UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR ~~15(D)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2017~~March 31, 2018

o TRANSITION REPORT PURSUANT TO SECTION 13 OR ~~15(D)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 000-50368

(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, OH		45177
(Address of Principal Executive Offices)		(Zip Code)

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 o

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 o

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,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer ox		Accelerated filer xo
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o
Emerging growth company o

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) of the Securities 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 x

As of ~~November 9, 2017, 59,121,112~~May 10, 2018, 59,080,512 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 Operations	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income	5
	Unaudited Condensed Consolidated Balance Sheets	6
	Unaudited Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	2726
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3835
Item 4.	Controls and Procedures	3835

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3936
Item 1A.	Risk Factors	3936
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4036
Item 5.	Other Information	4037
Item 6.	Exhibits	4237
SIGNATURES		4438

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, ~~2016,~~2017, filed with the Securities and Exchange Commission on March ~~8, 2017.~~1, 2018.

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 ~~“projects,~~“future,” “anticipates,” “believes,” ~~“anticipates,~~“estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” ~~“estimates,~~“would,” ~~“plans,~~“could,” ~~“expects,~~“can,” ~~“intends”~~“may,” and similar ~~words~~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 ~~2016~~2017 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 STATEMENTS OF OPERATIONS

(In thousands, except per share data)


													Three Months Ended
	Three Months Ended September 30,						Nine Months Ended September 30,						March 31
	2017			2016			2017			2016			2018			2017
REVENUES	$	254,101		$	193,261		$	745,229		$	547,195		$	203,040		$	237,917
OPERATING EXPENSES
Salaries, wages and benefits	66,706			59,405			205,379			165,471			70,783			72,486
Depreciation and amortization	37,605			33,939			111,828			99,605			40,004			36,442
Maintenance, materials and repairs	33,100			30,196			100,970			90,968			36,866			30,282
Fuel	34,035			24,372			101,134			58,171			5,788			34,841
Contracted ground and aviation services	40,445			12,865			93,283			32,664			2,384			20,687
Travel	6,357			5,440			20,543			14,926			6,632			7,366
Landing and ramp	4,682			3,220			14,338			9,523			1,148			5,299
Rent	3,052			3,309			10,091			8,515			3,230			3,286
Insurance	1,234			1,099			3,451			3,335			1,357			1,262
Other operating expenses	7,962			4,960			24,588			18,409			7,205			8,036
	235,178			178,805			685,605			501,587			175,397			219,987
OPERATING INCOME	18,923			14,456			59,624			45,608			27,643			17,930
OTHER INCOME (EXPENSE)
Interest income	37			37			85			98			23			32
Net loss on financial instruments	(34,433		)	(8,473		)	(100,213		)	(3,443		)
Charges from non-consolidated affiliate	(945		)	—			(945		)	—
Non-service component of retiree benefit costs													2,045			(177		)
Net gain (loss) on financial instruments													(885		)	1,869
Loss from non-consolidated affiliate													(2,536		)	—
Interest expense	(4,351		)	(2,897		)	(11,658		)	(8,229		)	(5,362		)	(3,548		)
	(39,692		)	(11,333		)	(112,731		)	(11,574		)	(6,715		)	(1,824		)

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(20,769		)	3,123			(53,107		)	34,034
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES													20,928			16,106
INCOME TAX EXPENSE	(7,460		)	(1,007		)	(19,244		)	(12,219		)	(5,246		)	(6,310		)
EARNINGS (LOSS) FROM CONTINUING OPERATIONS	(28,229		)	2,116			(72,351		)	21,815
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES	(4,655		)	47			(4,271		)	141
NET EARNINGS (LOSS)	$	(32,884	)	$	2,163		$	(76,622	)	$	21,956
EARNINGS FROM CONTINUING OPERATIONS													15,682			9,796
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES													196			192
NET EARNINGS													$	15,878		$	9,988

BASIC EARNINGS (LOSS) PER SHARE
BASIC EARNINGS PER SHARE
Continuing operations	$	(0.48	)	$	0.04		$	(1.23	)	$	0.35		$	0.27		$	0.17
Discontinued operations	(0.08		)	—			(0.07		)	—			—			—
TOTAL BASIC EARNINGS (LOSS) PER SHARE	$	(0.56	)	$	0.04		$	(1.30	)	$	0.35
TOTAL BASIC EARNINGS PER SHARE													$	0.27		$	0.17

DILUTED EARNINGS (LOSS) PER SHARE
DILUTED EARNINGS PER SHARE
Continuing operations	$	(0.48	)	$	0.04		$	(1.23	)	$	0.34		$	0.26		$	0.13
Discontinued operations	(0.08		)	—			(0.07		)	—			0.01			—
TOTAL DILUTED EARNINGS (LOSS) PER SHARE	$	(0.56	)	$	0.04		$	(1.30	)	$	0.34
TOTAL DILUTED EARNINGS PER SHARE													$	0.27		$	0.13

WEIGHTED AVERAGE SHARES
Basic	58,733			59,379			58,965			62,084			58,840			59,133
Diluted	58,733			60,283			58,965			64,024			59,558			64,949

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 Ended
September 30, September 30,
2017 2016 2017 2016
NET EARNINGS (LOSS) $ (32,884 ) $ 2,163
$ (76,622 ) $ 21,956
OTHER COMPREHENSIVE INCOME:
Defined benefit pension 5,763
2,146
8,232
6,438
Defined benefit post-retirement 37
9
111
27
Foreign currency translation (15 ) (256 ) 121
54

TOTAL COMPREHENSIVE INCOME (LOSS), NET OF TAXES $ (27,099 ) $ 4,062
$ (68,158 ) $ 28,475



	Three Months Ended
	March 31
	2018			2017
NET EARNINGS	$	15,878		$	9,988
OTHER COMPREHENSIVE INCOME (LOSS):
Defined Benefit Pension	687			1,234
Defined Benefit Post-Retirement	42			37
Foreign Currency Translation	(16		)	37

TOTAL COMPREHENSIVE INCOME, net of tax	$	16,591		$	11,296

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	September 30,			December 31,			March 31,			December 31,
	2017			2016			2018			2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	53,891		$	16,358		$	47,472		$	32,699
Accounts receivable, net of allowance of $1,352 in 2017 and $1,264 in 2016	65,563			77,247
Accounts receivable, net of allowance of $2,495 in 2018 and $2,445 in 2017							100,186			109,114
Inventory	17,282			19,925			22,256			22,169
Prepaid supplies and other	23,699			19,123			13,426			20,521
TOTAL CURRENT ASSETS	160,435			132,653			183,340			184,503
Property and equipment, net	1,111,201			1,000,992			1,176,520			1,159,962
Lease incentive	84,910			54,730			76,458			80,684
Goodwill and acquired intangibles	45,317			45,586			44,287			44,577
Convertible note hedges	60,605			—			56,046			53,683
Other assets	24,435			25,369			30,852			25,435
TOTAL ASSETS	$	1,486,903		$	1,259,330		$	1,567,503		$	1,548,844
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	75,820		$	60,704		$	96,041		$	99,728
Accrued salaries, wages and benefits	30,260			37,044			29,436			40,127
Accrued expenses	10,745			10,324			10,259			10,455
Current portion of debt obligations	19,247			29,306			14,846			18,512
Unearned revenue	29,186			18,407			12,765			15,850
TOTAL CURRENT LIABILITIES	165,258			155,785			163,347			184,672
Long term debt	473,924			429,415			515,595			497,246
Note conversion obligations	61,230			—
Convertible note obligations							56,881			54,359
Stock warrant obligations	229,965			89,441			214,205			211,136
Post-retirement obligations	72,876			77,713			56,771			61,355
Other liabilities	48,039			52,542			44,276			45,353
Deferred income taxes	143,337			122,532			107,930			99,444
TOTAL LIABILITIES	1,194,629			927,428			1,159,005			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; 85,000,000 shares authorized; 59,123,112 and 59,461,291 shares issued and outstanding in 2017 and 2016, respectively	591			595
Common stock, par value $0.01 per share; 85,000,000 shares authorized; 59,080,512 and 59,057,195 shares issued and outstanding in 2018 and 2017, respectively							591			591
Additional paid-in capital	471,950			443,416			467,570			471,456
Accumulated deficit	(108,865		)	(32,243		)
Retained earnings (accumulated deficit)							2,644			(13,748		)
Accumulated other comprehensive loss	(71,402		)	(79,866		)	(62,307		)	(63,020		)
TOTAL STOCKHOLDERS’ EQUITY	292,274			331,902			408,498			395,279
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,486,903		$	1,259,330		$	1,567,503		$	1,548,844

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 Ended							Three Months Ended
	September 30,							March 31
	2017				2016			2018			2017
OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations	$	(72,351	)		$	21,815
Net earnings (loss) from discontinued operations	(4,271		)		141
Net earnings from continuing operations								$	15,682		$	9,796
Net earnings from discontinued operations								196			192
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	121,589			��	101,971			46,320			39,033
Pension and post-retirement	18,916				10,146			942			1,995
Deferred income taxes	15,986				12,057			5,053			6,149
Amortization of stock-based compensation	2,648				2,248			1,014			784
Net loss on financial instruments	100,213				3,443
Net (gain) loss on financial instruments								885			(1,869		)
Changes in assets and liabilities:
Accounts receivable	11,770				2,750			10,567			(6,487		)
Inventory and prepaid supplies	(2,661		)		(4,203		)	4,871			(4,413		)
Accounts payable	11,698				726			(608		)	6,932
Unearned revenue	6,995				(2,883		)	(3,752		)	4,765
Accrued expenses, salaries, wages, benefits and other liabilities	(7,357		)		4,267			(10,079		)	(9,911		)
Pension and post-retirement assets	(10,658		)		(10,551		)	(4,584		)	(3,039		)
Other	(1,244		)		1,670			2,335			283
NET CASH PROVIDED BY OPERATING ACTIVITIES	191,273				143,597			68,842			44,210
INVESTING ACTIVITIES:
Capital expenditures	(218,759		)		(182,106		)	(79,092		)	(83,786		)
Proceeds from property and equipment	9				7			16,763			—
Acquisitions and investments in businesses	(6,900		)		—			(2,450		)	(640		)
Redemption of long term deposits	9,975				—			—			4,725
NET CASH (USED IN) INVESTING ACTIVITIES	(215,675		)		(182,099		)	(64,779		)	(79,701		)
FINANCING ACTIVITIES:
Principal payments on long term obligations	(250,131		)		(23,623		)	(17,390		)	(10,337		)
Proceeds from borrowings	90,000				155,000			30,000			60,000
Proceeds from convertible notes	258,750				—
Payments for financing costs	(6,469		)		—			(17		)	—
Purchase convertible note hedges	(56,097		)		—
Proceeds from issuance of warrants	38,502				—
Purchase of common stock	(11,184		)		(62,155		)	(564		)	(1,463		)
Withholding taxes paid for conversion of employee stock awards	(1,436		)		(1,231		)	(1,319		)	(1,436		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	61,935				67,991			10,710			46,764

NET INCREASE IN CASH AND CASH EQUIVALENTS	37,533				29,489			14,773			11,273
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	16,358				17,697			32,699			16,358
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	53,891			$	47,186		$	47,472		$	27,631

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amount capitalized	$	11,229			$	7,793		$	2,413		$	3,406
Federal alternative minimum and state income taxes paid	$	1,285			$	761		$	526		$	113
SUPPLEMENTAL NON-CASH INFORMATION:
Accrued capital expenditures	$	12,561			$	19,721		$	24,629		$	18,251

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 ~~principal~~ subsidiaries ~~include an aircraft leasing company~~primarily operate within the airfreight and ~~two U.S. certificated airlines.~~logistics industry. The Company leases aircraft and provides airline operations, ground services, aircraft ~~leases, aircraft~~modification and maintenance services and other support ~~services primarily to the cargo transportation and package delivery industries. Through the~~services. The Company's subsidiaries ~~it offers~~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”), each have the authority, through their separate U.S. Department of Transportation ("DOT") and Federal Aviation Administration ("FAA") certificates, to transport cargo worldwide. ~~ATI provides passenger transportation, primarily to the U.S. Military, using "combi" aircraft, which are certified to carry passengers as well as cargo on the main deck.~~

The ~~Company provides air transportation services to a concentrated base of customers. The Company provides~~Company's airlines provide a combination of aircraft, crews, maintenance and insurance services for a customer's transportation network through "CMI" and "ACMI" agreements and through charter contracts in which aviation fuel is also included. ATI provides passenger transportation, primarily to the U.S. Military, using "combi" aircraft, which are certified to carry passengers as well as cargo on the main deck.

In addition to its airline operations and aircraft leasing services, the Company ~~sells aircraft parts,~~ provides aircraft maintenance and modification services, equipment maintenance services, and operates mail and package sorting facilities.

Basis of Presentation

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, ~~2016~~2017 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 ~~an affiliate~~affiliates in which the Company has significant influence but does not exercise control are accounted for using the equity method of accounting. Using the equity method, the Company’s share of the nonconsolidated ~~affiliate's~~affiliates' 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. Inter-company balances and transactions are eliminated.

~~New~~ Accounting ~~Pronouncements~~Standards Updates

~~In May 2014,~~Effective January 1, 2018 the Company adopted the Financial Accounting Standards ~~Board~~Board's ("FASB") ~~issued~~ Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” ~~(“ASU 2014-09”~~("Topic 606”)~~. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers, Identifying Performance Obligations and~~

~~Licensing" clarifying the accounting under ASU 2014-09 for licenses of intellectual property and for identifying distinct performance obligations in a contract.~~

~~ASU 2014-09~~ 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. ~~ASU 2014-09 also requires additional disclosure about~~The Company's lease revenues within the ~~nature, amount, timing and uncertainty~~scope of ~~revenue and cash flows arising~~ASC 840, Leases, are specifically excluded from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 with earlier adoption permitted for reporting periods beginning after December 15, 2016. ASU 2014-09 may be appliedTopic 606.

The Company adopted the standard using ~~either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or~~ a modified retrospective approach, under which financial statements ~~will be~~are prepared under the revised guidance for the year of adoption, but not for prior years. Under ~~the latter~~this method, entities ~~would~~ recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for ~~contracts~~open contract performance at that ~~still require performance by~~time. The Company's adoption efforts have included the ~~entity, and disclose all line items in~~identification of revenue within the ~~year~~scope of ~~adoption as if they were prepared under the old revenue guidance.~~

~~The Company plans to adopt~~ the standard, ~~using~~ the ~~modified retrospective method. The Company is currently evaluating~~evaluation of customer contracts in conjunction with new guidance and an assessment of the ~~effect~~qualitative and quantitative impacts of the new standard ~~is expected to have~~ on ~~the Company's consolidated~~its financial ~~position, results of operations, cash flows and related disclosures.~~statements. The evaluation ~~includes~~included the application of each of the five steps identified in the ~~ASU 2014-09~~Topic 606 revenue recognition ~~model, which~~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 ~~as follows: 1) identify~~reported net of the ~~contract with~~corresponding expenses beginning in 2018. This application of Topic 606 did not have a material impact on the ~~customer; 2) identify the performance obligations~~Company's reported earnings in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when (or as) performance obligations are satisfied. The Company's lease contracts within the scope of ASC 840, ~~Leases,~~ ~~are specifically excluded from ASU 2014-09. As~~any period. Additionally under Topic 606, the Company ~~completes its evaluation~~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 ~~new information may arise~~using the modified retrospective method which requires the Company to record a one time adjustment to retained deficit for the cumulative effect that ~~could change~~ the ~~Company's current understanding~~standard has on open contracts at the time of adoption. Upon adoption of the ~~impact~~new standard the Company accelerated $3.6 million of revenue resulting in an immaterial adjustment to ~~revenue~~its January 1, 2018 retained deficit for open airframe and ~~expense recognized. Management is monitoring recent industry activities and other guidance provided by regulators, standards setters, and~~modification services contracts.

In January 2017, the ~~accounting profession that may impact the Company's recognition of revenue.~~

~~In July 2015,~~ FASB issued ASU ~~"Inventory~~"Intangibles-Goodwill and Other (Topic ~~330)~~350): Simplifying the ~~Measurement~~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 ~~Inventory" ("~~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 ~~2015-11"). ASU 2015-11 more closely aligns~~2017-04 is effective for any annual or interim goodwill impairment tests in the ~~measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards ("IFRS"). The amendment in ASU 2015-11 is for~~ fiscal years beginning after December 15, ~~2016,~~2019 and ~~interim periods within fiscal years beginning after December 15, 2017. The amendment should~~must be applied ~~prospectively with earlier application~~prospectively. Early adoption is permitted ~~as of the beginning of an~~for interim or annual ~~reporting period.~~goodwill impairment tests performed on testing dates after January 1, 2017. The Company ~~does~~adopted this new accounting guidance in January of 2018. The adoption did not ~~expect the~~have an impact ~~of adopting ASU 2015-11 to be material to~~on the Company's financial ~~statements and related disclosures.~~position, results of operations, or cash flows.

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~~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 ~~would~~are required to be presented ~~in the income statement~~ separately from the service cost component and outside a subtotal of income from ~~operations, if one is presented. The standard is effective for annual periods beginning after December 15, 2017 and should be applied retrospectively.~~operations. The Company ~~anticipates~~adopted ASU 2017-07 on January 1, 2018, retrospectively to all periods presented. As a result, retiree benefit plan interest expense, investment returns, settlements and other non-service cost components of retiree benefit expenses are excluded from the ~~standard will impact the Operating Income~~Company's operating income subtotal as reported in the Company's Consolidated Statement of Operations, ~~by excluding interest expense, investment returns and other non service cost components of~~but remain included in earnings before income taxes. Information about retiree benefit ~~expenses. Information about~~plans' interest expense, investment returns and other components of retiree benefit expenses can be found in Note I.

In February 2016, the FASB issued ASU "Leases (Topic 842)" ("ASU 2016-02"), which will require the recognition of right to-use-assets and lease liabilities for leases previously classified as operating leases by lessees. The standard will take effect 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 ~~FASB decided to not permit a full retrospective transition approach. The~~ Company is currently evaluating the impact of the standard on its financial statements and disclosures.

In ~~August 2016,~~February 2018, the FASB issued ASU ~~"Statement of Cash Flows (Topic 230): Classification~~“Reclassification of Certain ~~Cash Receipts and Cash Payments"~~Tax Effects From Accumulated Other Comprehensive Income" ("ASU ~~2016-15"~~2018-02"). ASU ~~2016-15 clarifies how cash receipts~~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 ~~cash payments in~~Jobs Act. In addition, under the ASU 2018-02, a Company will be required to provide certain ~~transactions are presented and classified in the statement of cash flows. The~~disclosures regarding stranded tax effects. ASU 2018-02 is effective ~~date of this update is~~ for ~~fiscal~~ years beginning after December 15, 2018, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires retrospective application to all periods presented but may be applied prospectively if retrospective application is impracticable. The Company is currently evaluating the impact of the adoption of the standard on its financial statements and disclosures.

In November 2016, the FASB issued ASU "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"). ASU 2016-18 requires that the statement of cash flows explain the changes in the combined total of restricted and unrestricted cash balance. Amounts generally described as restricted cash or restricted cash equivalents will be combined with unrestricted cash and cash equivalents when reconciling the beginning and end of period balances on the statement of cash flows. Further, the ASU requires a reconciliation of balances from the statement of cash flows to the balance sheet in situations in which the balance sheet includes more than one line item of cash, cash equivalents, and restricted cash. Companies will also be disclosing the nature of the restrictions. ASU 2016-18 is effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.

In January 2017, the FASB issued ASU "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. ASU 2017-04 would require applying a one-step quantitative test and recording the amount of goodwill impairment as the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The amendments in ASU 2017-04 are effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019.years. Early adoption is ~~permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.~~permitted. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.

NOTE B—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 ~~25%~~28% and ~~25%~~26% of the Company's consolidated revenues from continuing operations for the three ~~and nine~~ month periods ending ~~September 30,~~March 31, 2018 and 2017, ~~respectively compared to 34% and 35%~~respectively. Revenues excluding directly reimbursed expenses from continuing operations performed for DHL comprised approximately 30% of the Company's consolidated revenues from continuing operations for the ~~corresponding periods of 2016.~~three month period ending March 31, 2017. The Company’s balance sheets include accounts receivable with DHL of ~~$3.7~~$10.8 million and ~~$7.3~~$15.7 million as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.

The Company leases 16 Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under a separate crew, maintenance and insurance (“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 and a contracted minimum number of block 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. ~~("AFS")~~, 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 ~~AFS~~ASI, pursuant to which CAM ~~will lease~~leases 20 Boeing 767 freighter aircraft to ~~AFS,~~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. The ATSA ~~which has a term of five years,~~ also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the ~~performance~~management of ~~hub and gateway~~ground services by the Company's subsidiary LGSTX Services Inc. ("LGSTX"). The ATSA became effective on April 1, 2016 and has a term of five years. CAM owns all 20 of the Boeing 767 aircraft that are leased and operated under the ATSA. ~~The ATSA became effective on April 1, 2016. As of September 30, 2017, the Company has met its 20 aircraft commitment.~~

Revenues from ~~aircraft leases and related services~~continuing operations performed for ~~AFS~~Amazon comprised approximately ~~45%~~28% and ~~42%~~41% of the Company's consolidated revenues from continuing operations for the three ~~and nine~~ month periods ending ~~September 30,~~March 31, 2018 and 2017, ~~respectively, compared to 31% and 24%~~respectively. Revenues excluding directly reimbursed expenses from continuing operations performed for Amazon comprised approximately 27% of the Company's consolidated revenues from continuing operations for the ~~corresponding periods of 2016.~~three month period ending March 31, 2017. The Company’s balance sheets include accounts receivable with ~~AFS~~Amazon of ~~$25.9~~$31.3 million and ~~$24.6~~$44.2 million as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~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 ~~right to purchase~~first 7.69 million common shares vesting upon issuance on March 8, 2016, and ~~the right to purchase~~ the remaining 5.12 million common shares vesting as the Company delivered additional aircraft leased under the ~~ATSA, or as the Company achieved specified revenue targets in connection with the~~ ATSA. The second

tranche of warrants, which were issued and vested on March 8, 2018, grants Amazon athe right to purchase approximately 1.59 million ATSG common ~~shares, and will be issued and vest on March 8, 2018.~~shares. The third tranche of warrants will be issued and vest on September 8, ~~2020. The third tranche of warrants~~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 ~~will be~~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 ~~will be~~are exercisable in accordance with its terms through March 8, 2021. The Company anticipates making available the common shares required for the underlying warrants through a combination of share repurchases and the issuance of additional shares.

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. ~~During~~The warrants issued to Amazon as of March 8, 2016, were recorded to stockholders equity, having a fair value of $4.89 per share. At that time, the fair value of the 7.69 million vested warrants issued to Amazon was recorded as a lease incentive asset and is being amortized against revenues 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 shares and to approve the warrants 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 ~~nine months~~tranche and the warrants of ~~2017, 3.8~~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 ~~six~~eight aircraft ~~leases during 2017.~~leases. As of ~~September 30, 2017,~~March 31, 2018, the Company's liabilities reflected ~~14.90~~14.83 million warrants having a fair value of ~~$15.44~~$14.45 per share. ~~As of September 30, 2017, the~~The re-measurements of the warrants to fair value resulted in a ~~third quarter~~ non-operating loss of ~~$35.0~~$3.1 million and a gain of $1.7 million before the effect of income ~~taxes.~~taxes for the three month periods ending March 31, 2018 and 2017, respectively.

The Company's earnings in future periods will be impacted by the number of warrants granted, the re-measurements of warrant fair value, amortizations of the lease 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.

U.S. Military

A substantial portion of the Company's revenues is also derived from the U.S. Military. The U.S. Military awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from services performed for the U.S. Military were approximately 7%11% and 7% of the Company's total revenues from continuing operations for the three ~~and nine~~ month periods ending ~~September 30,~~March 31, 2018 and 2017, ~~respectively, compared to 12% and 13%~~respectively. Revenues excluding directly reimbursed expenses from continuing operations performed for Amazon comprised approximately 10% of the Company's consolidated revenues from continuing operations for the ~~corresponding periods of 2016.~~three month period ending March 31, 2017. The Company's balance sheets included accounts receivable with the U.S. Military of ~~$5.3~~8.0 million and ~~$7.0~~6.7 million as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.

NOTE C—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS

OnThe Company's assets for CAM and the MRO Services segments each include goodwill. An annual impairment test was performed for each, respectively, at December, ~~30, 2016, the Company purchased 100%~~31, 2017 using industry market multiples and discounted cash flows utilizing a market-derived rate of the outstanding stock of Pemco World Air Services Inc., ("Pemco") for cash consideration in a debt-free acquisition. The purchase price has been allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess purchase price over the estimatedreturn (level 3 fair value ~~of net assets acquired~~inputs). Goodwill was ~~recorded as goodwill~~

and reflects the strategic value of marketing Pemco's aircraft conversion capabilities and current aircraft hangar operations with the Company's comprehensive set of air transportation solutions. Identified intangible assets include Supplemental Type Certificates ("STCs") granting approval by the FAA for Pemco to market and complete certain aircraft modifications. The Company is in the process of refining its estimates of certain assets including goodwill and intangible assets, therefore the allocation of purchase price is preliminary at this time. The consolidated statements of operations include the revenues and expenses for Pemco for the periods after its acquisition by the Company. The consolidated statements of operations reflect the reclassification of certain previously reported operating expenses to conform to the current presentation.not impaired.

The carrying amounts of goodwill are as follows (in thousands):

CAM All Other Total
Carrying value as of December 31, 2016 $ 34,395
$ 2,738
$ 37,133
Purchase price adjustment —
146
146
Carrying value as of September 30, 2017 $ 34,395
$ 2,884
$ 37,279



	CAM		MRO Services		Total
Carrying value as of December 31, 2017	$	34,395	$	2,884	$	37,279
Carrying value as of March 31, 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, 2016 $ 3,000
$ 5,453
$ 8,453
Amortization —
(415 ) (415 )
Carrying value as of September 30, 2017 $ 3,000
$ 5,038
$ 8,038



	Airline		Amortizing
	Certificates		Intangibles			Total
Carrying value as of December 31, 2017	$	3,000	$	4,298		$	7,298
Amortization	—		(290		)	(290		)
Carrying value as of March 31, 2018	$	3,000	$	4,008		$	7,008

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	(4,226		)
Carrying value as of March 31, 2018	$	76,458

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"). 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. ~~The Company accounts for West using the equity method of accounting.~~ The Company’s carrying value of West was ~~$7.9~~$7.6 million and ~~$9.9~~$7.1 million at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively, including $5.5 million of excess purchase price over the Company's fair value of West's ~~net~~nets assets in January of 2014. In 2017, the Company paid $2.4 million to West and entered into a preferred equity instrument. The ~~carrying value is~~Company's equity interest and the preferred equity instrument are reflected in “Other Assets” in the Company’s consolidated balance ~~sheets.~~sheets as of March 31, 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. During the first three months of 2018, the company contributed $2.5 million to the joint venture. The Company accounts for its investment in the joint venture under the equity method of ~~accounting. During~~accounting, in which the ~~third quarter,~~carrying value of the ~~company contributed $6.3 million to~~investment is reduced for the Company's share of the joint ~~venture.~~ventures operating losses. The carrying value of the joint venture,reflected in “Other Assets” in the Company’s consolidated balance sheets, was ~~$5.3~~$5.5 million and $5.6 million at ~~September 30,~~March 31, 2018 and December 31, 2017.

Lease
Incentive
Carrying value as of December 31, 2016 $ 54,730
Value of warrants granted 39,940
Amortization (9,760 )
Carrying value as of September 30, 2017 $ 84,910

~~The lease incentive began to amortize in April 2016, with the commencement of certain aircraft leases over the duration of the related leases.~~

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 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-parties to the instruments as well as change in general market conditions. While the change in fair value of the note conversion obligations and the convertible note hedges are generally expected to move in opposite directions, the net change in any given period may be material.

The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):


As of September 30, 2017	Fair Value Measurement Using							Total
As of March 31, 2018								Total			Fair Value Measurement Using							Total
	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
Assets								Total
Cash equivalents—money market	$	—	$	50,800		$	—	$	50,800		$	—	$	35,785		$	—	$	35,785
Interest rate swaps	—		546			—		546
Interest rate swap											—		4,183			—		4,183
Convertible note hedges	—		60,605			—		60,605			—		56,046			—		56,046
Total Assets	$	—	$	111,951		$	—	$	111,951		$	—	$	96,014		$	—	$	96,014
Liabilities
Interest rate swaps	$	—	$	(351	)	$	—	$	(351	)
Note conversion obligations	—		(61,230		)	—		(61,230		)	—		(56,881		)	—		(56,881		)
Stock warrant obligations	—		(229,965		)	—		(229,965		)	—		(214,205		)	—		(214,205		)
Total Liabilities	$	—	$	(291,546	)	$	—	$	(291,546	)	$	—	$	(271,086	)	$	—	$	(271,086	)


As of December 31, 2016	Fair Value Measurement Using							Total
As of December 31, 2017								Total			Fair Value Measurement Using							Total
	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
Assets								Total
Cash equivalents—money market	$	—	$	482		$	—	$	482		$	—	$	1,326		$	—	$	1,326
Interest rate swap	—		547			—		547			—		1,840			—		1,840
Convertible note hedges											—		53,683			—		53,683
Total Assets	$	—	$	1,029		$	—	$	1,029		$	—	$	56,849		$	—	$	56,849
Liabilities
Interest rate swap	$	—	$	(77	)	$	—	$	(77	)
Note conversion obligations											—		(54,359		)	—		(54,359		)
Stock warrant obligation	—		(89,441		)	—		(89,441		)	—		(211,136		)	—		(211,136		)
Total Liabilities	$	—	$	(89,518	)	$	—	$	(89,518	)	$	—	$	(265,495	)	$	—	$	(265,495	)

~~The~~As a result of lower market interest rates compared to the stated interest rates of the Company’s fixed rate debt obligations, the fair value of the Company’s ~~fixed and variable~~ debt obligations, based on Level 2 observable inputs, was approximately ~~$12.4~~$3.0 million more than the carrying value, which was ~~$493.2~~$530.4 million at ~~September 30, 2017.~~March 31, 2018. As of December 31, ~~2016,~~2017, the fair value of the Company’s ~~fixed and variable~~ debt obligations was approximately ~~$0.2~~$9.1 million more than the carrying value, which was ~~$458.7~~$515.8 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, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Flight equipment	$	1,689,027		$	1,541,872		$	1,799,301		$	1,801,808
Ground equipment	51,209			49,229			53,461			53,523
Leasehold improvements, facilities and office equipment	27,385			27,364			28,205			26,897
Aircraft modifications and projects in progress	157,251			113,518			164,414			121,760
	1,924,872			1,731,983			2,045,381			2,003,988
Accumulated depreciation	(813,671		)	(730,991		)	(868,861		)	(844,026		)
Property and equipment, net	$	1,111,201		$	1,000,992		$	1,176,520		$	1,159,962

CAM owned aircraft with a carrying value of ~~$632.3~~$705.2 million and ~~$524.3~~$697.4 million that were under leases to external customers as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.

The Company’s accounting policy for major airframe and engine maintenance varies by subsidiary and aircraft type. The costs of airframe maintenance for ~~ABX's~~ Boeing 767-200 ~~airframe maintenance~~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

~~Long term~~Debt obligations consisted of the following (in thousands):


	September 30,			December 31,			March 31,			December 31,
	2017			2016			2018			2017
Unsubordinated term loan	$	74,311		$	85,636		$	66,857		$	70,568
Revolving credit facility	220,000			355,000			265,000			245,000
Aircraft loans	4,374			18,085			—			3,640
Convertible debt	194,486			—			198,584			196,550
Total long term obligations	493,171			458,721
Total debt obligations							530,441			515,758
Less: current portion	(19,247		)	(29,306		)	(14,846		)	(18,512		)
Total long term obligations, net	$	473,924		$	429,415		$	515,595		$	497,246

The Company executed a syndicated credit agreement ("Senior Credit Agreement") in May 2011 which includes an unsubordinated term loan and a revolving credit facility. Effective March 31, 2017, the Company executed an amendment to the Senior Credit ~~Agreement. The March 2017 amendment~~Agreement that extended the maturity of the term loan and revolving credit facility to May 30, 2022, increased the capacity of the revolving credit facility by $120.0 million to $545.0 million and preserved the accordion feature such that the Company can ~~still~~now draw up to an additional $100.0 million subject to the lenders' consent. Each year, through May 6, 2019, the Company may request a one year extension of the final maturity date, subject to the lenders' consent. In September 2017, the Company executed amendments to the Senior Credit ~~agreement.~~ Agreement.

These amendments increased the revolving credit facility's permitted additional indebtedness to $300.0 million for convertible notes described below. The amendments also increased the amount of dividends the Company can pay and the amount of common stock it can repurchase to $100.0 million during any ~~calendar~~calender 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 March 31, 2018, the unused revolving credit facility totaled $270.7 million, net of draws of $265.0 million and outstanding letters of credit of $9.3 million.

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 ~~balances~~balance of the term loan and the maximum capacity of ~~the~~ 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 ~~balances~~balance of the unsubordinated term loan ~~are~~is net of debt issuance costs of ~~$0.7~~$0.6 million and ~~$0.6~~$0.7 million for the periods ending ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~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 ~~secured~~ debt-to-EBITDA ratio, the LIBOR based financing for the unsubordinated term loan and revolving credit facility bear a variable interest rate of ~~3.24%~~3.38% and ~~3.24%~~3.38%, respectively. The ~~Senior Credit Agreement provides for~~aircraft loan was paid off by the issuance of letters of credit on the Company's behalf. As of September 30, 2017, the unused revolving credit facility totaled $315.7 million, net of draws of $220.0 million and outstanding letters of credit of $9.3 million.Company in January 2018.

~~The aircraft loans are collateralized by two aircraft, and amortize monthly with a balloon payment of approximately~~ ~~20%~~ ~~with maturities between 2017 and early 2018. Interest rates range from~~ ~~6.74%~~ to ~~6.82%~~ ~~per annum payable monthly. The Senior Credit Agreement is collateralized by certain of the Company's Boeing 767 and 757 aircraft that are not collateralized under aircraft loans.~~ 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 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. Until the Company's shareholders increase the number of authorized shares of common stock to cover the full number of shares underlying the Notes, the Company is required to settle conversions solely in cash. If the number of authorized shares is increased, 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.

The Company evaluated the conversion features of the Notes under the applicable accounting guidance including ASC 815, "Derivatives and Hedging," and determined that the conversion features require separate accounting as a derivative. At the time of issuance, the fair value of this derivative was recorded on the balance sheet as the note conversion obligations (a long-term liability) and an offsetting discount to the Notes. Until the Company's shareholders increase the number of authorized shares of common stock, the note conversion obligations will be adjusted to reflect its fair value at the end of each quarter. The fair value of the note conversion obligation at issuance was $57.4 million. The fair value of the note conversion obligations was $56.9 million and $54.4 million at ~~September 30,~~March 31, 2018 and December 31, 2017, ~~was $61.2 million~~respectively, and resulted in a non-operating loss of ~~$3.9~~$2.5 million before the effect of income tax during ~~the third quarter ended September 30, 2017.~~2018.

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,~~

~~2017~~

~~Principal value, Convertible Senior Notes, due 2024~~

~~258,750~~

~~Unamortized issuance costs~~



	March 31,		December 31,
	2018		2017
Principal value, Convertible Senior Notes, due 2024	258,750		258,750
Unamortized issuance costs	(6,479	)	(6,685	)
Unamortized discount	(53,687	)	(55,515	)
Convertible debt	198,584		196,550

~~(6,938~~

)

~~Unamortized discount~~

~~(57,326~~

)

~~Convertible debt~~

~~194,486~~

In conjunction with the offering of the Notes, the Company purchased convertible note hedges under privately negotiated transactions for $56.1 million. These transactions cover, subject to customary anti-dilution adjustments, the number of the Company’s common shares that initially underlie the Notes, and are expected to reduce the potential equity dilution with respect to our 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 initial strike price of the convertible note hedges is $31.90 per share. The Company evaluated the convertible note hedges under the applicable accounting guidance, including ASC 815, "Derivatives and Hedging," and determined that the convertible note hedges should be accounted for as derivatives. These derivatives were capitalized on the balance sheet as long-term assets and are adjusted to reflect their fair value at the end of the quarter. The fair value of the convertible note hedges at September 30, 2017 was $60.6 million. As of September 30, 2017, the re-measurement of the convertible note hedges to fair value resulted in a non-operating gain of $4.5 million before the effect of income tax.

In conjunction with the offering of the Notes, the Company also sold warrants to the convertible note ~~hedges~~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 warrants could have a dilutive effect on the Company’s outstanding common shares and the Company’s earnings per share to the extent that the traded market price of the Company’s common shares exceeds the strike price of the warrants which is $41.35 per share and is subject to certain adjustments under the terms of the warrant transactions. ~~The Company evaluated the warrants under the applicable accounting guidance, including ASC 815 "Derivatives and Hedging,"~~and determined that the warrants meet the definition of a derivative, however, because these warrants have been determined to be indexed to the Company's own stock and meet the criteria for equity classification, they have been recorded in shareholder's equity. In the event these warrants are exercised, the Company has enough authorized and unissued shares for their issuance. The amount ~~paid~~received for these warrants and recorded in Stockholders' Equity in the Company’s consolidated balance sheets was $38.5 million. Taken together, the convertible note hedge and warrant transactions are intended to limit, during Notes conversion events, the dilution of the Company's common shares until the traded market price exceeds $41.35..

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 term loan. Accordingly, the Company entered into interest rate swaps. The Company entered into two new interest rate swaps in February 2017 and April 2017, respectively, having an initial value of $39.4 million and $50.0 million, respectively, and forward start dates of June 30, 2017. The Company also entered into a new interest rate swap in July 2017, having an initial value of $75.0 million and a forward start date of December 31, 2017. Under these three new swaps, the Company pays a fixed rate of 1.703%, 1.9% and 1.95%, respectively, and receives a floating rate that resets monthly based on LIBOR. The table below provides information about the Company’s interest rate swaps (in thousands):

September 30, 2017 December 31, 2016
Expiration Date
Stated
Interest
Rate

Notional
Amount

Market
Value
(Liability)

Notional
Amount

Market
Value
(Liability)
June 30, 2017 1.183 % —
—
43,125
(77 )
May 5, 2021 1.090 % 37,500
544
43,125
547
May 30, 2021 1.703 % 37,500
2
—
—
March 31, 2022 1.900 % 50,000
(126 ) —
—
March 31, 2022 1.950 % 75,000
(225 ) —
—

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 the net loss on derivatives of $0.3 million and net gains on derivatives of $0.1 million for the nine month periods ending September 30, 2017 and 2016, respectively. The asset for outstanding derivatives is recorded in other assets. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.

During September 2017, the Company issued convertible debt in the form of the Notes and recorded a long-term liability representing the Note conversion liability. In conjunction with the Notes, the Company purchased convertible note hedges having the same number of the Company’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 evaluated the convertible note hedges under the applicable accounting guidance, including ASC 815, "Derivatives and Hedging," and determined that the convertible note hedges should be accounted for as derivatives. These derivatives were capitalized on the balance sheet as long-term assets and are adjusted to reflect their fair value at the end of the quarter. The fair value of the convertible note hedges was $56.0 million and $53.7 million at March 31, 2018 and December 31, 2017, respectively. The Company recorded a net ~~gain~~loss before the effects of income taxes of ~~$0.6~~$0.2 million during the ~~quarter~~three month period ending ~~September 30, 2017~~March 31, 2018 for the revaluation of the convertible note hedges and the note conversion obligations to fair value. ~~For additional~~



			March 31, 2018		December 31, 2017
Expiration Date	Stated Interest Rate		Notional Amount	Market Value (Liability)	Notional Amount	Market Value (Liability)
May 5, 2021	1.090	%	33,750	914	35,625	719
May 30, 2021	1.703	%	33,750	491	35,625	240
March 31, 2022	1.900	%	50,000	1,166	50,000	416
March 31, 2022	1.950	%	75,000	1,612	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 gains on derivatives of $2.3 million and $0.2 million for the three month periods ending March 31, 2018 and 2017, respectively. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.

NOTE H—COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases portions of the air park in Wilmington, Ohio, under lease agreements with a regional port authority, the terms of which expire in May of 2019 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 shop at the air park. ABX also has the non-exclusive right to use the airport, which includes one active runway, taxi ways and ramp space. The Company also leases and operates a 311,500 square foot, two hangar aircraft maintenance complex in Tampa, Florida. Additionally, the Company leases certain equipment and airport facilities, office space, and maintenance facilities at ~~locations outside~~other locations. As of March 31, 2018 and December 31, 2017, the ~~airpark in Wilmington.~~Company did not lease any aircraft from lessors.

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, 2017,~~March 31, 2018, the Company was committed to acquire and modify additional Boeing 767-300 passenger aircraft into standard freighter aircraft. In addition to ~~three Boeing 767-300~~eight aircraft that were in the modification process at ~~September 30, 2017,~~March 31, 2018, the Company is committed to induct ~~six~~three more aircraft into the freighter modification process through 2018, including commitments to purchase three more Boeing 767-300 passenger aircraft during the first half of 2018. As of ~~September 30, 2017,~~March 31, 2018, the Company's commitments to complete the conversions of aircraft it owns or has the contracts to purchase totaled ~~$124.5~~$101.7 million. Additionally, the Company could incur a cancellation fee for part kits for any aircraft that is not inducted into conversion at IAI.

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 September 2015, the Company entered into a joint venture agreement to establish an express cargo airline serving multiple destinations within the People's Republic of China (including Hong Kong, Macau and Taiwan) and surrounding countries, pending governmental approvals. The Company's contributions to the joint venture have been minimal and are expected to remain so over the next several months. Obtaining required governmental approvals for any new airline has since been delayed and as a result, the Company is evaluating alternatives. The Company is seeking to develop other aircraft investments in China by leveraging the relationship developed by Pemco, which provides modified Boeing 737 freighter aircraft in China.

In addition to the foregoing matters, the Company is also a party to legal proceedings ~~including FAA enforcement actions,~~ 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, 2017~~,March 31, 2018, the flight crewmember employees of ABX and ATI and flight attendant employees of ATI were represented by the labor unions listed below:



Airline	Labor Agreement Unit	Percentage of the Company’s Employees
ABX	International Brotherhood of Teamsters	~~8.9%~~8.2%
ATI	Air Line Pilots Association	~~7.7%~~7.6%
ATI	Association of Flight Attendants	1.2%

~~In addition, the Company has approximately 40 flight attendants that are represented by a recognized labor unit and are negotiating a collective bargaining agreement.~~

NOTE I—PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

Defined Benefit and Post-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. ~~The plans are funded through Company contributions to an invested trust.~~ 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 ~~crewmembers,~~employees, 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. ~~Effective~~

ABX measures plan assets and benefit obligations as of December 31 ~~2016, ABX modified its unfunded, non-pilot retiree medical plan to terminate benefits to all participants. Retired participants were directed to public~~of each year. Information regarding ABX’s sponsored defined benefit pension plans and post-retirement healthcare ~~exchanges for more flexible~~plans follow below. The accumulated benefit obligation reflects pension benefit obligations based on the actual earnings and ~~lower cost alternatives. As a result, ABX settled all retiree medical obligations.~~

~~On August 30, 2017, the Company transferred investment assets totaling $106.6 million from the pension plan trust to purchase a group annuity contract from Mutual~~service to-date of America Life Insurance Company ("MUA"). The group annuity contract transfers payment obligations for pension benefits owed to certain former, non-pilot retirees of ABX (or their beneficiaries) to MUA. As a result of the transaction, the Company recognized pre-tax settlement charges of $5.3 million to continued operations and $7.6 million to discontinued operations in the third quarter due to the reclassification of $12.9 million of pretax losses from accumulated other comprehensive loss.

current employees.

The ~~Company's~~Company’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,												Three Months Ended March 31,
	Pension Plans						Post-Retirement Healthcare Plan						Pension Plans						Post-Retirement Healthcare Plan						Pension Plans						Post-Retirement Healthcare Plan
	2017			2016			2017			2016			2017			2016			2017			2016			2018			2017			2018		2017
Service cost	$	—		$	—		$	39		$	31		$	—		$	—		$	117		$	93		$	—		$	—		$	30	$	39
Interest cost	8,396			8,968			36			42			25,946			26,904			108			126			7,284			8,775			32		36
Expected return on plan assets	(10,520		)	(10,264		)	—			—			(32,379		)	(30,792		)	—			—			(10,523		)	(10,930		)	—		—
Settlement charge	12,923			—			—			—			12,923			—			—			—
Amortization of prior service cost	—			—			(13		)	(26		)	—			—			(39		)	(78		)	—			—			—		(13		)
Amortization of net loss	1,944			3,368			71			40			5,819			10,104			213			120
Net periodic benefit cost	$	12,743		$	2,072		$	133		$	87		$	12,309		$	6,216		$	399		$	261
Amortization of net (gain) loss																									887			1,937			55		71
Net periodic benefit cost (income)																									$	(2,352	)	$	(218	)	$	117	$	133

During the ~~nine~~three month period ending ~~September 30, 2017,~~March 31, 2018, the Company contributed ~~$4.1~~$1.3 million to the pension plans. The Company expects to contribute an additional ~~$0.4~~$21.1 million during the remainder of ~~2017.~~2018.

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 expense recorded through ~~September 30, 2017~~March 31, 2018 utilized a projected annualized ~~39.6%~~23.9% rate applied to year-to-date income. Additionally, the Company recorded discrete tax items for the conversion of employee stock awards during the first quarter of ~~2017 and the issuance of stock warrants during the first three quarters of 2017,~~2018, resulting in an effective tax rate of ~~(36.2)%~~25.1%. The final effective tax rate applied to ~~2017~~2018 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 warrants 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 ~~2019~~2023 or later. The Company may, however, be required to pay ~~alternative minimum taxes~~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,~~March 31, 2018 and 2017 ~~and 2016~~ (in thousands):

Defined Benefit Pension Defined Benefit Post-Retirement Foreign Currency Translation Total
Balance as of June 30, 2016 (93,010 ) (297 ) (1,085 ) (94,392 )
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment —
—
(397 ) (397 )
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits) 3,368
40
—
3,408
Negative prior service cost (reclassified to salaries, wages and benefits) —
(26 ) —
(26 )
Income tax expense (1,222 ) (5 ) 141
(1,086 )
Other comprehensive income, net of tax 2,146
9
(256 ) 1,899
Balance as of September 30, 2016 (90,864 ) (288 ) (1,341 ) (92,493 )

Balance as of December 31, 2015 (97,302 ) (315 ) (1,395 ) (99,012 )
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment —
—
75
75
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits) 10,104
120
—
10,224
Negative prior service cost (reclassified to salaries, wages and benefits) —
(78 ) —
(78 )
Income tax expense (3,666 ) (15 ) (21 ) (3,702 )
Other comprehensive income, net of tax 6,438
27
54
6,519
Balance as of September 30, 2016 (90,864 ) (288 ) (1,341 ) (92,493 )

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 salaries, wages and benefits) 1,944
71
—
2,015
Negative prior service cost (reclassified to salaries, wages and benefits) —
(13 ) —
(13 )
Income tax expense (3,283 ) (21 ) 9
(3,295 )
Other comprehensive income, net of tax 5,763
37
(15 ) 5,785
Balance as of September 30, 2017 (68,856 ) (1,190 ) (1,356 ) (71,402 )

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 salaries, wages and benefits) 5,819
213
—
6,032
Negative prior service cost (reclassified to salaries, wages and benefits) —
(39 ) —
(39 )
Income tax expense (4,689 ) (63 ) (65 ) (4,817 )
Other comprehensive income, 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 December 31, 2016	(77,088	)	(1,301	)	(1,477	)	(79,866	)
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment	—		—		58		58
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to non-service costs)	1,937		71		—		2,008
Negative prior service cost	—		(13	)	—		(13	)
Income Tax (Expense) or Benefit	(703	)	(21	)	(21	)	(745	)
Other comprehensive income (loss), net of tax	1,234		37		37		1,308
Balance as of March 31, 2017	(75,854	)	(1,264	)	(1,440	)	(78,558	)

	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	—		—		(25	)	(25	)
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to non-service costs)	887		55		—		942
Income Tax (Expense) or Benefit	(200	)	(13	)	9		(204	)
Other comprehensive income (loss), net of tax	687		42		(16	)	713
Balance as of March 31, 2018	(59,888	)	(1,055	)	(1,364	)	(62,307	)

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 ~~approximately~~ 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. 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								Three Months Ended
	September 30, 2017				September 30, 2016				March 31, 2018				March 31, 2017
	Number of Awards		Weighted average grant-date fair value		Number of Awards		Weighted average grant-date fair value		Number of Awards		Weighted average grant-date fair value		Number of Awards		Weighted average grant-date fair value
Outstanding at beginning of period	1,040,569		$	9.97	1,157,659		$	7.52	873,849		$	12.30	1,040,569		$	9.97
Granted	243,940		17.52		294,060		15.43		206,695		26.53		243,940		17.52
Converted	(173,210	)	9.69		(160,500	)	7.20		(96,616	)	10.89		(173,210	)	9.69
Expired	—		—		—		—		—		—		—		—
Forfeited	(3,800	)	13.66		(9,200	)	10.23		—		—		(3,800	)	13.66
Outstanding at end of period	1,107,499		$	11.66	1,282,019		$	9.36	983,928		$	15.43	1,107,499		$	11.66
Vested	324,599		$	6.39	338,919		$	6.12	326,928		$	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 ~~2017~~2018 was $~~16.72~~25.15, 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 ~~2017~~2018 was $~~20.18~~31.60. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of ~~1.7%~~2.4% and a volatility of ~~34.7%~~33.8% based on volatility over three years using daily stock prices.

For the ~~nine~~ month periods ending ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ the Company recorded expense of ~~$2.6~~$1.0 million and ~~$2.2~~$0.8 million, respectively, for stock incentive awards. At ~~September 30, 2017,~~March 31, 2018, there was ~~$4.7~~$8.5 million of unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average period of ~~1.3~~1.8 years. As of ~~September 30, 2017,~~March 31, 2018, none of the awards were convertible, ~~324,599~~326,928 units of the Board members 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 ~~1,360,474~~1,219,878 additional outstanding shares of the Company’s common stock depending on service, performance and market results through December 31, ~~2019.~~2020.

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 Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Numerator:
Earnings (loss) from continuing operations - diluted $ (28,229 ) $ 2,116
$ (72,351 ) $ 21,815

Denominator:
Weighted-average shares outstanding - basic 58,733
59,379
58,965
62,084
Common equivalent shares:
Effect of stock-based compensation awards —
904
—
1,940
Weighted-average shares outstanding assuming dilution 58,733
60,283
58,965
64,024

Basic earnings (loss) per share from continuing operations $ (0.48 ) $ 0.04
$ (1.23 ) $ 0.35
Diluted earnings (loss) per share from continuing operations $ (0.48 ) $ 0.04
$ (1.23 ) $ 0.34



	Three Months Ending March 31,
	2018		2017
Numerator:
Earnings from continuing operations - basic	$	15,682	$	9,796
Gain from stock warrants revaluation, net of tax	—		(1,539		)
Earnings from continuing operations - diluted	$	15,682	$	8,257

Denominator:
Weighted-average shares outstanding for basic earnings per share	58,840		59,133
Common equivalent shares:
Effect of stock-based compensation awards and warrants	718		5,816
Weighted-average shares outstanding assuming dilution	59,558		64,949
Basic earnings per share from continuing operations	$	0.27	$	0.17
Diluted earnings per share from continuing operations	$	0.26	$	0.13

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), if such warrants have ana anti-dilutive effect on earnings per share. ~~For~~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, the weighted-average diluted shares outstanding is calculated using the treasury method.~~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,~~March 31, 2018 and 2017 ~~and 2016, could~~would have resulted in ~~14.9~~14.8 million and ~~9.8~~12.3 million additional shares of the Company's common stock, respectively, if the warrants ~~recorded as a liability~~ were settled by tendering cash. The warrants recorded in stockholders' equity as of ~~September 30, 2017 and 2016, could~~March 31, 2018, would have resulted in 8.1 million ~~and zero~~ additional shares of the Company's common stock, ~~respectively,~~ if the Company's stock price exceeded $41.35 and the warrants were settled in shares.

~~Purchase of Common Stock~~

The Company's Board of Directors has authorized management to repurchase outstanding common stock of the Company from time to time on the open market or in privately negotiated transactions. The authorization does not require the Company to repurchase a specific number of shares and the Company may terminate the repurchase program at any time. Upon the retirement of common stock repurchased, the excess purchase price over the par value for retired shares of common stock is recorded to additional paid-in-capital.

The Company repurchased common stock during the first six months of 2017, including 380,637 shares on June 6, 2017 from an underwriter in conjunction with an underwritten secondary offering by its largest shareholder, Red Mountain Partners, L.P., a fund that is affiliated with Red Mountain Capital Partners, LLC (“Red Mountain”), a related party, for an aggregate purchase price of $8.5 million. The share price of $22.42 was equal to the price per share paid by the underwriter to Red Mountain.

NOTE N—SEGMENT AND REVENUE INFORMATION

The Company operates in ~~two~~three reportable segments. The CAM segment consists of the Company's aircraft leasing operations and its segment earnings include an allocation of interest expense. The ACMI Services segment consists of the Company's airline operations, including CMI agreements as well as ACMI and charter service agreements that the Company has with its customers. The MRO Services segment provides aircraft parts, component repairs, airframe maintenance services, aircraft modifications and other ~~customers. Due~~aircraft maintenance services. The MRO Services became reportable during 2018 due to the ~~similarities among the~~size of its revenues. Prior periods presented below have been prepared by separating MRO Services from "All other" for comparative purposes. The Company's ~~airline operations, the airline operations are aggregated into a single reportable segment, ACMI Services. The Company's~~ground services and other activities, which include the mail and ~~parcel handling~~package sorting services, ~~as well as hub management~~maintenance services for ~~the USPS and AFS, the sale of aircraft parts, aircraft maintenance services, aircraft modifications, facility and~~ ground equipment, ~~services,~~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” with inter-segment profit eliminations.~~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 segment information for revenue from continuing operations is presented below (in thousands):


	Three Months Ending September 30,						Nine Months Ending September 30,						Three Months Ending March 31
	2017			2016			2017			2016			2018			2017
Total revenues:
CAM	$	58,465		$	46,346		$	155,973		$	145,511		$	52,376		$	47,978
ACMI Services	146,943			128,702			436,391			357,803			119,374			144,949
MRO Services													52,723			40,338
All other	94,470			65,328			300,184			177,592			19,283			48,868
Eliminate inter-segment revenues	(45,777		)	(47,115		)	(147,319		)	(133,711		)	(40,716		)	(44,216		)
Total	$	254,101		$	193,261		$	745,229		$	547,195		$	203,040		$	237,917
Customer revenues:
CAM	$	40,940		$	27,920		$	104,102		$	86,068		$	35,887		$	30,782
ACMI Services	146,938			128,702			436,386			357,803			119,374			144,949
MRO Services													30,939			25,417
All other	66,223			36,639			204,741			103,324			16,840			36,769
Total	$	254,101		$	193,261		$	745,229		$	547,195		$	203,040		$	237,917
Depreciation and amortization expense:
CAM	$	26,829		$	22,958		$	31,368		$	68,295
ACMI Services	9,805			10,528			77,383			30,300
All other	971			453			3,077			1,010
Total	$	37,605		$	33,939		$	111,828		$	99,605
Segment earnings (loss):
CAM	$	19,445		$	16,110		$	45,570		$	51,849
ACMI Services	(5,223		)	(9,686		)	(8,841		)	(27,172		)
All other	655			5,089			11,977			13,087
Net unallocated interest expense	(268		)	83			(655		)	(287		)
Net loss on financial instruments	(34,433		)	(8,473		)	(100,213		)	(3,443		)
Charges for non-consolidating affiliates	(945		)	—			(945		)	—
Pre-tax earnings (loss) from continuing operations	$	(20,769	)	$	3,123		$	(53,107	)	$	34,034

CAM's aircraft lease revenues are recognized as operating lease revenues on a straight-line basis over the term of the applicable lease agreements. CAM's customer revenues included $0.8 million and $2.7 million for the three month periods ending March 31, 2018 and 2017 respectively, for maintenance related payments from customers that are recognized at a point in time.

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 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 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 in which the Company is responsible for fuel and full services, the related costs are recorded in operating expenses. During the three month period ended March 31, 2018, the Company netted $49.2 million of ACMI Services customer reimbursable revenues against the related expenses as an agent of customers. ACMI Services are invoiced monthly or more frequently.

MRO Services revenues for 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 are generally recognized over time based on the

percentage of costs completed. MRO Services revenues for 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 the Company records revenues and estimated earnings for its airframe maintenance and modification contracts using the percentage-of-completion cost-to-cost 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. 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. 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 customer revenues for providing sorting services and related equipment maintenance for the three month periods ending March 31, 2018 and 2017 were $16.2 million and $36.3 million, respectively, and are reported in All other. The Company's external customer revenues from providing sorting services are recognized as the services are performed for the customer over time. Revenues from related equipment maintenance services are primarily recognized at a point in time. During the three month period ended March 31, 2018, the Company netted $51.3 million of customer reimbursable revenues against the related expenses when functioning as the customers agent for arranging ground services.

Revenue is not recognized until collectibility of 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. During the three month periods ending March 31, 2018 the Company recognized $5.9 million of non lease revenue that was reported in deferred revenue at the beginning of the period.

The effects of the adoption of Topic 606 on the Company's customer revenues are summarized below:



	For the three months ending March 31, 2018
	Revenue
	As Reported		Without Topic 606		Increase (decrease)
ACMI Services	$	119,374	$	168,549	$	(49,175	)
MRO Services	30,939		25,479		5,460
Other (ground services)	16,840		68,187		(51,347		)

The Company's other segment information from continuing operations is presented below (in thousands):



	Three Months Ending March 31
	2018			2017
Depreciation and amortization expense:
CAM	$	28,925		$	24,301
ACMI Services	10,225			11,072
MRO Services	850			674
All other	4			395
Total	$	40,004		$	36,442
Segment earnings (loss):
CAM	$	15,464		$	13,330
ACMI Services	3,941			(3,534		)
MRO Services	4,462			3,188
All other	2,581			2,463
Inter-segment earnings eliminated	(3,325		)	(862		)
Net unallocated interest expense	(819		)	(171		)
Net gain (loss) on financial instruments	(885		)	1,869
Other non-service components of retiree benefit costs, net	2,045			(177		)
Loss from non-consolidated affiliate	(2,536		)	—
Pre-tax earnings from continuing operations	$	20,928		$	16,106

The Company's assets are presented below by segment (in thousands):


	September 30,		December 31,		March 31		December 31
	2017		2016		2018		2017
Assets:
CAM	$	1,140,559	$	971,986	$	1,201,208	$	1,192,890
ACMI Services	175,963		164,489		195,790		189,379
MRO Services					96,451		87,177
All other	170,381		122,855		74,054		79,398
Total	$	1,486,903	$	1,259,330	$	1,567,503	$	1,548,844

Interest expense allocated to CAM was ~~$4.0~~$4.5 million and ~~$10.9~~$3.3 million for the three ~~and nine~~ month periods ending ~~September 30, 2017, respectively, compared to~~ ~~$2.9 million~~March 31, 2018 and ~~$7.8 million for the corresponding periods of 2016,~~2017, respectively.

~~The Company's external customers revenues from other activities for the three and nine month periods ended September 30, 2017 and 2016 are presented below (in thousands):~~

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Mail and package handling services $ 48,283
$ 23,502
$ 123,564
$ 62,553
Aircraft maintenance, modifications and part sales 13,915
8,958
70,492
30,217
Facility and ground equipment services 3,625
3,780
9,528
9,281
Other 400
399
1,157
1,273
Total customer revenues $ 66,223
$ 36,639
$ 204,741
$ 103,324

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, ~~2016.~~2017.

INTRODUCTION

The Company leases aircraft, provides air cargo ~~lift~~transportation and performs aircraft maintenance and other support services primarily to the air cargo transportation and package delivery industries. Through the Company's subsidiaries, we offer a range of complementary services to delivery companies, freight forwarders, e-commerce operators, airlines and government customers. ~~The Company's~~Our principal subsidiaries include two independently certificated airlines, ABX Air, Inc. (“ABX”) and Air Transport International, Inc. (“ATI”), and an aircraft leasing company, Cargo Aircraft Management, Inc. (“CAM”). CAM provides competitive aircraft lease rates by converting passenger aircraft into cargo freighters and offering them to customers under long-term leases.

~~The Company has two~~We have three reportable segments: CAM, which leases Boeing 767, Boeing 757 and Boeing ~~757~~737 aircraft and aircraft engines, ~~and~~ ACMI Services, which primarily includes the ~~cargo~~air transportation operations of the ~~Company's~~ two ~~airlines. The ACMI~~airlines, and MRO Services, ~~segment~~which provides ~~airline operations to its customers. Services include a combination of~~ aircraft ~~crews,~~ maintenance and ~~insurance through "CMI" and "ACMI" agreements and through charter contracts in which aviation fuel is also included. The Company's~~modification services to customers. Our other business operations, which primarily provide support services to the transportation industry, include ~~aircraft maintenance, aircraft parts sales, ground~~mail and ~~material handling~~package sorting services as well as related equipment maintenance ~~and mail handling~~ services. These operations do not constitute reportable segments due to their size.

~~DHL~~

~~The Company has had long-term contracts with~~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.

DHL

The Company has had long-term contracts with DHL since August 2003. DHL accounted for ~~25%~~28% of the Company's consolidated revenues for the first ~~nine~~three months of ~~2017,~~2018, compared with ~~35%~~30% of the Company's consolidated revenues excluding directly reimbursed revenues in the corresponding period in ~~2016.~~2017. As of ~~September 30, 2017,~~March 31, 2018, the Company, through CAM, leased 1617 Boeing 767 aircraft to DHL, 1213 of which were being operated by the Company's airlines for DHL under a crew, maintenance and insurance agreement and four aircraft which are operated by a DHL-affiliated airline in the Middle East. Additionally, ATI operated four CAM-owned Boeing 757 aircraft under other operating arrangements with DHL.

Amazon

The Company has been providing freighter aircraft, operating flight services and ~~services for~~arranging cargo handling and logistical support for ~~Amazon Fulfillment Services, Inc. ("AFS"), a subsidiary of Amazon.com, Inc. ("Amazon")~~ASI since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with ~~AFS~~ASI pursuant to which CAM agreed to lease 20 Boeing 767 freighter aircraft to AFS, 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.

The ATSA, which has a term of five years, provides for the operation of those aircraft by the Company’s airline subsidiaries, and the performance of ground handling services by the Company's subsidiary, LGSTX Services, Inc. ("LGSTX"). CAM owns all of the Boeing 767 aircraft that are leased and operated under the ATSA. The ATSA became effective on April 1, 2016.

Revenues from continuing operations performed for ~~AFS~~ASI comprised approximately ~~42%~~28% of the Company's consolidated revenues from continuing operations for the first ~~nine~~three months of ~~2017,~~2018, compared with ~~24%~~27% of ~~the Company's consolidated~~ revenues ~~from continuing operations~~excluding directly reimbursed revenues during the corresponding period in ~~2016.~~2017.

shares as described below. The first tranche of warrants, issued upon execution of the Investment Agreement, granted Amazon the right to purchase approximately 12.81 million ATSG common shares, with the right to purchase 7.69 million common shares vesting upon issuance on March 8, 2016, and the right to purchase the remaining 5.12 million common shares vesting as the Company delivered additional aircraft leased under the ATSA, or as the Company achieved specified revenue targets in connection with the ATSA. The second tranche of warrants grants Amazon a right to purchase approximately 1.59 million ATSG common shares, and will be issued and vest on March 8, 2018. The third tranche of warrants will be issued and vest on September 8, 2020. The third tranche of warrants 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 ~~will be~~is $9.73 per share, which represents the closing price of ~~ATSG’s~~the Company’s common shares on February 9, 2016. Each of the three tranches of warrants will be exercisable in accordance with its terms through March 8, 2021.

~~The Company’s~~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 isare recorded as a lease incentive asset and isare 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 in future periods will be impacted by the number~~As of March 31, 2018, our liabilities reflected 14.83 million warrants ~~granted, the~~having a fair value ~~re-measurement~~ of ~~warrants at~~$14.45 per share. During the ~~end~~first quarter of ~~each period, lease incentive amortizations and~~2018, the ~~related income tax effects. For income tax calculations, the value and timing~~re-measurements 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 B~~ to fair value resulted in a non-operating loss of $3.1 million before the ~~accompanying unaudited condensed consolidated financial statements.~~

~~U.S. Military~~effect of income taxes.

The U.S. Military comprised 7%11% and ~~13%~~10% of the Company's consolidated revenues ~~from continuing operations~~excluding directly reimbursed revenues during the ~~nine~~three month periods ending ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. ~~Revenues from~~The Company's airlines contract their services to the Air Mobility Command ("AMC"), through the U.S. ~~Military~~Transportation Command ("USTC"), both of which are ~~primarily for~~organized under the ~~operation~~U.S. Military.

Fleet Summary 2018

As of March 31, 2018, the combined operating fleet of owned freighter aircraft consisted of 36 Boeing 767-200 aircraft, 25 Boeing 767-300 aircraft, four Boeing 757-200 aircraft, four Boeing 757 "combi" aircraft ~~which~~and one Boeing 737-400 aircraft. The Boeing 757 combi aircraft are capable of simultaneously carrying passengers and cargo containers on the main flight deck.

~~Fleet Summary 2017~~

As of September 30, 2017, the combined operating fleet of owned freighter aircraft consisted of 36 Boeing 767-200 aircraft, 22 Boeing 767-300 aircraft, four Boeing 757-200 aircraft and four Boeing 757 "combi" aircraft. At ~~September 30, 2017,~~March 31, 2018, the Company owned ~~six~~eight Boeing 767-300 aircraft and ~~two~~one Boeing 737-400 aircraft that were either already undergoing or awaiting induction into the freighter conversion process.

Aircraft fleet activity during the first ~~nine~~three months of ~~2017~~2018 is summarized below:

- CAM completed the modification of ~~six~~one Boeing 767-300 freighter aircraft purchased in the previous year and began to lease ~~five of those~~that aircraft ~~which are being operated by ATI,~~ under a multi-year lease to ~~AFS. CAM began to lease the sixth~~an external customer.

- ABX returned one Boeing 767-300 freighter aircraft to ~~ATI.~~CAM. That aircraft was then leased to an external customer under a multi-year lease and is being operated by ABX.

- CAM ~~leased~~sold one Boeing 767-300 freighter aircraft, which was ~~modified during 2016,~~under lease to ~~AFS under a multi-year lease. ATI was separately contracted~~an external customer, to ~~operate~~ that ~~aircraft.~~

~~- CAM leased one Boeing 767-200 freighter, which was being staged for leasing, to ATI.~~

~~- External lessees returned two Boeing 767-200 freighter aircraft which were operated by ABX. Two Boeing 767-200 aircraft were released to~~same external ~~customers.~~customer.

- CAM purchased ~~five~~three Boeing 767-300 passenger aircraft ~~during the first nine months of 2017~~ for the purpose of converting the aircraft into standard freighter configuration.

~~- The Company purchased two Boeing 737-400 passenger aircraft during the first nine months of 2017 for the purpose of converting the aircraft into standard freighter configuration.~~

~~The Company’s cargo aircraft fleet is summarized below as of September 30, 2017 and December 31, 2016:~~


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
	ACMI Services	CAM	Total	ACMI Services	CAM	Total	ACMI Services	CAM	Total	ACMI Services	CAM	Total
In-service aircraft
Aircraft owned
Boeing 767-200	7	29	36	6	29	35	7	29	36	7	29	36
Boeing 767-300	4	18	22	4	12	16	3	22	25	4	21	25
Boeing 757-200	4	—	4	4	—	4	4	—	4	4	—	4
Boeing 757-200 Combi	4	—	4	4	—	4	4	—	4	4	—	4
Boeing 737-400							—	1	1	—	1	1
Total	19	47	66	18	41	59	18	52	70	19	51	70
Other aircraft
Owned Boeing 767-300 under modification	—	6	6	—	7	7	—	8	8	—	6	6
Owned Boeing 737-400 under modification	—	2	2	—	—	—	—	1	1	—	1	1
Owned Boeing 767 available or staging for lease	—	—	—	—	1	1

As of ~~September 30, 2017,~~March 31, 2018, ABX and ATI were leasing 1918 in-service aircraft internally from CAM for use in ACMI Services. As of ~~September 30, 2017,~~March 31, 2018, six of CAM's 29 Boeing 767-200 aircraft shown in the aircraft fleet table above and ~~six~~seven of the 1822 Boeing 767-300 aircraft were leased to DHL and operated by ABX. Additionally, ~~twelve~~12 of CAM's 29 Boeing 767-200 aircraft and eight of CAM's 1822 Boeing 767-300 aircraft were leased to ~~AFS~~ASI and operated by ABX or ATI. CAM leased the other ~~eleven~~11 Boeing 767-200 aircraft and ~~four~~seven Boeing 767-300 aircraft to external customers, including four Boeing 767-200 aircraft to DHL that are being operated by a ~~DHL-affiliated~~DHL-owned airline. The carrying values of the total in-service fleet as of ~~September 30, 2017 was $881.6 million compared to $793.9 million as of~~March 31, 2018 and December 31, ~~2016.~~2017 were $940.3 million and $955.2 million, respectively. The table above does not reflect one Boeing 767-200 passenger aircraft owned by CAM.

RESULTS OF OPERATIONS

Summary

External customer revenues from continuing operations ~~increased~~decreased by ~~$60.8~~$34.9 million to ~~$254.1~~$203.0 million ~~and increased by $198.0 million to $745.2 million for~~during the ~~three and nine month periods ended September 30, 2017, respectively,~~first quarter of 2018 compared to 2017. Effective January 1, 2018, the ~~corresponding periods~~Company adopted Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("Topic 606”). As a result of ~~2016. Excluding~~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 reimbursements. Excluding revenues directly reimbursed in 2017, customer revenues increased ~~$49.1~~$19.5 million, ~~and $146.0 million~~or 11% during the ~~three and nine month periods ended September 30, 2017, respectively,~~first quarter of 2018 compared ~~to the corresponding periods of 2016.~~with 2017. External customer revenues increased due to additional aircraft leases from CAM's leasing operations, expanded CMI and ~~logistics~~logistic services for ~~AFS~~ASI and aircraft maintenance and modification services for various customers.

The consolidated net ~~losses~~earnings from continuing operations were ~~$28.2 million and $72.4~~$15.7 million for the ~~three and nine month periods ended September 30, 2017, respectively,~~first quarter of 2018 compared to ~~earnings of $2.1 million and $21.8~~$9.8 million for ~~the corresponding periods of 2016.~~2017. The pre-tax ~~losses~~earnings from continuing operations were ~~$20.8 million and $53.1~~$20.9 million for the ~~three and nine month periods ended September 30, 2017, respectively,~~first quarter of 2018 compared to pre-tax earnings of ~~$3.1 million and $34.0~~$16.1 million, for ~~the corresponding periods of 2016.~~2017. 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 ~~net~~ losses of ~~$34.4~~$0.9 million and ~~$100.2~~gains of $1.9 million for the three ~~and nine month periods~~months ended ~~September 30,~~March 31, 2018 and 2017, respectively, for the re-measurement of financial instruments, including the warrant obligations granted to ~~Amazon, to fair value. This compares to pre-tax losses for re-measurements of $8.5 million and $3.4 million for the corresponding periods of 2016.~~Amazon. Pre-tax earnings were also reduced by ~~$3.9~~$4.2 million and ~~$9.8~~$2.6 million for the three ~~and nine month periods~~months ended ~~September 30,~~March 31, 2018 and 2017, respectively, for the amortization of lease incentives given to ~~AFS~~ASI in the form of ~~warrants, compared to $1.4 million and $2.4 million for the corresponding periods of 2016.~~warrants. Additionally, pre-tax earnings from continuing operations included ~~expenses~~a gain of ~~$5.5~~$2.0 million and ~~$5.9~~a loss of $0.2 million for the ~~three~~first quarters of 2018 and ~~nine month periods ending September 30,~~ 2017, respectively, for ~~settlement charges and other~~the non-service components of retiree benefit ~~plans, compared to $2.2 million and $6.6 million for the corresponding periods of 2016.~~plans. Pre-tax earnings for the ~~third~~first quarter of ~~2017~~2018 included a ~~$0.9~~$2.5 million ~~charge~~loss for the Company's share of development costs for a new

joint venture. Pre-tax earnings for the first quarter of 2016 also included a $1.2 million charge for the Company's share of capitalized debt issuance costs that were charged off when West Atlantic AB, a non-consolidated affiliate, restructured its debt. After removing the effects of these items, adjusted pre-tax earnings from continuing operations, a non-GAAP measure (a definition and reconciliation of adjusted pre-tax earnings from continuing operations follows) were ~~$24.0 million and $63.7~~$26.5 million for the ~~three and nine months ended September 30, 2017, respectively,~~first quarter of 2018 compared to ~~$15.2 million and $47.7~~$17.0 million for ~~2016.~~2017, an increase of 56%.

Adjusted pre-tax earnings from continuing operations for the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2018 improved compared to ~~2016,~~2017, driven primarily by additional revenues and the improved financial results of our airline operations. We also experienced additional revenues and earnings due to the ~~acquisition of Pemco World Air Services, Inc. ("Pemco") in December 2016 and the~~ expansion of gateway ground operations for ~~AFS since June of 2016.~~ASI. This growth in revenue was partially offset by the cost necessary to support expanded flight operations, ~~including training costs related to new flight crews,~~ higher ~~aircraft~~ depreciation expense and more employee expenses, particularly in support of logistical services. Pre-tax earnings for the first quarter of 2018 included an additional interest expense of $2.1 million for the amortization of convertible debt discount and issuance costs.

A summary of our revenues and pre-tax earnings ~~from continuing operations,~~and adjusted pre-tax earnings from continuing operations ~~(a non-GAAP measure), and a non-GAAP reconciliation,~~ is shown below (in thousands):


	Three Months Ending September 30,						Nine Months Ending September 30,						Three Months Ending March 31
	2017			2016			2017			2016			2018			2017
Revenues from Continuing Operations:
CAM
Aircraft leasing and related revenues	$	62,351		$	47,778		$	165,733		$	147,877
Aircraft leasing and related services													$	56,602		$	50,569
Lease incentive amortization	(3,886		)	(1,432		)	(9,760		)	(2,366		)	(4,226		)	(2,591		)
Total CAM	58,465			46,346			155,973			145,511			52,376			47,978
ACMI Services													119,374			108,066
Airline services	112,203			105,747			332,120			305,587
Reimbursable	34,740			22,955			104,271			52,216
Total ACMI Services	146,943			128,702			436,391			357,803
MRO Services													52,723			40,338
Other Activities	94,470			65,328			300,184			177,592			19,283			31,398
Total Revenues	299,878			240,376			892,548			680,906			243,756			227,780
Eliminate internal revenues	(45,777		)	(47,115		)	(147,319		)	(133,711		)	(40,716		)	(44,216		)
Customer Revenues - non reimbursed													$	203,040		$	183,564
Revenues for reimbursed expenses													—			54,353
Customer Revenues	$	254,101		$	193,261		$	745,229		$	547,195		$	203,040		$	237,917


Pre-Tax Earnings (Loss) from Continuing Operations:
Pre-Tax Earnings from Continuing Operations:
CAM, inclusive of interest expense	$	19,445		$	16,110		$	45,570		$	51,849		$	15,464		$	13,330
ACMI Services	(5,223		)	(9,686		)	(8,841		)	(27,172		)	3,941			(3,534		)
MRO Services													4,462			3,188
Other Activities	655			5,089			11,977			13,087			2,581			2,463
Inter-segment earnings eliminated													(3,325		)	(862		)
Net unallocated interest expense	(268		)	83			(655		)	(287		)	(819		)	(171		)
Net financial instrument re-measurement loss	(34,433		)	(8,473		)	(100,213		)	(3,443		)
Charges for non-consolidated affiliate	(945		)	—			(945		)	—
Pre-Tax Earnings (Loss) from Continuing Operations	(20,769		)	3,123			(53,107		)	34,034
Net financial instrument re-measurement (loss) gain													(885		)	1,869
Other non-service components of retiree benefit costs, net													2,045			(177		)
Loss from non-consolidated affiliate													(2,536		)	—
Pre-Tax Earnings from Continuing Operations													20,928			16,106
Add other non-service components of retiree benefit costs, net	5,529			2,203			5,883			6,609			(2,045		)	177
Add charges for non-consolidated affiliate	945			—			945			1,229			2,536			—
Add lease incentive amortization	3,886			1,432			9,760			2,366			4,226			2,591
Add net loss on financial instruments	34,433			8,473			100,213			3,443
Add net loss (gain) on financial instruments													885			(1,869		)
Adjusted Pre-Tax Earnings from Continuing Operations	$	24,024		$	15,231		$	63,694		$	47,681		$	26,530		$	17,005

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 ~~plans,~~costs, gains and losses for the fair value re-measurement of financial instruments, lease incentive amortizations and the start-up costs of a non-consolidated joint ~~venture and the charge off of debt issuance costs from a non-consolidated affiliate during the first quarter of 2016.~~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.

~~ACMI Reimbursable revenues shown above include revenues related to~~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 ~~landing fees, navigation fees~~ and certain other ~~operating~~ costs reimbursed under its ACMI and CMI contracts and for certain ground services that it arranges for ASI. Under the new standards, such reimbursed amounts are reported net of the corresponding expenses beginning in 2018. Revenues during the first quarter of 2017 included $54.4 million for reimbursable revenues under its ACMI and CMI contracts and directly reimbursed toground services, which under the ~~airlines by their customers.~~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 eight years. ~~In a typical leasing agreement, customers pay rent and maintenance deposits on a monthly basis.~~

As of ~~September 30,~~March 31, 2018 and 2017, CAM had ~~a fleet of 66 cargo aircraft in service condition, 19 of them leased internally to the Company's airlines~~52 and ~~47 leased to external customers. CAM has added eight aircraft to its operating fleet since October 1, 2016.~~

~~As of September 30, 2017 and 2016, CAM had 47 and 38~~43 aircraft under lease to external customers, respectively. CAM's revenues grew by $4.4 million during the first quarter of 2018 compared to 2017, primarily as a result of additional aircraft leases. Revenues from external customers totaled ~~$40.9~~$35.9 million and ~~$104.1~~$30.8 million for the ~~three~~first quarters of 2018 and ~~nine month periods ending September 30,~~ 2017, ~~respectively, compared to $27.9 million and $86.1 million for the corresponding periods of 2016.~~respectively. CAM's revenues from the Company's airlines totaled ~~$17.5~~$16.5 million ~~and $51.2~~during the first quarter of 2018, compared to $17.2 million for ~~the three and nine month periods ending September 30,~~ 2017, ~~respectively, compared to $18.4 and $59.4 for the corresponding periods of 2016,~~ reflecting the transition of CAM owned aircraft to long-term leases with external customers. CAM's aircraft leasing and related services revenues, which excludes customer lease incentive ~~costs,~~amortization, increased ~~$14.6~~$6.0 million ~~and $17.9 million during~~in the ~~three and nine month periods ended September 30, 2017, respectively,~~first quarter of 2018 compared to ~~the corresponding periods of 2016,~~2017, primarily as a result of new aircraft ~~leases since October~~leases. Since April 1, ~~2016, additional engine maintenance agreements~~2017, CAM has added nine Boeing 767-300 freighter aircraft and ~~the timing of maintenance related revenues. CAM's revenues related~~one Boeing 737-400 freighter aircraft to maintenance increased $7.5 million and $2.3 million for the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016. CAM's revenues related to maintenance can vary among periods due to the timing of customer maintenance events.its lease portfolio.

CAM's pre-tax earnings were reduced by the increased amortization for the value of warrants issued to Amazon as a lease incentive. The amortization of the lease incentive increased by $2.5 million and $7.4 million for the three and nine months ended September 30, 2017 compared to the corresponding periods of 2016 due to additional vesting of warrants and a higher value of warrants at the time of vesting. CAM's pre-tax earnings, inclusive of aninternally allocated interest expense, ~~allocation,~~ were ~~$19.4~~$15.5 million and ~~$45.6~~$13.3 million during the ~~three~~first quarters of 2018 and ~~nine month periods ended September 30,~~ 2017, ~~respectively, compared to $16.1 million and $51.8 million during the corresponding periods of 2016.~~respectively. Increased pre-tax earnings ~~for the third quarter~~ reflect additional ~~aircraft leases and~~external lease revenues. These increases were partially offset by a $1.2 million increase in internally allocated interest expense due to higher debt levels, the ~~timing of customer maintenance revenues and related expenses. Decreased earnings for~~$1.6 million increase in the ~~first nine months reflect more~~ amortization of the ~~value of warrants issued to Amazon as a~~ASI lease incentive, ~~higher~~and $4.6 million more depreciation expense ~~for eight additional~~driven by the addition of ten Boeing ~~767-300~~ aircraft in the ~~interruption~~first quarter of ~~lease revenues when transitioning aircraft between customers and increased interest allocation due~~2018 compared to ~~the higher debt levels.~~2017.

During the first ~~nine~~three months of ~~2017,~~2018, CAM purchased ~~five~~three 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, 2017,~~March 31, 2018, all ~~five~~three of ~~these Boeing 767-300 passenger aircraft and one other~~the Boeing 767-300 passenger aircraft purchased in ~~2016~~2018 and five Boeing 767-300 passenger aircraft purchased during 2017 were being modified from passenger to freighter configuration. The Company also purchased ~~two~~one Boeing 737-400 ~~aircraft during the first nine months of~~in 2017 ~~and these aircraft are currently~~which was being modified from passenger to freighter ~~configuration.~~

CAM's agreement to lease 20 Boeing 767 freighter aircraft to AFS includes 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. Leases for six of these aircraft began in April 2016 and the remaining fourteen were executedconfiguration as of ~~September 1, 2017, to fulfill the 20 aircraft requirement for AFS.~~March 31, 2018.

CAM expects to complete ~~through the third quarter of 2018,~~ the freighter modification of ~~eight~~the nine passenger aircraft which it ~~owns. While~~owned at March 31, 2018. CAM has customer commitments or letters of intent for ~~most~~seven of these ~~aircraft,~~nine aircraft. CAM's future operating results will depend on the timing and lease rates under which these aircraft are ultimately leased. CAM's

operating results will depend on its continuing ability to convert passenger aircraft into freighters within planned costs and within the time frames ~~of customers' needs. Additionally, CAM's operating results will be negatively impacted~~required by ~~the amortization of warrants issuable to Amazon as a lease incentive.~~customers.

ACMI Services Segment

The ACMI Services segment provides airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance and insurance ("ACMI"). Our customers are usually 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, usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price. As of ~~September 30, 2017,~~March 31, 2018, ACMI Services included 5152 in-service aircraft, including 1918 leased internally from CAM, 1213 CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under athe restated CMI agreement, ~~and~~ 20 CAM-owned freighter aircraft which are under lease to ~~AFS~~ASI and operated by ATI and ABX under the ~~ATSA.~~ATSA and another CAM-owned freighter operated by ATI.

Total revenues from ACMI Services ~~increased $18.2 million and $78.6~~decreased $25.6 million during the ~~three and nine month periods ended September 30,~~first quarter of 2018 compared with 2017 to ~~$146.9~~$119.4 million. ACMI Services revenues for the first quarter of 2017 included $36.9 million for the reimbursement of fuel and ~~$436.4 million, respectively, compared to~~certain operating expenses. Such revenues for 2018 are reported net of expenses after the ~~corresponding periods~~adoption of ~~2016.~~Topic 606. Airline services revenues from external customers, which do not include revenues for the reimbursement of fuel and certain operating expenses, increased ~~$6.5 million and $26.5 million for the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016.~~$11.3 million. Improved revenues were driven by additional aircraft operations for ~~AFS~~ASI and reflect ~~an 8% and 21%~~a 10% increase in billable block hours for both the three and nine month periods ended September 30, 2017, compared to the corresponding periods of 2016. In the third quarter of 2017, we added two CAM-owned Boeing 767-300 aircraft into ACMI Service for AFS.hours. As of ~~September 30, 2017,~~March 31, 2018, ACMI Services ~~were operating seven~~included the operation of six more CAM-owned aircraft compared to ~~September 30, 2016. Beginning in April 2016, in conjunction with the long-term leases executed between AFS and CAM, the related aircraft rent revenues for five aircraft operated for AFS~~March 31, 2017.

ACMI Services had pre-tax earnings of $3.9 million during the first quarter of ~~2016 are reflected under CAM instead of ACMI Services.~~

~~ACMI Services had pre-tax losses of $5.2 million and $8.8 million during the three and nine month periods ended September 30, 2017, respectively,~~2018, compared to pre-tax losses of ~~$9.7 million and $27.2~~$3.5 million for ~~the corresponding periods of 2016. Pre-tax~~2017. Improved pre-tax results in ~~2017~~2018 compared to ~~2016~~2017 were ~~affected~~bolstered by expanded revenues, ~~the timing of scheduled airframe maintenance events,~~

and lower flight crew ~~training~~ and related ~~expenses, and increased pension~~training expenses. Scheduled airframe maintenance expense increased ~~$0.9 million and decreased $3.1~~$0.7 million during the ~~three and nine month periods ended September 30, 2017, respectively,~~first quarter of 2018 compared to ~~the corresponding periods of 2016.~~2017. Airframe maintenance expense varies depending upon the number of C-checks and the scope of the checks required for those airframes scheduled for maintenance. Effective January 1, 2018, we adopted ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension ~~expense~~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 ~~including~~do not include the other non-service components of retiree benefit ~~costs,~~costs.

In March 2018, ATI began to implement recently ratified amendments to the collective bargaining agreement with its crewmembers. The amendments will result in increased ~~$3.3 million and decreased $0.8 million as actuarially determined~~wages for the ~~three and nine month periods ending September 30, 2017, respectively, compared to the corresponding periods of 2016. The pension expense~~ATI crewmembers beginning in the ~~third~~second quarter of ~~2017 included a $5.3 million pre-tax charge for~~2018. 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 ~~settlement~~marketability of ~~certain retirement obligations through a third party group annuity contract.~~

~~Achieving longer term~~our services. Maintaining profitability in ACMI Services will depend on a number of factors, including customer flight schedules, ~~revenue levels for airline services,~~ crewmember productivity ~~the level of pilot~~and pay, employee benefits, aircraft maintenance schedules and the number of aircraft we operate. ~~Currently each of~~

MRO Services Segment

MRO Services sells aircraft parts and provides aircraft maintenance and modification services through the Company's ~~airlines are negotiating with their respective flight crewmembers' collective bargaining units. These negotiations could result~~Airborne Maintenance and Engineering Services, Inc. ("AMES") and Pemco World Air Services, Inc. ("Pemco"), subsidiaries.

Total revenues from MRO Services were $52.7 million and $40.3 million for the first quarter of 2018 and 2017, respectively. External customer revenues for MRO Services increased $5.5 million to $30.9 million for the first quarter of 2018 compared to the first quarter of 2017. Revenues increased during 2018 compared to 2017, reflecting increase in ~~changes that may effect~~airframe maintenance and modification revenues. Revenues from aircraft maintenance services can vary among periods due to the ~~productivity~~timing of scheduled maintenance events and ~~costs~~the completion level of ~~our operations.~~work during a period. The pre-tax earnings from MRO Services increased by $1.3 million to $4.5 million in the first quarter of 2018, primarily reflecting expanded aircraft maintenance and modification services.

Other Activities

We provide ~~related~~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. The Company's aircraft maintenance, engineering and repair businesses, Airborne Maintenance and Engineering Services, Inc. ("AMES") and Pemco, sell aircraft parts and provide aircraft maintenance and modification services. We ~~also~~ provide mail and package sorting ~~parcel handling~~ and logistical support to the U.S. Postal Service (“USPS”) at five USPS facilities and arrange similar services tofor certain ~~AFS hubs and~~ASI gateway locations in the U.S. We provide ~~other~~maintenance for ground ~~services for our own airlines~~equipment, facilities and ~~external customers, including the sale~~

ofmaterial handling equipment. We also resell aviation fuel ~~the lease of ground equipment such as ground power units~~in Ohio and ~~cargo loaders, as well as facility and equipment maintenance services.~~provide flight training.

External customer revenues from all other activities ~~were $66.2~~decreased $19.9 million ~~and $204.7~~to $16.8 million for 2017. Customer revenues in 2017 included $17.5 million for the ~~three and nine month periods ended September 30, 2017, respectively, compared to $36.6 million and $103.3 million~~reimbursement of certain ground services that it arranges for ASI which are being net against expenses in 2018 after the ~~corresponding periods~~adoption of ~~2016.~~Topic 606. Revenues from our mail sorting, parcel handling and logistical support services increased $24.8 million and $61.0 million during the three and nine month periods ended September 30, 2017, respectively, compared to 2016, reflecting higher contractual costs and additional AFS locations. Additionally, airframe maintenance and modification revenues from external customers, ~~increased~~which do not include 2017 revenues for the reimbursement of certain ground services, decreased $2.5 million. The decrease in revenue was driven by ~~$5.0 million and $40.3 million during~~ the ~~three and nine month periods ended September 30,~~the termination of hub logistics services we provided through May of 2017 ~~respectively, primarily due to the addition of Pemco, which was acquired~~for ASI at the ~~end of 2016. Revenues from aircraft maintenance can vary among periods due to the timing of scheduled maintenance events and the completion level of work during a period.~~airport in Wilmington, Ohio.

The pre-tax earnings from other activities ~~decreased~~increased by ~~$4.4~~$0.1 million to $2.6 million in the first quarter of 2018. Additional earnings from higher contractual costs and $1.1 million during the three and nine month periods ended September 30, 2017 to $0.7 million and $12.0 million, respectively, compared to the corresponding periods in 2016, principally reflecting the termination of aircraft fueling and hub logistics services we provided for Amazonincreased volumes at the ~~airport in Wilmington, Ohio through May of 2017,~~USPS and ASI locations as well as earnings from an airline affiliate accounted for under the ~~timing~~equity method were offset by reduced ground services and aviation fuel sales after ASI discontinued its hub in Wilmington, Ohio.

The contracts for five USPS facilities we service have been extended from their original expiration dates and are currently scheduled to expire during September 2018. We understand the USPS is evaluating alternatives for these facilities. The contract for some or all of ~~completion of airframe services. Revenues for scheduled airframe maintenance and modification services are recognized by our subsidiaries when the customer work is completed.~~these may not be renewed.

Discontinued Operations

Pre-tax results related to former sorting operations were a $6.7 million loss and a $0.2 million gain for the first nine months of 2017 and 2016, respectively. Results in the third quarter of 2017 included a $7.6 million pre-tax charge for the settlement of certain retirement obligations through a third party group annuity contract. The financial results of discontinued operations primarily reflect ~~the effects of defined benefit~~ pension, ~~plans~~workers' compensation cost adjustments and other benefits for former employees ~~that supported sort~~previously associated with ABX's former freight sorting and aircraft fueling services provided to DHL. Pre-tax earnings related to the former sorting operations ~~under a former hub service agreement with DHL.~~were $0.3 million for first quarters of 2018 and 2017.

Expenses from Continuing Operations

Salaries, wages and benefits expense ~~increased $7.3 million and $39.9~~decreased $1.7 million during the ~~three and nine month periods~~quarter ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to the corresponding ~~periods of 2016. The increase in expense for the third quarter~~period of 2017 ~~reflects the $5.3 million settlement charge~~driven by lower headcount after ASI discontinued its hub in Wilmington, Ohio in May 2017 and less need for ~~the pension plan and $4.7 million for Pemco acquired in December 2016, offset by a reduction in pilot~~ premium pay from year-ago levels and the reduction in the number of employees for the Wilmington, Ohio logistics operation, which was terminated in May 2017. The increase in expense through the first nine months of 2017 also includes higher headcount for expandedas additional flight ~~operations and package handling services during the first half of 2017.~~crewmembers completed training.

Depreciation and amortization expense increased ~~$3.7 million and $12.2~~$3.6 million during the ~~three and nine month periods~~quarter ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to the corresponding ~~periods~~period of ~~2016.~~2017. The increase in depreciation expense reflects incremental depreciation for ~~eight~~nine Boeing 767-300 aircraft and ~~additional~~one Boeing 737-400 aircraft ~~engines~~ added to the operating fleet since ~~October, 2016, as well as capitalized heavy maintenance and navigation technology upgrades.~~April 1, 2017. 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 ~~$2.9 million and $10.0~~$6.6 million during the ~~three and nine month periods~~quarter ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to the corresponding ~~periods~~period of ~~2016.~~2017. The increase ~~is primarily~~was due to the addition of Pemco's maintenance and materials, which added $7.0 million and $21.1 million of expenses for the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016. The additional expense from Pemco was partially offset by fewermore airframe checks for the Company's airlines and ~~lower airframe~~additional costs to service increased external customer revenues for aircraft maintenance ~~costs for third party customers~~and modifications during ~~2017~~2018 compared to ~~2016.~~2017. Aircraft maintenance expenses ~~and materials~~ can vary among periods due to the number of scheduled airframe maintenance checks and the scope of the checks that are performed. In May 2017, our airlines entered into maintenance agreements for certain General Electric CF6 engines that power many of the Boeing 767-300 aircraft leased from CAM. Under the agreement, the engines are maintained by the service provider for a fixed fee per cycle. As a result, beginning in June 2017, the airlines began to record engine maintenance expense as flights occur. ~~As a result, we estimate that~~Accordingly, our ~~airlines'~~airlines recorded an additional $1.7 million of engine maintenance expense ~~will increase approximately $2.0 million per quarter with~~during 2018 compared to the first three months of 2017, which were partially offset by a ~~partially offsetting~~ reduction to engine depreciation expense.

Fuel expense ~~increased~~decreased by ~~$9.7 million and $43.0~~$29.1 million during the ~~three and nine month periods~~quarter ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to the corresponding ~~periods~~period of ~~2016.~~2017. In 2017, fuel expense included reimbursable fuel billed to DHL, ASI and other ACMI customers which is being net against the revenue in 2018 after the adoption of Topic 606. The customer-reimbursed fuel for the first quarter of 2017 was $31.5 million. Fuel expense includes the cost of fuel to operate U.S. Military charters ~~reimbursable fuel billed to DHL, AFS and other ACMI customers,~~ as well as fuel used to position aircraft for service and for maintenance purposes. The increase in fuel expense was driven by a higher level of customer-reimbursed fuel which increased $11.3 million and $48.7 million for the three and nine month periods ended September 30, 2017, respectively, compared to 2016. Fuel expense for military customers and other purposes ~~declined~~increased due to ~~fewer~~more block hours flown for military customers in ~~2017.~~

~~Travel expense increased by $0.9 million and $5.6 million during~~ the ~~three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods~~first quarter of ~~2016. The increase reflects additional aircraft in service and the higher level of employee headcount in airline operations during 2017 compared to 2016.~~2018.

Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services and other airport services. Contracted ground and aviation services ~~increased $27.6 million and $60.6~~decreased $18.3 million during the ~~three and nine month periods~~quarter ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to the corresponding ~~periods~~period of ~~2016, due to additional logistical support services for AFS gateways.~~

Rent expense decreased by $0.3 million and increased by $1.6 million during the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016. Rent expense increased2017. The decrease is primarily due to the ~~acquisition~~netting of ~~Pemco and declined during~~reimbursable revenues from certain ground services arranged for ASI against the ~~third~~expense in 2018 due to the adoption of Topic 606. The customer-reimbursed expenses in the first quarter of 2017 ~~due to a reduced need for aircraft simulators to train new flight crews.~~were $17.5 million.

Landing and ramp expense, which includes the cost of deicing chemicals, ~~increased~~decreased by ~~$1.5 million and $4.8~~$4.2 million during the ~~three and nine month periods~~quarter ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to the corresponding ~~periods~~period of ~~2016, driven by additional flight operations. Landing~~2017. The decrease is primarily due to the netting of reimbursable revenues from landing and ramp fees ~~can vary based on~~billed to DHL, ASI and other ACMI customers against the ~~flight schedules and~~expense in 2018 due to the ~~airports that are used in a period.~~adoption of Topic 606.

Other operating expenses ~~increased~~decreased by ~~$3.0 million and $6.2~~$0.8 million during the ~~three and nine month periods~~quarter ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to the corresponding ~~periods~~period of ~~2016.~~2017. Other operating expenses include professional fees, employee training and utilities. Other operating expenses ~~increased by $0.4 million and $2.3 million for the three and nine month periods ended September 30, 2017, respectively, for the addition~~also includes improved operating results of ~~Pemco, acquired at the end of 2016. Other operating expense also increased to support additional aircraft and customer block hours. Losses from a non-consolidated~~an airline affiliate ~~airline~~ accounted for under the equity ~~method increased $0.6 million and decreased by $0.7 million for the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods of 2016.~~method.

Interest expense increased by ~~$1.5 million and $3.4~~$1.8 million during the ~~three and nine month periods~~quarter ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to the corresponding ~~periods~~period of ~~2016.~~2017. Interest expense increased due to a higher average debt level and interest rates on the Company's outstanding ~~loans, partially offset by more capitalized~~loans. Capitalized interest ~~related~~due to our fleet ~~expansion. Capitalized interest increased~~expansion decreased $0.1 ~~million and $0.6~~ million during the ~~three and nine month periods ended September 30, 2017~~first quarter of 2018 to $0.4 ~~million and $1.5 million, respectively.~~

~~Future interest~~million. Interest expense ~~will be~~in the first quarter of 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% ~~and mature on October 15, 2024.~~. 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 cost to interest expense over the seven year term of the convertible notes. ~~We expect the~~The non-cash amortization of the debt discount and issuance costs ~~will be approximately $2~~was $2.1 million during the ~~fourth~~first quarter of 2017. We received net proceeds of $234.7 million from the issuance of the convertible notes and related bond hedge and warrant transactions. Interest payments for the convertible notes will be $2.9 million annually and there are no scheduled principal payments until maturity, resulting in a combined cash financing rate of approximately 2.55%.2018.

The Company recorded pre-tax net losses on financial instruments of ~~$34.4 million and $100.2 million for the three and nine month periods ended September 30, 2017, respectively, compared to $8.5 million and $3.4~~$0.9 million during the ~~corresponding period~~quarter ended March 31, 2018, compared to gains of ~~2016.~~$1.9 million during 2017. The ~~2017~~ losses are primarily a result of re-measuring, as of ~~September 30, 2017,~~March 31, 2018, the fair value of the stock warrants granted to Amazon. ~~An increase~~A decrease in the fair value of the ~~warrants~~ warrant obligation

since the previous re-measurement dates of ~~June 30, 2017 and~~ December 31, ~~2016,~~2017, corresponded to an increase in the traded price of the

Company's shares and resulted in ~~the~~ non-cash ~~loss.~~losses. The non-cash gains and losses resulting from quarterly re-measurements of the ~~financial instruments~~warrants may vary widely among quarters.

The effective tax rate from continuing operations for the ~~three~~quarter ended March 31, 2018 was 25.1% and ~~nine month periods ended September 30, 2017 was (35.9)% and (36.2)%, respectively. These effective~~includes deferred tax ~~rates reflect~~expense related to the ~~non deductible tax treatment of certain warrants vesting for Amazon and certain~~ warrant ~~revaluation losses~~re-measurement loss at the end of the period. The effective tax rates for the three and nine month periods ended September 30, 2017 are negative because the warrant revaluation losses do not generate a corresponding tax benefit for certain warrants. The effective tax rate ~~without~~before including the effects of the warrants was ~~37.5%~~22.3% and ~~36.5%~~34.1% for the ~~three~~first quarters of 2018 and ~~nine months periods ended September 30,~~ 2017, respectively. The effective tax rate ~~from continuing operations, without including~~decreased for the ~~effects~~first quarter of 2018 due to the enactment of the warrants for the three and nine month periods ended September 30, 2016 were 35.4% and 36.0%, respectively. The effective tax rate, without including the effects of the warrants, increased for 2017 due to a lesser amount of discrete tax benefits related to state income taxes and employee stock incentive awards.Tax Act in December 2017.

As of December 31, ~~2016,~~2017, the Company had operating loss carryforwards for U.S. federal income tax purposes of approximately ~~$40.2~~$57.6 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 ~~2019~~2023 or later. ~~However, the~~The Company may, however, be required to pay ~~alternative~~ minimum ~~taxes~~tax and certain state and local income taxes before then. The Company's taxable income earned from international flights are 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 $~~191.3~~68.8 million and ~~$143.6~~$44.2 million for the first ~~nine~~three months ofin 2018 and 2017, ~~and 2016,~~ respectively. ~~Cash~~Improved cash flows generated from operating activities during 2018, were driven primarily by additional aircraft leases to customers, increased ~~during~~operating levels of the ~~first nine months~~ACMI Services segment, the collection of ~~2017, reflecting improved operating results and customer collections.~~peak season balances from customers. Cash outlays for pension contributions were $1.3 million and $0.8 million for the first ~~nine~~three months of 2018 and 2017, ~~were $4.1 million compared to $6.3 million for the corresponding period of 2016.~~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 $~~218.8~~79.1 million and ~~$182.1~~$83.8 million for the first ~~nine~~three months of ~~2017~~2018 and ~~2016,~~2017, respectively. Capital expenditures in ~~2017~~2018 included ~~$159.4~~$63.6 million for the acquisition of ~~five~~three Boeing 767-300 ~~aircraft and two Boeing 737-400~~ aircraft and freighter modification costs; ~~$36.2~~$9.2 million for required heavy maintenance; and ~~$23.2~~$6.3 million for other equipment, including purchases of aircraft engines and rotables. Our capital expenditures ~~during 2016~~in the first quarter of 2017 included ~~$133.1~~$54.3 million for the acquisition of ~~nine~~three Boeing 767-300 aircraft and one Boeing 737-400 aircraft and freighter modification ~~costs and next generation navigation modifications; $20.5~~costs; $21.0 million for required heavy maintenance; and ~~$28.5~~$8.5 million for other equipment, including purchases of aircraft engines and rotables.

During the first quarter of 2018 we contributed an additional $2.5 million 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 $0.6 million to complete our acquisition of Pemco World Air Services, Inc.

Net cash provided by financing activities was ~~$61.9~~$10.7 million for the first ~~nine~~three months of ~~2017~~2018 compared to ~~$68.0~~$46.8 million in ~~2016.~~2017. During the first ~~nine~~three months of ~~2017,~~2018, we drew ~~$90.0~~$30.0 million from the revolving credit facility under the Senior Credit Agreement to fund capital ~~spending.~~spending for aircraft acquisition and modifications. We made debt principal payments of ~~$250.1 million during 2017. Our borrowing activities were necessary to acquire and modify aircraft for deployment into air cargo markets.~~

In September 2017, we received proceeds of $258.8 million from the issuance of convertible notes. In conjunction with the issuance of convertible notes, we received $38.5 million for the issuance of stock warrants and paid $56.1 million for related convertible note hedges. We paid issuance costs of $6.5 million for these transactions. The net proceeds from these transactions were $234.7 million, of which $205.0 million was used to pay down the balance of our revolving credit facility, thereby increasing the amount available for future draws under that facility. The convertible notes bear interest at a rate of 1.125% and mature on October 15, 2024, unless repurchased or converted in accordance

with their terms prior to such date. The convertible notes are unsecured indebtedness, subordinated to the Company's existing and future secured indebtedness and other liabilities, including trade payables. The convertible notes and the related transactions are described further in Note F of the accompanying condensed consolidated financial statements.$17.4 million.

During the first ~~nine months~~quarter of ~~2017,~~2018, we ~~spent $11.2 million to buy 530,637~~repurchased 157,000 shares of the Company's common stock pursuant to aan authorized share repurchase plan ~~authorized~~for $3.6 million, of which $0.6 million was paid in ~~2014~~the first quarter and ~~amended~~$3.0 million was paid in ~~May 2016~~April 2018. The repurchase plan was amended by the Board ~~of Directors~~again in February 2018 to increase the authorized share repurchase plan to up to ~~$100 million of the Company's common stock.~~$150 million.

Commitments

We estimate that capital expenditures for ~~2017~~2018 will total ~~$335~~$300 million of which ~~$265 million~~the majority will be related to aircraft purchases and freighter modifications. Actual capital spending for any future period will be impacted by aircraft acquisitions, maintenance and modification processes. We expect to finance the capital expenditures from current cash balances, future operating cash flow and the Senior Credit ~~Agreement.~~Agreement, the latter of which we anticipate amending for the purpose of obtaining additional borrowing. 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.

~~In September 2015,~~Since August 3, 2017, the Company ~~entered into~~has been part of a ~~joint venture agreement~~joint-venture with Precision Aircraft Solutions, LLC, to ~~establish an express cargo airline serving multiple destinations within~~develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. We anticipate approval of a supplemental type certificate from the ~~People's Republic of China (including Hong Kong, Macau and Taiwan) and surrounding countries, pending governmental approvals. The Company's~~FAA in 2019. We expect to make contributions equal to the ~~joint venture have been minimal~~Company's 49% ownership percentage of the program's total costs during 2018 and are expected to remain so over the next several months. Obtaining required governmental approvals for any new airline has since been delayed and as a result, the Company is evaluating alternatives. The Company is seeking to develop other aircraft investments in China by leveraging the relationship developed by Pemco, which provides modified Boeing 737 freighter aircraft in China.2019.

Liquidity

The Company has a Senior Credit Agreement with a consortium of banks that includes an unsubordinated term loan of ~~$74.3~~$66.9 million, net of debt issuance costs, and a revolving credit facility from which the Company ~~had~~has drawn ~~$220.0~~$265.0 million, net of repayments, as of ~~September 30, 2017.~~March 31, 2018. The revolving credit facility has a capacity of $545.0 million, permitted additional indebtedness of $300.0 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 million subject to the lenders' consent. The Senior Credit Agreement is collateralized by the Company's fleet of Boeing 767 and 757 ~~aircraft that are not collateralized under aircraft loans.~~freighter aircraft. Under the ~~amended~~ terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 125% of the outstanding balances of the term loan and the maximum capacity of ~~the~~ 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. Each year, through May 6, 2019, the Company may request a one year extension of the final maturity date, subject to the lenders' consent. Absent such future extensions, the maturity date is currently set to expire on May 30, 2022.

Under the Senior Credit Agreement, the Company is subject to covenants and warranties that are usual and customary including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt to EBITDA 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). At the Company's current debt-to-EBITDA ratio, the unsubordinated term loan and the revolving credit facility both bear a variable interest rate of ~~3.24%~~3.38%.

At ~~September 30, 2017,~~March 31, 2018, the Company had ~~$53.9~~$47.5 million of cash balances. The Company had ~~$315.7~~$270.7 million available under the revolving credit facility, net of outstanding letters of credit, which totaled $9.3 million. We believe that the Company's current cash balances and forecasted cash flows provided from its operating agreements, combined

with its Senior Credit Agreement, will be sufficient to fund operations, capital spending, scheduled debt payments and required pension funding for at least the next 12 months.

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,~~March 31, 2018 and 2017, ~~and 2016,~~ 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 its 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.

~~Changes~~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 ~~2016~~2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March ~~8, 2017.~~1, 2018.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of ~~September 30, 2017~~March 31, 2018, 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

There were no changes in internal control over financial reporting during the most recently completed fiscal quarter 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

~~The Company is~~We are currently a party to legal proceedings ~~including FAA enforcement actions,~~ 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, we believe that the ~~Company believes that its~~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 ~~2016~~2017 Annual Report on form 10-K, filed with the Securities and Exchange Commission on March ~~8, 2017.~~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 ~~2016~~2017 Annual Report on Form 10-K. Other risks that are currently unknown to management or are currently considered immaterial or unlikely, could also adversely affect the Company.

On August 3, 2017 we entered into a joint-venture agreement 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 by the FAA in 2019. We expect to make contributions equal to our 49% ownership percentage of the program's total costs over the next two years and account for the investment in the joint venture under the equity method of accounting. While the joint venture is developing the conversion program, the Company's results will reflect non operating losses for our 49% share of the joint venture's development costs. The development costs may be larger than we expect and approval may take longer than anticipated. The benefits of our investment may be less than projected.

The convertible note hedge transactions and the warrant transactions that we entered into in September 2017 may affect the value of our common stock. In connection with the pricing of our 1.125% senior convertible notes due 2024 (the "Notes") and the exercise by the initial purchasers of their option to purchase additional Notes, we entered into privately-negotiated convertible note hedge transactions with the hedge counterparties. The convertible note hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the Notes. We also entered into separate, privately-negotiated warrant transactions with the hedge counterparties relating to the same number of shares of our common stock that initially underlie the Notes, subject to customary anti-dilution adjustments.

The hedge counterparties and/or their affiliates may modify their hedge positions with respect to the convertible note hedge transactions and the warrant transactions from time to time after the pricing of the Notes. They may do so by purchasing and/or selling shares of our common stock and/or other securities of ours, including the Notes in privately-negotiated transactions and/or open-market transactions or by entering into and/or unwinding various over-the-counter derivative transactions with respect to our common stock. The hedge counterparties are likely to modify their hedge positions during any observation period for the Notes.

The effect, if any, of these activities on the market price of our common stock will depend on a variety of factors, including market conditions, and cannot be determined at this time. Any of these activities could, however, adversely affect the market price of our common stock. In addition, the hedge counterparties and/or their affiliates may choose to engage in, or to discontinue engaging in, any of these transactions with or without notice at any time, and their decisions will be at their sole discretion and not within our control.

We are subject to counterparty risk with respect to the convertible note hedge transactions. The hedge counterparties are financial institutions, and we will be subject to the risk that they might default under the convertible note hedge transactions. Our exposure to the credit risk of the hedge counterparties is unsecured by any collateral. Global economic conditions have from time to time resulted in failure or financial difficulties for many financial institutions. If a hedge counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with that hedge counterparty. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market

price and volatility of our common stock. In addition, upon a default by a hedge counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of any hedge counterparty.

Conversion of the Notes or exercise of the warrants may dilute the ownership interest of stockholders. Any sales in the public market of the common stock issuable upon such conversion of the Notes or such exercise of the warrants could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could depress the price of our common stock.

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 amended the common stock repurchase program to increase the amount that management may repurchase to $150 million (less amounts previously repurchased). The Board's authorization does not require the Company to repurchase a specific number of shares 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. All of the repurchases done by the Company during the first quarter of 2018 were in the open market. There is no expiration date for the repurchase program. ~~There were no~~The following table summarizes the Company's repurchases ~~made~~of its common stock during the ~~third~~first quarter of ~~2017. As of September 30, 2017, the Company has repurchased 6,435,349 shares and has a maximum dollar value of shares that may yet be purchased under the program of $14.9 million.~~2018:



Period	Total Number of Shares Purchased	Average Price paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program
January 1, 2018 through January 31, 2018	—	$	—	—	$	64,901,207
February 1, 2018 through February 28, 2018	—	$	—	—	$	64,901,207
March 1, 2018 through March 31, 2018	157,000	$	22.80	157,000	$	61,321,436
Total for the quarter	157,000	$	22.80	157,000	$	61,321,436

ITEM 5. OTHER INFORMATION



~~(a)~~	~~Severance Pay Plan for Senior Management~~

On November 3, 2017, the Board of Directors of the Company (the “Board”) adopted the Air Transport Services Group, Inc. Severance Pay Plan for Senior Management (the “Severance Plan”), which Severance Plan will cover certain designated key employees of the Company and its subsidiaries, including Messrs. Hete, Corrado, Payne and Turner, each a named executive officer of the Company.

~~The Severance Plan sets forth the terms and conditions of severance benefits to be provided to a covered employee in the event the covered employee experiences a covered termination.~~

~~Eligibility~~

The Board’s Compensation Committee will designate those key employees of the Company who are eligible for the Severance Plan pursuant to a participation agreement and will include in such participation agreement whether the level of participation of such employee is as a Tier I Participant, Tier II Participant, Tier III Participant or Tier IV Participant.

~~Severance on Account of Employment Termination~~

Under the terms of the Severance Plan, if a covered employee (i) is terminated by the Company for any reason other than for “Cause” (as defined in the Plan), death or disability, or (ii) in the case of Tier I and Tier II Participants only, resigns on account of “Good Reason” (as defined in the Plan), the covered employee will receive the following severance benefits:



-		~~A continuation of annual base salary for the covered employee’s Severance Period (as defined below);~~



-		Pro rata annual incentive bonus for the fiscal year in which the covered employee’s employment termination occurs, which bonus will be paid at the same time that bonuses are paid under the applicable plan or policy; and

None.



-		For the shorter of (a) the Severance Period and (b) 18 months following the covered employee’s termination date, a continuation of eligibility to participate in the Company’s medical, dental, vision and prescription drug plans in which the covered employee was participating (including the covered employee’s spouse and eligible dependents); provided that to receive such coverage, the covered employee must pay the amount that the covered employee would have been required to pay if such covered employee were employed by the Company at such time.

The severance benefits will be discontinued if it is determined that the covered employee has engaged in actions that constitute Cause or has breached the terms of the release, restrictive covenants or any other agreement relating to the covered employee’s employment with the Company or termination thereof. The Severance Period for Tier I Participants is 24 months, for Tier II Participants is 18 months, for Tier III Participants is 12 months, and for Tier IV Participants is six months.

~~Release~~

The receipt of severance benefits is conditioned upon the execution and non-revocation of a release of claims. The severance benefits will be discontinued if a covered employee breaches any term of the release.

~~Effect of a Change in Control Agreement or Employment Agreement~~

If a covered employee is also a party to a change in control agreement and there occurs a change in control that results in such covered employee being entitled to receive severance benefits thereunder, then the Severance Plan will cease to be applicable to such covered employee, with all payments and benefits to such covered employee arising out of any termination of the employment of such covered employee to be determined and paid in accordance with the terms of such change in control agreement. Similarly, if a covered employee is also a party to an employment agreement with the Company that provides for severance payments and benefits following termination of employment under the same or similar circumstances as are set forth in the Severance Plan, then the Severance Plan will not be applicable to such covered employee so long as such employment agreement is in effect.

~~Restrictive Covenants~~

As a condition for a covered employee to be eligible to participate in the Severance Plan, and to receive severance benefits under the Severance Plan, a covered employee must agree to comply with the restrictive covenants set forth in the Severance Plan, which restrictive covenants include (a) a confidential information disclosure restriction during the term of the covered employment and thereafter, (b) a non-competition restriction during the term of the covered employee’s employment and for the Restriction Period (as defined below) after such termination of employment and (c) a non-solicitation restriction applicable to the solicitation of actual or prospective customers and employees and contractors of the Company during the term of the covered employee’s employment and for the Restriction Period after such termination of employment. The Restriction Period for Tier I Participants is 24 months, for Tier II Participants is 18 months, for Tier III Participants is 12 months and for Tier IV Participants is six months. The severance benefits will be discontinued if a covered employee breaches any terms of the restrictive covenants.

~~Amendment and Termination~~

The Board or the Compensation Committee may amend, suspend or terminate the Severance Plan at any time; provided that (i) no amendment, suspension or termination may materially adversely affect a covered employee’s entitlements under the Severance Plan without the prior written consent of such adversely affected covered employee and (ii) no such amendment, suspension or termination will give the Company the right to recover any amount paid to a covered employee prior to the date of such amendment, suspension or termination or to cause the cessation and termination of payments of severance benefits to any person under the Severance Plan receiving severance benefits.

~~Terms for Initially Designated Covered Employees~~

In connection with the adoption of the Severance Plan, Mr. Hete was designated as being eligible to participate in the Severance Plan as a Tier I Participant and Messrs. Corrado, Payne and Turner were designated as being eligible to participate in the Severance Plan as Tier II Participants.

~~The foregoing description of the Severance Plan is qualified in its entirety by the provisions of the Severance Plan, a copy of which is filed herewith as Exhibit 10.21.~~

ITEM 6. EXHIBITS

The following exhibits are filed with or incorporated by reference into this report.



Exhibit No.	Description of Exhibit

~~Instruments defining the rights~~Articles of ~~security holders~~

~~4.1~~	~~Indenture, dated September 29, 2017, by and between Air Transport Services Group, Inc. and U.S. Bank National Association. (4)~~

~~4.2~~	~~Form of 1.125% Convertible Senior Note due 2024 (included in Exhibit 4.1). (4)~~

~~Material Contracts~~

~~10.1~~	First Amendment to the Amended and Restated Credit Agreement, dated as of March 31, 2017, among Cargo Aircraft Management, Inc., as Borrower, Air Transport Services Group, Inc., the Lenders from time to time party hereto, SunTrust Bank, as Administrative Agent, Regions Bank and JPMorgan Chase Bank, N.A., as Syndication Agents and Bank of America, N.A., as Documentation Agent. (1)

~~10.2~~	~~Underwriting Agreement, dated May 31, 2017, by and among Air Transport Services Group, Inc., Red Mountain Partners, L.P. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (2)~~

~~10.3~~	Second Amendment to the Amended and Restated Credit Agreement, entered into on September 25, 2017, by and among Air Transport Services Group, Inc., Cargo Aircraft Management, Inc., as borrower, the guarantors party thereto, the lenders party thereto and SunTrust Bank, as Administrative Agent. (3)

~~10.4~~	Purchase Agreement, dated September 25, 2017, by and among Air Transport Services Group, Inc. and Goldman Sachs & Co. LLC and SunTrust Robinson Humphrey, Inc., as representatives of the initial purchasers named therein. (4)

~~10.5~~	~~Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Goldman Sachs & Co. LLC. (4)~~

~~10.6~~	~~Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Bank of America, N.A. (4)~~

~~10.7~~	~~Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and JPMorgan Chase Bank, National Association, London Branch. (4)~~

~~10.8~~	~~Base Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Bank of Montreal. (4)~~

~~10.9~~	~~Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Goldman Sachs & Co. LLC. (4)~~

~~10.10~~	~~Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Bank of America, N.A. (4)~~

~~10.11~~	~~Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and JPMorgan Chase Bank, National Association, London Branch. (4)~~

~~10.12~~	~~Additional Convertible Bond Hedge Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Bank of Montreal. (4)~~

~~10.13~~	~~Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Goldman Sachs & Co. LLC. (4)~~

~~10.14~~	~~Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Bank of America, N.A. (4)~~

~~10.15~~	~~Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and JPMorgan Chase Bank, National Association, London Branch. (4)~~




~~10.16~~	~~Bank Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Bank of Montreal. (4)~~

~~10.17~~	~~Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Goldman Sachs & Co. LLC. (4)~~

~~10.18~~	~~Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Bank of America, N.A. (4)~~

~~10.19~~	~~Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and JPMorgan Chase Bank, National Association, London Branch. (4)~~

~~10.20~~	~~Additional Warrant Confirmation, dated September 25, 2017, between Air Transport Services Group, Inc., and Bank of Montreal. (4)~~

~~10.21~~	~~Air Transport Services Group, Inc. Severance Plan for Senior Management, filed herewith~~

~~10.22~~	~~Confirmation Agreement, dated August 23, 2017, between Mutual of America Life Insurance Company and ABX Air, Inc., relating to the ABX Air Retirement Income Plan, filed herewith.~~ Incorporation

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.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Labels Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

____________________


~~(1)~~	~~Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2017.~~


~~(2)~~	~~Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on June 2, 2017.~~


~~(3)~~	~~Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on September 25, 2017.~~


~~(4)~~	~~Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on September 29, 2017.~~

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this ~~Quarterly~~ report ~~on Form 10-Q~~ 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 9, 2017~~May 10, 2018

		/S/ QUINT O. TURNER
		Quint O. Turner
		Chief Financial Officer (Principal Financial Officer
Date:	~~November 9, 2017~~May 10, 2018	and Principal Accounting Officer)

4438



	CAM		All Other		Total
Carrying value as of December 31, 2016	$	34,395	$	2,738	$	37,133
Purchase price adjustment	—		146		146
Carrying value as of September 30, 2017	$	34,395	$	2,884	$	37,279