, CAM has added eight Boeing 767-300 freighter aircraft and two Boeing 737-400 freighter aircraftunder lease to its lease portfolio. Revenues from external customers, respectively, with the increase occurring during the last four months. CAM's revenues from the Company's airlines totaled $41.4$29.0 million and $115.3$87.0 million for the three and nine month periods ended September 30, 2018,2019, respectively, compared to $40.9$17.4 million and $104.1$50.3 million for the corresponding periods of 2017.2018, reflecting lease revenues for the addition of the eleven passenger aircraft acquired with Omni in November 2018. In addition to the Omni acquisition, CAM has added eight Boeing 767-300 freighter aircraft to its lease portfolio since October 1, 2018.
CAM's pre-tax earnings, inclusive of internally allocated interest expense, were $19.0$17.4 million and $49.9 million during the three and nine month periods ended September 30, 2018, respectively, compared to $19.4 million and $45.6 million during the corresponding periods of 2017. Pre-tax earnings for 2018 reflects additional external aircraft lease revenues. These additions were partially offset by increases in internally allocated interest expense of $0.6 million and $2.8$50.3 million for the three and nine month periods ended September 30, 2018,2019, respectively, compared to $19.0 million and $49.9 million for the corresponding periods of 2018. Pre-tax earnings reflect the eleven initial passenger aircraft leased to Omni as well as lease revenues for additional aircraft, offset by increases of $4.8 million and $15.2 million in internally allocated interest expense due to higher debt levels for the three and nine month periods ended September 30, 2019 compared to the corresponding periods of 2017 due to higher debt levels.2018. The pre-tax earnings were also partially offset by the increased amortizationdepreciation expense of the ASI lease incentive of $0.3$7.7 million and $2.9$25.7 million for the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017. Depreciation expense increased2018 driven by $4.8 million and $13.7 million for the three and nine month periods ended September 30, 2018, respectively, compared to the corresponding periods of 2017, due to the addition of sixeight Boeing freighter aircraft in the first nine months of 20182019 compared to 2017. Pre-tax earnings during2018, and the third quarteraddition of 2018 reflect fewer spare engine leases and less engine maintenance services revenues compared to 2017. Additionally, CAM's pre-tax earnings during the third quarter of 2018 was reduced due to11 Boeing passenger aircraft from the transition time of aircraft between lessees.Omni acquisition.
During the first nine months of 2018,2019, CAM purchased five 767-300 passenger aircraft for freighter conversion. CAM also sold one Boeing 767-300 aircraft which had been under a long-term lease to an external customer. As of September 30, 2018, all five of theeight Boeing 767-300 passenger aircraft purchased in 2018 and one Boeing 767-300 passengerfreighter aircraft. We expect to purchase one more Boeing 767-300 aircraft purchased during 2017 were being modified from passenger to freighter configuration.
CAM expects to complete the freighter modification of five of the six passenger aircraft which it owned at September 30, 2018 during the fourth quarter of 2018. CAM has2019 and we expect to add up to six aircraft into service during the fourth quarter of 2019. We have customer commitments or letters of intent for threeall of these five aircraft. CAM's future operating results will depend on the timing
CAM has agreements to purchase 17 more Boeing 767-300 aircraft and lease rates under which these aircraft are ultimately leased.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. CAM's future operating results will also depend on the timing and lease rates under which these aircraft are ultimately leased. CAM's future operating results will also be impacted by the amortization of additional warrants committed to Amazon in conjunction with the recent agreements for ten additional long-term aircraft leases and amendments to extend the terms of existing aircraft leases.
ACMI Services Segment
The ACMI Services segment provides airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance, insurance and insurance ("ACMI").aviation fuel. Our customers are usuallytypically 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 U.S. Military,DoD, usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price. As of September 30, 2018,2019, ACMI

Services included 5167 in-service aircraft, including 1932 passenger and freighter aircraft leased internally from CAM, 11eight CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under the restateda CMI agreement, 2024 CAM-owned freighter aircraft which are under lease to ASI and operated by ATI and ABX under the ATSA, and another CAM-owned freighter operated under a CMI by ATI.ATI and two passenger aircraft leased from an external lessor.
Total revenues from ACMI Services decreased $30.7increased $156.0 million and $81.2$429.9 million during the three and nine month periods ended September 30, 2018,2019, respectively, to $116.2$272.2 million and $355.2$785.1 million compared to the corresponding periods of 2017.2018. These increases reflect the acquisition of OAI and increases in billable block hours of 56% and 37% for the three and nine month periods ended September 30, 2019, respectively, compared to 2018. Increased revenues for 2019 included additional aircraft operations for ASI and the DoD. As of September 30, 2019, ACMI Services revenues included the operation of 16 more CAM-owned aircraft compared to September 30, 2018. On a combined pro forma basis, ACMI Services revenues for the three and nine month periods ended September 30, 2017 included $34.72018 would have been $243.1 million and $104.3$709.6 million, respectively, forwith the reimbursementinclusion of fuel and certain operating expenses. Such revenues for 2018 are reported net of expenses after the adoption of Topic 606. Airline services revenues from external customers, which do not include revenues for the reimbursement of fuel and certain operating expenses, increased $4.0 million and $23.1 million for the three and nine month periods ended September 30, 2018, respectively, compared to the corresponding periods of 2017. Improved revenues were driven by additional aircraft operations for ASI and reflect a 2% and 6% increase in billable block hours for the three and nine month periods ended September 30, 2018, respectively, compared to the corresponding periods of 2017. As of September 30, 2018, ACMI Services included the operation of the same number of CAM-owned aircraft as of September 30, 2017.OAI.
ACMI Services had pre-tax earnings of $0.1$4.4 million and $5.0$17.7 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to pre-tax earningslosses of $0.3 million and lossespre-tax earnings of $3.0$3.6 million for the corresponding periods of 2017.2018. Improved pre-tax results in 20182019 compared to 2017 reflect higher2018 were bolstered by expanded revenues from increasedthe acquisition of OAI and the timing of scheduled airframe maintenance costs. The improved pre-tax earnings were offset by increases of $6.1 million and $18.1 million in internally allocated interest expense due to higher

debt levels for the three and nine month periods ended September 30, 2019, respectively, compared to 2018. Earnings for the third quarter of 2019 also reflected additional personnel and training time in preparation for additional aircraft and block hours offset byscheduled for operations in 2019 and 2020. Scheduled airframe maintenance expense decreased $2.4 million during the costfirst nine months of additional employees2019 compared to 2018. Airframe maintenance expense varies depending upon the number of C-checks and aircraft maintenance expenses to support the expanded operations.scope of the checks required for those airframes scheduled for maintenance. In March 2018, ATI began to implement a recently ratifiedan 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.
Effective January 1, 2018, we adopted ASU "Compensation - Retirement Benefits (Topic 715): Improving the PresentationThe future growth of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). As a result of adopting ASU 2017-07, the pre-tax earnings for ACMI Services do not includewill be impacted by additional aircraft operations for Amazon. We began to operate four CAM-owned Boeing 767-300 aircraft in 2019 under the other non-service componentsATSA and we expect to add at least six additional CAM-owned Boeing 767-300 for Amazon, including two in the fourth quarter of retiree benefit costs.2019 and four during 2020. Additionally, during the fourth quarter of 2019, we expect to add two aircraft which will be provided by Amazon and operated by ATI under the ATSA . Future operating results may also be impacted by the vesting of additional warrants for Amazon, as Amazon leases additional aircraft from CAM and our airline begins to operate the aircraft under the ATSA.
ABX is negotiating with its flight crewmembers' collective bargaining unit. These negotiations could result in changes that may effect our productivity, employee compensation levels and the marketability of our services. Maintaining profitability in ACMI Services will depend on a number of factors, including customer flight schedules, crewmember productivity and pay, employee benefits, aircraft maintenance schedules and the number of aircraft we operate.
MRO Services Segment
MRO Services sells aircraft parts ABX is negotiating with its flight crewmembers' collective bargaining unit. These negotiations could result in changes that may effect ABX's productivity, its crewmembers compensation levels and provides aircraft maintenance and modification services through the AMES and Pemco World Air Services, Inc. ("Pemco"), subsidiaries. Total revenues from MRO Services increased $7.0 million and decreased $1.5 million for the three and nine month periods ended September 30, 2018, respectively, compared to the corresponding periodsmarketability of 2017. External customer revenues for MRO Services increased $13.3 million and $16.7 million during the three and nine month periods ended September 30, 2018, respectively, compared to the corresponding periods of 2017. Revenues for 2018 reflect the change in accounting standards beginning in 2018 after the adoption of Topic 606 to recognize certain aircraft maintenance and modification services over time instead of upon completion. During 2017, revenues were recognized in large amounts upon completion and redelivery of an aircraft to the customer.
The pre-tax earnings from MRO Services decreased $0.2 million and $8.7 million during the three and nine month periods ended September 30, 2018 to $2.3 million and $8.1 million, respectively, compared to the corresponding periods of 2017. The decline in MRO Services profitability reflects a mix of more lower margin maintenance services revenues during 2018 and longer completion times. During the third quarter of 2018, the time to complete several complex maintenance projects took longer than expected, negatively impacting earnings.its services.
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 Airborne Maintenance and Engineering Services, Inc. and its subsidiaries ("AMES"), we sell aircraft parts and provide aircraft maintenance and modification services. We provided mail and package sorting and logistical support to the U.S. Postal Service (“USPS”) at five USPS facilities through September 30, 2018, at which time our contracts expired. We arrange and further, arrangeperform similar services for certain

ASI gateway locations in the U.S. During the second quarter of 2019, ASI began to in-source some of the gateway locations for which we arrange contracted logistical support. We also provide maintenance for ground equipment, facilities and material handling equipment. We also resell aviation fuel in Ohio and provide flight training.
External customer revenues from all other activities were $20.1decreased $4.6 million and $53.9$0.9 million during the three and nine month periods ended September 30, 2018, respectively, compared to $52.3 million and $134.2 million for the corresponding periods of 2017. Customer revenues for the three and nine month periods ended September 30, 2017 included $37.4 million and $83.3 million, respectively, for the reimbursement of certain ground services that it arranges for ASI which are being netted against expenses in 2018, after the adoption of Topic 606. Revenues from external customers, which do not include 2017 revenues for the reimbursement of certain ground services, increased $5.2 million and increased $3.0 million for the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017. The increase2018. Declines in revenue compared to 2017 was drivenUSPS revenues and aircraft conversion revenues during 2019 were offset partially by additional mail volumes, higher contractual rates and additionalfacility maintenance services, ground support services and fuel sales provided to ASI. During June of 2018, we began to provide cargo handling and related ground support services directly to ASI at one of its gateway locations.
The pre-tax earnings from other activities increased $1.7decreased by $0.1 million and $3.2$1.0 million during the three and nine month periods ended September 30, 20182019 to $3.1$2.9 million and $8.5$8.8 million, respectively, compared to the corresponding periods of 2017. Additional2018. Lower earnings were a resultfor 2019 compared to 2018 reflect lower revenues for aircraft maintenance and conversions provided to external customers as well as the absence of higher contractual rates and increased volumes at the USPS facilities, additional ASI services and improved results from an airline affiliate accounted for under the equity method.
The contracts for five USPS facilities expired in September 2018 without renewal. Revenues from these USPS facilities were $9.6 million and $28.9 million during the three and nine month periods ended September 30, 2018, respectively,USPS.
Discontinued Operations
The financial results of discontinued operations primarily reflectconsist of cost adjustments to benefits forof former employees previously associated with ABX's former freight sorting and aircraft fueling serviceshub operations provided to DHL. Pre-tax resultsearnings related to the former sortinghub operations were a$0.4 million and $0.7 million gain and a $6.7 million loss for the first nine months of 20182019 and 2017,2018, respectively.
Expenses from Continuing Operations
Salaries, wages and benefits expense increased $10.2$39.4 million and $16.7$91.7 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017. Expenses2018 driven by higher headcount for flight operations, maintenance services and package sorting services. The increases in expense for the three and nine month periods ended September 30, 2018, increased due to2019 included $28.8 million and $83.4 million, respectively, for Omni, acquired in November 2018. Expenses for 2019 also included higher flight crew wages in conjunction with an amendment to the collective bargaining agreement with the ATI crewmembers additional employees and additional aircraft maintenance technician time

technicians to support increased block hourshours. Increases in salaries, wages and increased MRO services revenues.benefits expense were partially offset by personnel reductions due to the expiration of the USPS contracts.
Depreciation and amortization expense increased $5.6$20.9 million and $13.0$65.2 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017.2018. The increase in depreciation expense for the three and nine month periods ended September 30, 2019 included $16.6 million and $47.7 million, respectively, for Omni assets acquired in November 2018. The increase also reflects incremental depreciation for eight Boeing 767-300 aircraft and two Boeing 737-400additional aircraft engines added to the operating fleet since October 1, 2017.2018, 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 $0.4$8.0 million and increased $6.2$18.3 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017.2018. The increase in expensesexpense for the three and nine month periods ended September 30, 2019 included $3.6 million and $11.7 million, respectively, for Omni, acquired in November 2018. The timing and work scope of scheduled airframe checks resulted in fluctuations of maintenance expense during 20182019 compared to 2017 was due primarily to MRO Services for external customers. During 2018, MRO Services had an increased level of customer revenues and direct expenses compared to 2018. Additionally, during the third quarter of 2018, the airlines experienced a decline in engine maintenance incidents and costs. 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.
Fuel expense decreasedincreased by $28.1$35.2 million and $83.5$92.6 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017. In 2017,2018. Fuel expense includes the cost of fuel expense included reimbursableto operate DoD charters, fuel billedused to DHL, ASIposition aircraft for service and other ACMI customers which is being netted againstfor maintenance purposes, as well as the revenue in 2018 after the adoptioncost of Topic 606.fuel sales. The customer-reimbursed fuelincrease for the three and nine month periods ended September 30, 2017 was $30.42019 included $27.4 million and $90.2$81.7 million, respectively. Fuel expense includes the cost of fuel to operate U.S. Military charters as well as fuel used to position aircraftrespectively, for serviceOmni and for maintenance purposes. Fuel expense, excluding customer reimbursed

fuel increased $2.3$5.6 million and $6.7$5.7 million, respectively, for the three and nine month periods ended September 30, 2018 compared to 2017 due to more block hours flown for military customers in the first nine months of 2018.increased fuel sales.
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 $37.8increased $14.6 million and $85.8$39.9 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017. The decrease is primarily due to the netting of reimbursable revenues from certain ground services arranged2018. This increase for ASI against the expense in 2018 due to the adoption of Topic 606. The customer-reimbursed expenses in the three and nine month periods ended September 30, 2017 were $38.22019 included $13.6 million and $86.9$37.8 million, respectively.respectively, for Omni.
Travel expense increased by $18.5 million and $45.6 million during the three and nine month periods ended September 30, 2019, respectively, compared to the corresponding periods of 2018. The increase for the three and nine month periods ended September 30, 2019 included $16.2 million and $42.2 million, respectively, for Omni.
Landing and ramp expense, which includes the cost of deicing chemicals, decreasedincreased by $3.5$1.3 million and $10.7$4.3 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017.2018. The decrease is primarily due toincrease for the netting of reimbursable revenues from landingthree and ramp fees billed to DHL, ASInine month periods ended September 30, 2019 included $1.6 million and other ACMI customers against the$4.8 million, respectively, for Omni.
Rent expense in 2018 due to the adoption of Topic 606.
Other operating expenses increased by $0.4$0.8 million and decreased $3.9$1.6 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017.2018. This increase for the three and nine month periods ended September 30, 2019 included $1.6 million and $4.6 million, respectively, 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 $0.1 million and $1.1 million during the three and nine month periods ended September 30, 2019, respectively, compared to the corresponding periods of 2018. Aircraft fleet insurance has increased due to additional aircraft operations during the first nine months of 2019 compared to 2018.
Other operating expenses increased by $8.3 million and $30.1 million during the three and nine month periods ended September 30, 2019, respectively, compared to the corresponding periods of 2018. Other operating expenses include professional fees, employee training and utilities. The decline in otherincrease for the three and nine month periods ended September 30, 2019 included $7.4 million and $23.7 million, respectively, for Omni. Other operating expenses forduring 2019 were negatively impacted by the first nine months of 2018 includes gains related to the sale of equipment, improved operating results of an airline affiliate accounted for under the equity method.
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 lowerother 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.
  Three Months Ended September 30, 2018
  Actual ATSG Actual Omni Pro Forma Adjustments Pro Forma Results
Operating Expenses        
Salaries, wages and benefits $71,341
 $24,837
 $(2,029) $94,149
Depreciation and amortization 43,201
 14,531
 2,645
 60,377
Maintenance, materials and repairs 33,469
 4,706
 (52) 38,123
Fuel 5,981
 26,357
 23
 32,361
Contracted ground and aviation services 2,636
 12,625
 —
 15,261
Travel 6,903
 12,291
 —
 19,194
Landing and ramp 1,211
 1,603
 —
 2,814
Rent 3,274
 1,726
 —
 5,000
Insurance 1,696
 444
 —
 2,140
Other operating expenses 8,380
 5,128
 —
 13,508
Total Operating Expenses $178,092
 $104,248
 $587
 $282,927
         
  Nine Months Ended September 30, 2018
  Actual ATSG Actual Omni Pro Forma Adjustments Pro Forma Results
Operating Expenses        
Salaries, wages and benefits $216,173
 $70,232
 $(2,294) $284,111
Depreciation and amortization 124,825
 44,550
 7,933
 177,308
Maintenance, materials and repairs 107,152
 11,957
 (372) 118,737
Fuel 17,682
 73,802
 —
 91,484
Contracted ground and aviation services 7,464
 36,960
 —
 44,424
Travel 20,823
 32,188
 —
 53,011
Landing and ramp 3,670
 5,080
 —
 8,750
Rent 10,264
 5,327
 —
 15,591
Insurance 4,473
 1,419
 —
 5,892
Other operating expenses 20,672
 17,297
 —
 37,969
Total Operating Expenses $533,198
 $298,812
 $5,267
 $837,277
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 three and nine month periods ended September 30, 2018.
Adjustment to reflect estimated additional depreciation and amortization expense of $2.6 million and $7.9 million for the three and nine month periods ended September 30, 2018, resulting from the fair value adjustments to Omni’s intangible and tangible assets. Pro forma combined depreciation expense for uncollectible customer accounts comparedthe 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 the same periods of 2017.modify certain aircraft to freighters as an aircraft is removed from passenger service.
Interest expense increased by $1.3$11.1 million and $4.7$34.6 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017.2018. Interest expense increased due to

a higher average debt level, including an additional term loan 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. Capitalized interest due to our fleet expansion was flat during the three and nine month periods ended September 30, 2018, respectively, compared to the corresponding periods of 2017. Interest expense in the first nine months of2019 and 2018 was also impacted by the convertible notes issued in September 2017. The convertible notes have a principal value of $258.8 million and bear interest at a cash coupon rate of 1.125%. At the time of issuance, the value of the conversion feature of the convertible notes was recorded as a debt discount and is being amortized along with debt issuance costs to interest expense over the seven year term of the convertible notes.
The non-cash amortizationCompany recorded net, pre-tax gains on financial instruments of the debt discount and issuance costs was $2.1$92.0 million and $6.2$60.6 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to the corresponding periods of 2017.
The Company recorded pre-tax net gains on financial instruments of $17.9 million and $28.7 million during 2018. The gains and losses are primarily a result of re-measuring, as of September 30, 2019 and 2018, the fair value of the stock warrants granted to Amazon.
Non-service components of retiree benefits were net losses of $2.4 million and $7.1 million during the three and nine month periods ended September 30, 2018,2019, respectively, compared to net gains of $2.0 million and $6.1 million for 2018. The non-service component gain and losses of $34.4 millionretiree benefits are actuarially determined and $100.2 million duringinclude the corresponding periodsamortization of 2017.The gains are primarily a resultunrecognized gain and loss stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. Non-service components of re-measuring, as of September 30, 2018,retiree benefits can vary significantly from one year to the fair value of the stock warrants grantednext based on investment results and changes in discount rates used to Amazon. A decrease in the fair value of the warrant obligation since the previous re-measurement dates of June 30, 2018 and December 31, 2017, corresponded to a decrease in the traded price of the Company's shares and resulted in non-cash losses. The non-cash gains and losses resulting from quarterly re-measurements of the warrants may vary widely among quarters.account for defined benefit retirement plans.
The provision for income taxes for interim periods is based on management's best estimate of the effective income tax rate expected to be applicable for the current year, plus any adjustments arising from changes in the estimated amount of taxable income related to prior periods. Income taxes recorded through September 30, 2018,2019 have been estimated utilizing a 24.4%27% rate based upon year-to-date income and projected results for the full year. 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 tax rate during a period.
The effective tax rate from continuing operations for the three and nine month periods ended September 30, 2018,2019 was 14.6%5% and and 18.3%12%, respectively. TheseThe effective tax rates include deferredrate is affected by the re-measurement of warrants, changes in valuation allowances and other discrete tax expense related toitems in which expenses and benefits for tax purposes are different than required by generally accepted accounting principals. The effective tax rate before including the effects of the warrant re-measurement loss atre-measurements, incentive amortizations and valuation allowance changes was 25% and 24% for the end of the period.three and nine month periods ended September 30, 2019, respectively. The effective tax rate before including the effects of the warrants was 23.8% and 23.9%24% for both the three and nine month periods ended September 30, 2018, respectively. The effective tax rate before including the effects of the warrants for the three and nine month periods ended September 30, 2017 were 37.5% and 36.5%, respectively. The effective tax rate decreased for the first nine months of 2018 due to the enactment of the Tax Act in December 2017.

2018.
As of December 31, 2017,2018, the Company had operating loss carryforwards for U.S. federal income tax purposes of approximately $57.6$253.8 million which will begin to expire in 2031 if not utilized before then. 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 2023 or later. The Company may, however, be required to pay some federal tax due to loss carryforward usage limitationsminimum taxes and certain state and local income taxes before then. The Company's taxable income earned from international flights areis 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.


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash generated from operating activities totaled $200.8$307.1 million and $191.3$200.8 million for the first nine months ofin 2019 and 2018, and 2017, respectively. Improved cash flows generated from operating activities during the first nine months of 20182019, were driven primarily by additional aircraft leases to customers and by increased operating levels of the ACMI Services segment and customer collections.segment. Cash outlays for pension contributions were $5.4 million and $22.2 million for the first nine months of 2019 and 2018, were $22.2 million compared to $4.1 million for the corresponding period of 2017.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 $214.0$336.9 million and $218.8$214.0 million for the first nine months of 20182019 and 2017,2018, respectively. Capital expenditures in 2019 included $247.9 million for the acquisition of nine Boeing 767-300 aircraft and freighter modification costs; $54.3 million for required heavy maintenance; and $34.7 million for other equipment, including purchases of aircraft engines and rotables. Our capital expenditures in

the first nine months of 2018 included $149.2 million for the acquisition of five Boeing 767-300 aircraft and freighter modification costs; $38.4 million for required heavy maintenance; and $26.4 million for other equipment, including purchases of aircraft engines and rotables. Our capital expenditures during 2017 included $159.4 million for the acquisition of five Boeing 767-300 aircraft and two Boeing 737-400 aircraft and freighter modification costs; $36.2 million for required heavy maintenance; and $23.2 million for other equipment, including purchases of aircraft engines and rotables.
During the first nine months of 2019, we paid $12.0 million to complete the acquisitions of Omni and TriFactor. During the first nine months of 2019 and 2018, we contributed an additional$9.8 million and $8.3 million, respectively, to a joint venture with Precision Aircraft Solutions, LLC, which is developing a passenger-to-freighter conversion program for Airbus A321-200 aircraft. During the first quarter of 2017 we paid $6.9 million to complete our acquisition of Pemco World Air Services, Inc.
Net cash provided by financing activities was $14.8$28.0 million for the first nine months of 20182019 compared to $61.9$14.8 million used by financing activities in 2017.2018. During the first nine months of 2018,2019, we drew $60.0$70.0 million from the revolving credit facility under the Senior Credit Agreement to fund capital spending for aircraft acquisition and modifications. We made debt principal payments of $39.9$38.9 million.
During the first quarter of 2018, we repurchased 157,000 shares of the Company's common stock pursuant to an authorized share repurchase plan for $3.6 million, of which $0.6 million was paid in the first quarter and $3.0 million was paid in April 2018. The repurchase plan was amended by the Board again in February 2018 to increase the authorized share repurchase plansuch authorization to up to $150 million (less amounts previously repurchased).million. We have not repurchased any shares in 2019.
Commitments
On October 2, 2018, we announced that the Company has agreed to acquire Omni Air for $845 million, subject to adjustments, as described in Note O in the accompanying financial statements. The Company plans to fund the all-cash acquisition of Omni Air by expanding its existing Senior Credit Agreement. The acquisition is expected to close during the fourth quarter of 2018, subject to regulatory approvals and the satisfaction of customary closing conditions. In conjunction with the close of the acquisition, the Company will have significant fees. We estimate that deal expenses for the fourth quarter of 2018 will be $5.5 million in addition to financing fees.
We estimate that capital expenditures for 20182019 will total $280$460 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 and the timing of large payments.processes. We expect to finance the capital expenditures from current cash balances, future operating cash flow 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 H of the accompanying financial statements.

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 2019.2020. We expect to make contributions equal to the Company's 49% ownership percentage of the program's total costs during 2018 and 2019.
Liquidity
The Company has a Senior Credit Agreement with a consortium of banks that includes antwo unsubordinated term loanloans of $59.3$698.4 million, net of debt issuance costs, and a revolving credit facility from which the Company has drawn $280.0$530.0 million, net of repayments, as of September 30, 2018.2019. The revolving credit facility has a capacity of $545.0$645.0 million, permitted additional indebtedness of $300.0$500.0 million of which $258.8 million has been utilized for the issuance of convertible notes, and an accordion feature whereby the Company can draw up to an additional $100.0$300.0 million subject to the lenders' consent. The Senior Credit Agreement is collateralized by the Company's fleet of Boeing 777, 767 and 757 freighter aircraft. Under the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 125%102% of the outstanding balances of the term loan and the maximum capacity of revolving credit facility or 150% of the outstanding balance of the term loanloans and the total funded revolving credit facility, whichever is less.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 $545.0 million. Each year, through May 6,commitment.
In November 2019, the Company may request aSenior Credit Agreement was amended. This amendment includes an increase to the maximum revolver capacity from $645.0 million to $750.0 million, combines the two terms loans into one year extensionloan and reduces the interest rate spread of the final maturity date, subjectLIBOR based financing at the current debt-to-EBITDA ratio. This amendment extends the agreement six months to the lenders' consent. Absent such future extensions, the maturity date is currently set to expireNovember 2024 if certain liquidity measures are maintained during 2024 and adds incremental accordion capacity based on May 30, 2023.debt ratios.
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 EBITDAdebt-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.

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 (earnings before interest, taxes, depreciation and amortization expenses).EBITDA. At the Company's current debt-to-EBITDA ratio, the unsubordinated term loanloans and the revolving credit facility botheach bear a variable interest raterates of 3.75%4.3%.
At September 30, 2018,2019, the Company had $43.5$46.8 million of cash balances. The Company had $254.9$100.8 million available under the revolving credit facility, net of outstanding letters of credit, which totaled $10.1$14.2 million. Also, the Company has additional borrowing capacity available under the accordion feature of its Senior Credit Agreement, subject to lender consent (see Note F). We believe that the Company's current cash balances and forecasted cash flows provided from its operating agreements, combined with its Senior Credit Agreement, which is being amended and restated in conjunction with the pending acquisition of Omni Air, will be sufficient to fund operations, capital spending, scheduled debt payments and required pension funding for at least the next 12 months.
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 September 30, 20182019 and 2017,2018, 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 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. The Company bases itsWe 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.
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 the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk for changes in interest rates and changes in the price of jet fuel. The risk associated with jet fuel, however, is largely mitigated by reimbursement through the agreements with our customers.
No changes have occurred to the market risks the Company faces since information about those risks were disclosed in item 7A of the Company's 20172018 Annual Report on Formform 10-K filed with the Securities and Exchange Commission on March 1, 2018.2019.


ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of September 30, 20182019, the Company carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
ThereExcept for the internal controls of Omni, which was acquired on November 9, 2018, there were no changes in internal control over financial reporting during the most recently completed fiscal quarteryear that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.




PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS
We are currently a party to legal proceedings in various federal and state jurisdictions arising out of the operation of the Company's business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, we believe that the Company's ultimate liability, if any, arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to our financial condition or results of operations.


ITEM 1A. RISK FACTORS
The Company faces risks that could adversely affect its condition or results of operations. Many of these risks are disclosed in Item 1A of the Company's 20172018 Annual Report on form 10-K, filed with the Securities and Exchange Commission on March 1, 2018. The risk factors presented below update, and should be considered in addition to, the risk factors previously disclosed in Item 1A of the Company's 2017 Annual Report on Form 10-K.2019. Other risks that are currently unknown to management or are currently considered immaterial or unlikely, could also adversely affect the Company.
On October 2, 2018, the Company announced that it has agreed to acquire Omni Air as described in this report. As a result, the Company faces additional risks and uncertainties associated with the pending acquisition, including, but not limited to, the possibility: (i) that one or more closing conditions to the acquisition, including certain regulatory approvals, may not be satisfied or waived, on a timely basis or otherwise, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the acquisition, or may require conditions, limitations or restrictions in connection with such approvals; (ii) the risk that the acquisition may not be completed on the terms or in the time frame expected by the Company, or at all; (iii) uncertainty of the expected financial performance of the combined company following completion of the acquisition; (iv) failure to realize the anticipated benefits of the acquisition; (v) difficulties and delays in achieving synergies of the combined company; (vi) the inability to retain key personnel subsequent to the acquisition; (vii) the occurrence of any event that could give rise to termination of the acquisition; (viii) changes in general economic and/or industry specific conditions that could adversely impact the acquisition; and (ix) actions by third parties, including government agencies that could adversely impact the acquisition.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 5, 2014, the Board of Directors authorized the Company to repurchase up to $50.0 million of outstanding common stock. In May 2016, the Board amended the Company's common stock repurchase program increasing the amount that management may repurchase from $50.0 million to $100.0 million of outstanding common stock. In February 2018, the Board again amendedincreased the common stock repurchase programauthorization from $100.0 million to increase the amount that management may repurchase to $150$150.0 million (less amounts previously repurchased). The Board's authorization does not require the Company to repurchase a specific number of shares or establish a time frame for any repurchase and the Board may terminate the repurchase program at any time. Repurchases may be made from time to time in the open market or in privately negotiated transactions. There is no expiration date for the repurchase program. There were no repurchases made during the third quarter of 2018.2019. As of September 30, 2018,2019, the Company hashad repurchased 6,592,349 shares and has athe maximum dollar value of shares that may yetcould then be purchased under the program ofwas $61.3 million.


ITEM 5. OTHER INFORMATION
None.On November 4, 2019, Air Transport Services Group, Inc. (“ATSG”) entered into an amendment (the “Third Amendment”) of its Second Amended and Restated Credit Agreement (the “Credit Agreement”), dated November 9, 2018, with SunTrust Bank, as Administrative Agent, and the other financial institutions from time to time a party thereto. The Third Amendment: (i) extends the maturity date of the term loan and revolving credit facility for six months to November 30, 2024; (ii) reduces the interest pricing, by lowering rate spreads above the one-month LIBOR for borrowings, ranging from 37.5 basis points at ATSG’s current secured net leverage ratio to 25.0 basis points at each of the other steps on the pricing grid; (iii) reduces the pricing applied to unused revolver capacity by 5 basis points; (iv) increases the aggregate amount of the revolving credit facility by $105 million, to $750 million; (iv) consolidates two term loans totaling $707 million at September 30, 2019, into a single term loan of $635 million; (v) reduces the required term loan principal amortization over its remaining duration; (vi) adds a new leverage-based feature providing access to additional revolver or term loan capacity through the accordion option, subject to lenders’ consent; (vii) increases the maximum permitted total (secured and unsecured) leverage from 4.0x to 4.25x trailing 12-month EBITDA, as defined under the Credit Agreement; and (viii) increases the additional permitted indebtedness outside of the secured facility from $500 million to $750 million, excluding the existing convertible notes.




ITEM 6. EXHIBITS
The following exhibits are filed with or incorporated by reference into this report.
Exhibit No.Description of Exhibit
 Articles of Incorporation
3.1
First Amendment to Restated Certificate of Incorporation of Air Transport Services Group, Inc. (3)
3.2
Amended and Restated Bylaws of Air Transport Services Group, Inc. (1)
Material Contracts
10.1
First Amendment to Second Amended and Restated Credit Agreement, dated as of February 13, 2019, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services Group, Inc.; each of the Guarantors party hereto; each of the financial institutions party hereto as "Lenders"; and SunTrust Bank, in its capacity as Administrative Agent. (2)
10.2
Second Amendment to Second Amended and Restated Credit Agreement, dated as of May 24, 2019, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services Group, Inc.; each of the financial institutions party hereto as "Lenders"; and SunTrust Bank, in its capacity as Administrative Agent. (2)
10.3
Third Amendment to Second Amended and Restated Credit Agreement, dated as of November 4, 2019, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services Group, Inc.; each of the financial institutions party hereto as "Lenders"; and SunTrust Bank, in its capacity as Administrative Agent. (4)
Certifications
  
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
  
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
  
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
  
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101.INSXBRL Instance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Labels Linkbase Document
  
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
____________________
(1)Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on May 10, 2019.
(2)Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on May 29, 2019.
(3)Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 8, 20186, 2019.
(4)Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on November 6, 2019


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
    AIR TRANSPORT SERVICES GROUP, INC.,
    a Delaware Corporation
    Registrant
     
    /S/  JOSEPH C. HETE
    Joseph C. Hete
    Chief Executive Officer (Principal Executive Officer)
Date:November 2, 20187, 2019   
     
    /S/  QUINT O. TURNER
    Quint O. Turner
    Chief Financial Officer (Principal Financial Officer
Date:November 2, 20187, 2019  and Principal Accounting Officer)




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