UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________

FORM 10-Q

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

For the quarterly period ended June 30, ~~2018~~2019

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

For the transition period from ________ to ________

Commission file number 000-50368

Air Transport Services Group, Inc.

(Exact name of registrant as specified in its charter)



Delaware		26-1631624
(State of Incorporation)		(I.R.S. Employer Identification No.)

~~145 Hunter Drive, Wilmington, OH~~		~~45177~~
~~(Address of Principal Executive Offices)~~		~~(Zip Code)~~

145 Hunter Drive, Wilmington, OH45177

~~937-382-5591~~(Address of principal executive offices)

937-382-5591

(Registrant’s telephone number, including area code)

________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~YES~~ x NO oYes ☒No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). ~~YES~~ x NO oYes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting ~~company,”~~company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



~~Large accelerated filer~~ x		~~Accelerated filer~~ o
~~Non-accelerated~~Large Accelerated Filer	☒	Accelerated filero ~~(Do not check if a smaller reporting company)~~	☐	Smaller reporting companyo	☐
Non-accelerated filer	☐	Emerging growth companyo	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section ~~7(a)(2)(B)~~13(a) of the ~~Securities~~Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ~~YES~~ o NO xYes ☐No ☒

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	ATSG	NASDAQ Stock Market LLC

As of August ~~8, 2018, 59,080,387~~6, 2019, 59,362,770 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~~Balance Sheets	4
	Unaudited Condensed Consolidated Statements of ~~Comprehensive Income~~Operations	5
	Unaudited Condensed Consolidated ~~Balance Sheets~~Statements of Comprehensive Income	6
	Unaudited Condensed Consolidated Statements of ~~Cash Flows~~Stockholders' Equity	7
	Unaudited Condensed Consolidated Statements of Cash Flows	9
	Notes to Unaudited Condensed Consolidated Financial Statements	810
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2730
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3842
Item 4.	Controls and Procedures	3842

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3843
Item 1A.	Risk Factors	3943
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3943
Item 5.	Other Information	3943
Item 6.	Exhibits	3944
SIGNATURES		4045

FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION

The financial information, including the financial statements, included in the Quarterly Report on Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the Securities and Exchange Commission on March 1, ~~2018.~~2019.

The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements and other information regarding Air Transport Services Group, Inc. at www.sec.gov. Additionally, our filings with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, are available free of charge from our website at www.atsginc.com as soon as reasonably practicable after filing with the SEC.

FORWARD LOOKING STATEMENTS

Statements contained in this Quarterly report on Form 10-Q that are not historical facts are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). Words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms and expressions are intended to identify forward-looking statements. These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described in this report and in our ~~2017~~2018 Annual Report filed on Form 10-K with the Securities and Exchange Commission.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



	June 30,			December 31,
	2019			2018
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and restricted cash	$	54,784		$	59,322
Accounts receivable, net of allowance of $2,716 in 2019 and $1,444 in 2018	128,514			147,755
Inventory	36,477			33,536
Prepaid supplies and other	19,092			18,608
TOTAL CURRENT ASSETS	238,867			259,221
Property and equipment, net	1,650,612			1,555,005
Lease incentive	155,605			63,780
Goodwill and acquired intangibles	533,371			535,359
Operating lease assets	57,576			—
Other assets	67,285			57,220
TOTAL ASSETS	$	2,703,316		$	2,470,585
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	122,092		$	109,843
Accrued salaries, wages and benefits	49,068			50,932
Accrued expenses	14,212			19,623
Current portion of debt obligations	39,236			29,654
Current portion of lease obligations	15,770			—
Unearned revenue	18,637			19,082
TOTAL CURRENT LIABILITIES	259,015			229,134
Long term debt	1,402,782			1,371,598
Stock warrant obligations	401,441			203,782
Post-retirement obligations	59,738			64,485
Long term lease obligations	40,573			—
Other liabilities	50,882			51,905
Deferred income taxes	118,076			113,243
TOTAL LIABILITIES	2,332,507			2,034,147
Commitments and contingencies (Note H)
STOCKHOLDERS’ EQUITY:
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock	—			—
Common stock, par value $0.01 per share; 150,000,000 shares authorized; 59,363,839 and 59,134,173 shares issued and outstanding in 2019 and 2018, respectively	594			591
Additional paid-in capital	473,053			471,158
Accumulated earnings (deficit)	(19,243		)	56,051
Accumulated other comprehensive loss	(83,595		)	(91,362		)
TOTAL STOCKHOLDERS’ EQUITY	370,809			436,438
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,703,316		$	2,470,585

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
REVENUES	$	203,607		$	253,211		$	406,647		$	491,128		$	334,576		$	203,607		$	682,759		$	406,647
OPERATING EXPENSES
Salaries, wages and benefits	74,049			65,833			144,832			138,319			97,850			74,049			197,191			144,832
Depreciation and amortization	41,620			37,781			81,624			74,223			63,266			41,620			125,903			81,624
Maintenance, materials and repairs	36,817			37,588			73,683			67,870			39,651			36,817			84,389			73,683
Fuel	5,913			32,258			11,701			67,099			33,984			5,913			68,734			11,701
Contracted ground and aviation services	2,444			32,151			4,828			52,838			14,531			2,444			30,129			4,828
Travel	7,288			6,820			13,920			14,186			20,937			7,288			41,035			13,920
Landing and ramp	1,311			4,357			2,459			9,656			2,391			1,311			5,439			2,459
Rent	3,760			3,753			6,990			7,039			3,984			3,760			7,737			6,990
Insurance	1,420			955			2,777			2,217			1,857			1,420			3,768			2,777
Transaction fees													—			—			373			—
Other operating expenses	5,087			8,590			12,292			16,626			18,643			5,087			34,051			12,292
	179,709			230,086			355,106			450,073			297,094			179,709			598,749			355,106
OPERATING INCOME	23,898			23,125			51,541			41,055			37,482			23,898			84,010			51,541
OTHER INCOME (EXPENSE)
Interest income	54			16			77			48			81			54			177			77
Non-service component of retiree benefit costs	2,045			(177		)	4,090			(354		)
Non-service component of retiree benefit (costs) credits													(2,351		)	2,045			(4,702		)	4,090
Net gain (loss) on financial instruments	11,697			(67,649		)	10,812			(65,780		)	(35,886		)	11,697			(31,386		)	10,812
Loss from non-consolidated affiliate	(2,417		)	—			(4,953		)	—
Loss from non-consolidated affiliates													(5,998		)	(2,417		)	(9,814		)	(4,953		)
Interest expense	(5,366		)	(3,759		)	(10,728		)	(7,307		)	(16,804		)	(5,366		)	(34,194		)	(10,728		)
	6,013			(71,569		)	(702		)	(73,393		)	(60,958		)	6,013			(79,919		)	(702		)

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	29,911			(48,444		)	50,839			(32,338		)	(23,476		)	29,911			4,091			50,839
INCOME TAX EXPENSE	(5,447		)	(5,474		)	(10,693		)	(11,784		)	(3,156		)	(5,447		)	(8,089		)	(10,693		)
EARNINGS (LOSS) FROM CONTINUING OPERATIONS	24,464			(53,918		)	40,146			(44,122		)	(26,632		)	24,464			(3,998		)	40,146
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES	170			192			366			384			31			170			62			366
NET EARNINGS (LOSS)	$	24,634		$	(53,726	)	$	40,512		$	(43,738	)	$	(26,601	)	$	24,634		$	(3,936	)	$	40,512

BASIC EARNINGS (LOSS) PER SHARE
BASIC EARNINGS PER SHARE
Continuing operations	$	0.42		$	(0.91	)	$	0.68		$	(0.75	)	$	(0.45	)	$	0.42		$	(0.07	)	$	0.68
Discontinued operations	—			—			0.01			0.01			—			—			—			0.01
TOTAL BASIC EARNINGS (LOSS) PER SHARE	$	0.42		$	(0.91	)	$	0.69		$	(0.74	)	$	(0.45	)	$	0.42		$	(0.07	)	$	0.69

DILUTED EARNINGS (LOSS) PER SHARE
DILUTED EARNINGS PER SHARE													��
Continuing operations	$	0.21		$	(0.91	)	$	0.48		$	(0.75	)	$	(0.45	)	$	0.21		$	(0.07	)	$	0.48
Discontinued operations	—			—			—			0.01			—			—			—			—
TOTAL DILUTED EARNINGS (LOSS) PER SHARE	$	0.21		$	(0.91	)	$	0.48		$	(0.74	)	$	(0.45	)	$	0.21		$	(0.07	)	$	0.48

WEIGHTED AVERAGE SHARES
Basic	58,739			59,035			58,790			59,084			58,909			58,739			58,874			58,790
Diluted	68,363			59,035			68,784			59,084			58,909			68,363			58,874			68,784

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						Six Months Ended						Three Months Ended						Six Months Ended
	June 30						June 30						June 30,						June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
NET EARNINGS (LOSS)	$	24,634		$	(53,726	)	$	40,512		$	(43,738	)
NET EARNINGS													$	(26,601	)	$	24,634		$	(3,936	)	$	40,512
OTHER COMPREHENSIVE INCOME (LOSS):
Defined Benefit Pension	687			1,235			1,374			2,469			3,273			687			6,224			1,374
Defined Benefit Post-Retirement	42			37			84			74			36			42			69			84
Foreign Currency Translation	(123		)	99			(139		)	136			1,479			(123		)	1,474			(139		)

TOTAL COMPREHENSIVE INCOME (LOSS), net of tax	$	25,240		$	(52,355	)	$	41,831		$	(41,059	)
TOTAL COMPREHENSIVE INCOME, net of tax													$	(21,813	)	$	25,240		$	3,831		$	41,831

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. ~~AND SUBSIDIARIES~~

UNAUDITED CONDENSED CONSOLIDATED ~~BALANCE SHEETS~~STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

June 30, December 31,
2018 2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,704
$ 32,699
Accounts receivable, net of allowance of $1,130 in 2018 and $2,445 in 2017 100,805
109,114
Inventory 24,147
22,169
Prepaid supplies and other 13,017
20,521
TOTAL CURRENT ASSETS 169,673
184,503
Property and equipment, net 1,200,997
1,159,962
Lease incentive 72,232
80,684
Goodwill and acquired intangibles 43,999
44,577
Convertible note hedges —
53,683
Other assets 30,573
25,435
TOTAL ASSETS $ 1,517,474
$ 1,548,844
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 85,691
$ 99,728
Accrued salaries, wages and benefits 34,189
40,127
Accrued expenses 10,833
10,455
Current portion of debt obligations 14,860
18,512
Unearned revenue 15,022
15,850
TOTAL CURRENT LIABILITIES 160,595
184,672
Long term debt 505,853
497,246
Convertible note obligations —
54,359
Stock warrant obligations 203,426
211,136
Post-retirement obligations 53,032
61,355
Other liabilities 45,417
45,353
Deferred income taxes 113,571
99,444
TOTAL LIABILITIES 1,081,894
1,153,565
Commitments and contingencies (Note H)

STOCKHOLDERS’ EQUITY:
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock —
—
Common stock, par value $0.01 per share; 110,000,000 shares authorized; 59,080,387 and 59,057,195 shares issued and outstanding in 2018 and 2017, respectively 591
591
Additional paid-in capital 469,412
471,456
Retained earnings (accumulated deficit) 27,278
(13,748 )
Accumulated other comprehensive loss (61,701 ) (63,020 )
TOTAL STOCKHOLDERS’ EQUITY 435,580
395,279
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,517,474
$ 1,548,844



	Common Stock					Additional Paid-in Capital			Accumulated Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
	Number		Amount			Additional Paid-in Capital			Accumulated Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
BALANCE AT MARCH 31, 2018	59,080,512		$	591		$	467,570		$	2,644		$	(62,307	)	$	408,498
Stock-based compensation plans
Issuance of common shares, net of withholdings	1,175		—			(12		)							(12		)
Forfeited restricted stock	(1,300	)	—			—									—
Reclassification of bond hedge, net of taxes						(50,435		)							(50,435		)
Reclassification of note conversion obligation, net of taxes						50,999									50,999
Amortization of stock awards and restricted stock						1,290									1,290
Total comprehensive income									24,634			606			25,240
BALANCE AT JUNE 30, 2018	59,080,387		$	591		$	469,412		$	27,278		$	(61,701	)	$	435,580

BALANCE AT JANUARY 1, 2018	59,057,195		$	591		$	471,456		$	(13,748	)	$	(63,020	)	$	395,279
Stock-based compensation plans
Grant of restricted stock	101,400		1			(1		)							—
Issuance of common shares, net of withholdings	80,092		1			(1,333		)							(1,332		)
Forfeited restricted stock	(1,300	)	—			—									—
Purchase of common stock	(157,000	)	(2		)	(3,578		)							(3,580		)
Reclassification of bond hedge, net of taxes						(50,435		)							(50,435		)
Reclassification of note conversion obligation, net of taxes						50,999									50,999
Cumulative effect in change in accounting principle									514						514
Amortization of stock awards and restricted stock						2,304									2,304
Total comprehensive income									40,512			1,319			41,831
BALANCE AT JUNE 30, 2018	59,080,387		$	591		$	469,412		$	27,278		$	(61,701	)	$	435,580

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, cont.

(In thousands, except share data)



	Common Stock				Additional Paid-in Capital			Accumulated Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
	Number		Amount		Additional Paid-in Capital			Accumulated Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
BALANCE AT MARCH 31, 2019	59,351,326		$	594	$	471,245		$	7,358		$	(88,383	)	$	390,814
Stock-based compensation plans
Grant of restricted stock	18,600		—		—									—
Issuance of common shares, net of withholdings	(4,787	)	—		(112		)							(112		)
Forfeited restricted stock	(1,300	)	—		—									—
Amortization of stock awards and restricted stock					1,920									1,920
Total comprehensive income (loss)								(26,601		)	4,788			(21,813		)
BALANCE AT JUNE 30, 2019	59,363,839		$	594	$	473,053		$	(19,243	)	$	(83,595	)	$	370,809

BALANCE AT JANUARY 1, 2019	59,134,173		$	591	$	471,158		$	56,051		$	(91,362	)	$	436,438
Stock-based compensation plans
Grant of restricted stock	143,800		2		(2		)							—
Issuance of common shares, net of withholdings	87,166		1		(1,497		)							(1,496		)
Forfeited restricted stock	(1,300	)	—		—									—
Cumulative effect in change in accounting principle								(71,358		)				(71,358		)
Amortization of stock awards and restricted stock					3,394									3,394
Total comprehensive income								(3,936		)	7,767			3,831
BALANCE AT JUNE 30, 2019	59,363,839		$	594	$	473,053		$	(19,243	)	$	(83,595	)	$	370,809

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Six Months Ended						Six Months Ended
	June 30						June 30,
	2018			2017			2019			2018
OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations	$	40,146		$	(44,122	)	$	(3,998	)	$	40,146
Net earnings from discontinued operations	366			384			62			366
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	94,270			80,097			139,516			94,270
Pension and post-retirement	1,884			3,990			7,850			1,884
Deferred income taxes	10,475			11,454			8,021			10,475
Amortization of stock-based compensation	2,304			1,710			3,394			2,304
Loss from non-consolidated affiliates							9,814			4,953
Net (gain) loss on financial instruments	(10,812		)	65,780			31,386			(10,812		)
Changes in assets and liabilities:
Accounts receivable	11,006			1,905			21,235			11,006
Inventory and prepaid supplies	3,433			(1,822		)	(4,242		)	3,433
Accounts payable	(2,067		)	14,244			(3,899		)	(2,067		)
Unearned revenue	(1,504		)	1,807			896			(1,504		)
Accrued expenses, salaries, wages, benefits and other liabilities	(3,406		)	(6,793		)	1,874			(3,406		)
Pension and post-retirement assets	(8,323		)	(5,847		)	(4,747		)	(8,323		)
Other	4,211			1,991			2,281			(742		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	141,983			124,778			209,443			141,983
INVESTING ACTIVITIES:
Capital expenditures	(150,816		)	(144,325		)
Expenditures for property and equipment							(216,769		)	(150,816		)
Proceeds from property and equipment	17,452			—			78			17,452
Acquisitions and investments in businesses	(5,150		)	(646		)
Redemption of long term deposits	—			9,975
Acquisitions and investments in businesses, net of cash acquired							(18,429		)	(5,150		)
NET CASH (USED IN) INVESTING ACTIVITIES	(138,514		)	(134,996		)	(235,120		)	(138,514		)
FINANCING ACTIVITIES:
Principal payments on long term obligations	(29,140		)	(20,500		)	(15,938		)	(29,140		)
Other financing payments							(346		)	—
Proceeds from borrowings	30,000			90,000			40,000			30,000
Payments for financing costs	(414		)	—			(1,081		)	(414		)
Purchase of common stock	(3,581		)	(11,184		)	—			(3,581		)
Withholding taxes paid for conversion of employee stock awards	(1,329		)	(1,436		)	(1,496		)	(1,329		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	(4,464		)	56,880
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES							21,139			(4,464		)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(995		)	46,662
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	32,699			16,358
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	31,704		$	63,020
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
INCREASE (DECREASE)							(4,538		)	(995		)
BEGINNING OF YEAR							59,322			32,699
END OF PERIOD							$	54,784		$	31,704

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amount capitalized	$	6,450		$	7,101		$	30,338		$	6,450
Federal alternative minimum and state income taxes paid	$	806		$	1,220
Income taxes paid							$	533		$	806
SUPPLEMENTAL NON-CASH INFORMATION:
Accrued capital expenditures	$	18,755		$	12,615
Accrued expenditures for property and equipment							$	26,601		$	18,755

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Nature of Operations

Air Transport Services Group, Inc. is a holding company whose subsidiaries ~~primarily operate within the airfreight and logistics industry. The Company leases~~lease aircraft, ~~and provides~~provide contracted airline operations, ground services, aircraft modification and maintenance services and other support ~~services.~~services mainly to the air transportation and package delivery industries. The Company's subsidiaries offer a range of complementary services to delivery companies, freight forwarders, airlines and government customers.

The Company's leasing subsidiary, Cargo Aircraft Management, Inc. (“CAM”), leases aircraft to each of the Company's airlines as well as to non-affiliated airlines and other lessees. The airlines, ABX Air, Inc. (“ABX”) ~~and~~, Air Transport International, Inc. (“ATI”), Omni Air International LLC ("OAI" ) each have the authority, through their separate U.S. Department of Transportation ("DOT") and Federal Aviation Administration ("FAA") certificates, to transport cargo worldwide. The ~~Company's airlines provide~~Company provides air transportation services to a concentrated base of customers. The Company provides a combination of aircraft, crews, maintenance and insurance services for a customer's transportation network through customer "CMI" and "ACMI" agreements and through charter contracts in which ~~aviation~~aircraft fuel is also included. ~~ATI provides passenger transportation, primarily~~In addition to ~~the U.S. Military, using "combi"~~its aircraft ~~which are certified to carry passengers as well as cargo on the main deck. Through its subsidiary Airborne Maintenance~~leasing and ~~Engineering Services, Inc. ("AMES"),~~airline services the Company sells aircraft parts, provides aircraft maintenance and modification ~~services. In addition, the Company provides ground~~services, equipment maintenance services and ~~operates mail~~arranges load transfer and package sorting ~~facilities.~~services for customers.

Basis of Presentation

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and such principles are applied on a basis consistent with the financial statements reflected in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the air cargo industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year or any interim period. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. The accounting estimates reflect the best judgment of management, but actual results could differ materially from those estimates.

The accompanying condensed consolidated financial statements include the accounts of Air Transport Services Group, Inc. and its wholly-owned subsidiaries. Investments in affiliates in which the Company has significant influence but does not exercise control are accounted for using the equity method of accounting. ~~Using~~Under the equity method, the Company’s share of the nonconsolidated ~~affiliates'~~affiliate's income or loss is recognized in the consolidated statement of earnings and cumulative post-acquisition changes in the investment are adjusted against the carrying amount of the investment. Inter-company balances and transactions are eliminated.

On November 9, 2018, the Company acquired OAI, a passenger airline, along with related entities Advanced Flight Services, LLC; Omni Aviation Leasing, LLC; and T7 Aviation Leasing, LLC (referred to collectively herein as "Omni"). OAI is a leading provider of contracted passenger airlift for the U.S. Department of Defense ("DoD") via the Civil Reserve Air Fleet ("CRAF") program, and a provider of full-service passenger charter and ACMI services. OAI carries passengers worldwide for a variety of private sector customers and other government services agencies. Revenues and operating expenses include the activities of Omni for periods since their acquisition by the Company on November 9, 2018.

On February 1, 2019, the Company acquired TriFactor Solutions, LLC along with a group of companies that had been under under common control (referred to as "Trifactor"). Trifactor resells material handling equipment and provides engineering design solutions for warehousing, retail distribution and e-commerce operations. Revenues and operating expenses include the activities of TriFactor for periods since its acquisition by the Company. The acquisition of TriFactor did not have a significant impact on the Company's financial statements or results of operations.

Accounting Standards Updates

Effective January 1, 2018 the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("Topic 606”) which superseded previous revenue recognition guidance. Topic 606 is a comprehensive ~~new~~ revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The Company's lease revenues within the scope of ~~ASC~~Accounting Standards Codification 840, Leases, ("Topic 840") are specifically excluded from Topic 606.

~~The Company adopted the standard using a modified retrospective approach, under which financial statements are prepared under the revised guidance for the year of adoption, but not for prior years.~~ Under this method, entities recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for open contract performance at that time. The Company's adoption efforts included the identification of revenue within the scope of the standard, the evaluation of customer contracts in conjunction with new guidance and an assessment of the qualitative and quantitative impacts of the new standard on its financial statements. The evaluation included the application of each of the five steps identified in the Topic 606 revenue recognition model.

The Company determined that under Topic 606, it is an agent for aviation fuel and certain other costs reimbursed by customers under its ACMI and CMI contracts and for certain cargo handling services that it arranges for a customer. Under the new revenue standard, such reimbursed amounts are reported net of the corresponding expenses beginning in 2018. This application of Topic 606 did not have a material impact on the Company's reported earnings in any period. Additionally under Topic 606, the Company is required to record revenue over time, instead of at the time of completion, for certain customer contracts for airframe and modification services that do not have an alternative use and for which the Company has an enforceable right to payment during the service cycle. The Company adopted the provisions of this new standard using the modified retrospective method which requires the Company to record a one time adjustment to retained deficit for the cumulative effect that the standard has on open contracts at the time of adoption. Upon adoption of the new standard the Company accelerated $3.6 million of revenue resulting in an immaterial adjustment to its January 1, 2018 retained deficit for open airframe and modification services contracts.

In January 2017, the FASB issued ASU "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" (“ASU 2017-04”). This new standard eliminates Step 2 from the goodwill impairment test and requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for any annual or interim goodwill impairment tests in the fiscal years beginning after December 15, 2019 and must be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates afterEffective January 1, ~~2017.~~2019 the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update No. 2016-02, “Leases (Topic 842)” which superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease model that requires a company to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The Company adopted ~~this new accounting guidance in January~~the standard using the modified retrospective approach that does not require the restatement of ~~2018.~~prior year financial statements. The adoption of Topic 842 did not have ana material impact on the Company’s consolidated income statement or consolidated cash flow statement. The adoption of Topic 842 resulted in the recognition of ROU assets and corresponding lease liabilities as of January 1, 2019 in the amount of $52.6 million for leases classified as operating leases. Topic 842 also applies to the Company's aircraft lease revenues, however, the adoption of Topic 842 did not have a significant impact on the Company's ~~financial position, results of operations, or cash flows.~~accounting for its customer lease agreements.

In March 2017, the FASB issued ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost "(ASU 2017-07"). ASU 2017-07 requires an employer to report the service cost component of retiree benefits in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. The Company adopted ~~ASU 2017-07 on January 1, 2018, retrospectively~~the package of practical expedients and transition provisions available for expired or existing contracts, which allowed the Company carryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees to ~~all periods presented. As a result, retiree benefit plan interest expense, investment returns, settlements~~treat the lease and ~~other non-service cost~~non-lease components of ~~retiree benefit expenses are excluded from~~leases as a single lease component. The Company also elected the ~~Company's operating income subtotal as reported in~~hindsight practical expedient to determine the Company's Consolidated Statement of Operations, but remain included in earnings before income taxes. Information about retiree benefit plans' interest expense, investment returns and other components of retiree benefit expenses can be found in Note I.

~~In February 2016,~~reasonably certain lease term for existing leases. Further, the ~~FASB issued ASU "Leases (Topic 842)" ("ASU 2016-02"), which will require~~Company elected the short-term lease exception policy, permitting it to exclude the recognition ~~of right to-use-assets and lease liabilities~~requirements for leases ~~previously classified as operating leases by lessees. The standard will take effect~~with terms of 12 months or less. See Note H for annual reporting periods beginning after December 15, 2018, including interim reporting periods. Early application will be permitted for all entities. In addition, the FASB has decided to require a lessee to apply a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements (the date of initial application). The modified retrospective approach would not require any transition accounting for leases that expired before the date of initial application. The Company is currently evaluating the impact of the standard on its financial statements and disclosures.

additional information about leases.

In February 2018, the FASB issued ASU No. 2018-02 “Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income" ("ASU 2018-02"). ASU 2018-02 amends ASC 220, Income Statement —- Reporting Comprehensive Income, to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. federal tax legislation known as the Tax Cuts and Jobs Act. ~~In addition, under the ASU 2018-02, a Company will be required to provide certain disclosures regarding stranded tax effects.~~ ASU 2018-02 is effective for years beginning after December 15, 2018, and interim periods within those fiscal years. ~~Early adoption is permitted.~~ The Company ~~is currently evaluating the impact of the standard on its financial statements and disclosures.~~elected to retain stranded tax effects in accumulated other comprehensive income.

In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-based Payment Accounting" ("ASU 2018-07"). ASU 2018-07 amends ASC 718, "Compensation - Stock Compensation" ("ASC 718"), ~~to simplify~~with the ~~accounting for share-based payments granted to non-employees for goods and services. ASU 2018-07 supersedes ASC 505-50, "Equity-Based Payments to Non-employees" ("ASC 505-50"). ASU 2018-07 aligns much~~intent of simplifying the accounting for share-based payments granted to non-employees for goods and services and aligning the accounting for share-based payments granted to non-employees with the accounting for share-based payments granted to employees. The Company adopted ASU 2018-07 on January 1, 2019 using the modified retrospective approach as required. ASU 2018-07 replaced ASC 505-50, "Equity-Based Payments to Non-employees" ("ASC 505-50") which was previously applied by the Company for warrants granted to Amazon.com, Inc.

("Amazon") as customer incentives. As a result of ASU 2018-07, the Company applied accounting guidance for financial instruments to the unvested warrants conditionally granted to Amazon in conjunction with an investment agreement reached with Amazon on December 22, 2018. Applying ASU 2018-07 as of January 1, 2019, through the modified retrospective approach, resulted in the recognition of $176.9 million for unvested warrant liabilities, $100.1 million for customer incentive assets and cumulative-effect adjustments of $71.4 million to reduce retained earnings for customer incentives that were not probable of being realized.

The adoption of ASU2018-07 on January 1, 2019 did not have an impact on the accounting for vested warrants.

NOTE B—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS

The Changes in the carrying amount of goodwill, by operating segment, are as follows:



	CAM		ACMI Services		All Other		Total
Carrying value as of December 31, 2018	$	153,290	$	234,571	$	2,884	$	390,745
Acquisition of TriFactor	—		—		5,229		5,229
Carrying value as of June 30, 2019	$	153,290	$	234,571	$	8,113	$	395,974

Changes in the carrying amount of acquired intangible assets are as follows (in thousands):



	Airline		Amortizing
	Certificates		Intangibles			Total
Carrying value as of December 31, 2018	$	9,000	$	135,614		$	144,614
Amortization	—		(5,717		)	(5,717		)
Right of use asset	—		(1,500		)	(1,500		)
Carrying value as of June 30, 2019	$	9,000	$	128,397		$	137,397

The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangibles assets, including customer relationship and STC intangibles, over 4 to 20 years.

The acquisition of Omni by the Company is ~~effective for years beginning after December 15, 2018,~~reported in accordance with Accounting Standards Codification 805, Business Combinations, in which the total purchase price is allocated to Omni’s tangible and interim periods within those fiscal years. Early adoption is permitted. Companies will apply the new guidance to equity-classified non-employee awards for which a measurement date has not been establishedintangible assets acquired and ~~liability-classified non-employee awards that have not been settled~~liabilities assumed based on their estimated fair values as of the date of ~~adoption by recognizing a cumulative-effect adjustment~~the acquisition. The excess of the purchase price over the estimated fair value of net assets acquired was recorded as goodwill. The purchase price exceeded the fair value of the net assets acquired due to ~~retained earnings~~the strategic opportunities and expected benefits associated with adding Omni's capabilities to the Company's existing offerings in the market. The allocation of the purchase price to specific assets and liabilities is based, in part, upon preliminary valuations from internal estimates and independent appraisals.

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

The pro forma results exclude non-recurring charges recorded by Omni that were directly related to the acquisition by the Company. Combined results for Air Transport Services Group and Omni for the three and six month periods ended June 30, 2018 were adjusted for the following in order to create the unaudited pro forma results in the table:



	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Pro forma revenues	$	327,801	$	633,657
Pro forma net earnings from continuing operations	32,715		54,129

The following adjustments were made to the historical financial records to create the unaudited pro forma information in the table above:

Adjustments to eliminate transactions between the Company and Omni during the three and six month periods ended June 30, 2018.

Adjustment to reflect estimated additional depreciation and amortization expense of $2.6 million and $5.3 million for the three and six month periods ended June 30, 2018, resulting primarily from the fair value adjustments to Omni’s intangible assets. Pro forma combined depreciation expense for the periods presented reflect the increased fair values of the aircraft acquired and longer useful lives of the aircraft, indicative of the Company's policies and intent to modify certain aircraft to freighters as an aircraft is removed from passenger service.

Adjustment to reflect additional interest expense and amortization of debt issuance costs for the three and six month periods ended June 30, 2018, related to the combined $855 million from an unsubordinated term loan and revolving facility draws using the prevailing rates of 4.57%.

In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden ("West"). In April 2019, West issued additional shares to a new investor in conjunction with a capital investment and purchase agreement which reduced the Company's ownership to approximately 10% and reduced the Company's influence over West. West, through its two airlines, Atlantic Airlines Ltd. and West Air Sweden AB, operates a fleet of aircraft on behalf of European regional mail carriers and express logistics providers. The airlines operate a combined fleet of British Aerospace ATPs, Bombardier CRJ-200-PFs, and Boeing 767 and 737 aircraft. West leases three Boeing 767 aircraft and one Boeing 737 from the Company.

On August 3, 2017 the Company entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The Company ~~is currently evaluating~~anticipates approval of a supplemental type certificate from the ~~impact~~FAA in 2020. The Company expects to make contributions equal to its 49% ownership percentage of the ~~standard~~program's total costs over the next two years. During the six month periods ending June 30, 2019 and 2018, the Company contributed $6.4 million and $5.2 million to the joint venture, respectively.

The carrying value of West and the joint venture totaled $12.6 million and $12.5 million at June 30, 2019 and December 31, 2018, respectively. and are reflected in “Other Assets” in the Company’s consolidated balance sheets. The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in accordance with GAAP. If the Company determines that an other-than-temporary decline in value has occurred, it recognizes an impairment loss, which is measured as the difference between the recorded carrying value and the fair value of the investment. The fair value is generally determined using an income approach based on discounted cash flows or using negotiated transaction values.

Stock warrants issued to a lessee (see Note C) as an incentive are recorded as a lease incentive asset using their fair value at the time that the lessee has met its ~~financial statements~~performance obligation and ~~disclosures.~~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, 2018	$	63,780
Warrants granted	100,076
Amortization	(8,251		)
Carrying value as of June 30, 2019	$	155,605

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

NOTE B—C—SIGNIFICANT CUSTOMERS

DHL

The Company has had long term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. Revenues from aircraft leases and related services performed for DHL were approximately ~~28%~~15% and ~~28%~~15% of the Company's consolidated revenues from continuing operations for the three and six month periods ending June 30, ~~2018,~~2019, respectively, compared to ~~25%~~28% and ~~26%~~28% for the corresponding periods of 2017. Revenues excluding directly reimbursed expenses from continuing operations performed for DHL comprised approximately 30% and 30% of the Company's consolidated revenues from continuing operations for the three and six month periods ending June 30, 2017.2018. The Company’s balance sheets include accounts receivable with DHL of $~~10.7~~11.0 million and $~~15.7~~13.4 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Leases for eleven Boeing 767 aircraft run through March and April 2022. Under a ~~separate crew, maintenance and insurance (“CMI”)~~CMI agreement, the Company operates Boeing 767 aircraft that DHL leases from the Company. Pricing for services provided through the CMI agreement is based on pre-defined fees, scaled for the number of aircraft operated and the number of flight crews provided to DHL for its U.S. network. The Company provides DHL with scheduled maintenance services for aircraft that DHL leases. The Company also provides Boeing 767 and Boeing 757 air cargo transportation services for DHL through additional ACMI agreements in which the Company provides the aircraft, crews, maintenance and insurance under a single contract. Revenues generated from the ACMI agreements are typically based on hours flown. The Company also provides ground equipment, such as power units, air starts and related maintenance services to DHL under separate agreements.

Amazon

The Company has been providing freighter aircraft and services for cargo handling and logistical support for Amazon.com Services, Inc. ("ASI"), successor to Amazon Fulfillment Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon") since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with ASI, pursuant to which CAM leases 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200 freighter aircraft for aan original term of five years and eight Boeing 767-300 freighter aircraft for aan original term of seven years. The ATSA also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the management of ground services by the Company's subsidiary LGSTX Services Inc. ("LGSTX"). The ATSA became effective on April 1, 2016 and ~~has a~~had an original term of five years. ~~CAM owns all 20 of the Boeing 767 aircraft that are leased and operated under the ATSA.~~

Revenues from continuing operations performed for Amazon comprised approximately 29% and 29% of the Company's consolidated revenues from continuing operations for the three and six month periods ending June 30, 2018, respectively, compared to 42% and 41% for the corresponding periods of 2017. Revenues excluding directly reimbursed expenses from continuing operations performed for Amazon comprised approximately 26% and 26% of the Company's consolidated revenues from continuing operations for the three and six month period ending June 30, 2017. The Company’s balance sheets include accounts receivable with Amazon of $34.5 million and $44.2 million as of June 30, 2018 and December 31, 2017, respectively.

In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement on March 8, 2016. The Investment Agreement calls for the Company to issue warrants in three tranches which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common shares as described below. The first tranche of warrants, issued upon the execution of the Investment Agreement and all of which are now fully vested, granted Amazon the right to purchase approximately 12.81 million ATSG common shares, with the first 7.69 million common shares vesting upon issuance on March 8, 2016, and the remaining 5.12 million common shares vesting as the Company delivered additional aircraft leased under the ATSA. The second tranche of warrants, which were issued and vested on March 8, 2018, grants Amazon the right to purchase approximately 1.59

million ATSG common shares. The third tranche of warrants will be issued ~~and vest~~ on September 8, 2020, and will grant Amazon the right to purchase such additional number of ATSG common shares as is necessary to bring Amazon’s ownership to 19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company following the date of the Investment Agreement and after giving effect to the warrants granted. The exercise price of the warrants is $9.73 per share, which represents the closing price of ATSG’s common shares on February 9, 2016. Each of the three tranches of warrants are exercisable in accordance with its terms through March 8, 2021.

On December 22, 2018 the Company announced agreements with Amazon to 1) lease and operate ten additional Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing 767-200 aircraft currently leased to ASI by two years to 2023 with an option for three more years, 3) extend the term of the eight Boeing 767-300 aircraft currently leased to ASI by three years to 2026 and 2027 with an option for three more years.and 4) amend and extend the ATSA by five years through March 2026, with an option to extend for an additional three years. The Company ~~anticipates making available~~plans to deliver five of the 767-300 aircraft in 2019, the first of which was leased during the second quarter, and the remainder in 2020. All ten of these aircraft leases will be for ten years.

In conjunction with the commitment for ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and the ATSA described above, Amazon and the Company entered another Investment Agreement on December 20, 2018. Pursuant to the 2018 Investment Agreement, Amazon will be issued warrants for up to14.8 million common shares ~~required~~which could expand its potential ownership in the Company to approximately 33.2%, including the warrants described above for the ~~underlying~~2016 agreements. These new warrants ~~through~~will vest as existing leases are extended and additional aircraft leases are executed and added to the ATSA operations. These new warrants will expire if not exercised within seven years from their issuance date. They have an exercise price of $21.53 per share, based on the volume-weighted average price of the Company's shares over the 30 trading days immediately preceding execution of a ~~combination~~non-binding term sheet by the parties on October 29, 2018.

Additionally, Amazon will be able to earn incremental warrant rights, increasing its potential ownership from 33.2% up to approximately 39.9% of ~~share repurchases~~the Company, by leasing up to seventeen more cargo aircraft from the Company before January 2026. Incremental warrants granted for Amazon’s commitment to any such future aircraft leases will have an exercise price based on the volume-weighted average price of the Company’s shares during the 30 trading days immediately preceding contractual commitment for each lease.

The warrants potentially issuable under these new agreements with Amazon required an increase in the number of authorized common shares of the Company. Management submitted proposals for shareholder consideration at the Company’s annual meeting of shareholders on May 9, 2019 calling for an increase in the number of authorized common shares and approval of the ~~issuance~~warrants as required under the rules of ~~additional shares.~~the Nasdaq Global Select Market. Both proposals were approved by shareholders on May 9, 2019.

The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance for ~~equity-based payments to non-employees and for~~ financial instruments. ~~The warrants issued~~Warrants obligations are marked to ~~Amazon as of March 8, 2016, were recorded to stockholders equity, having a~~ fair value at the end of ~~$4.89 per share. At that time, the fair~~each reporting period. The value of ~~the 7.69 million vested~~ warrants ~~issued to Amazon was~~is recorded as a ~~lease~~customer incentive asset ~~and~~if it is ~~being~~probable of vesting. Upon a warrant vesting event, the customer incentive asset is amortized ~~against revenues~~as a reduction of revenue over the duration of the aircraft leases. On May 12, 2016, the Company’s stockholders approved an amendment to the Certificate of Incorporation of the Company at the annual meeting of stockholders to increase the number of authorized common sharesrelated revenue contract and ~~to approve the warrants~~further changes in full as required under the rules of the Nasdaq Global Select Market. The stockholders' approval enabled features of the warrants that required the vested warrants of the first tranche and the warrants of the second and third tranches to be classified as financial instruments as of May 12, 2016. Accordingly, the fair value of ~~those warrants was measured and classified in liabilities on that date. Since May 12, 2016, 5.12 million additional warrants in the first tranche~~ vested ~~in conjunction with the execution of eight aircraft leases.~~ warrant obligations are recorded to earnings.

As of June 30, ~~2018,~~2019, the Company's liabilities reflected 14.83 million warrants from 2016 Investment Agreement having a fair value of ~~$13.72 per share. The re-measurements of~~$222.7 million and 24.7 million warrants from the ~~warrants to~~2018 Amazon agreements having a fair value ~~resulted in non-operating gains before the effect~~ of ~~income taxes of $10.8 million and $7.7 million for~~$178.7 million. During the three and six month periods ended June 30, ~~2018,~~2019, the re-measurements of all the warrants to fair value resulted in a net non-operating losses of $29.0 million and $20.7 million before the effect of income taxes, respectively, compared to ~~non-operating~~gains of $10.8 million and losses of ~~$67.3 million and $65.6~~$7.7 million for the corresponding periods of ~~2017.~~2018.

Revenues from continuing operations performed for Amazon comprised approximately 20% and 19% of the Company's consolidated revenues from continuing operations for the three and six month periods ending June 30, 2019, respectively, compared to 29% and 29% for the corresponding periods of 2018. The Company’s balance sheets include accounts receivable with Amazon of $31.4 million and $29.2 million as of June 30, 2019 and December 31, 2018, respectively.

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

DoD

~~U.S. Military~~

~~A substantial portion~~The Company is a provider of cargo and passenger airlift services to the DoD. The Company's ~~revenues is also derived from~~airlines have been providing services to the ~~U.S. Military.~~DoD since the 1990's. The ~~U.S. Military~~DoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from services performed for the ~~U.S. Military~~DoD were approximately ~~11%~~36% and 11% of the Company's total revenues from continuing operations for the three and six month periods ending June 30, 2018, respectively, compared to 7% and 7% for the corresponding periods of 2017. Revenues excluding directly reimbursed expenses from continuing operations performed for the U.S. Military comprised approximately 10% and 10%37% of the Company's consolidated revenues from continuing operations for the three and six month periods ending June 30, ~~2017.~~2019, respectively, compared to 11% and 11% for the corresponding periods of 2018. The Company's balance sheets included accounts receivable with the ~~U.S. Military~~DoD of ~~6.0~~$39.0 million and ~~6.7~~$50.5 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

~~NOTE C—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS~~

The Company's assets for CAM and the MRO Services segments each include goodwill. An annual impairment test was performed for each, respectively, at December, 31, 2017 using industry market multiples and discounted cash flows utilizing a market-derived rate of return (level 3 fair value inputs). Goodwill was not impaired.

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

CAM MRO Services Total
Carrying value as of December 31, 2017 $ 34,395
$ 2,884
$ 37,279
Carrying value as of June 30, 2018 $ 34,395
$ 2,884
$ 37,279

~~The Company's acquired intangible assets are as follows (in thousands):~~

Airline Amortizing
Certificates Intangibles Total
Carrying value as of December 31, 2017 $ 3,000
$ 4,298
$ 7,298
Amortization —
(578 ) (578 )
Carrying value as of June 30, 2018 $ 3,000
$ 3,720
$ 6,720

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 (8,452 )
Carrying value as of June 30, 2018 $ 72,232

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

In January 2014, the Company acquired a 25 percent equity interest in West Atlantic AB of Gothenburg, Sweden ("West") and in December 2017, the Company entered into a preferred equity instrument. West, through its two airlines, Atlantic Airlines Ltd. and West Air Sweden AB, operates a fleet of aircraft on behalf of European regional mail carriers and express logistics providers. The airlines operate a combined fleet of British Aerospace ATPs, Bombardier CRJ-200-PFs, and Boeing 767 and 737 aircraft. West leases three Boeing 767 aircraft and two Boeing 737 from the Company. The Company’s carrying value of West was $7.7 million and $7.1 million at June 30, 2018 and December 31, 2017,

respectively, including $5.5 million of excess purchase price over the Company's fair value of West's net assets in January of 2014. The Company's equity interest and the preferred equity instrument are reflected in “Other Assets” in the Company’s consolidated balance sheets as of June 30, 2018 and December 31, 2017.

On August 3, 2017 the Company entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The Company anticipates approval of a supplemental type certificate from the FAA in 2019. The Company expects to make contributions equal to its 49% ownership percentage of the program's total costs over the next two years. The Company accounts for its investment in the joint venture under the equity method of accounting, in which the carrying value of the investment is reduced for the Company's share of the joint ventures operating losses. The carrying value of the joint venture, reflected in “Other Assets” in the Company’s consolidated balance sheets, was $5.8 million and $5.6 million at June 30, 2018 and December 31, 2017.

NOTE D—FAIR VALUE MEASUREMENTS

The Company’s money market funds and interest rate swaps are reported on the Company’s consolidated balance sheets at fair values based on market values from identical or comparable transactions. The fair value of the Company’s money market funds, stock warrant obligations ~~convertible note, convertible note hedges~~ and interest rate swaps are based on observable inputs (Level 2) from comparable market transactions. The fair value of ~~the~~ stock warrant obligations (Level 2) were determined using a Black-Scholes pricing model which considers the Company’s common stock price and various assumptions, such as the volatility of the Company’s common stock, the expected dividend yield, and the risk-free interest rate. The fair value of the note conversion obligations and the convertible note hedges were estimated using a Black-Scholes pricing model and incorporate the terms and conditions of the underlying financial instruments. The valuations are, among other things, subject to changes in both the Company's credit worthiness and the counter-partiesAdditionally, certain warrants related to the ~~instruments as well as change in general market conditions. While the change in fair value~~2018 investment agreement (see Note C) require inputs of ~~the note conversion obligations~~estimated warrant strike price and ~~the convertible note hedges are generally expected to move in opposite directions, the net change in any given period may be material.~~other assumptions (Level 3).

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


As of June 30, 2018	Fair Value Measurement Using							Total
As of June 30, 2019								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	$	—	$	20,835		$	—	$	20,835		$	—	$	17,104		$	—		$	17,104
Interest rate swap	—		4,992			—		4,992			—		218			—			218
Total Assets	$	—	$	25,827		$	—	$	25,827		$	—	$	17,322		$	—		$	17,322
Liabilities
Interest rate swap											$	—	$	(9,061	)	$	—		$	(9,061	)
Stock warrant obligations	—		(203,426		)	—		(203,426		)	—		(369,485		)	(31,956		)	(401,441		)
Total Liabilities	$	—	$	(203,426	)	$	—	$	(203,426	)	$	—	$	(378,546	)	$	(31,956	)	$	(410,502	)



As of December 31, 2018	Fair Value Measurement Using							Total
	Level 1		Level 2			Level 3		Total
Assets
Cash equivalents—money market	$	—	$	17,986		$	—	$	17,986
Interest rate swap	—		2,971			—		2,971
Total Assets	$	—	$	20,957		$	—	$	20,957
Liabilities
Interest rate swap	$	—	$	(1,138	)	$	—	$	(1,138	)
Stock warrant obligation	—		(203,782		)	—		(203,782		)
Total Liabilities	$	—	$	(204,920	)	$	—	$	(204,920	)

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

As a result of higher market interest rates compared to the stated interest rates of the Company’s fixed rate debt obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was approximately ~~$7.7~~$7.6 million less than the carrying value, which was $~~520.7~~1,442.0 million at June 30, ~~2018~~2019. As of December 31, ~~2017,~~2018, the fair value of the Company’s debt obligations was approximately ~~$9.1~~$6.0 million ~~more~~less than the carrying value, which was ~~$515.8~~$1,401.3 million. The non-financial assets, including goodwill, intangible assets and property and equipment are measured at fair value on a non-recurring basis.

NOTE E—PROPERTY AND EQUIPMENT

The Company's property and equipment consists primarily of cargo aircraft, aircraft engines and other flight equipment. Property and equipment, to be held and used, is summarized as follows (in thousands):



	June 30, 2019			December 31, 2018
Flight equipment	$	2,389,747		$	2,340,840
Ground equipment	58,821			57,455
Leasehold improvements, facilities and office equipment	29,955			28,745
Aircraft modifications and projects in progress	218,302			74,449
	2,696,825			2,501,489
Accumulated depreciation	(1,046,213		)	(946,484		)
Property and equipment, net	$	1,650,612		$	1,555,005

June 30,
2018 December 31,
2017
Flight equipment $ 1,870,120
$ 1,801,808
Ground equipment 54,165
53,523
Leasehold improvements, facilities and office equipment 28,660
26,897
Aircraft modifications and projects in progress 148,999
121,760
2,101,944
2,003,988
Accumulated depreciation (900,947 ) (844,026 )
Property and equipment, net $ 1,200,997
$ 1,159,962

CAM owned aircraft with a carrying value of ~~$751.1~~$758.9 million and $~~697.4~~803.7 million that were under leases to external customers as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

The Company’s accounting policy for major airframe and engine maintenance varies by subsidiary and aircraft type. The costs of airframe maintenance for Boeing 767-200 operated by ABX are expensed as they are incurred. The costs of major airframe maintenance for the Company's other aircraft are capitalized and amortized over the useful life of the overhaul. Many of the Company's General Electric CF6 engines that power the Boeing 767-200 aircraft are maintained under “power by the hour” and "power by the cycle" agreements with an engine maintenance provider. Further, in May 2017, the Company entered into similar maintenance agreements for certain General Electric CF6 engines that power many of the Company's Boeing 767-300 aircraft. Under these agreements, the engines are maintained by the service provider for a fixed fee per cycle and/or flight hour. As a result, the cost of maintenance for these engines is generally expensed as flights occur. During their term, these maintenance agreements contain provisions for a minimum level of flight activity. Maintenance for the airlines’ other aircraft engines, including those powering Boeing 757 aircraft, are typically contracted to service providers on a time and material basis and the costs of those engine overhauls are capitalized and amortized over the useful life of the overhaul.

NOTE F—DEBT OBLIGATIONS

Debt obligations consisted of the following (in thousands):



	June 30,			December 31,
	2019			2018
Unsubordinated term loans	$	705,909		$	721,406
Revolving credit facility	515,000			475,000
Convertible debt	209,115			204,846
Other financing arrangements	11,994			—
Total debt obligations	1,442,018			1,401,252
Less: current portion	(39,236		)	(29,654		)
Total long term obligations, net	$	1,402,782		$	1,371,598

June 30, December 31,
2018 2017
Unsubordinated term loan $ 63,061
$ 70,568
Revolving credit facility 257,000
245,000
Aircraft loans —
3,640
Convertible debt 200,652
196,550
Total debt obligations 520,713
515,758
Less: current portion (14,860 ) (18,512 )
Total long term obligations, net $ 505,853
$ 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 which has a capacity~~facility. Effective November 9, 2018, in conjunction with the acquisition of ~~$545.0 million. The~~Omni, the Senior Credit Agreement ~~expires~~was amended. The amendment continued the secured revolving credit facility and the existing secured term loan while securing a second term loan of $675.0 million. Effective May 28, 2019, the Senior Credit Agreement was amended to extend its the expiration to May 30, ~~2023. Each year, through May 6, 2019,~~2024. This amendment also increased the capacity of revolving credit facility to $645.0 million and set the accordion feature such that the Company ~~may request a one year extension of the final maturity date,~~can draw up to an additional $300.0 million subject to the lenders' consent. As of June 30, 2019, the unused revolving credit facility totaled $117.3 million, net of draws of $515.0 million and outstanding letters of credit of $12.7 million. The Senior Credit Agreement permits additional indebtedness of up to ~~$300.0~~$500.0 million of which $258.8 million has been utilized for the issuance of convertible notes.

The balance of the unsubordinated term loans is net of debt issuance costs of $9.4 million and $9.8 million for the ~~convertible debt.~~ periods ended June 30, 2019 and December 31, 2018, respectively. Under the terms of the Senior Credit Agreement, interest rates are adjusted at least quarterly based on the Company's EBITDA, its outstanding debt level and prevailing LIBOR or prime rates. At the Company's current debt-to-EBITDA ratio, the LIBOR based financing for the unsubordinated term loans and revolving credit facility bear variable interest rates of 4.66%, 4.66% and 4.66%, respectively.

The Senior Credit Agreement is collateralized by certain of the Company's Boeing 777, 767 and 757 aircraft. Under the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 102% of the outstanding balance of the term loans and the total funded revolving credit facility. The minimum collateral coverage which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit facility commitment which was $645.0 million.

The Senior Credit Agreement limits the amount of dividends the Company can pay and the amount of common stock it can repurchase to $100.0 million during any 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 June 30, 2018, the unused revolving credit facility totaled $278.8 million, net of draws of $257.0 million and outstanding letters of credit of $9.2 million. Additionally, the Senior Credit Agreement includes an accordion feature such that the Company can now draw up to an additional $100.0 million subject to the lenders' consent.

The Senior Credit Agreement is collateralized by certain of the Company's Boeing 767 and 757 aircraft that are not collateralized under aircraft loans. Under the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 125% of the outstanding balance of the term loan and the maximum capacity of revolving credit facility or 150% of the outstanding balance of the term loan and the total funded revolving credit facility, whichever is less. The minimum collateral coverage which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit facility commitment which was $545.0 million.

The balance of the unsubordinated term loan is net of debt issuance costs of $0.7 million and $0.7 million for the periods ending June 30, 2018 and December 31, 2017, respectively. Under the terms of the Senior Credit Agreement, interest rates are adjusted quarterly based on the Company's EBITDA, its outstanding debt level and prevailing LIBOR or prime rates. At the Company's current debt-to-EBITDA ratio, the LIBOR based financing for the unsubordinated term loan and revolving credit facility bear a variable interest rate of ~~3.6%~~ ~~and~~ ~~3.6%, respectively. The aircraft loan was paid off by the Company in January 2018.~~

The Senior Credit Agreement contains covenants including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt to EBITDA ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default, including unspecified events that may have material adverse effects on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement.

In September 2017, the Company issued $258.8 million aggregate principal amount of 1.125% Convertible Senior Notes due 2024 ("Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Notes bear interest at a rate of 1.125% per year payable semi-annually in arrears on April 15 and October 15 each year, beginning April 15, 2018. The Notes mature on October 15, 2024, unless repurchased or converted in accordance with their terms prior to such date. The Notes are unsecured indebtedness, subordinated to the Company's existing and future secured indebtedness and other liabilities, including trade payables. Conversion of the Notes can only occur upon satisfaction of certain conditions and during certain periods, beginning in any calendar quarter commencing after December 31, 2017 and thereafter, until the close of business on the second scheduled trading day

immediately preceding the maturity date. Upon the occurrence of certain fundamental changes, holders of the Notes can require the Company to repurchase their notes at the cash repurchase price equal to the principal amount of the notes, plus any accrued and unpaid interest.

The Notes may be settled in cash, the Company’s common shares or a combination of cash and the Company’s common shares, at the Company’s election. The initial conversion rate is 31.3475 common shares per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $31.90 per common share). If a “make-whole fundamental change” (as defined in the offering circular with the Notes) occurs, the Company will, in certain circumstances, increase the conversion rate for a specified period of time.

In conjunction with the Notes, the Company purchased convertible note hedges under privately negotiated transactions for $56.1 million, having the same number of the ~~Company’s~~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's current intent and policy is to settle all Note conversions through a combination settlement which satisfies the principal amount of the Notes outstanding with cash. The Notes could have a dilutive effect on the computation of earnings per share in accordance with accounting principles to the extent that the average traded market price of the Company’s common shares for a reporting period exceeds the conversion price.

The conversion feature of the Notes required bifurcation from the principal amount under the applicable accounting guidance. Settlement provisions of the Notes and the convertible note hedges required cash settlement of these instruments until the Company's shareholders increased the number of authorized shares of common stock toto cover the full number of shares underlying the Notes. As a result, the conversion feature of the Notes and the convertible note hedges were initially accounted for as liabilities and assets, respectively, and marked to market at the end of each period. The fair value of the note conversion obligation at issuance was $57.4 million.

On May 10, 2018, the Company's shareholders increased the number of authorized shares of common stock to cover the full number of shares underlying the Notes. The Company reevaluated the Notes and convertible note hedges under the applicable accounting guidance including ASC 815, "Derivatives and Hedging," and determined that the instruments, which meet the definition of derivative and are indexed to the Company's own stock, should be classified in shareholder's equity. The fair value of the the conversion feature of the Notes and the convertible note hedges of $51.3 million and $50.6 million, respectively on May 10, 2018 were reclassified to paid-in capital.

The net proceeds from the issuance of the Notes were approximately $252.3 million, after deducting initial issuance costs. These unamortized issuance costs and discount are being amortized to interest expense through October 2024, using an effective interest rate of approximately 5.15%. The carrying value of the Company's Convertible debt is shown ~~below:~~below.



	June 30,		December 31,
	2019		2018
Principal value, Convertible Senior Notes, due 2024	258,750		258,750
Unamortized issuance costs	(5,336	)	(5,799	)
Unamortized discount	(44,299	)	(48,105	)
Convertible debt	209,115		204,846

June 30, December 31,
2018 2017
Principal value, Convertible Senior Notes, due 2024 258,750
258,750
Unamortized issuance costs

(6,255 ) (6,685 )
Unamortized discount

(51,843 ) (55,515 )
Convertible debt 200,652
196,550

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

NOTE G—DERIVATIVE INSTRUMENTS

The Company's Senior Credit Agreement requires the Company to maintain derivative instruments for protection from fluctuating interest rates, for at least fifty percent of the outstanding balance of the original term ~~loan.~~loan and twenty-five percent of the outstanding balance of the second term loan issued in November 2018. Accordingly, the Company entered into additional interest rate ~~swaps.~~swaps in December 2018 and January 2019 having an initial values of $150.0 million and $150.0 million, respectively, and forward start dates of December 31, 2018 and June 28, 2019. The table below provides information about the Company’s interest rate swaps (in thousands):



			June 30, 2019			December 31, 2018
Expiration Date	Stated Interest Rate		Notional Amount	Market Value (Liability)		Notional Amount	Market Value (Liability)
May 5, 2021	1.090	%	24,375	213		28,125	650
May 30, 2021	1.703	%	24,375	5		28,125	366
December 31, 2021	2.706	%	148,125	(3,797	)	150,000	(1,138	)
March 31, 2022	1.900	%	50,000	(396	)	50,000	829
March 31, 2022	1.950	%	75,000	(695	)	75,000	1,126
March 31, 2023	2.425	%	150,000	(4,173	)	—	—

June 30, 2018 December 31, 2017
Expiration Date
Stated
Interest
Rate

Notional
Amount

Market
Value
(Liability)

Notional
Amount

Market
Value
(Liability)
May 5, 2021 1.090 % 31,875
943
35,625
719
May 30, 2021 1.703 % 31,875
570
35,625
240
March 31, 2022 1.900 % 50,000
1,444
50,000
416
March 31, 2022 1.950 % 75,000
2,035
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~~a net loss on derivatives of ~~$3.2~~$6.9 million and ~~pre-tax losses of $0.2~~$10.7 million for the three and six month periods ending June 30, ~~2018~~ 2019, respectively, compared to net gains of $0.8 million

and ~~2017, respectively.~~$3.2 million for the corresponding periods of 2018. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.

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

NOTE H—COMMITMENTS AND CONTINGENCIES

~~Lease Commitments~~Leases

The Company leases ~~portions~~property, two aircraft, aircraft engines and other types of equipment under operating leases. Property leases include hangars, warehouses, offices and other space at certain airports with fixed rent payments and lease terms ranging from one month to seven years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of the ~~air park in Wilmington, Ohio, under~~ lease ~~agreements~~asset or lease liability. These expenses are recognized as variable lease expense when incurred and are not material. Equipment leases include ground support and industrial equipment as well as computer hardware with ~~a regional port authority, the~~fixed rent payments and terms of ~~which expire in May of 2019~~one month to three years.

The Company records the initial lease asset and ~~June of 2036 with options to extend the leases. The leased facilities include corporate offices, 310,000 square feet of maintenance hangars and a 100,000 square foot component repair shop~~lease liability at the ~~air park. ABX also has~~present value of lease payments scheduled during the ~~non-exclusive right to use the airport, which includes one active runway, taxi ways and ramp space.~~lease term. The ~~Company also~~ leases ~~and operates a 311,500 square foot, two hangar aircraft maintenance complex in Tampa, Florida. Additionally,~~ typically do not provide an implicit rate; therefore,the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount the present value of lease payments. The Company’s average discount rate for operating leases ~~certain equipment and airport facilities, office space, and maintenance facilities~~ at ~~other locations.~~ June 30, 2019 was 4.75%. Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Although not material, the amount of such options is reflected below in the maturity of operating lease liabilities table. Lease expense is recognized on a straight-line basis over the lease term. Our weighted-average remaining lease term is 4.3 years.

As of June 30, ~~2018 and~~2019, the maturities of operating leases liabilities are as follows (in thousands):



	Operating Leases
Remaining 2019	$	18,053
2020	13,536
2021	10,010
2022	8,371
2023	5,428
2024 and beyond	7,436
Total	62,834
Less: amount representing interest	(6,491		)
Present value of future minimum lease payments	56,343
Less: current obligations under leases	15,770
Long-term lease obligations	$	40,573

As of December 31, ~~2017,~~2018, the ~~Company did not lease any aircraft from lessors.~~cash flows of operating leases over the next five years were as follows (in thousands):



	Operating Leases
2019	$	16,674
2020	14,586
2021	11,875
2022	5,906
2023	3,813
2024 and beyond	2,001
Total minimum lease payments	$	54,855

Purchase Commitments

The Company has agreements with Israel Aerospace Industries Ltd. ("IAI") for the conversion of Boeing 767 passenger aircraft into a standard configured freighter aircraft. The conversions primarily consist of the installation of a standard cargo door and loading system. At June 30, ~~2018,~~2019, the Company ~~was committed~~had non-refundable deposits of $30.3 million to ~~acquire and modify additional~~purchase 19 Boeing 767-300 ~~passenger aircraft into standard freighter~~ aircraft. In addition to five aircraft that were in the modification process at June 30, 2018, the Company is committed to induct two more aircraft into the freighter modification process through 2019, including commitments to purchase two more Boeing 767-300 passenger aircraft during the second half of 2018. As of June 30, 2018, the Company's commitments to complete the conversions of aircraft it owns or has the contracts to purchase totaled $79.8 million. Additionally, theThe Company could incur a cancellation fee with IAI for unused modification part ~~kits for any aircraft that is not inducted into conversion at IAI.~~kits.

Guarantees and Indemnifications

Certain leases and agreements of the Company contain guarantees and indemnification obligations to the lessor, or one or more other parties that are considered reasonable and customary (e.g. use, tax and environmental

indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after expiration of the respective lease or agreement.

Other

In addition to the foregoing matters, the Company is also a party to legal proceedings in various federal and state jurisdictions from time to time arising out of the operation of the Company's business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, the Company believes that its ultimate liability, if any, arising from pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to our financial condition or results of operations.

Employees Under Collective Bargaining Agreements

As of June 30, ~~2018,~~2019, the flight crewmember employees of ABX, ATI and ~~ATI~~Omni and flight attendant employees of ATI and Omni were represented by the labor unions listed below:



Airline	Labor Agreement Unit	Percentage of the Company’s Employees
ABX	International Brotherhood of Teamsters	~~7.6%~~5.8%
ATI	Air Line Pilots Association	~~6.9%~~7.3%
Omni	International Brotherhood of Teamsters	6.8%
ATI	Association of Flight Attendants	~~1.1%~~0.9%
Omni	Association of Flight Attendants	7.1%

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. ABX also sponsors non-qualified defined benefit pension plans for certain employees. These non-qualified plans are unfunded. Employees are no longer accruing benefits under any of the defined benefit pension plans. ABX also sponsors a post-retirement healthcare plan for its ABX employees, which is unfunded. Benefits for covered individuals terminate upon reaching age 65 under the post-retirement healthcare plans.

The accounting and valuation for these post-retirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long term nature of these benefit payouts increases the sensitivity of certain estimates of our post-retirement costs. The assumptions considered most sensitive in actuarially valuing ABX’s pension obligations and determining related expense amounts are discount rates and expected long term investment returns on plan assets. Additionally, other assumptions concerning retirement ages, mortality and employee turnover also affect the valuations. Actual results and future changes in these assumptions could result in future costs significantly higher than those recorded in our results of operations.

ABX measures plan assets and benefit obligations as of December 31 of each year. Information regarding ABX’s sponsored defined benefit pension plans and post-retirement healthcare plans follow below. The accumulated benefit obligation reflects pension benefit obligations based on the actual earnings and service to-date of current employees.

The ~~Company’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 June 30,										Six Months Ended June 30,
	Pension Plans						Post-Retirement Healthcare Plan				Pension Plans						Post-Retirement Healthcare Plan
	2019			2018			2019		2018		2019			2018			2019		2018
Service cost	$	—		$	—		$	27	$	30	$	—		$	—		$	54	$	60
Interest cost	7,825			7,284			37		32		15,649			14,568			74		64
Expected return on plan assets	(9,477		)	(10,523		)	—		—		(18,954		)	(21,046		)	—		—
Amortization of net loss	3,882			887			43		55		7,764			1,774			86		110
Net periodic benefit cost (income)	$	2,230		$	(2,352	)	$	107	$	117	$	4,459		$	(4,704	)	$	214	$	234

Three Months Ended June 30, Six Months Ended June 30,
Pension Plans Post-Retirement Healthcare Plan Pension Plans Post-Retirement Healthcare Plan
2018 2017 2018 2017 2018 2017 2018 2017
Service cost $ —
$ —
$ 30
$ 39
$ —
$ —
$ 60
$ 78
Interest cost 7,284
8,775
32
36
14,568
17,550
64
72
Expected return on plan assets (10,523 ) (10,930 ) —
—
(21,046 ) (21,859 ) —
—
Amortization of prior service cost —
—
—
(13 ) —
—
—
(26 )
Amortization of net (gain) loss 887
1,937
55
71
1,774
3,874
110
142
Net periodic benefit cost (income) $ (2,352 ) $ (218 ) $ 117
$ 133
$ (4,704 ) $ (435 ) $ 234
$ 266

During the six month period ending June 30, ~~2018,~~2019, the Company contributed $~~1.8~~1.4 million to the pension plans. The Company expects to contribute an additional ~~$20.7~~$6.7 million during the remainder of ~~2018.~~2019.

NOTE J—INCOME TAXES

The provision for income taxes for interim periods is based on management's best estimate of the effective income tax rate expected to be applicable for the current year, plus any adjustments arising from changes in the estimated amount of taxable income related to prior periods. Federal legislation known as the The Tax Cuts and Jobs Acts ("Tax Act") was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from the previous rate of 35% to 21% effective January 1, 2018. The Tax Act also makes broad and complex changes to the U.S. tax code, including, but not limited to a one time tax on earnings of certain foreign subsidiaries, limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, bonus depreciation for full expensing of qualified property, and limitations on the deductibility of certain executive compensation. The Company will continue to refine the calculations as additional analysis is completed and the Company gains a more thorough understanding of the Tax Act, including the tax law related to the deductibility of purchased assets, state tax treatment, and amounts related to employee compensation.

Income ~~tax expense~~taxes recorded through June 30, ~~2018 utilized~~2019 have been estimated utilizing a 25% rate based upon year-to-date income and projected ~~annualized 24.3%~~results for the full year. The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants and other items, have an impact on the effective rate ~~applied to year-to-date income. Additionally,~~during a period.

During 2019, the Company recorded discrete tax items for the conversion of employee stock awards, ~~during~~limitations on the ~~first quarter~~deductibility of ~~2018, resulting~~executive compensation and gains and losses on warrant revaluations which were not subject to tax. During 2019, the Company recorded a valuation allowance against a deferred tax benefit related to a foreign investment. As a result of these differences in anwhich expenses and benefits for tax purposes are different than required by generally accepted accounting principals, the Company's effective tax rate for the first six months of ~~21.0%~~2019 was 194%. The final effective tax rate ~~applied to 2018~~for the year 2019 will depend on the actual amount of pre-tax book results by the Company for the full year, the additional conversions of employee stock awards, ~~issuance of~~ stock ~~warrants~~warrant valuations, executive compensation and other items.

The Company has operating loss carryforwards for U.S. federal income tax purposes. Management expects to utilize the loss carryforwards to offset federal income tax liabilities in the future. Due to the Company's deferred tax assets, including its loss carryforwards, management does not expect to pay federal income taxes until ~~2023~~2024 or later. The Company may, however, be required to pay some federal tax due to loss carryforward usage limitations and certain state and local income taxes before then.

NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) includes the following items by components for the three and six month periods ending June 30, ~~2018~~2019 and ~~2017~~2018 (in thousands):


	Defined Benefit Pension		Defined Benefit Post-Retirement		Foreign Currency Translation		Total		Defined Benefit Pension			Defined Benefit Post-Retirement			Foreign Currency Translation			Total
Balance as of March 31, 2017	(75,854	)	(1,264	)	(1,440	)	(78,558	)
Balance as of March 31, 2018									$	(59,888	)	$	(1,055	)	$	(1,364	)	$	(62,307	)
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment	—		—		152		152		—			—			(186		)	(186		)
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	)
Actuarial costs (reclassified to salaries, wages and benefits)									887			55			—			942
Income Tax (Expense) or Benefit	(702	)	(21	)	(53	)	(776	)	(200		)	(13		)	63			(150		)
Other comprehensive income (loss), net of tax	1,235		37		99		1,371		687			42			(123		)	606
Balance as of June 30, 2017	(74,619	)	(1,227	)	(1,341	)	(77,187	)
Balance as of June 30, 2018									$	(59,201	)	$	(1,013	)	$	(1,487	)	$	(61,701	)

	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	)
Balance as of January 1, 2018									$	(60,575	)	$	(1,097	)	$	(1,348	)	$	(63,020	)
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment	—		—		210		210		—			—			(211		)	(211		)
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to non-service costs)	3,874		142		—		4,016
Negative prior service cost	—		(26	)	—		(26	)
Actuarial costs (reclassified to salaries, wages and benefits)									1,774			110			—			1,884
Income Tax (Expense) or Benefit	(1,405	)	(42	)	(74	)	(1,521	)	(400		)	(26		)	72			(354		)
Other comprehensive income (loss), net of tax	2,469		74		136		2,679		1,374			84			(139		)	1,319
Balance as of June 30, 2017	(74,619	)	(1,227	)	(1,341	)	(77,187	)
Balance as of June 30, 2018									$	(59,201	)	$	(1,013	)	$	(1,487	)	$	(61,701	)



	Defined Benefit Pension			Defined Benefit Post-Retirement			Foreign Currency Translation			Total
Balance as of March 31, 2019	$	(86,091	)	$	(808	)	$	(1,484	)	$	(88,383	)
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment	—			—			(4		)	(4		)
Amounts reclassified from accumulated other comprehensive income:
Recognition of foreign currency loss	—			—			2,253			2,253
Actuarial costs (reclassified to salaries, wages and benefits)	3,882			43			—			3,925
Income Tax (Expense) or Benefit	(609		)	(7		)	(770		)	(1,386		)
Other comprehensive income (loss), net of tax	3,273			36			1,479			4,788
Balance as of June 30, 2019	$	(82,818	)	$	(772	)	$	(5	)	$	(83,595	)

Balance as of January 1, 2019	$	(89,042	)	$	(841	)	$	(1,479	)	$	(91,362	)
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment	—			—			(11		)	(11		)
Amounts reclassified from accumulated other comprehensive income:
Recognition of foreign currency loss	—			—			2,253			2,253
Actuarial costs (reclassified to salaries, wages and benefits)	7,764			86			—			7,850
Income Tax (Expense) or Benefit	(1,540		)	(17		)	(768		)	(2,325		)
Other comprehensive income (loss), net of tax	6,224			69			1,474			7,767
Balance as of June 30, 2019	$	(82,818	)	$	(772	)	$	(5	)	$	(83,595	)

Defined Benefit Pension Defined Benefit Post-Retirement Foreign Currency Translation Total
Balance as of March 31, 2018 (59,888 ) (1,055 ) (1,364 ) (62,307 )
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment —
—
(186 ) (186 )
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to non-service costs) 887
55
—
942
Income Tax (Expense) or Benefit (200 ) (13 ) 63
(150 )
Other comprehensive income (loss), net of tax 687
42
(123 ) 606
Balance as of June 30, 2018 (59,201 ) (1,013 ) (1,487 ) (61,701 )

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 —
—
(211 ) (211 )
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to non-service costs) 1,774
110
—
1,884
Income Tax (Expense) or Benefit (400 ) (26 ) 72
(354 )
Other comprehensive income (loss), net of tax 1,374
84
(139 ) 1,319
Balance as of June 30, 2018 (59,201 ) (1,013 ) (1,487 ) (61,701 )

NOTE L—STOCK-BASED COMPENSATION

The Company's Board of Directors has granted stock incentive awards to certain employees and board members pursuant to a long term incentive plan which was approved by the Company's stockholders in May 2005 and in May 2015. Employees have been awarded non-vested stock units with performance conditions, non-vested stock units with market conditions and non-vested restricted stock. The restrictions on the non-vested restricted stock awards lapse at the end of a specified service period, which is typically three years from the date of grant. Restrictions could lapse sooner upon a business combination, death, disability or after an employee qualifies for retirement. The non-vested stock units will be converted into a number of shares of Company stock depending on performance and market conditions at the end of a specified service period, lasting approximately three ~~years.~~ years. The performance condition awards will be converted into a number of shares of Company stock based on the Company's average return on invested capital during the service period. Similarly, the market condition awards will be converted into a number of shares depending on the appreciation of the Company's stock compared to the NASDAQ Transportation Index. Board members were granted time-based awards with vesting periods of approximately ~~six~~ or twelve months. The Company expects to settle all of the stock unit awards by issuing new shares of stock. The table below summarizes award activity.



	Six Months Ended
	June 30, 2019				June 30, 2018
	Number of Awards		Weighted average grant-date fair value		Number of Awards		Weighted average grant-date fair value
Outstanding at beginning of period	969,928		$	15.89	873,849		$	12.30
Granted	295,096		23.22		207,295		26.50
Converted	(153,464	)	17.29		(96,616	)	10.89
Expired	(5,600	)	23.78		(500	)	28.38
Forfeited	(2,600	)	22.16		(2,600	)	26.76
Outstanding at end of period	1,103,360		$	17.61	981,428		$	15.39
Vested	337,060		$	8.04	326,928		$	7.18

Six Months Ended
June 30, 2018 June 30, 2017

Number of
Awards

Weighted
average
grant-date
fair value

Number of
Awards

Weighted
average
grant-date
fair value
Outstanding at beginning of period 873,849
$ 12.30
1,040,569
$ 9.97
Granted 207,295
26.50
243,940
17.52
Converted (96,616 ) 10.89
(173,210 ) 9.69
Expired (500 ) 28.38
—
—
Forfeited (2,600 ) 26.76
(3,800 ) 13.66
Outstanding at end of period 981,428
$ 15.39
1,107,499
$ 11.66
Vested 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 ~~2018~~2019 was $~~25.15~~22.80, the fair value of the Company’s stock on the date of grant. The average grant-date fair value of each market condition award granted in ~~2018~~2019 was ~~$31.60~~.$24.75. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of ~~2.4%~~2.5% and a volatility of ~~33.8%~~35.6% based on volatility over three years using daily stock prices.

For the ~~six~~three month periods ending June 30, ~~2018~~2019 and ~~2017,~~2018, the Company recorded expense of $3.4 million and $2.3 million ~~and~~ ~~$1.7 million~~, respectively, for stock incentive awards. At June 30, ~~2018,~~2019, there was ~~$7.2~~$10.1 million of unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average period of 1.6 years. As of June 30, ~~2018,~~2019, none of the awards were convertible, ~~326,928~~337,060 units of the Board ~~members~~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 ~~1,216,478~~1,341,035 additional outstanding shares of the Company’s common stock depending on service, performance and market results through December 31, ~~2020.~~2021.

NOTE M—COMMON STOCK AND EARNINGS PER SHARE

Earnings per Share

The calculation of basic and diluted earnings per common share are as follows (in thousands, except per share amounts):



	Three Months Ending						Six Months Ending
	June 30,						June 30,
	2019			2018			2019			2018
Numerator:
Earnings (loss) from continuing operations - basic	$	(26,632	)	$	24,464		$	(3,998	)	$	40,146
Gain from stock warrants revaluation, net of tax	—			(10,448		)	—			(7,473		)
Earnings (loss) from continuing operations - diluted	$	(26,632	)	$	14,016		$	(3,998	)	$	32,673

Denominator:
Weighted-average shares outstanding for basic earnings per share	58,909			58,739			58,874			58,790
Common equivalent shares:
Effect of stock-based compensation awards and warrants	—			9,624			—			9,994
Weighted-average shares outstanding assuming dilution	58,909			68,363			58,874			68,784
Basic earnings (loss) per share from continuing operations	$	(0.45	)	$	0.42		$	(0.07	)	$	0.68
Diluted earnings (loss) per share from continuing operations	$	(0.45	)	$	0.21		$	(0.07	)	$	0.48

Three Months Ending Six Months Ending
June 30, June 30,
2018 2017 2018 2017
Numerator:
Earnings (loss) from continuing operations - basic $ 24,464
$ (53,918 ) $ 40,146
$ (44,122 )
Gain from stock warrants revaluation, net of tax (10,448 ) —
(7,473 ) —
Earnings (loss) from continuing operations - diluted $ 14,016
$ (53,918 ) $ 32,673
$ (44,122 )

Denominator:
Weighted-average shares outstanding for basic earnings per share 58,739
59,035
58,790
59,084
Common equivalent shares:
Effect of stock-based compensation awards and warrants 9,624
—
9,994
—
Weighted-average shares outstanding assuming dilution 68,363
59,035
68,784
59,084
Basic earnings per share from continuing operations $ 0.42
$ (0.91 ) $ 0.68
$ (0.75 )
Diluted earnings per share from continuing operations $ 0.21
$ (0.91 ) $ 0.48
$ (0.75 )

The determination of diluted earnings per share requires the exclusion of the fair value re-measurement of the stock warrants recorded as a liability (see Note B)C), if such warrants have a anti-dilutive effect on earnings per share. The dilutive effect of the weighted-average diluted shares outstanding is calculated using the treasury method for periods in which equivalent shares have a dilutive effect on earnings per share. Under this method, the number of diluted shares is determined by dividing the assumed proceeds of the warrants recorded as a liability by the average stock price during the period and comparing that amount with the number of corresponding warrants outstanding.

The underlying warrants recorded as a liability as of June 30, ~~2017, could result~~2019 and 2018 would have resulted in ~~13.6~~39.5 million and 14.8 million additional shares of the Company's common stock, respectively, if the warrants ~~are~~were settled by tendering cash.

The number of equivalent shares that were not included in weighted average shares outstanding assuming dilution because their effect would have been anti-dilutive, were ~~8.5~~10.9 million and ~~7.2~~10.8 million for the three and six month periods ended June 30, ~~2017,~~2019, respectively.

NOTE N—SEGMENT AND REVENUE INFORMATION

The Company operates in ~~three~~two reportable segments. The CAM segment consists of the Company's aircraft leasing operations ~~and its segment earnings include an allocation of interest expense. The~~while the ACMI Services segment consists of the Company's airline operations, including CMI agreements as well as ACMI, charter service and ~~charter~~passenger service agreements that the Company has with its customers. The ~~MRO Services segment provides airframe~~Company's aircraft maintenance ~~services, aircraft modifications~~ and other maintenance services. The MRO Services became reportable during 2018 due to the size of its revenues. Prior periods presented below have been prepared by separating MRO Services from "All other" for comparative purposes. The Company'smodification services, ground services and other activities ~~which include the mail and package sorting services, maintenance services for ground equipment, facilities and material handling equipment, the sales of aviation fuel and other services,~~ are not large enough to constitute reportable segments and are combined in All other. ~~Inter-segment~~Intersegment revenues are valued at arms-length market rates. ~~Cash and cash equivalents are reflected in Assets - All other below.~~

~~The Company's segment~~Revenue information ~~for revenue from continuing operations~~ is presented below (in thousands):



	Three Months Ending						Six Months Ending
	June 30,						June 30,
	2019			2018			2019			2018
Total revenues:
CAM	$	69,256		$	54,377		$	139,606		$	106,753
ACMI Services	254,938			119,606			512,894			238,980
All other	71,104			65,361			138,466			137,259
Eliminate inter-segment revenues	(60,722		)	(35,737		)	(108,207		)	(76,345		)
Total	$	334,576		$	203,607		$	682,759		$	406,647
Customer revenues:
CAM	$	39,953		$	38,016		$	81,562		$	73,903
ACMI Services	254,869			119,589			512,822			238,963
All other	39,754			46,002			88,375			93,781
Total	$	334,576		$	203,607		$	682,759		$	406,647

Three Months Ending Six Months Ending
June 30, June 30,
2018 2017 2018 2017
Total revenues:
CAM $ 54,377
$ 49,530
$ 106,753
$ 97,508
ACMI Services 119,606
144,499
238,980
289,448
MRO Services 45,794
66,336
98,517
106,674
All other 19,730
50,172
39,013
99,040
Eliminate inter-segment revenues (35,900 ) (57,326 ) (76,616 ) (101,542 )
Total $ 203,607
$ 253,211
$ 406,647
$ 491,128
Customer revenues:
CAM $ 38,016
$ 32,380
$ 73,903
$ 63,162
ACMI Services 119,589
144,499
238,963
289,448
MRO Services 29,069
31,159
60,009
56,576
All other 16,933
45,173
33,772
81,942
Total $ 203,607
$ 253,211
$ 406,647
$ 491,128

The Company adopted Topic 606 for revenue recognition using a modified retrospective approach, under which financial statements are prepared under the revised guidance for the year of adoption, but not for prior years. The effects of Topic 606 on the Company's customer revenues are summarized below:

For the three months ending For the six months ending
June 30, 2018 June 30, 2018
Revenue Revenue
As Reported Without Topic 606 Increase (decrease) As Reported Without Topic 606 Increase (decrease)
ACMI Services $ 119,589
$ 167,724
$ (48,135 ) $ 238,963
$ 336,272
$ (97,309 )
MRO Services 29,069
28,549
520
60,009
54,918
5,091
Other (ground services) 16,933
62,682
(45,749 ) 33,772
130,868
(97,096 )

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

based upon on-time reliability. These incentives are measured on a monthly basis and recorded to revenue in the corresponding month earned. Under CMI agreements, the Company's airlines have an obligation to provide integrated services including flight crews, aircraft maintenance and insurance for the customer's cargo network. Under ACMI agreements, the Company's airlines are also obligated to provide aircraft. Under CMI and ACMI agreements, customers are generally responsible for aviation fuel, landing fees, navigation fees and certain other flight expenses. When functioning as the ~~customers~~customers' agent for arranging such services, the Company records amounts reimbursable from the customer as revenues net of the related expenses as the costs are incurred. Under charter agreements the Company's airline is obligated to provide full services for one or more flights having specific origins and destinations. Under charter agreements in which the Company's airline is responsible for fuel, airport fees and all flight services, the related costs are recorded in operating expenses. ACMI Services are invoiced monthly or more frequently. (There are no customer rewards programs associated with services offered by the Company nor does the Company sell passenger tickets or issue freight bills.)

~~MRO Services~~The Company's revenues for customer contracts for airframe maintenance and aircraft modification services that do not have an alternative use and for which the Company has an enforceable right to payment are generally recognized over time based on the percentage of costs completed. Other ~~MRO Services~~ revenues for aircraft part sales, component repairs and line service are recognized at a point in time typically when the parts are delivered to the customer and the the services are completed. For airframe maintenance, aircraft modifications and aircraft component repairs, contracts include assurance warranties that are not sold separately.

~~Effective January 1, 2018 the~~ The Company records revenues and estimated earnings over time for its airframe maintenance and aircraft modification contracts using the percentage-of-completion ~~cost-to-cost~~cost input method. For such services, the Company estimates the earnings on a contract as the difference between the expected revenue and estimated costs to complete a contract and recognizes revenues and earnings based on the proportion of costs incurred compared to the total estimated costs. 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~~ground services revenues ~~for providing mail~~include load transfer and ~~package~~ sorting services and related facility and equipment maintenance for the three and six month periods ending June 30, 2018 were $16.2 million and $32.3 million, respectively, compared to $44.7 million and $80.9 million for the corresponding periods in 2017. During the three and six month periods ended June 30, 2018, the Company netted $45.7 million and $97.1 million of customer reimbursable revenues against the related expenses when functioning as the customers agent for arranging ground services, respectively.services. These revenues ~~are reported in All other. The Company's external customer revenues from providing mail and package sorting services~~ are recognized as the services are performed for the customer over time. Revenues from related facility and equipment maintenance services are recognized over time and at a point in time depending on the nature of the customer contracts.

~~Revenue is not recognized until collectibility of~~The Company's external customer payment is probable. For customers that are not a governmental agency or department, the Company generally receives partial payment in advance of services, otherwise customer balances are typically paid within 30 to 60 days of service. Forrevenues from other activities for the three and six month periods ended June 30, 2019 and 2018 ~~the Company recognized $3.4 million and $8.0 million of non lease revenue that was reported in deferred revenue at the beginning of the respective period.~~are presented below (in thousands):



	Three Months Ended				Six Months Ended
	June 30, 2019				June 30, 2019
	2019		2018		2019		2018
Aircraft maintenance, modifications and part sales	$	23,303	$	29,069	$	57,284	$	60,008
Ground services	15,775		16,159		29,713		32,313
Other	676		774		1,378		1,460
Total customer revenues	$	39,754	$	46,002	$	88,375	$	93,781

CAM's aircraft lease revenues are recognized as operating lease revenues on a straight-line basis over the term of the applicable lease agreements. Customer payments for leased aircraft and equipment are typically paid monthly in advance. CAM's leases do not contain residual guarantees. Approximately 5% of CAM's leases to external customers contain purchase options at projected market values. As of June 30, 2019, minimum future payments from external customers for leased aircraft and equipment were scheduled to be $84.7 million for the remainder of 2019, $163.3 million, $157.5 million, $131.3 million, $88.2 million respectively for each of the next 4 years years ending December 31, 2023 and $139.9 million thereafter. Minimum future payments from external customers for leased aircraft and equipment as of December 31, 2018 was scheduled to be $142.3 million, $127.1 million, $124.3 million, $121.2 million , $87.1 million for each of the next five years ending December 31, 2023 and $119.8 million thereafter.

For customers that are not a governmental agency or department, the Company generally receives partial payment in advance of services, otherwise customer balances are typically paid within 30 to 60 days of service. During the three and six month periods ending June 30, 2019, the Company recognized $0.6 million and $2.8 million of non lease revenue that was reported in deferred revenue at the beginning of the respective period, respectively, compared to $3.4 million and $8.0 million in the corresponding periods of 2018. Deferred revenue was $1.5 million and $3.1 million at June 30, 2019 and December 31, 2018, respectively, for contracts with customers.

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



	Three Months Ending						Six Months Ending
	June 30,						June 30,
	2019			2018			2019			2018
Depreciation and amortization expense:
CAM	$	38,723		$	30,540		$	77,518		$	59,465
ACMI Services	23,865			10,327			46,960			20,552
All other	678			753			1,425			1,607
Total	$	63,266		$	41,620		$	125,903		$	81,624
Segment earnings (loss):
CAM	$	16,683		$	15,394		$	32,857		$	30,858
ACMI Services	973			500			13,283			3,915
All other	4,006			3,039			5,909			6,757
Net unallocated interest expense	(903		)	(347		)	(1,683		)	(640		)
Net loss on financial instruments	(35,886		)	11,697			(31,386		)	10,812
Transaction fees	—			—			(373		)	—
Other non-service components of retiree benefit (costs) credits, net	(2,351		)	2,045			(4,702		)	4,090
Loss from non-consolidated affiliate	(5,998		)	(2,417		)	(9,814		)	(4,953		)
Pre-tax earnings from continuing operations	$	(23,476	)	$	29,911		$	4,091		$	50,839

Three Months Ending Six Months Ending
June 30, June 30,
2018 2017 2018 2017
Depreciation and amortization expense:
CAM $ 30,540
$ 26,253
$ 59,465
$ 50,554
ACMI Services 10,327
10,491
20,552
21,563
MRO Services 830
685
1,680
1,359
All other (77 ) 352
(73 ) 747
Total $ 41,620
$ 37,781
$ 81,624
$ 74,223
Segment earnings (loss):
CAM $ 15,394
$ 12,795
$ 30,858
$ 26,125
ACMI Services 991
258
4,932
(3,276 )
MRO Services 1,321
11,103
5,783
14,291
All other 2,749
1,400
5,330
3,863
Inter-segment earnings eliminated (1,031 ) (5,958 ) (4,356 ) (6,820 )
Net unallocated interest expense (838 ) (216 ) (1,657 ) (387 )
Net gain (loss) on financial instruments 11,697
(67,649 ) 10,812
(65,780 )
Other non-service components of retiree benefit costs, net 2,045
(177 ) 4,090
(354 )
Loss from non-consolidated affiliate (2,417 ) —
(4,953 ) —
Pre-tax earnings from continuing operations $ 29,911
$ (48,444 ) $ 50,839
$ (32,338 )

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

June 30 December 31
2018 2017
Assets:
CAM $ 1,214,986
$ 1,192,890
ACMI Services 190,309
189,379
MRO Services 99,129
87,177
All other 13,050
79,398
Total $ 1,517,474
$ 1,548,844

Interest expense allocated to CAM was ~~$4.5~~$9.4 million and ~~$9.0~~$19.3 million for the three and six month periods ending June 30, ~~2018,~~2019, respectively, compared to ~~$3.5~~$4.5 million and ~~$6.9~~$9.0 million for the corresponding periods of ~~2017.~~2018. Interest expense allocated to ACMI Services was $6.4 million and $13.0 million for the three and six month periods ending June 30, 2019, respectively, compared to $0.5 million and $1.0 million for the corresponding periods of 2018.

The Company's assets are presented below by segment (in thousands). Cash and cash equivalents are reflected in Assets - All other.



	June 30,		December 31,
	2019		2018
Assets:
CAM	$	1,782,950	$	1,577,182
ACMI Services	751,373		759,131
All other	168,993		134,272
Total	$	2,703,316	$	2,470,585

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis has been prepared with reference to the historical financial condition and results of operations of Air Transport Services Group, Inc., and its subsidiaries. Air Transport Services Group, Inc. and its subsidiaries may hereinafter individually and collectively be referred to as "the Company", "we", "our" or "us" from time to time. The following discussion and analysis describes the principal factors affecting the results of operations, financial condition, cash flows, liquidity and capital resources. It should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and ~~the~~ related notes prepared in accordance with accounting principles generally accepted in the United States of America ~~("GAAP")~~ contained in this report and our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

INTRODUCTION

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

We have ~~three~~two reportable segments: CAM, which leases Boeing 777, 767, ~~Boeing~~ 757 and ~~Boeing~~ 737 aircraft and aircraft engines and ACMI Services, which ~~primarily~~ includes the ~~air~~cargo and passenger transportation operations of the ~~two airlines, and MRO Services, which provides aircraft maintenance and modification services to customers.~~three airlines. Our other business operations, which primarily provide support services to the transportation industry, include ~~mail~~providing aircraft maintenance and ~~package~~modification services to customers, load transfer and sorting services as well as related equipment maintenance services. These operations do not constitute reportable segments due to their size. On November 9, 2018, the Company acquired OAI, a passenger airline, along with related entities (referred to collectively as "Omni"). Revenues and operating expenses include the activities of Omni for periods since their acquisition by the Company on November 9, 2018.

Our largest customers are DHL Network Operations (USA), Inc. and its affiliates ("DHL"), Amazon.com Services, Inc. ("ASI"), successor to Amazon Fulfillment Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon"), and the U.S. ~~Military.~~Department of Defense ("DoD").

DHL

The Company has had long-term contracts with DHL since August 2003. DHL accounted for 15% and 28% of the Company's consolidated revenues ~~for~~during the first six months of 2019 and 2018, ~~compared with 30% of the Company's consolidated revenues excluding directly reimbursed revenues in the corresponding period in 2017.~~respectively. As of June 30, ~~2018,~~2019, the Company, through CAM, leased 1614 Boeing 767 aircraft to DHL 11comprised of ~~which~~seven Boeing 767-200 aircraft and seven Boeing 767-300 aircraft expiring between 2022 and 2024. Eight of the 14 Boeing 767 aircraft were being operated for DHL by the Company's ~~airlines for DHL under a crew, maintenance and insurance agreement and five aircraft which are operated by a DHL-affiliated airline in the Middle East. Additionally, ATI operated~~airlines. We also operate four CAM-owned Boeing 757 aircraft under other operating arrangements with DHL. On April 30, 2019, the Company extended the leases for four of the 767-300 aircraft and one of the 767-200 aircraft leased to DHL through April 2022. The Company also extended the leases for six of the 767-200 aircraft through March 2022.

Amazon

The Company has been providing freighter aircraft ~~operating flight~~and services ~~and arranging~~for cargo handling and logistical support for ASI since September 2015. Revenues from our commercial arrangements with ASI comprised approximately 19% and 29% of our consolidated revenues during the first six months of 2019 and 2018, respectively. On March 8, 2016, ~~the Company~~we entered into an Air Transportation Services Agreement (the “ATSA”) with ASI pursuant to which CAM ~~agreed to lease~~leased 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. ~~CAM owns all~~The ATSA also provides for the operation of those aircraft by our airline subsidiaries and the performance of ground handling services by our subsidiary, LGSTX Services Inc. ("LGSTX"). In December 2018, the Company announced agreements with Amazon to 1) lease and operate ten additional Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing ~~767~~767-200 aircraft ~~that are~~currently leased ~~and operated under~~to ASI by two years to 2023 with an option for three more years, 3) extend the ~~ATSA. The ATSA became effective on April 1, 2016. Revenues from continuing operations performed for ASI comprised approximately 29%~~term of the ~~Company's consolidated revenues from continuing operations~~eight Boeing 767-300 aircraft currently leased to ASI by three years to 2026 and 2027 with an option for three more years and 4) amend and extend the ATSA

by five years through March 2026, with an option to extend for an additional three years. During January, 2019, amendments to extend the terms of aircraft leases were executed. We leased the first of ten Boeing 767-300 aircraft to ASI during the second quarter of 2019. We plan to deliver five more of the 767-300 aircraft in 2019 and the remainder in 2020 for lease. All ten of these aircraft leases will be for ten years. Under the ATSA, we operate the aircraft based on pre-defined fees scaled for the ~~first six months~~number of ~~2018, compared with 26% of revenues, excluding directly reimbursed revenues, during the corresponding period in 2017.~~aircraft hours flown, aircraft scheduled and flight crews provided to ASI for its network.

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~~In conjunction with the December 22, 2018 agreement for the ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and additional aircraft operations under the ATSA, Amazon may vest additional warrants totaling 14.8 million common shares which could expand its potential ownership in the Company to approximately 33.2%, including the warrants described above for the 2016 agreements. On January 22, 2019, 5.5 million warrants vested in conjunction with the execution of 20 aircraft lease extensions and in June 2019 warrants vested in conjunction with the execution of a Boeing 767 aircraft lease. Additional warrants will vest as additional aircraft leases are executed and added to the ATSA operations. Additionally, Amazon can earn incremental warrant rights, increasing its potential ownership from 33.2% up to approximately 39.9% of the ~~warrants is $9.73 per share, which represents~~Company, by leasing up to seventeen more cargo aircraft from the ~~closing price of 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.~~Company before January 2026.

Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting guidance ~~for equity-based payments to non-employees and~~ for financial instruments. The fair value of the warrants issued or issuable to Amazon are recorded as a lease incentive asset and are amortized against revenues over the duration of the aircraft leases. The warrants are accounted for as financial instruments, and accordingly, the fair value of the outstanding warrants are measured and classified in liabilities at the end of each reporting period. The Company's earnings are impacted by the fair value re-measurement of warrants at the end of each reporting period, lease incentive amortization and the related income tax effects. For income tax calculations, the value and timing of

related tax deductions will differ from the guidance described above for financial reporting. For additional information about the ~~accounting for the~~ warrants, see Note BC to the accompanying ~~unaudited condensed~~ consolidated financial statements.

DoD

The ~~U.S. Military~~Company's airlines have been providing services to the DoD since the 1990's. The DoD comprised ~~11%~~37% and ~~10%~~11% of the Company's consolidated revenues ~~excluding directly reimbursed revenues~~ during the first six ~~month periods ending June 30,~~months of 2019 and 2018, ~~and 2017,~~ respectively. The Company's airlines ~~contract their~~provide passenger and cargo airlift services to the ~~Air Mobility Command ("AMC"), through~~U.S. DoD. Due to the ~~U.S. Transportation Command ("USTC"), both~~acquisition of ~~which are organized under~~OAI in November of 2018, the ~~U.S. Military.~~DoD comprises a larger portion of our 2019 consolidated revenues compared to previous periods.

Aircraft Fleet Summary ~~2018~~

AsOur fleet of cargo and passenger aircraft is summarized in the following table as of June 30, ~~2018, the combined operating fleet of owned freighter~~2019 and December 31, 2018. Our freighters, converted from passenger aircraft, ~~consisted of 34 Boeing 767-200~~utilize standard shipping containers and can be deployed into regional cargo markets more economically than larger capacity aircraft, 29 Boeing 767-300 aircraft, four Boeing 757-200 aircraft, four Boeing 757 "combi" aircraft and two Boeing 737-400 aircraft. The Boeing 757 combi aircraft are capable of simultaneously carrying passengers and cargo containers on the main flight deck.newly built freighters or other competing alternatives. At June 30, ~~2018,~~2019, the Company owned ~~five~~eleven Boeing 767-300 aircraft that were either already undergoing, or awaiting induction into the freighter conversion process.

Aircraft fleet activity during the first six months of ~~2018~~2019 is summarized below:

- CAM completed the modification of ~~five~~one Boeing 767-300 freighter aircraft purchased in the previous ~~year and began~~year. After leasing the aircraft to ~~lease four of those aircraft under multi-year leases to external customers.~~ATI for a short period, CAM began to lease ~~the fifth~~this aircraft ~~to ATI.~~

~~- CAM completed the modification of one 737-400 freighter aircraft purchased the previous year and entered into a multi-year lease with an external customer.~~

~~- ABX returned one Boeing 767-300 freighter aircraft to CAM. That aircraft was then leased~~ to an external customer under a multi-year ~~lease~~lease. ATI operates the aircraft for the customer.

- External customers returned three Boeing 767-200 freighter aircraft and ~~is being operated by~~one Boeing 737-400 freighter aircraft to CAM. CAM leased two of the Boeing 767-200 aircraft to ABX.

- CAM ~~sold one Boeing 767-300 freighter aircraft, which was under lease to an external customer, to that same external customer.~~

~~- CAM~~ purchased ~~four~~seven Boeing 767-300 passenger aircraft for the purpose of converting six of the aircraft into a standard freighter ~~configuration.~~

~~- External lessees returned two Boeing 767-200 freighter aircraft to CAM. Both of these aircraft are being prepped for redeployment to other lessees.~~

configuration and leasing one as a passenger aircraft.


	June 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
	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	27	34	7	29	36
Boeing 767-300	4	25	29	4	21	25
Boeing 757-200	4	—	4	4	—	4
Boeing 767-200 Freighter							7	26	33	5	29	34
Boeing 767-200 Passenger							2	—	2	2	—	2
Boeing 767-300 Freighter							5	29	34	5	28	33
Boeing 767-300 Passenger							6	—	6	6	—	6
Boeing 777-200 Passenger							3	—	3	3	—	3
Boeing 757-200 Freighter							4	—	4	4	—	4
Boeing 757-200 Combi	4	—	4	4	—	4	4	—	4	4	—	4
Boeing 737-400	—	2	2	—	1	1
Boeing 737-400 Freighter							—	1	1	—	2	2
Total							31	56	87	29	59	88
Operating lease
Boeing 767-200 Passenger							1	—	1	1	—	1
Boeing 767-300 Passenger							1	—	1	1	—	1
Total	19	54	73	19	51	70	2	—	2	2	—	2
Other aircraft
Owned Boeing 767-300 under modification	—	5	5	—	6	6	—	11	11	—	5	5
Owned Boeing 737-400 under modification	—	—	—	—	1	1
Owned Boeing 737 available or staging for lease								1	1
Owned Boeing 767 available or staging for lease	—	2	2	—	—	—	—	2	2	—	1	1

As of June 30, ~~2018,~~2019, ABX, ATI and ~~ATI~~OAI were leasing 1931 in-service aircraft internally from CAM for use in ACMI Services. As of June 30, ~~2018, four~~2019, one of CAM's 2726 Boeing 767-200 freighter aircraft shown in the fleet table above and seven of the 2529 Boeing 767-300 freighter aircraft ~~shown in the aircraft fleet table above~~ were leased to DHL and operated by ABX. Additionally, 12 of CAM's 2726 Boeing 767-200 freighter aircraft and ~~eight~~nine of CAM's 2529 Boeing 767-300 freighter aircraft were leased to ASI and operated by ABX or ATI. ~~The~~CAM leased the other 1113 Boeing 767-200 freighter aircraft and 13 Boeing 767-300 aircraft to external customers, including six Boeing 767-200 aircraft ~~leased to external customers include five Boeing 767-200 aircraft leased~~ to DHL ~~and~~that are being operated by a DHL-owned airline. ~~One of the other 10 Boeing 767-300 aircraft leased to external customers was operated by ATI.~~ The carrying values of the total in-service fleet as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018 were ~~$998.7~~$1,273.1 million and ~~$955.2~~$1,334.9 million, respectively. The table above does not reflect one Boeing 767-200 passenger aircraft owned by ~~CAM.~~CAM that is not in service condition or in the process of freighter modification.

RESULTS OF OPERATIONS

Summary

External customer revenues from continuing operations ~~decreased~~increased by ~~$49.6~~$131.0 million to ~~$203.6~~$334.6 million and ~~decreased~~ by ~~$84.5~~$276.1 million to ~~$406.6~~$682.8 million for the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of ~~2017. Effective January 1, 2018,~~2018. Revenues in 2019 grew due to additional passenger transportation services provided to the DoD after the Company ~~adopted Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("Topic 606”). As a result~~completed the acquisition of adopting Topic 606 beginning January 1, 2018, the Company reported certain revenues net of related expenses that are directly reimbursed by customers. Corresponding 2017 revenues include such expense reimbursements. Excluding revenues directly reimbursedOAI in ~~2017, customer revenues~~November 2018. Revenues also increased $11.5 million, or 6% and $31.0 million, or 8% during the three and six month periods ended June 30, 2018, respectively, compared with the corresponding periods of 2017. External customer revenues increased primarily due to additional aircraft leases ~~and~~from CAM's leasing operations, expanded CMI ~~services.~~

and logistics services for ASI and increased aircraft maintenance and modification services for various customers.

The consolidated net ~~earnings~~losses from continuing operations were $26.6 million and $4.0 million for the three and six months periods ended June 30, 2019, respectively, compared to net earnings of $24.5 million and $40.1 million for the corresponding periods of 2018. The Company had pre-tax losses from continuing operations of $23.5 million and pre-tax earnings of $4.1 million for the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to ~~net losses of $53.9 million and $44.1 million for the corresponding periods of 2017. The~~ pre-tax earnings ~~from continuing operations were~~of $29.9 million and $50.8 million for the ~~three and six month periods ended June 30, 2018, respectively, compared to pre-tax losses of $48.4 million and $32.3 million for the~~ corresponding periods of ~~2017.~~2018. Earnings were affected by specific events and certain adjustments that do not directly reflect our underlying operations among the years presented. ~~Net earnings from continuing operations for 2018 benefited from a lower effective tax rate due to The Tax Cuts and Jobs Acts ("Tax Act") which was enacted on December 22, 2017.~~ On a pre-tax basis, earnings included ~~gains~~net losses of ~~$11.7~~$35.9 million and ~~$10.8~~$31.4 million for the three and six ~~months~~month periods ended June 30, ~~2018,~~2019, respectively for the re-measurement of financial instruments, including the warrant obligations granted to Amazon. This compares to pre-tax ~~losses~~gains for re-measurement of such financial instruments of ~~$67.6~~$11.7 million and ~~$65.8~~$10.8 million for the corresponding periods of ~~2017. Pre-tax~~2018. Additionally, pre-tax earnings ~~were also reduced by $4.2~~from continuing operations included losses of $2.4 million and ~~$8.5~~$4.7 million for the three and six month periods ended June 30, ~~2018,~~2019, respectively, for the non-service components of retiree benefit plans compared to gains of $2.0 million and $4.1 million for the corresponding periods of 2018. Pre-tax earnings for the three and six month periods ended June 30, 2019 included losses of $6.0 million and $9.8 million, respectively for the Company's share of development costs for a joint venture and losses from a non-consolidated affiliate, compared to $2.4 million and $5.0 million for the corresponding periods of 2018. Pre-tax earnings were also reduced by $4.0 million and $8.3 million for the three and six month periods ended June 30, 2019, respectively, for the amortization of lease incentives given to ASI in the form of warrants, compared to ~~$3.3~~$4.2 million and ~~$5.9~~$8.5 million for the corresponding periods of 2017. Additionally, pre-tax earnings from continuing operations included gains of $2.0 million and $4.1 million for the three and six month periods ended June 30, 2018, respectively, for the non-service components of retiree benefit plans, compared to losses of $0.2 million and $0.4 million for the corresponding periods of 2017.2018. Pre-tax earnings for the ~~three and six month periods ending June 30, 2018~~first half of 2019 also included ~~losses~~expense of ~~$2.4~~$0.4 million ~~and $5.0 million, respectively,~~for acquisition fees incurred for the Company's ~~share~~2018 acquisition of ~~development costs for a new joint venture.~~Omni. After removing the effects of these items, adjusted pre-tax earnings from continuing operations, a non-GAAP measure (a definition and reconciliation of adjusted pre-tax earnings from continuing operations follows) ~~increased $0.1~~were $24.8 million and ~~$9.7 million to $22.8 million and $49.3~~$58.6 million for the three and six month periods ended June 30, ~~2018, respectively,~~2019 compared to ~~2017.~~$22.8 million and $49.3 million for the corresponding periods of 2018.

Adjusted pre-tax earnings from continuing operations for 2019 improved for the first half ~~of 2018 improved~~ compared to ~~2017,~~2018, driven primarily by additional ~~aircraft lease~~ revenues and the improved financial results of our airline operations. ~~The~~We experienced additional revenues and earnings due to the acquisition of Omni in November 2018. Adjusted pre-tax ~~results included reduced~~ earnings from ~~MRO Services~~continuing operations also improved due to ~~a lower level~~additional aircraft leases and the expansion of ~~recognized revenues~~gateway ground operations for ASI. Growth in revenue was partially offset by the costs necessary to support expanded flight operations, higher costs for flight crews and ~~a mix of lower margin services through~~higher depreciation expense. Pre-tax earnings for 2018 included contributions from the Company's former USPS contracts for parcel sorting which expired in September 2018. Pre-tax earnings for the first half of ~~2018 compared to 2017. Results for the three and six month periods ended June 30, 2018~~2019 included an additional ~~pre-tax~~ interest expense due to the acquisition of ~~$2.1 million~~Omni and ~~$4.1 million, respectively, for~~ the ~~amortization~~expansion of ~~convertible debt discount and issuance costs.~~CAM's fleet.

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


	Three Months Ending						Six Months Ending						Three Months Ending						Six Month Ending
	June 30,						June 30,						June 30,						June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenues from Continuing Operations:
CAM
Aircraft leasing and related services	$	58,603		$	52,813		115,205			103,382			$	73,280		$	58,603		$	147,857		$	115,205
Lease incentive amortization	(4,226		)	(3,283		)	(8,452		)	(5,874		)	(4,024		)	(4,226		)	(8,251		)	(8,452		)
Total CAM	54,377			49,530			106,753			97,508			69,256			54,377			139,606			106,753
ACMI Services	119,606			111,851			238,980			219,917			254,938			119,606			512,894			238,980
MRO Services	45,794			66,336			98,517			106,674
Other Activities	19,730			21,706			39,013			53,104			71,104			65,361			138,466			137,259
Total Revenues	239,507			249,423			483,263			477,203			395,298			239,344			790,966			482,992
Eliminate internal revenues	(35,900		)	(57,326		)	(76,616		)	(101,542		)	(60,722		)	(35,737		)	(108,207		)	(76,345		)
Customer Revenues - non reimbursed	$	203,607		$	192,097		$	406,647		$	375,661
Revenues for reimbursed expenses	—			61,114			—			115,467
Customer Revenues	$	203,607		$	253,211		$	406,647		$	491,128		$	334,576		$	203,607		$	682,759		$	406,647


Pre-Tax Earnings (Loss) from Continuing Operations:
Pre-Tax Earnings from Continuing Operations:
CAM, inclusive of interest expense	$	15,394		$	12,795		30,858			26,125			$	16,683		$	15,394		$	32,857		$	30,858
ACMI Services	991			258			4,932			(3,276		)
MRO Services	1,321			11,103			5,783			14,291
ACMI Services, inclusive of interest expense													973			500			13,283			3,915
Other Activities	2,749			1,400			5,330			3,863			4,006			3,039			5,909			6,757
Inter-segment earnings eliminated	(1,031		)	(5,958		)	(4,356		)	(6,820		)
Net unallocated interest expense	(838		)	(216		)	(1,657		)	(387		)	(903		)	(347		)	(1,683		)	(640		)
Net financial instrument re-measurement (loss) gain	11,697			(67,649		)	10,812			(65,780		)
Other non-service components of retiree benefit costs, net	2,045			(177		)	4,090			(354		)
Loss from non-consolidated affiliate	(2,417		)	—			(4,953		)	—
Pre-Tax Earnings (Loss) from Continuing Operations	29,911			(48,444		)	50,839			(32,338		)
Add other non-service components of retiree benefit costs, net	(2,045		)	177			(4,090		)	354
Add charges for non-consolidated affiliate	2,417			—			4,953			—
Net financial instrument re-measurement gain (loss)													(35,886		)	11,697			(31,386		)	10,812
Transaction fees													—			—			(373		)	—
Other non-service components of retiree benefits (credits) costs, net													(2,351		)	2,045			(4,702		)	4,090
Loss from non-consolidated affiliates													(5,998		)	(2,417		)	(9,814		)	(4,953		)
Pre-Tax Earnings from Continuing Operations													(23,476		)	29,911			4,091			50,839
Add other non-service components of retiree benefit costs (credits), net													2,351			(2,045		)	4,702			(4,090		)
Add charges for non-consolidated affiliates													5,998			2,417			9,814			4,953
Add lease incentive amortization	4,226			3,283			8,452			5,874			4,024			4,226			8,251			8,452
Add net loss (gain) on financial instruments	(11,697		)	67,649			(10,812		)	65,780
Add transaction fees													—			—			373			—
Add net (gain) loss on financial instruments													35,886			(11,697		)	31,386			(10,812		)
Adjusted Pre-Tax Earnings from Continuing Operations	$	22,812		$	22,665		$	49,342		$	39,670		$	24,783		$	22,812		$	58,617		$	49,342

Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding settlement charges and other non-service components of retiree benefit costs, gains and losses for the fair value re-measurement of financial instruments, lease incentive ~~amortizations~~amortization, the transaction fees related to the acquisition of Omni and the start-up costs of a non-consolidated joint venture. We exclude these items from adjusted pre-tax earnings because they are distinctly different in their predictability or not closely related to our on-going operating activities. Management uses adjusted pre-tax earnings to compare the performance of core operating results between periods. Presenting this measure provides investors with a comparative metric of fundamental operations while highlighting changes to certain items among periods. Adjusted pre-tax earnings should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP.

Effective January 1, 2018, we adopted Topic 606 using a modified retrospective approach, under which financial statements are prepared under the revised guidance for the year of adoption, but not for prior years. We determined

that under Topic 606, the Company is an agent for aircraft fuel and certain other costs reimbursed under its ACMI and CMI contracts and for certain ground services that it arranges for ASI. Under the new standard, such reimbursed amounts are reported net of the corresponding expenses beginning in 2018. Revenues for the three and six month periods ended June 30, 2017 included $61.1 million and $115.5 million for reimbursable revenues under its ACMI and CMI contracts and for directly reimbursed ground services, which, under the new standard, have been reported net of the related expenses in 2018.

CAM Segment

CAM offers aircraft leasing and related services to external customers and also leases aircraft internally to the Company's airlines. CAM acquires passenger aircraft and manages the modification of the aircraft into freighters. The follow-on aircraft leases normally cover a term of five to ~~eight~~ten years.

~~As of June 30, 2018 and 2017, CAM had 54 and 45 aircraft under lease to external customers, respectively.~~ CAM's revenues grew by $4.8 million and $9.2 million for the three and six month periods ended June 30, 2018, respectively, compared to the corresponding periods of 2017, primarily as a result of additional aircraft leases. Revenues from external customers totaled $38.0 million and $73.9 million for the three and six month periods ended June 30, 2018, respectively, compared to $32.4 million and $63.2 million for the corresponding periods of 2017. CAM's revenues from the Company's airlines totaled $16.4$14.9 million and $32.9 million for the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to ~~$17.2 million and $34.3 million for~~ the corresponding periods of ~~2017, reflecting the transition~~2018, primarily as a result of ~~CAM-owned~~additional aircraft ~~to long-term leases with~~leases. Revenues from external ~~customers. CAM's aircraft leasing and related services revenues, which exclude customer lease incentive amortization, increased $5.8~~customers totaled $40.0 million and ~~$11.8~~$81.6 million ~~during~~for the three and six month periods ended June 30, ~~2018,~~

2019, respectively, compared to $38.0 million and $73.9 million for the corresponding periods of ~~2017, primarily as a result~~2018. As of ~~new~~June 30, 2019 and 2018, CAM had 56 and 54 aircraft ~~leases. Since July 1, 2017,~~under lease to external customers, respectively. CAM's revenues from the Company's airlines totaled $29.3 million and $58.0 million for the three and six month periods ended June 30, 2019, respectively, compared to $16.4 million and $32.9 million for the corresponding periods of 2018, reflecting lease revenues for the addition of the eleven passenger aircraft acquired with Omni in November 2018. In addition to the Omni acquisition, CAM has added ~~ten~~five Boeing 767-300 ~~freighter aircraft and two Boeing 737-400~~ freighter aircraft to its lease ~~portfolio.~~portfolio since July 1, 2018.

CAM's pre-tax earnings, inclusive of internally allocated interest expense, were ~~$15.4~~$16.7 million and $30.9 million during the three and six month periods ended June 30, 2018, respectively, compared to $12.8 million and $26.1 million during the corresponding periods of 2017. Increased pre-tax earnings reflect additional external lease revenues. These increases were partially offset by increases in internally allocated interest expense of $0.9 million and $2.1$32.9 million for the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to $15.4 million and $30.9 million for the corresponding periods of 2018. Increased pre-tax earnings reflect the eleven passenger aircraft leased to Omni as well as lease revenues for additional aircraft, offset by increases of $4.9 million and $10.4 million in internally allocated interest expense due to higher debt levels for the three and six month periods ended June 30, 2019 compared to the corresponding periods of ~~2017 due to higher debt levels.~~2018. The pre-tax earnings were also partially offset by ~~the~~ increased ~~amortization~~depreciation expense of ~~the ASI lease incentive of $0.9~~$8.2 million and ~~$2.6~~$18.1 million for the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of ~~2017. Depreciation expense increased by $4.3 million and $8.9 million for the three and six month periods ended June 30,~~ 2018 ~~respectively, compared to the corresponding periods of 2017~~ driven by the addition of ~~nine~~five Boeing freighter aircraft in the first half of ~~2018~~2019 compared to ~~2017.~~2018, and the addition of the 11 Boeing passenger aircraft from the Omni acquisition.

During the first six months of ~~2018,~~2019, CAM purchased ~~four~~seven Boeing 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.~~aircraft. As of June 30, ~~2018, all four~~2019, six of the Boeing 767-300 passenger aircraft purchased in ~~2018~~2019 and ~~one~~four Boeing 767-300 passenger aircraft purchased during ~~2017~~2018 were being modified from passenger to freighter configuration.

~~CAM expects to complete the freighter modification~~ One of the ~~five~~Boeing 767-300 aircraft purchased in 2019 was being prepped for passenger service. We expect to add up to nine aircraft ~~which it owned at June 30, 2018~~into service during the second half of ~~2018. CAM has~~2019. We have customer commitments or letters of intent for ~~three~~most of these ~~five~~ aircraft. ~~CAM's future operating results will depend on the timing and lease rates under which~~Additionally, CAM has agreements to purchase 19 more Boeing 767-300 aircraft. CAM began to acquire these aircraft ~~are ultimately leased.~~ in July 2019 and currently expects to complete their freighter modifications through 2021.

CAM's operating results will depend on its continuing ability to convert passenger aircraft into freighters within planned costs and within the time frames required by customers. CAM's future operating results will also depend on the timing and lease rates under which these aircraft are ultimately leased. CAM's future operating results will also be impacted by the amortization of additional warrants committed to Amazon in conjunction with the recent agreements for ten additional long-term aircraft leases and amendments to extend the terms of existing aircraft leases.

ACMI Services ~~Segment~~

The ACMI Services segment provides airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance, insurance and ~~insurance ("ACMI").~~aviation fuel. Our customers are ~~usually~~typically responsible for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the airline. Aircraft charter agreements, including those for the ~~U.S. Military,~~DoD, usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price. As of June 30, ~~2018,~~2019, ACMI Services included 5163 in-service aircraft, including 1931 passenger and freighter aircraft leased internally from CAM, 11eight CAM-owned freighter aircraft which are

under lease to DHL and operated by ABX under ~~the restated~~a CMI agreement, 2021 CAM-owned freighter aircraft which are under lease to ASI and operated by ATI and ABX under the ATSA, ~~and~~ another CAM-owned freighter operated under a CMI by ~~ATI.~~ATI and two passenger aircraft leased from an external lessor.

Total revenues from ACMI Services ~~decreased $24.9~~increased $135.3 million and ~~$50.5~~$273.9 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, to ~~$119.6~~$254.9 million and ~~$239.0~~$512.9 million compared to the corresponding periods of ~~2017.~~2018. These increases reflect the acquisition of OAI and increases in billable block hours of 32% and 28% for the three and six month periods ended June 30, 2019, respectively, compared to 2018. Increased revenues for 2019 included additional aircraft operations for ASI and the DoD. As of June 30, 2019, ACMI Services revenues included the operation of twelve more CAM-owned aircraft compared to June 30, 2018. On a combined pro forma basis, ACMI Services revenues for the three and six month periods ended June 30, ~~2017 included $32.6~~2018 would have been $243.9 million and ~~$69.5~~$466.5 million, respectively, ~~for~~with the ~~reimbursement~~inclusion of fuel and certain operating expenses. Such revenues for 2018 are reported net of expenses after the adoption of Topic 606. Airline services revenues from external customers, which do not include revenues for the reimbursement of fuel and certain operating expenses, increased $7.8 million and $19.1 million for the three and six month periods ended June 30, 2018, respectively, compared to the corresponding periods of 2017. Improved revenues were driven by additional aircraft operations for ASI and reflect a 5% and 8% increase in billable block hours for both the three and six month periods ended June 30, 2018, respectively, compared to the corresponding periods of 2017. As of June 30, 2018, ACMI Services included the operation of two more CAM-owned aircraft compared to June 30, 2017.OAI.

ACMI Services had pre-tax earnings of $1.0 million and ~~$4.9~~$13.3 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to ~~pre-tax earnings of $0.3~~$0.5 million and ~~losses of $3.3~~$3.9 million for the corresponding periods of ~~2017.~~2018. Improved pre-tax results in ~~2018~~2019 compared to ~~2017 reflect~~2018 were bolstered by expanded revenues from the acquisition of OAI and the timing of scheduled airframe maintenance costs. The improved pre-tax earnings were offset by increases of

$6.0 million and $12.0 million in internally allocated interest expense due to higher ~~revenues from~~debt levels for the three and six month periods ended June 30, 2019, respectively, compared to 2018. Earnings for the second quarter of 2019 also reflected additional personnel and training time in preparation for additional aircraft and block hours ~~offset by~~scheduled for operations in the ~~cost~~second half of ~~additional employees~~2019. Scheduled airframe maintenance expense decreased $3.0 million during the first half of 2019 compared to 2018. Airframe maintenance expense varies depending upon the number of C-checks and ~~aircraft maintenance expenses to support~~ the ~~expanded operations.~~scope of the checks required for those airframes scheduled for maintenance. In March 2018, ATI began to implement ~~recently ratified~~ an amendment to the collective bargaining agreement with its crewmembers. The ~~amendments~~amendment resulted in increased wages for the ATI crewmembers beginning in the second quarter of 2018.

Effective January 1, 2018, we adopted ASU "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07").The future growth for ACMI Service may be impacted by additional aircraft operations for Amazon. As a result of ~~adopting ASU 2017-07,~~recent agreements with Amazon, we began to operate an additional Boeing 767-300 aircraft in June of 2019 under the ~~pre-tax earnings~~ATSA and we expect to add at least nine additional Boeing 767-300 for ~~ACMI Services do not include~~Amazon, including five in the ~~other non-service components~~second half of ~~retiree benefit costs.~~2019 and four during 2020. (These aircraft will be leased to Amazon from CAM). Future operating results would also be impacted by the vesting of additional warrants committed to Amazon in exchange for adding aircraft into the ATSA.

ABX is negotiating with its flight crewmembers' collective bargaining unit. These negotiations could result in changes that may effect our productivity, employee compensation levels and the marketability of our services. Maintaining profitability in ACMI Services will depend on a number of factors, including customer flight schedules, crewmember productivity and pay, employee benefits, aircraft maintenance schedules and the number of aircraft we operate.

~~MRO Services Segment~~

~~MRO Services sells aircraft parts~~ ABX is negotiating with its flight crewmembers' collective bargaining unit. These negotiations could result in changes that may effect our productivity, employee compensation levels and provides aircraft maintenance and modification services through AMES and Pemco World Air Services, Inc. ("Pemco"), subsidiaries. Total revenues from MRO Services decreased $20.5 million and $8.2 million for the ~~three and six month periods ended June 30, 2018, respectively, compared to the corresponding periods~~marketability of 2017. External customer revenues for MRO Services decreased $2.1 million and increased $3.4 million during the three and six month periods ended June 30, 2018, respectively, compared to the corresponding periods of 2017. During the second quarter of 2017, MRO Services completed significant aircraft modification services for CAM in conjunction with aircraft leases and additional aircraft freighter conversions for external customers. The decline in revenues for the second quarter of 2018 also reflects the change in accounting standards beginning in 2018 after the adoption of Topic 606 to recognize certain aircraft maintenance and modification services over time instead of upon completion. During 2017, revenues were recognized in large amounts upon completion and redelivery of an aircraft to the customer.

The pre-tax earnings from MRO Services decreased $9.8 million and $8.5 million during the three and six month periods ended June 30, 2018 to $1.3 million and $5.8 million, respectively, compared to the corresponding periods of 2017. The decline in MRO Services profitability reflects the lower level of revenue recognized and a mix of more lower margin maintenance services revenues during 2018.

our services.

Other Activities

We provide other support services to our ACMI Services customers and other airlines by leveraging our knowledge and capabilities developed for our own operations over the years. Through the Airborne Maintenance and Engineering Services, Inc. and its subsidiaries ("AMES"), we sell aircraft parts and provide aircraft maintenance and modification services. We ~~provide~~provided mail and package sorting and logistical support to the U.S. Postal Service (“USPS”) at five USPS facilities through September 30, 2018, at which time our contracts expired. We arrange and ~~arrange~~perform similar services for certain ASI gateway locations in the U.S. During the second quarter, ASI has begun to in-source some of the gateway locations for which we arrange contracted logistical support. We also provide maintenance for ground equipment, facilities and material handling equipment. We also resell aviation fuel in Ohio and provide flight training.

External customer revenues from all other activities ~~were $16.9~~decreased $6.2 million and ~~$33.8~~$5.4 million during the three and six month periods ended June 30, 2018, respectively, compared to $45.2 million and $81.9 million for the corresponding periods of 2017. Customer revenues for the three and six month periods ended June 30, 2017 included $28.5 million and $45.9 million, respectively, for the reimbursement of certain ground services that it arranges for ASI which are being net against expenses in 2018 after the adoption of Topic 606. Revenues from external customers, which do not include 2017 revenues for the reimbursement of certain ground services, increased $0.2 million and decreased $2.2 million for the three and six month periods ended June 30, 2018,2019, respectively, compared to the corresponding periods of ~~2017. The decrease~~2018. Declines in USPS revenue ~~was driven~~during 2019 were offset partially by ~~the the termination of hub logistics~~additional facility maintenance services weand ground support services provided ~~through May of 2017 for ASI at the airport in Wilmington, Ohio.~~to ASI.

The pre-tax earnings from other activities increased ~~$1.3~~by $1.0 million and ~~$1.5~~decreased by $0.8 million during the three and six month periods ended June 30, ~~2018~~2019 to ~~$2.7~~$4.0 million and ~~$5.3~~$5.9 million, respectively, compared to the corresponding periods of ~~2017. Additional earnings from higher contractual costs~~2018. Improved results for second quarter of 2019 compared to 2018 reflect improved revenues and ~~increased volumes at~~margins on aircraft maintenance provided to other airlines. Results for the ~~USPS and ASI locations as well as earnings from an airline affiliate accounted for under~~first six months of 2019 compared to the ~~equity method were offset by reduced ground services and aviation fuel sales after ASI discontinued its hub in Wilmington, Ohio.~~

~~During June~~same period of 2018 ~~we began~~were negatively impacted by lower aircraft maintenance revenues during the first quarter of 2019 and projects with longer than expected completion times compared to provide cargo handling and related ground support services directly to ASI at one of its gateway locations. 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 these may not be renewed.~~

Discontinued Operations

The financial results of discontinued operations primarily ~~reflect~~consist of cost adjustments to benefits ~~for~~of former employees ~~previously~~ associated with ABX's former ~~freight sorting and aircraft fueling services~~hub operations provided to DHL. Pre-tax earnings related to the former ~~sorting~~hub operations were ~~$0.5~~$0.1 million and ~~$0.6~~$0.4 million for the first six months of ~~2018~~2019 and ~~2017,~~2018, respectively.

Expenses from Continuing Operations

Salaries, wages and benefits expense increased ~~$8.2~~$23.8 million and ~~$6.5~~$52.4 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of ~~2017. Expenses~~2018 driven by higher headcount for flight operations, maintenance services and package sorting services. The increases in expense for the three and six month periods ended June 30, ~~2018, increased due to~~2019 included $28.1 million and $54.6 million, respectively, for Omni, acquired in November 2018. Expenses for 2019 also included higher flight crew wages in conjunction with an amendment to the collective bargaining agreement with ~~its~~the ATI crewmembers ~~additional employees~~ and additional aircraft maintenance ~~technician time~~technicians to support

increased block hours. Increases in salaries, wages and benefits expense were partially offset by personnel reductions due to the expiration of the USPS contracts.

Depreciation and amortization expense increased ~~$3.8~~$21.6 million and ~~$7.4~~$44.3 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of ~~2017.~~2018. The increase in depreciation expense for the three and six month periods ended June 30, 2019 included $15.5 million and $31.0 million, respectively, for Omni assets acquired in November 2018. The increase also reflects incremental depreciation for ~~ten~~five Boeing 767-300 aircraft and ~~two Boeing 737-400~~additional aircraft engines added to the operating fleet since July 1, ~~2017.~~2018, as well as capitalized heavy maintenance and navigation technology upgrades. We expect depreciation expense to increase during future periods in conjunction with our fleet expansion and capital spending plans.

Maintenance, materials and repairs expense ~~decreased~~increased by ~~$0.8~~$2.8 million and ~~increased $5.8~~$10.7 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of 2017. The decrease in the second quarter of 2018 compared to 2017 was due to lower cost of material for the Company's MRO Services segment, offset by increased costs for airframe checks that are expensed by the Company's airlines. During the second quarter of 2017, MRO Services had an increased level of customer revenues and direct expenses compared to 2018. The increase in ~~maintenance, materials and repairs~~ expense for the ~~first~~three and six ~~months~~month periods ended June 30, 2019 included $4.4 million and $8.2 million, respectively, for Omni, acquired in November 2018. The timing and work scope of ~~2018~~scheduled airframe checks resulted in fluctuations of maintenance expense during 2019 compared to ~~2017 was due to additional airframe checks that are expensed by the Company's airlines and an increase in the cost of materials to support additional airline block hours and MRO Services.~~2018. Aircraft maintenance and material expenses can vary among periods due to the number of ~~scheduled airframe~~ maintenance ~~checks~~events and the scope of ~~the~~airframe checks that are performed.

Fuel expense ~~decreased~~increased by ~~$26.3~~$28.1 million and ~~$55.4~~$57.0 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of 2017. In 2017, fuel expense included reimbursable fuel billed to DHL, ASI and other ACMI customers which is being netted against the revenue in 2018 after the adoption of Topic 606. The customer-reimbursed fuel for the three and six month periods ended June 30, 2017 was $28.4 million and $59.9 million, respectively.2018. Fuel expense includes the cost of fuel to operate ~~U.S. Military~~DoD charters as well as fuel used to position aircraft for service and for maintenance purposes. ~~Fuel expense, excluding customer reimbursed fuel increased $2.1 million and $4.5 million~~The increase for the three and six month periods ended June 30, ~~2018 compared to 2017~~2019 included $26.2 million and $54.3 million, respectively, for Omni. The remainder of the increase was due to more block hours flown for military customers in ~~the first half of 2018.~~2019.

Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services, baggage handling services and other airport services. Contracted ground and aviation services ~~decreased $29.7~~increased $12.1 million and ~~$48.0~~$25.3 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of ~~2017. The decrease is primarily due to the netting of reimbursable revenues from certain ground services arranged~~2018. This increase for ~~ASI against the expense in 2018 due to the adoption of Topic 606. The customer-reimbursed expenses in~~ the three and six month periods ended June 30, ~~2017 were $30.0~~2019 included $12.3 million and ~~$48.6~~$24.2 million, ~~respectively.~~respectively, for Omni.

Travel expense increased by $13.6 million and $27.1 million during the three and six month periods ended June 30, 2019, respectively, compared to the corresponding periods of 2018. The increase for the three and six month periods ended June 30, 2019 included $13.1 million and $26.0 million, respectively, for Omni.

Landing and ramp expense, which includes the cost of deicing chemicals, ~~decreased~~increased by ~~$3.0~~$1.1 million and ~~$7.2~~$3.0 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of ~~2017.~~2018. The ~~decrease is primarily due to~~increase for the ~~netting of reimbursable revenues from landing~~three and ~~ramp fees billed to DHL, ASI and other ACMI customers against the expense in 2018 due to the adoption of Topic 606.~~

~~Other operating expenses decreased by $3.5~~six month periods ended June 30, 2019 included $1.3 million and ~~$4.3~~$3.2 million, respectively, for Omni.

Rent expense increased by $0.2 million and $0.7 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of ~~2017.~~2018. This increase for the three and six month periods ended June 30, 2019 included $1.5 million and $3.0 million, respectively, for Omni. This increase was partially offset by decreases in building rent after the expiration of the contracts for the five USPS facilities.

Insurance expense increased by $0.4 million and $1.0 million during the three and six month periods ended June 30, 2019, respectively, compared to the corresponding periods of 2018. Aircraft fleet insurance has increased due to additional aircraft operations during the first half of 2019 compared to 2018.

Other operating expenses increased by $13.6 million and $21.8 million during the three and six month periods ended June 30, 2019, respectively, compared to the corresponding periods of 2018. Other operating expenses include professional fees, employee training and utilities. The ~~decline in other~~increase for the three and six month periods ended June 30, 2019 included $8.9 million and $16.2 million, respectively, for Omni. Other operating expenses ~~for 2018 includes gains related to~~during 2019 were negatively impacted by the ~~sale of equipment, improved~~ operating results of an airline affiliate accounted for under the equity method. Operating expenses for 2018 included gains related to the sale of equipment.

The following table provides pro forma operating expenses (in thousands) for the Company after giving effect to the Omni acquisition. This information is based on adjustments to the historical consolidated financial statements of Omni using the purchase method of accounting for business combinations. The pro forma adjustments do not include any of the cost savings and ~~lower~~other synergies anticipated to result from the acquisition. These pro forma expenses have been prepared for comparative purposes only and do not purport to be indicative of results that would have actually

been reported as of the date or for the quarter presented had the acquisition taken place on such date or at the beginning of the quarter indicated, or to project the Company’s financial position or results of operations which may be reported in the future.



	Three Months Ended June 30, 2018
	Actual ATSG		Actual Omni		Pro Forma Adjustments			Pro Forma Results
Operating Expenses
Salaries, wages and benefits	$	74,049	$	27,815	$	(351	)	$	101,513
Depreciation and amortization	41,620		15,014		2,644			59,278
Maintenance, materials and repairs	36,817		3,723		(314		)	40,226
Fuel	5,913		26,386		(21		)	32,278
Contracted ground and aviation services	2,444		13,381		—			15,825
Travel	7,288		11,100		—			18,388
Landing and ramp	1,311		1,806		—			3,117
Rent	3,760		1,692		—			5,452
Insurance	1,420		487		—			1,907
Other operating expenses	5,087		5,984		—			11,071
Total Operating Expenses	$	179,709	$	107,388	$	1,958		$	289,055

	Six Months Ended June 30, 2018
	Actual ATSG		Actual Omni		Pro Forma Adjustments			Pro Forma Results
Operating Expenses
Salaries, wages and benefits	$	144,832	$	45,395	$	(265	)	$	189,962
Depreciation and amortization	81,624		30,019		5,288			116,931
Maintenance, materials and repairs	73,683		7,251		(320		)	80,614
Fuel	11,701		47,445		(23		)	59,123
Contracted ground and aviation services	4,828		24,335		—			29,163
Travel	13,920		19,897		—			33,817
Landing and ramp	2,459		3,477		—			5,936
Rent	6,990		3,601		—			10,591
Insurance	2,777		975		—			3,752
Other operating expenses	12,292		12,169		—			24,461
Total Operating Expenses	$	355,106	$	194,564	$	4,680		$	554,350

The following adjustments were made to the historical financial records to create the unaudited pro forma information in the table above:

Adjustments to eliminate transactions between the Company and Omni during the three and six month periods ended June 30, 2018.

increased fair values of the aircraft acquired and longer useful lives of the aircraft, indicative of the Company's polices and intent to ~~the same periods of 2017.~~modify certain aircraft to freighters as an aircraft is removed from passenger service.

Interest expense increased by ~~$1.6~~$11.4 million and ~~$3.4~~$23.5 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to the corresponding periods of ~~2017.~~2018. Interest expense increased due to a higher average debt level, including an additional term loan under the Senior Credit Agreement of $675.0 million to finance the acquisition of Omni and higher interest rates on the Company's outstanding loans. ~~Capitalized interest due to our fleet expansion was flat during the three and six month periods ended June 30, 2018, respectively, compared to the corresponding periods of 2017.~~ Interest expense in ~~the first half of~~2019 and 2018 was also impacted by the convertible notes issued in September 2017. The convertible notes have a principal value of $258.8 million and bear interest at a cash coupon rate of 1.125%. At the time of issuance, the value of the conversion feature of the convertible notes was recorded as a debt discount and is being amortized along with debt issuance costs to interest expense over the seven year term of the convertible notes. We expect interest expense to increase for 2019 reflecting our additional level of borrowings and higher interest rates.

The ~~non-cash amortization~~Company recorded pre-tax net losses on financial instruments of ~~the debt discount and issuance costs was $2.1~~$35.9 million and ~~$4.1~~$31.4 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to ~~the corresponding periods of 2017.~~

~~The Company recorded pre-tax net~~ gains ~~on financial instruments~~ of $11.7 million and $10.8 million during 2018. The gains and losses are primarily a result of re-measuring, as of June 30, 2019 and 2018, the fair value of the stock warrants granted to Amazon.

Non service components of retiree benefits were net losses of $2.4 million and $4.7 million during the three and six month periods ended June 30, ~~2018,~~2019, respectively, compared to net gains of $2.0 million and $4.1 million for 2018. The non service component gain and losses of ~~$67.6 million~~retiree benefits are actuarially determined and ~~$65.8 million during~~include the ~~corresponding periods~~amortization of ~~2017.The gains are primarily a result~~unrecognized gain and loss stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. Non service components of ~~re-measuring, as of June 30, 2018,~~retiree benefits can vary significantly from one year to the ~~fair value of the stock warrants granted~~next based on investment results and changes in discount rates used to Amazon. A decrease in the fair value of the warrant obligation since the previous re-measurement dates of March 31, 2018 and December 31, 2017, corresponded to a decrease in the traded price of the Company's shares and resulted in non-cash losses. The non-cash gains and losses resulting from quarterly re-measurements of the warrants may vary widely among quarters.account for defined benefit retirement plans.

The effective tax rate from continuing operations for the three and six month periods ended June 30, ~~2018,~~2019 was ~~18.2%~~13% and ~~and 21.0%~~198%, respectively. ~~These~~The effective tax ~~rates include deferred~~rate is affected by the re-measurement of warrants, changes in valuation allowances and other discrete tax ~~expense related to~~items in which expenses and benefits for tax purposes are different than required by generally accepted accounting principals. The effective tax rate before including the effects of the warrant ~~re-measurement loss at~~re-measurements, incentive amortizations and valuation allowance changes was 25% and 24% for the ~~end of the period.~~three and six month periods ended June 30, 2019, respectively. The effective tax rate before including the effects of the warrants was ~~26.0%~~26% and ~~24.0%~~24% for the three and six month periods ended June 30, 2018, respectively. ~~The effective tax rate before including~~

the effects of the warrants for the three and six month periods ended June 30, 2017 were 37.4% and 36.0%, respectively. The effective tax rate decreased for the first half of 2018 due to the enactment of the Tax Act in December 2017.

As of December 31, ~~2017,~~2018, the Company had operating loss carryforwards for U.S. federal income tax purposes of approximately ~~$57.6~~$253.8 million which will begin to expire in 2031 if not utilized before then. We expect to utilize the loss carryforwards to offset federal income tax liabilities in the future. As a result, we do not expect to pay federal income taxes until ~~2023~~2024 or later. The Company may, however, be required to pay minimum ~~tax~~taxes and certain state and local income taxes before then. The Company's taxable income earned from international flights ~~are~~is primarily sourced to the United States under international aviation agreements and treaties. When we operate in countries without such agreements, the Company could incur additional foreign income taxes.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Net cash generated from operating activities totaled $~~142.0~~209.4 million and ~~$124.8~~$142.0 million for the first six months ofin 2019 and 2018, ~~and 2017,~~ respectively. Improved cash flows generated from operating activities during ~~the first six months of 2018~~2019, were driven primarily by additional aircraft leases to customers and by increased operating levels of the ACMI Services ~~segment and customer collections.~~segment. Cash outlays for pension contributions were $1.4 million and $1.8 million for the first six months of 2019 and 2018, ~~were $1.8 million compared to $1.5 million for the corresponding period of 2017.~~respectively.

Capital spending levels were primarily the result of aircraft modification costs and the acquisition of aircraft for freighter modification. Cash payments for capital expenditures were ~~$150.8~~$216.8 million and ~~$144.3~~$150.8 million for the first six months of ~~2018~~2019 and ~~2017,~~2018, respectively. Capital expenditures in 2019 included $159.0 million for the acquisition of seven Boeing 767-300 aircraft and freighter modification costs; $34.7 million for required heavy maintenance; and $23.1 million for other equipment, including purchases of aircraft engines and rotables. Our capital expenditures in the first six of 2018 included $116.6 million for the acquisition of four Boeing 767-300 aircraft and freighter modification costs; $19.3 million for required heavy maintenance; and $14.9 million for other equipment, including purchases of aircraft engines and rotables. Our capital expenditures during 2017 included $96.7 million for the acquisition of three Boeing 767-300 aircraft and two Boeing 737-400 aircraft and freighter modification costs; $31.3 million for required heavy maintenance; and $16.3 million for other equipment, including purchases of aircraft engines and rotables.

During the first six months of 2019, we paid $12.0 million to complete the acquisitions of Omni and TriFactor. During the first six months of 2019 and 2018, we contributed ~~an additional~~$6.4 million and $5.2 million, respectively, to a joint venture with Precision Aircraft Solutions, LLC, which is developing a passenger-to-freighter conversion program for Airbus A321-200 aircraft. ~~During the first quarter of 2017 we paid $0.6 million to complete our acquisition of Pemco World Air Services, Inc.~~

Net cash provided by financing activities was ~~$4.5~~$21.1 million for the first six months of ~~2018~~2019 compared to ~~$56.9~~$4.5 million used by financing activities in ~~2017.~~2018. During the first six months of ~~2018,~~2019, we drew ~~$30.0~~$40.0 million from the revolving credit facility under the Senior Credit Agreement to fund capital spending for aircraft acquisition and modifications. We made debt principal payments of ~~$29.1~~$15.9 million.

During the first quarter of 2018, we repurchased 157,000 shares of the Company's common stock pursuant to an authorized share repurchase plan for $3.6 million, of which $0.6 million was paid in the first quarter and $3.0 million was paid in April 2018. The repurchase plan was amended by the Board ~~again~~ in February 2018 to increase ~~the authorized share repurchase plan~~such authorization to up to $150 ~~million (less amounts previously repurchased).~~million. We have not repurchased any shares in 2019.

Commitments

We estimate that capital expenditures for ~~2018~~2019 will total ~~$300~~$475 million, of which the majority will be related to aircraft purchases and freighter modifications. Actual capital spending for any future period will be impacted by aircraft acquisitions, maintenance and modification processes. We expect to finance the capital expenditures from current cash balances, future operating cash flow and the Senior Credit Agreement. The Company outsources a significant portion of the aircraft freighter modification process to a non-affiliated third party. The modification primarily consists of the installation of a standard cargo door and loading system. For additional information about the Company's aircraft modification obligations, see Note H of the accompanying financial statements.

Since August 3, 2017, the Company has been part of a joint-venture with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. We anticipate approval of a supplemental type certificate from the FAA in ~~2019.~~2020. We expect to make contributions equal to the Company's 49% ownership percentage of the program's total costs during ~~2018 and~~ 2019.

Liquidity

The Company has a Senior Credit Agreement with a consortium of banks that includes antwo unsubordinated term ~~loan~~loans of ~~$63.1~~$705.9 million, net of debt issuance costs, and a revolving credit facility from which the Company has drawn ~~$257.0~~$515.0 million, net of repayments, as of June 30, ~~2018.~~2019. The revolving credit facility has a capacity of ~~$545.0~~$645.0 million, permitted additional indebtedness of ~~$300.0~~$500.0 million of which $258.8 million has been utilized for the issuance of convertible notes, and an accordion feature whereby the Company can draw up to an additional ~~$100.0~~$300.0 million subject to the lenders' consent. The Senior Credit Agreement is collateralized by the Company's fleet of Boeing 777, 767 and 757 freighter aircraft. Under the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to ~~125%~~102% of the outstanding balances of the term ~~loan and the maximum capacity of revolving credit facility or 150% of the outstanding balance of the term loan~~loans and the total funded revolving credit ~~facility, whichever is less.~~facility. The minimum collateral coverage which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit facility commitment, which was ~~$545.0~~$645.0 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~~Senior Credit Agreement expires on May 30, ~~2023.~~2024.

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~~debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization expenses) ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default including unspecified events that may have a material adverse effect on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement.

Additional debt or lower EBITDA may result in higher interest rates. Under the Senior Credit Agreement, interest rates are adjusted quarterly based on the prevailing LIBOR or prime rates and a ratio of the Company's outstanding debt level to ~~EBITDA (earnings before interest, taxes, depreciation and amortization expenses).~~EBITDA. At the Company's current debt-to-EBITDA ratio, the unsubordinated term ~~loan~~loans and the revolving credit facility ~~both~~each bear a variable interest ~~rate~~rates of ~~3.6%~~4.66%.

At June 30, ~~2018,~~2019, the Company had ~~$31.7~~$54.8 million of cash balances. The Company had ~~$278.8~~$117.3 million available under the revolving credit facility, net of outstanding letters of credit, which totaled ~~$9.2~~$12.7 million. Also, the Company has up to $300 million of additional borrowing capacity available under the accordion feature of its Senior Credit Agreement, subject to lender consent. 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 June 30, ~~2018~~2019 and ~~2017,~~2018, we were not involved in any material unconsolidated SPE transactions.

Certain of our operating leases and agreements contain indemnification obligations to the lessor or one or more other parties that are considered usual and customary (e.g. use, tax and environmental indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after the expiration of the respective lease or agreement. No amounts have been recognized in our financial statements for the underlying fair value of guarantees and indemnifications.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as certain disclosures included elsewhere in this report, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to select appropriate accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies. In certain cases, there are alternative policies or estimation techniques which could be selected. On an ongoing basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves, valuation of spare parts inventory, useful lives, salvage

values and impairment of property and equipment, income taxes, contingencies and litigation. ~~The Company bases its~~We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances. Those factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

For information regarding recently issued accounting pronouncements and the expected impact on our annual statements, see Note A "SUMMARY OF FINANCIAL STATEMENT PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES" in the accompanying notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk for changes in interest rates and changes in the price of jet fuel. The risk associated with jet fuel, however, is largely mitigated by reimbursement through the agreements with our customers.

No changes have occurred to the market risks the Company faces since information about those risks were disclosed in item 7A of the Company's ~~2017~~2018 Annual Report on ~~Form~~form 10-K filed with the Securities and Exchange Commission on March 1, ~~2018.~~2019.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of June 30, ~~2018~~2019, 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~~Except for the internal controls of Omni, which was acquired on November 9, 2018, there were no changes in internal control over financial reporting during the most recently completed fiscal ~~quarter~~year that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

The Company faces risks that could adversely affect its condition or results of operations. Many of these risks are disclosed in Item 1A of the Company's ~~2017~~2018 Annual Report on form 10-K, filed with the Securities and Exchange Commission on March 1, ~~2018. The risk factors presented below update, and should be considered in addition to, the risk factors previously disclosed in Item 1A of the Company's 2017 Annual Report on Form 10-K.~~2019. Other risks that are currently unknown to management or are currently considered immaterial or unlikely, could also adversely affect the Company.

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~~increased the ~~common stock repurchase program~~authorization from $100.0 million to ~~increase the amount that management may repurchase to $150~~$150.0 million (less amounts previously repurchased). The Board's authorization does not require the Company to repurchase a specific number of shares or establish a time frame for any repurchase and the Board may terminate the repurchase program at any time. Repurchases may be made from time to time in the open market or in privately negotiated transactions. There is no expiration date for the repurchase program. There were no repurchases made during the second quarter of ~~2018.~~2019. As of June 30, ~~2018,~~2019, the Company ~~has~~had repurchased 6,592,349 shares and ~~has a~~the maximum dollar value of shares that ~~may yet~~could then be purchased under the program ofwas $61.3 million.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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



Exhibit No.	Description of Exhibit
	Articles of Incorporation

3.1	First Amendment to Restated Certificate of Incorporation of Air Transport Services Group, Inc., filed herewith.

3.2	Amended and Restated Bylaws of Air Transport Services Group, Inc. (1)

	Material Contracts
10.1	First Amendment to Second Amended and Restated Credit Agreement, dated as of February 13, 2019, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services Group, Inc.; each of the Guarantors party hereto; each of the financial institutions party hereto as "Lenders"; and SunTrust Bank, in its capacity as Administrative Agent. (2)

10.2	Second Amendment to Second Amended and Restated Credit Agreement, dated as of May 24, 2019, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services Group, Inc.; each of the financial institutions party hereto as "Lenders"; and SunTrust Bank, in its capacity as Administrative Agent. (2)

	Certifications

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.



101.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 Form 8-K filed with the Securities and Exchange Commission on May 10, 2019


(2)	Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on May 29, 2019

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		AIR TRANSPORT SERVICES GROUP, INC.,
		a Delaware Corporation
		Registrant

		/S/ JOSEPH C. HETE
		Joseph C. Hete
		Chief Executive Officer (Principal Executive Officer)
Date:	August ~~8, 2018~~6, 2019

		/S/ QUINT O. TURNER
		Quint O. Turner
		Chief Financial Officer (Principal Financial Officer
Date:	August ~~8, 2018~~6, 2019	and Principal Accounting Officer)

4045



	CAM		MRO Services		Total
Carrying value as of December 31, 2017	$	34,395	$	2,884	$	37,279
Carrying value as of June 30, 2018	$	34,395	$	2,884	$	37,279



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



	June 30, 2018			December 31, 2017
Flight equipment	$	1,870,120		$	1,801,808
Ground equipment	54,165			53,523
Leasehold improvements, facilities and office equipment	28,660			26,897
Aircraft modifications and projects in progress	148,999			121,760
	2,101,944			2,003,988
Accumulated depreciation	(900,947		)	(844,026		)
Property and equipment, net	$	1,200,997		$	1,159,962



	Six Months Ended
	June 30, 2018				June 30, 2017
	Number of Awards		Weighted average grant-date fair value		Number of Awards		Weighted average grant-date fair value
Outstanding at beginning of period	873,849		$	12.30	1,040,569		$	9.97
Granted	207,295		26.50		243,940		17.52
Converted	(96,616	)	10.89		(173,210	)	9.69
Expired	(500	)	28.38		—		—
Forfeited	(2,600	)	26.76		(3,800	)	13.66
Outstanding at end of period	981,428		$	15.39	1,107,499		$	11.66
Vested	326,928		$	7.18	324,599		$	6.39



	For the three months ending							For the six months ending
	June 30, 2018							June 30, 2018
	Revenue							Revenue
	As Reported		Without Topic 606		Increase (decrease)			As Reported		Without Topic 606		Increase (decrease)
ACMI Services	$	119,589	$	167,724	$	(48,135	)	$	238,963	$	336,272	$	(97,309	)
MRO Services	29,069		28,549		520			60,009		54,918		5,091
Other (ground services)	16,933		62,682		(45,749		)	33,772		130,868		(97,096		)



	June 30		December 31
	2018		2017
Assets:
CAM	$	1,214,986	$	1,192,890
ACMI Services	190,309		189,379
MRO Services	99,129		87,177
All other	13,050		79,398
Total	$	1,517,474	$	1,548,844