UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period September 30, ~~2021~~2022

☐ 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)

937-382-5591

(Registrant’s telephone number, including area code)

________________________________________________________________

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☒

Accelerated filer

☐

Smaller reporting company

☐

Non-accelerated filer

☐

Emerging growth company

☐

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 13(a) of the Exchange Act. ☐

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

As of November ~~8, 2021,~~9, 2022, there were ~~74,199,254~~72,728,397 shares of the registrant’s common stock outstanding.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION

The financial information, including the financial statements, included in this 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, ~~2020,~~2021, filed with the Securities and Exchange Commission ("SEC") on March 1, ~~2021.~~2022 ("2021 Form 10-K").

The ~~Securities and Exchange Commission~~SEC 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,~~SEC, 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 ~~2020 Annual Report filed on~~2021 Form ~~10-K with the Securities and Exchange Commission.~~

10-K.

PART I. FINANCIAL INFORMATION

~~Item~~ITEM 1. ~~Financial Statements~~FINANCIAL STATEMENTS

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


		September 30,		December 31,			September 30,		December 31,
		2021		2020			2022		2021
ASSETS	ASSETS					ASSETS
CURRENT ASSETS:	CURRENT ASSETS:					CURRENT ASSETS:
Cash, cash equivalents and restricted cash	Cash, cash equivalents and restricted cash	$	49,808	$	39,719	Cash, cash equivalents and restricted cash	$	54,486	$	69,496
Accounts receivable, net of allowance of $731 in 2021 and $997 in 2020		191,746		153,511
Accounts receivable, net of allowance of $989 in 2022 and $742 in 2021						Accounts receivable, net of allowance of $989 in 2022 and $742 in 2021	250,548		205,399
Inventory	Inventory	50,827		40,410		Inventory	55,322		49,204
Prepaid supplies and other	Prepaid supplies and other	20,008		39,096		Prepaid supplies and other	28,281		28,742
TOTAL CURRENT ASSETS	TOTAL CURRENT ASSETS	312,389		272,736		TOTAL CURRENT ASSETS	388,637		352,841
Property and equipment, net	Property and equipment, net	2,136,213		1,939,776		Property and equipment, net	2,339,278		2,129,934
Customer incentive	Customer incentive	108,712		126,007		Customer incentive	85,472		102,913
Goodwill and acquired intangibles	Goodwill and acquired intangibles	508,357		516,290		Goodwill and acquired intangibles	495,195		505,125
Operating lease assets	Operating lease assets	61,351		68,824		Operating lease assets	61,742		62,644
Other assets	Other assets	95,152		78,112		Other assets	154,841		113,878
TOTAL ASSETS	TOTAL ASSETS	$	3,222,174	$	3,001,745	TOTAL ASSETS	3,525,165		$	3,267,335
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:	CURRENT LIABILITIES:					CURRENT LIABILITIES:
Accounts payable	Accounts payable	$	151,064	$	141,425	Accounts payable	$	186,460	$	174,237
Accrued salaries, wages and benefits	Accrued salaries, wages and benefits	58,342		56,506		Accrued salaries, wages and benefits	60,170		56,652
Accrued expenses	Accrued expenses	16,117		19,005		Accrued expenses	12,910		14,950
Current portion of debt obligations	Current portion of debt obligations	625		13,746		Current portion of debt obligations	637		628
Current portion of lease obligations	Current portion of lease obligations	17,292		17,784		Current portion of lease obligations	21,879		18,783
Unearned revenue and grants	Unearned revenue and grants	42,404		53,522		Unearned revenue and grants	37,289		47,381
TOTAL CURRENT LIABILITIES	TOTAL CURRENT LIABILITIES	285,844		301,988		TOTAL CURRENT LIABILITIES	319,345		312,631
Long term debt	Long term debt	1,368,569		1,465,331		Long term debt	1,369,006		1,298,735
Stock warrant obligations	Stock warrant obligations	72,667		103,474		Stock warrant obligations	715		915
Post-retirement obligations	Post-retirement obligations	22,379		35,099		Post-retirement obligations	20,140		21,337
Long term lease obligations	Long term lease obligations	44,461		51,128		Long term lease obligations	40,581		44,387
Other liabilities	Other liabilities	47,890		47,963		Other liabilities	56,810		49,662
Deferred income taxes	Deferred income taxes	197,528		141,265		Deferred income taxes	253,036		217,291
TOTAL LIABILITIES	TOTAL LIABILITIES	2,039,338		2,146,248		TOTAL LIABILITIES	2,059,633		1,944,958
Commitments and contingencies (Note H)	Commitments and contingencies (Note H)	0		0		Commitments and contingencies (Note H)
STOCKHOLDERS’ EQUITY:	STOCKHOLDERS’ EQUITY:					STOCKHOLDERS’ EQUITY:
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock	Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock	—		—		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; 74,199,254 and 59,560,036 shares issued and outstanding in 2021 and 2020, respectively		742		596
Common stock, par value $0.01 per share; 150,000,000 shares authorized; 74,366,636 and 74,142,183 shares issued and outstanding in 2022 and 2021, respectively						Common stock, par value $0.01 per share; 150,000,000 shares authorized; 74,366,636 and 74,142,183 shares issued and outstanding in 2022 and 2021, respectively	744		741
Additional paid-in capital	Additional paid-in capital	991,650		855,547		Additional paid-in capital	1,039,354		1,074,286
Retained earnings	Retained earnings	264,906		78,010		Retained earnings	486,231		309,430
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(74,462)		(78,656)		Accumulated other comprehensive loss	(60,797)		(62,080)
TOTAL STOCKHOLDERS’ EQUITY	TOTAL STOCKHOLDERS’ EQUITY	1,182,836		855,497		TOTAL STOCKHOLDERS’ EQUITY	1,465,532		1,322,377
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,222,174	$	3,001,745	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	3,525,165		$	3,267,335

See notes to the unaudited condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


		Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
		September 30,				September 30,					September 30,				September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
REVENUES	REVENUES	$	465,955	$	404,146	$	1,251,915	$	1,171,217	REVENUES	$	516,916	$	465,955	$	1,512,444	$	1,251,915
OPERATING EXPENSES	OPERATING EXPENSES									OPERATING EXPENSES
Salaries, wages and benefits	Salaries, wages and benefits	148,074		128,608		431,614		373,642		Salaries, wages and benefits	169,967		148,074		$	494,526	431,614
Depreciation and amortization	Depreciation and amortization	77,751		67,974		224,435		205,607		Depreciation and amortization	83,283		77,751		$	246,726	224,435
Maintenance, materials and repairs	Maintenance, materials and repairs	43,751		48,767		131,671		134,148		Maintenance, materials and repairs	41,541		43,751		$	116,657	131,671
Fuel	Fuel	50,176		36,202		117,210		116,788		Fuel	68,620		50,176		$	202,080	117,210
Contracted ground and aviation services	Contracted ground and aviation services	21,620		19,840		55,217		47,735		Contracted ground and aviation services	18,278		21,620		$	56,762	55,217
Travel	Travel	24,928		20,254		61,833		59,226		Travel	29,865		24,928		$	82,544	61,833
Landing and ramp	Landing and ramp	4,027		3,378		10,162		8,895		Landing and ramp	4,210		4,027		$	12,873	10,162
Rent	Rent	5,807		5,137		17,401		13,821		Rent	8,383		5,807		$	22,114	17,401
Insurance	Insurance	3,178		3,119		9,382		7,295		Insurance	2,346		3,178		$	7,224	9,382
Other operating expenses	Other operating expenses	17,205		18,623		48,378		49,577		Other operating expenses	17,764		17,205		$	57,968	48,378
Government grants	Government grants	(30,322)		(21,726)		(96,626)		(31,547)		Government grants	—		(30,322)		$	—	(96,626)
Impairment of aircraft and related assets		—		—		—		39,075
		366,195		330,176		1,010,677		1,024,262			444,257		366,195		$	1,299,474	1,010,677
OPERATING INCOME	OPERATING INCOME	99,760		73,970		241,238		146,955		OPERATING INCOME	72,659		99,760		$	212,970	241,238
OTHER INCOME (EXPENSE)	OTHER INCOME (EXPENSE)									OTHER INCOME (EXPENSE)
Interest income	Interest income	8		93		36		217		Interest income	56		8		$	80	36
Non-service component of retiree benefit gains		4,457		2,897		13,370		8,693
Non-service component of retiree benefit (costs) gains										Non-service component of retiree benefit (costs) gains	4,635		4,457		$	15,411	13,370
Debt issuance costs	Debt issuance costs	—		—		(6,505)		—		Debt issuance costs	—		—		$	—	(6,505)
Net gain (loss) on financial instruments	Net gain (loss) on financial instruments	(7,378)		(53,393)		37,797		(56,072)		Net gain (loss) on financial instruments	695		(7,378)		$	9,402	37,797
Gain (loss) from non-consolidated affiliate		(1,147)		(2,485)		(1,365)		(11,762)
Loss from non-consolidated affiliates										Loss from non-consolidated affiliates	(954)		(1,147)		$	(5,577)	(1,365)
Interest expense	Interest expense	(14,459)		(15,440)		(44,002)		(47,808)		Interest expense	(12,167)		(14,459)		$	(33,027)	(44,002)
											(7,735)		(18,519)		$	(13,711)	(669)
		(18,519)		(68,328)		(669)		(106,732)
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	81,241		5,642		240,569		40,223		EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	64,924		81,241		$	199,259	240,569
INCOME TAX EXPENSE	INCOME TAX EXPENSE	(18,878)		(11,387)		(56,047)		(17,397)		INCOME TAX EXPENSE	(14,736)		(18,878)		$	(45,065)	(56,047)
EARNINGS (LOSS) FROM CONTINUING OPERATIONS		62,363		(5,745)		184,522		22,826
EARNINGS FROM CONTINUING OPERATIONS										EARNINGS FROM CONTINUING OPERATIONS	50,188		62,363		$	154,194	184,522
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES	EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES	2,309		154		2,374		4,162		EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES	854		2,309		$	1,736	2,374
NET EARNINGS (LOSS)		$	64,672	$	(5,591)	$	186,896	$	26,988
NET EARNINGS										NET EARNINGS	51,042		$	64,672	$	155,930	$	186,896

BASIC EARNINGS PER SHARE	BASIC EARNINGS PER SHARE									BASIC EARNINGS PER SHARE
Continuing operations	Continuing operations	$	0.85	$	(0.10)	$	2.75	$	0.39	Continuing operations	$	0.68	$	0.85	$	2.08	$	2.75
Discontinued operations	Discontinued operations	0.03		0.01		0.03		0.07		Discontinued operations	0.01		0.03		0.03		0.03
TOTAL BASIC EARNINGS (LOSS) PER SHARE		$	0.88	$	(0.09)	$	2.78	$	0.46
TOTAL BASIC EARNINGS PER SHARE										TOTAL BASIC EARNINGS PER SHARE	$	0.69	$	0.88	$	2.11	$	2.78

DILUTED EARNINGS PER SHARE	DILUTED EARNINGS PER SHARE									DILUTED EARNINGS PER SHARE
Continuing operations	Continuing operations	$	0.81	$	(0.10)	2.14		0.38		Continuing operations	$	0.57	$	0.81	$	1.76	$	2.14
Discontinued operations	Discontinued operations	0.03		0.01		0.03		0.07		Discontinued operations	0.01		0.03		0.02		0.03
TOTAL DILUTED EARNINGS (LOSS) PER SHARE		$	0.84	$	(0.09)	2.17		0.45
TOTAL DILUTED EARNINGS PER SHARE										TOTAL DILUTED EARNINGS PER SHARE	$	0.58	0.84		$	1.78	$	2.17

WEIGHTED AVERAGE SHARES	WEIGHTED AVERAGE SHARES									WEIGHTED AVERAGE SHARES
Basic	Basic	73,721		59,146		67,177		59,106		Basic	73,998		73,721		73,956		67,177
Diluted	Diluted	76,743		59,146		75,277		59,863		Diluted	88,746		76,743		88,980		75,277

See notes to the unaudited condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
NET EARNINGS (LOSS) $ 64,672 $ (5,591) $ 186,896 $ 26,988
OTHER COMPREHENSIVE INCOME (LOSS):
Defined Benefit Pension 1,362 726 4,086 2,178
Defined Benefit Post-Retirement 36 24 108 72
TOTAL COMPREHENSIVE INCOME (LOSS), net of tax $ 66,070 $ (4,841) $ 191,090 $ 29,238


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
NET EARNINGS	$	51,042	$	64,672	$	155,930	$	186,896
OTHER COMPREHENSIVE INCOME:
Defined Benefit Pension	773		1,362		1,256		4,086
Defined Benefit Post-Retirement	9		36		27		108


TOTAL COMPREHENSIVE INCOME, net of tax	$	51,824	$	66,070	$	157,213	$	191,090

See notes to the unaudited condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)


		Common Stock			Additional Paid-in Capital		Accumulated Earnings (Deficit)		Accumulated Other Comprehensive Income (Loss)		Total			Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
		Number	Amount											Number	Amount
BALANCE AT JUNE 30, 2020		59,589,770	$	596	$	477,829	$	78,474	$	(60,366)	$	496,533
BALANCE AT JUNE 30, 2021													BALANCE AT JUNE 30, 2021	74,202,815	$	742	$	989,611	$	200,234	$	(75,860)	$	1,114,727
Stock-based compensation plans	Stock-based compensation plans												Stock-based compensation plans
Grant of restricted stock	Grant of restricted stock	—	—		—						—		Grant of restricted stock	(761)	—		—						—
Withholdings of common shares, net of issuances	Withholdings of common shares, net of issuances	—	—		—						—		Withholdings of common shares, net of issuances	—	—		(5)						(5)
Forfeited restricted stock	Forfeited restricted stock	—	—		—						—		Forfeited restricted stock	(2,800)	—		—						—
Reclassification of warrant liability					221,093						221,093

Amortization of stock awards and restricted stock	Amortization of stock awards and restricted stock				1,835						1,835		Amortization of stock awards and restricted stock				2,044						2,044
Total comprehensive income (loss)							(5,591)		750		(4,841)
BALANCE AT SEPTEMBER 30, 2020		59,589,770	$	596	$	700,757	$	72,883	$	(59,616)	$	714,620
Total comprehensive income													Total comprehensive income						64,672		1,398		66,070
BALANCE AT SEPTEMBER 30, 2021													BALANCE AT SEPTEMBER 30, 2021	74,199,254	742		991,650		264,906		(74,462)		1,182,836

BALANCE AT JANUARY 1, 2020		59,329,431	$	593	$	475,720	$	45,895	$	(61,866)	$	460,342
BALANCE AT DECEMBER 31, 2020													BALANCE AT DECEMBER 31, 2020	59,560,036	596		855,547		78,010		(78,656)		855,497
Stock-based compensation plans	Stock-based compensation plans												Stock-based compensation plans
Grant of restricted stock	Grant of restricted stock	201,400	2		(2)						—		Grant of restricted stock	121,339	1		(1)						—
Issuance of common shares, net of withholdings	Issuance of common shares, net of withholdings	59,439	1		(1,840)						(1,839)		Issuance of common shares, net of withholdings	92,234	1		(1,242)						(1,241)
Forfeited restricted stock	Forfeited restricted stock	(500)	—		—						—		Forfeited restricted stock	(2,800)	—		—						—
Reclassification of warrant liability					221,093						221,093
Conversion of warrants													Conversion of warrants	14,428,445	144		131,823						131,967
Amortization of stock awards and restricted stock	Amortization of stock awards and restricted stock				5,786						5,786		Amortization of stock awards and restricted stock				5,523						5,523
Total comprehensive income (loss)							26,988		2,250		29,238
BALANCE AT SEPTEMBER 30, 2020		59,589,770	$	596	$	700,757	$	72,883	$	(59,616)	$	714,620
Total comprehensive income													Total comprehensive income						186,896		4,194		191,090
BALANCE AT SEPTEMBER 30, 2021													BALANCE AT SEPTEMBER 30, 2021	74,199,254	742		991,650		264,906		(74,462)		1,182,836

See notes to the unaudited 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			Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
		Number	Amount											Number	Amount
BALANCE AT JUNE 30, 2021		74,202,815	$	742	$	989,611	$	200,234	$	(75,860)	$	1,114,727
BALANCE AT JUNE 30, 2022													BALANCE AT JUNE 30, 2022	74,369,138	$	744	$	1,037,139	$	435,189	$	(61,579)	$	1,411,493
Stock-based compensation plans	Stock-based compensation plans												Stock-based compensation plans
Grant of restricted stock		(761)	—		—						—
Withholdings of common shares, net of issuances		—	—		(5)						(5)

Issuance of common shares, net of withholdings													Issuance of common shares, net of withholdings	(2,202)	—		(80)						(80)
Forfeited restricted stock	Forfeited restricted stock	(2,800)	—		—						—		Forfeited restricted stock	(300)	—		—						—
Conversion of warrants		0	—		—						—

Amortization of stock awards and restricted stock	Amortization of stock awards and restricted stock				2,044						2,044		Amortization of stock awards and restricted stock				2,295						2,295
Total comprehensive income (loss)							64,672		1,398		66,070
BALANCE AT SEPTEMBER 30, 2021		74,199,254	$	742	$	991,650	$	264,906	$	(74,462)	$	1,182,836
Total comprehensive income													Total comprehensive income						51,042		782		51,824
BALANCE AT SEPTEMBER 30, 2022													BALANCE AT SEPTEMBER 30, 2022	74,366,636	744		1,039,354		486,231		(60,797)		1,465,532

BALANCE AT JANUARY 1, 2021		59,560,036��	$	596	$	855,547	$	78,010	$	(78,656)	$	855,497
BALANCE AT DECEMBER 31, 2021													BALANCE AT DECEMBER 31, 2021	74,142,183	$	741	$	1,074,286	$	309,430	$	(62,080)	$	1,322,377
Stock-based compensation plans	Stock-based compensation plans												Stock-based compensation plans
Grant of restricted stock	Grant of restricted stock	121,339	1		(1)						—		Grant of restricted stock	109,200	1		(1)						—
Issuance of common shares, net of withholdings	Issuance of common shares, net of withholdings	92,234	1		(1,242)						(1,241)		Issuance of common shares, net of withholdings	120,053	2		(1,521)						(1,519)
Forfeited restricted stock	Forfeited restricted stock	(2,800)	—		—						—		Forfeited restricted stock	(4,800)	—		—						—
Conversion of warrants		14,428,445	144		131,823						131,967
Cumulative effect in change in accounting principle													Cumulative effect in change in accounting principle				(39,559)		20,871				(18,688)
Amortization of stock awards and restricted stock	Amortization of stock awards and restricted stock				5,523						5,523		Amortization of stock awards and restricted stock				6,149						6,149
Total comprehensive income (loss)							186,896		4,194		191,090
BALANCE AT SEPTEMBER 30, 2021		74,199,254	$	742	$	991,650	$	264,906	$	(74,462)	$	1,182,836
Total comprehensive income													Total comprehensive income						155,930		1,283		157,213
BALANCE AT SEPTEMBER 30, 2022													BALANCE AT SEPTEMBER 30, 2022	74,366,636	744		1,039,354		486,231		(60,797)		1,465,532

See notes to the unaudited condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


		Nine Months Ended				Nine Months Ended
		September 30,				September 30,
		2021		2020				2022		2021
OPERATING ACTIVITIES:	OPERATING ACTIVITIES:						OPERATING ACTIVITIES:
Net earnings from continuing operations	Net earnings from continuing operations	$	184,522	$	22,826		Net earnings from continuing operations	$	154,194	184,522
Net earnings from discontinued operations	Net earnings from discontinued operations	2,374		4,162			Net earnings from discontinued operations	$	1,736	2,374
Adjustments to reconcile net earnings to net cash provided by operating activities:	Adjustments to reconcile net earnings to net cash provided by operating activities:						Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	249,574		229,280			Depreciation and amortization	$	265,306	249,574
Pension and post-retirement	Pension and post-retirement	5,433		2,916			Pension and post-retirement	$	1,662	5,433
Deferred income taxes	Deferred income taxes	55,023		17,728			Deferred income taxes	$	40,892	55,023
Amortization of stock-based compensation	Amortization of stock-based compensation	5,524		5,786			Amortization of stock-based compensation	$	6,149	5,524
Loss from non-consolidated affiliates	Loss from non-consolidated affiliates	1,364		11,762			Loss from non-consolidated affiliates	$	5,577	1,364
Net (gain) loss on financial instruments	Net (gain) loss on financial instruments	(37,797)		56,072			Net (gain) loss on financial instruments	$	(9,402)	(37,797)
Debt issuance costs	Debt issuance costs	6,505		—			Debt issuance costs	$	—	6,505
Impairment of aircraft and related assets		—		39,075

Changes in assets and liabilities:	Changes in assets and liabilities:						Changes in assets and liabilities:
Accounts receivable	Accounts receivable	(38,235)		13,066			Accounts receivable	$	(45,149)	(38,235)
Inventory and prepaid supplies	Inventory and prepaid supplies	4,561		(8,927)			Inventory and prepaid supplies	$	(9,200)	4,561
Accounts payable	Accounts payable	18,261		13,466			Accounts payable	$	4,863	18,261
Unearned revenue	Unearned revenue	(11,545)		49,605			Unearned revenue	$	(10,685)	(11,545)
Accrued expenses, salaries, wages, benefits and other liabilities	Accrued expenses, salaries, wages, benefits and other liabilities	7,181		(8,623)			Accrued expenses, salaries, wages, benefits and other liabilities	$	12,789	7,181
Pension and post-retirement balances	Pension and post-retirement balances	(20,743)		(20,920)			Pension and post-retirement balances	$	(18,737)	(20,743)
Other	Other	(2,764)		(3,990)			Other	$	(1,925)	(2,764)
NET CASH PROVIDED BY OPERATING ACTIVITIES	NET CASH PROVIDED BY OPERATING ACTIVITIES	429,238		423,284			NET CASH PROVIDED BY OPERATING ACTIVITIES	$	398,070	429,238
INVESTING ACTIVITIES:	INVESTING ACTIVITIES:						INVESTING ACTIVITIES:
Expenditures for property and equipment	Expenditures for property and equipment	(428,126)		(394,295)			Expenditures for property and equipment	$	(448,358)	(428,126)
Proceeds from property and equipment	Proceeds from property and equipment	3,524		9,210			Proceeds from property and equipment	$	3,759	3,524
Investments in businesses	Investments in businesses	(2,155)		(9,053)			Investments in businesses	$	(16,233)	(2,155)

NET CASH USED IN INVESTING ACTIVITIES		(426,757)		(394,138)
NET CASH (USED IN) INVESTING ACTIVITIES							NET CASH (USED IN) INVESTING ACTIVITIES	$	(460,832)	(426,757)
FINANCING ACTIVITIES:	FINANCING ACTIVITIES:						FINANCING ACTIVITIES:
Proceeds from revolving credit facilities							Proceeds from revolving credit facilities	$	510,000	1,430,600
Principal payments on long term obligations	Principal payments on long term obligations	(1,758,018)		(584,923)			Principal payments on long term obligations	$	(345,525)	(1,758,018)
Proceeds from revolving credit facilities		1,430,600		80,000
Repurchase of senior unsecured notes							Repurchase of senior unsecured notes	$	(115,204)	—
Payments for financing costs	Payments for financing costs	(3,099)		(7,507)			Payments for financing costs	$	—	(3,099)
Proceeds from bond issuance	Proceeds from bond issuance	207,400		500,000			Proceeds from bond issuance	$	—	207,400

Proceeds from exercise of warrants		131,967		—
Proceeds from issuance of warrants							Proceeds from issuance of warrants	$	—	131,967
Withholding taxes paid for conversion of employee stock awards							Withholding taxes paid for conversion of employee stock awards	$	(1,519)	(1,242)
NET CASH PROVIDED BY FINANCING ACTIVITIES							NET CASH PROVIDED BY FINANCING ACTIVITIES	47,752		7,608

Withholding taxes paid for conversion of employee stock awards		(1,242)		(1,839)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		7,608		(14,269)

NET INCREASE IN CASH AND CASH EQUIVALENTS		10,089		14,877
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS							NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(15,010)		10,089
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	39,719		46,201			CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	69,496		39,719
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	49,808	$	61,078
CASH AND CASH EQUIVALENTS AT END OF YEAR							CASH AND CASH EQUIVALENTS AT END OF YEAR	$	54,486	$	49,808

SUPPLEMENTAL CASH FLOW INFORMATION:	SUPPLEMENTAL CASH FLOW INFORMATION:						SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amount capitalized	Interest paid, net of amount capitalized	$	39,104	$	36,060		Interest paid, net of amount capitalized	$	39,711	$	39,104
Federal and state income taxes paid	Federal and state income taxes paid	$	1,859	$	758		Federal and state income taxes paid	$	1,735	$	1,859
SUPPLEMENTAL NON-CASH INFORMATION:	SUPPLEMENTAL NON-CASH INFORMATION:						SUPPLEMENTAL NON-CASH INFORMATION:
Accrued expenditures for property and equipment	Accrued expenditures for property and equipment	$	27,358	$	25,832		Accrued expenditures for property and equipment	$	51,085	$	27,358

See notes to the unaudited condensed to 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. ("ATSG" and, together with its subsidiaries, the "Company," "we," "us," and "our") is a holding company whose subsidiaries lease aircraft and provide contracted airline operations ~~ground services, aircraft modification and maintenance services and~~as well as other support services mainly to the air transportation, e-commerce and package delivery industries. ~~The Company's subsidiaries offer a range of complementary services to delivery companies, freight forwarders, airlines and government customers.~~

~~The Company's~~ATSG's leasing subsidiary, Cargo Aircraft Management, Inc. (“CAM”), leases aircraft to each of ~~the Company's airlines~~ATSG's airline subsidiaries as well as to non-affiliated airlines and other lessees. ~~The Company's airlines,~~ATSG's airline subsidiaries, ABX Air, Inc. (“ABX”), Air Transport International, Inc. (“ATI”) and Omni Air International, LLC ("OAI") each have the authority, through their separate U.S. Department of Transportation ("DOT") and Federal Aviation Administration ("FAA") ~~certificate~~s,certificates, to transport cargo worldwide. A~~dditionally, both ATI and OAI each have the authority to conduct passenger charter operations worldwide. The Company provides air transportation services to a concentrated base of customers.~~ The Company provides a combination of aircraft, crews, maintenance and insurance services for its customers' transportation networks through ~~"CMI"~~crew, maintenance and ~~"ACMI"~~insurance ("CMI") agreements and aircraft, crew, maintenance and insurance ("ACMI") agreements and through charter contracts in which aircraft fuel is also included.

In addition to its aircraft leasing and airline services, the Company ~~sells aircraft parts, provides~~offers a range of complementary services to delivery companies, freight forwarders, airlines and government customers. These include aircraft maintenance and modification services, ~~sells~~aircraft parts supply, equipment maintenance services and ~~services material handling equipment and arranges~~ load transfer and package sorting ~~services for customers.~~services.

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 GAAP and such principles are applied on a basis consistent with the financial statements reflected in our ~~Annual Report on~~2021 Form ~~10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission ("SEC").~~10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with ~~accounting principles generally accepted in the United States of America~~GAAP 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 unaudited condensed consolidated financial statements include the accounts of ~~Air Transport Services Group, Inc.~~ATSG and its wholly-owned subsidiaries. Inter-company balances and transactions are eliminated. Investments in affiliates in which the Company has significant influence but does not exercise control are accounted for using the equity method of accounting. Under the equity method, the Company's share of the nonconsolidated affiliate's income or loss is recognized in the consolidated statement of earnings and cumulative post-acquisition changes in the investment are adjusted against the carrying amount of the investment. Investments in affiliates in which the Company does not exercise control or have significant influence are reflected at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

~~COVID-19~~ Uncertainties

The COVID-19 pandemic has had an impact on the Company's operations and financial results. Beginning in late February 2020, revenues have been disrupted when customers cancelled scheduled passenger flights and aircraft maintenance services, airport restrictions and closures were imposed and the Company ~~began to incur additional costs, including expenses to protect employees. Additionally in 2021, a vendor that converts the Company's~~

~~passenger aircraft into freighter aircraft~~ has experienced ~~supply chain~~ disruptions ~~for various parts that has delayed the conversion~~ ~~of aircraft expected~~ to ~~be completed this year by several weeks.~~

~~The extent of the impact that the pandemic will have on future financial and operational results will depend on developments, including recurrence of the COVID-19 virus and~~ its variants; the duration and scope of government orders and restrictions; the availability and effectiveness of vaccines on the virus and the extent of the pandemic on overall economic conditions. These are highly uncertain. Disruptions to the Company's operations, such as shortages of personnel, parts shortages, ~~of parts,~~ maintenance delays, shortages of transportation and hotel accommodations for flight crews, facility closures and other supply chain related issues ~~may occur. If~~as a result of the COVID-19 pandemic. The emergence of COVID-19 variants could result in reduced revenues, additional costs and supply chain delays for the Company. The extent of the impact that the coronavirus pandemic will have on our future operations and financial results will depend on future developments, including: the duration, spread, severity and recurrence of the COVID-19 variants; vaccination rates, the effectiveness of vaccines, the duration and scope of government orders and local restrictions as well as the extent of the impact of the pandemic ~~persists or reemerges, operating cash flows~~on overall economic conditions.

In February 2022, war started in Ukraine, intensifying geopolitical pressures worldwide. While the Company's operations have not been detrimentally impacted directly, additional supply chain disruptions and inflationary pressures could ~~decline significantly and the value of airframes, engines and certain intangible assets could decline significantly.~~

~~The pandemic has not had a significant adverse financial~~have an impact on overall economic conditions, as well as the Company's ~~leasing~~ operations ~~or its airline operations for customers' freight networks. However, the Company's passenger flight operations have been~~ and continue to be, impacted by the pandemic. The Company has received government funding pursuant to payroll support programs of the federal government as described in Note H. Management believes that the Company's current cash balances and forecasted cash flows provided from its customer leases, operating agreements and government grants combined with its Senior Credit Agreement, will be sufficient to fund operations, capital spending and scheduled debt payments for at least the next 12 months.financial results.

Accounting Standards Updates

In August 2020, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ~~ASU~~Accounting Standards Update ("ASU") No. 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" ("ASU 2020-06"). This new standard ~~changes~~removes the ~~accounting and measurement of~~separation models for convertible ~~instruments.~~debt with cash conversion or beneficial conversion features. It eliminates the ~~treasury stock~~"treasury stock" method for convertible instruments and requires application of the “if-converted” method for certain agreements. ~~This standard~~The Company adopted ASU 2020-06 on January 1, 2022 using the modified retrospective approach which resulted in the following adjustments:


(in thousands)	December 31, 2021		Adoption of ASU 2020-06		January 1, 2022
Balance Sheet line item:
Principal value	$	(258,750)	$	—	$	(258,750)
Unamortized issuance cost	$	2,889	$	—	$	2,889
Unamortized discount	$	24,215	$	(24,215)	$	—
Convertible Debt	$	(231,646)	$	(24,215)	$	(255,861)
Net deferred tax liability	$	(217,291)	$	5,527	$	(211,764)
Additional paid-in capital	$	(1,074,286)	$	39,559	$	(1,034,727)
Retained earnings	$	(309,430)	$	(20,871)	$	(330,301)

After adopting ASU 2020-06, the Company's Convertible Notes due 2024 (as defined and discussed in Note F) are reflected entirely as a liability as the embedded conversion feature is ~~effective~~no longer separately presented within stockholders' equity, which also eliminated the non-cash discount. Accordingly, earnings no longer reflect the discount amortization expense which was $6.4 million of interest expense, net of income taxes during 2021. After giving effect for the ~~Company beginning January 1, 2022. The Company~~adoption, the effective interest rate on the Convertible Notes is ~~currently evaluating~~1.5%.

ASU 2020-06 requires the application of the more dilutive if-converted method when calculating the impact of ~~adopting~~the Convertible Notes on earnings per diluted share. The adoption of ASU 2020-06 ondoes not change the accounting treatment of shares to be delivered by the convertible note hedges (see Note F) purchased by the Company that are designed to offset the shares issued to settle its ~~interest expense~~Convertible Notes, which are anti-dilutive and not reflected in earnings ~~(loss)~~ per ~~share calculation under the "if-converted" method related to its convertible debt.~~diluted share.

NOTE B—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS

The carrying amounts of goodwill by ~~operating~~reportable segment are as follows (in thousands):

CAM ACMI Services All Other Total
Carrying value as of December 31, 2020 153,290 234,571 $ 8,113 $ 395,974
Carrying value as of September 30, 2021 $ 153,290 $ 234,571 $ 8,113 $ 395,974


	CAM		ACMI Services		All Other		Total
Carrying value as of December 31, 2021	153,290		234,571		8,113		395,974
Carrying value as of September 30, 2022	$	153,290	$	234,571	$	8,113	$	395,974

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

Airline Amortizing
Certificates Intangibles Total
Carrying value as of December 31, 2020 $ 9,000 $ 111,316 $ 120,316
Amortization — (7,933) (7,933)
Carrying value as of September 30, 2021 $ 9,000 $ 103,383 $ 112,383


	Airline		Amortizing
	Certificates		Intangibles		Total
Carrying value as of December 31, 2021	$	9,000	$	100,151	$	109,151
Amortization	—		(9,930)		(9,930)
Carrying value as of September 30, 2022	9,000		90,221		99,221

The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangibles assets, including customer ~~relationships,~~relationship and Supplemental Type Certificates ("STC") intangibles, over 54 to 1817 remaining years.

Stock warrants issued to ~~a lessee~~Amazon (see Note C) as an incentive for Amazon subsidiary ASI to lease aircraft from the Company are recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligations and if probable of vesting at the time of issuance, 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, ~~2020~~2021	$	~~126,007~~102,913
Amortization	~~(17,295)~~(17,442)
Carrying value as of September 30, ~~2021~~2022	$	~~108,712~~85,472

~~In January 2014, the~~The Company ~~acquired~~has a ~~25 percent equity interest~~49% ownership in West Atlantic AB of Gothenburg, Sweden ("West"). West, through its two airlines, West Atlantic UK and West Atlantic Sweden, 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. 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. In 2020, the Company sold its remaining interest to the same investor.

~~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. ~~Approval~~In April of ~~a supplemental type certificate from the FAA was granted in April 2021~~ ~~and aircraft conversions began in 2021.~~ ~~The Company expects to make contributions equal to its 49% ownership percentage of the joint-venture's liquidity needs. During the first nine months of 2021 and 2020,~~2022, the Company ~~contributed $2.5 million~~acquired a 40% ownership interest in the joint-venture company GA Telesis Engine Services, LLC to provide engine tear-down services to harvest and ~~$9.1 million to the joint venture, respectively.~~sell engine parts. The Company accounts for its investment in ~~the aircraft conversion~~these joint ~~venture~~ventures under the equity method of accounting, in which the carrying value of each investment is reduced for the Company's share of the non-consolidated ~~affiliate's~~affiliates' operating results.

The carrying value of the joint ~~venture is~~ventures totaled $20.6 million and $10.3 million at September 30, 2022 and December 31, 2021, 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.

NOTE C—SIGNIFICANT CUSTOMERS

Three customers each account for a significant portion of the Company's consolidated revenues. The percentage of the Company's revenues for the Company's three largest customers, for the three and nine month periods ending September 30, ~~2021~~2022 and ~~2020~~2021 are as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Customer Percentage of Revenue Percentage of Revenue
DoD 31% 33% 26% 33%
Amazon 33% 29% 35% 29%
DHL 12% 13% 13% 12%


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2022	2021	2022	2021
Customer	Percentage of Revenue		Percentage of Revenue
DoD	31%	31%	29%	26%
Amazon	34%	33%	34%	35%
DHL	13%	12%	12%	13%

1311

The accounts receivable from the Company's three largest customers as of September 30, ~~2021,~~2022 and December 31, ~~2020,~~2021 are as follows (in thousands):


		September 30,		December 31,			September 30,		December 31,
		2021		2020			2022		2021
Customer	Customer	Accounts Receivable				Customer	Accounts Receivable
DoD	DoD	$	53,648	$	32,625	DoD	$	101,108	$	57,998
Amazon	Amazon	68,903		55,997		Amazon	76,966		68,429
DHL	DHL	15,546		10,471		DHL	17,037		9,111

DoD

The Company is a provider of cargo and passenger airlift services to the ~~United States~~U.S. Department of Defense ("DoD"). The DoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes.

DHL

The Company has had long-term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. As of September 30, 2022, the Company leased 14 Boeing 767 freighter aircraft to DHL comprised of three Boeing 767-200 aircraft and eleven Boeing 767-300 aircraft, with expirations between 2023 and 2029. Under a separate CMI agreement, the Company operates ten of the Boeing 767 aircraft that DHL leases from the Company and two Boeing 767 aircraft that DHL provides. The Company provides DHL with scheduled maintenance services under the agreement which is subject to renewal in May of 2028. 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 network. The Company also provides additional air cargo transportation services for DHL through ACMI agreements in which the Company provides the aircraft, crews, maintenance and insurance under a single contract. Further, beginning in third quarter of 2022, the Company began to operate the first two of four Boeing 767 aircraft provided by DHL under an additional CMI agreement which currently runs through August of 2027.

Amazon

The Company has been providing freighter aircraft, airline operations and services for cargo handling and logistical support for Amazon.com Services, LLC ("ASI"), successor to Amazon.com 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 Boeing 767 freighter aircraft to ASI. The ATSA also provides for the operation of aircraft by the Company’s airline subsidiaries, ~~maintenance services~~ and the management of ground services by the Company's subsidiary LGSTX Services, Inc. ("LGSTX"). ~~The~~As of September 30, 2022, the Company leased 30 Boeing 767-300 and 12 Boeing 767-200 freighter aircraft ~~leases have terms which expire~~to ASI with lease expirations between ~~March of~~ 2023 and ~~March of~~ 2031.

~~DHL~~

The Company has had long term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under a separate crew, maintenance and insurance (“CMI”) agreement, the Company operates Boeing 767 aircraft that DHL leases from the Company. Pricing for services provided through the CMI agreement is based on pre-defined fees, scaled for the number of aircraft operated and the number of flight crews provided to DHL for its U.S. network. The Company provides DHL with scheduled maintenance services for aircraft that DHL leases. The Company also provides additional air cargo transportation services for DHL through 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.

Amazon Investment Agreement

In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement on March 8, 2016 (the "2016 Investment Agreement") and a Stockholders Agreement on March 8, 2016. The 2016 Investment Agreement ~~provided~~called for the Company to issue warrants in three tranches ~~which granted~~granting Amazon the right to acquire up to 19.9% of the Company’s outstanding common ~~shares.~~shares as described below. The first tranche of warrants, issued upon the execution of the 2016 Investment Agreement 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, granted Amazon the right to purchase approximately 1.59 million ATSG common shares. The third tranche of warrants vested on September 8, 2020, and granted Amazon the right to purchase an additional 0.5 million ATSG common shares to bring Amazon’s ownership, ~~potential,~~ after the exercise in full of the three tranches of warrants, 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 2016 Investment Agreement and after giving effect~~subject to ~~the warrants granted.~~certain adjustments. The exercise price of the 14.9 million warrants issued under the 2016 Investment Agreement was $9.73

per share, which ~~represents~~represented the closing price of ATSG’s common shares on February 9, 2016. ~~These~~Each of the three tranches of warrants ~~had an expiration date of~~were exercisable in accordance with their terms through March 8, 2021 ~~subject~~(subject to extension if regulatory approvals, exemptions, authorizations, consents or clearances ~~had~~have not been obtained by such ~~date.~~

date).

On March 5, 2021, Amazon exercised warrants from the 2016 Investment Agreement for 865,548 shares of the Company's common stock through a cashless exercise by forfeiting 480,047 warrants from the 2016 Investment Agreement as payment. For the cashless exchange, ATSG shares were valued at $27.27 per share, its volume-weighted average price for the previous 30 trading days immediately preceding March 5, 2021. Also on March 5, 2021, Amazon notified the Company of its intent to exercise warrants from the 2016 Investment agreement for 13,562,897 shares of the Company's common stock by paying $132.0 million of cash to the Company. This exercise was contingent upon the approval of the ~~United States Department of Transportation,~~DOT, and the expiration or termination of any applicable waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. After receiving all required regulatory approvals and clearances, Amazon remitted the funds to the Company on May 7, 2021, and the Company issued the corresponding shares of common stock, completing the warrant exercise.

The Company resumed repurchases of its own shares during October 2022 in conjunction with the expiration of certain government restrictions (see Note H) on September 30, 2022. On October 7, 2022, Amazon sold 250,000 shares of the Company's common stock back to the Company for cash of $5.9 million, pursuant to the terms of the 2016 Investment Agreement, as amended on March 5, 2021. This resulted in Amazon maintaining its ownership percentage of less than 19.9% of the Company's outstanding shares at the time.

On December 22, 2018, the Company announced agreements with ~~Amazon~~ASI 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) extend the ATSA by five years through March 2026, with an option to extend for an additional three years. The Company leased all ten of the 767-300 aircraft in 2020. 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 into another Investment Agreement on December 20, ~~2018.~~2018 (the "2018 Investment Agreement"). Pursuant to the 2018 Investment Agreement, ~~Amazon was~~the Company issued ~~additional~~Amazon warrants for 14.8 million ATSG common shares. This group of warrants will expire if not exercised within seven years from their issuance date, in December of 2025 (subject to extension if regulatory approvals, exemptions, authorizations, consents or clearances have not been obtained by such date). The warrants have an exercise price of $21.53 per share.

On May 29, 2020, ~~Amazon~~ASI agreed to lease ~~twelve~~12 more Boeing 767-300 aircraft from the Company. The first of these leases began in the second quarter of 2020 ~~eight more leases were executed through the first nine months of 2021 and~~with the remaining ~~three aircraft to be delivered before the end of~~ 11 leases commencing in 2021. All ~~twelve~~12 of these aircraft leases ~~will be~~were for ~~ten year~~10-year terms. Pursuant to the 2018 Investment Agreement, as a result of leasing these 12 aircraft, Amazon was issued warrants for 7.0 million common shares, all of which ~~5.3 million common shares~~ have vested. These warrants will expire if not exercised by December 20, 2025 (subject to extension if regulatory approvals, exemptions, authorizations, consents or clearances have not been obtained by such date). The exercise price of these warrants is $20.40 per share.

Issued and outstanding ~~warrants~~warrants are summarized below as of September 30, ~~2021:~~2022:

Common Shares in millions

Lease Commitment

Exercise price

Vested

Non-Vested

Expiration

Exercise price

Vested

Non-Vested

Expiration

2018 Investment Agreement

10 aircraft

$21.53

14.8

0.0

December 20, 2025

2018 Investment Agreement

$21.53

14.8

0.0

December 20, 2025

2018 Investment Agreement

12 aircraft

$20.40

5.3

1.8

December 20, 2025

2018 Investment Agreement

$20.40

7.0

0.0

December 20, 2025

Additionally, Amazon can earn incremental ~~warrant~~warrants rights ~~for~~of up to 2.9 million common shares under the 2018 Investment Agreement by leasing up to five more cargo aircraft from the Company before January 2026. Incremental warrants granted to Amazon for ~~Amazon’s~~ASI’s commitment to any such future aircraft leases will have an exercise price based on the volume-weighted average price of the Company's shares during the 30 trading days immediately preceding the contractual commitment for each lease.

For all outstanding warrants vested, Amazon may select a cashless conversion option. Assuming ~~ATSG’s~~ATSG's stock price at the time of conversion is above the warrant exercise price, Amazon would receive fewer shares in exchange for any warrants exercised under the cashless option by surrendering the number of shares with a market value equal to the exercise ~~value.~~price.

The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance for financial instruments. Warrants classified as liabilities are marked to fair value at the end of each reporting period. The value of warrants is recorded as a customer incentive asset if it is probable of vesting at the

time of grant and further changes in the fair value of warrant obligations are recorded to earnings. Upon a warrant vesting event, the customer incentive asset is amortized as a reduction of revenue over the duration of the related revenue contract.

In accordance with the 2016 Investment Agreement, on September 8, 2020, the final number of shares issuable under the third tranche of warrants was determined to be 0.5 million common shares. As a result, under US GAAP, the value of the entire warrant grant under the 2016 Investment Agreement was remeasured on September 8, 2020, and ~~their~~its fair value of $221 million was reclassified from balance sheet liabilities to paid-in-capital. In October 2020, upon the execution of the 10th and final aircraft lease of the December 2018 commitment, warrants for 14.8 million shares ~~from the 2018 Investment Agreement~~ were ~~vested. As a result, under US GAAP, the value of this entire grant was~~ remeasured on October 1, 2020, and their fair value of $154 million was reclassified from balance sheet liabilities to paid-in-capital. In December 2021, upon execution of the 12th and final aircraft lease of the May 2020 commitment, warrants for 7.0 million shares were remeasured on December 7, 2021, and their fair value of $82.4 million was reclassified from balance sheet liabilities to paid-in-capital.

As of September 30, 2022 and December 31, 2021, the Company's liabilities reflected warrants ~~primarily~~ from the 2018 ~~Investment agreement for the May 2020 lease commitment,~~Amazon agreements having a fair value of ~~$72.7 million.~~$0.7 million and $0.9 million, respectively. During the three and nine ~~month periods~~months ended September 30 ~~2021,~~, 2022 the re-measurements of warrants to fair value resulted in a gain of $0.1 million and $0.2 million before the effect of income taxes, respectively, compared to net non-operating losses of $9.6 million and ~~net gains~~gain of $30.8 million before the effect of income taxes, respectively, ~~compared to losses of $55.9 million and gains of $48.3 million~~ for the corresponding periods of ~~2020.~~2021.

The Company's earnings in future periods will be impacted by 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.

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 comparable transactions. The fair value of the Company’s money market funds, ~~convertible note,~~Convertible Notes (as defined in Note F), 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 to Amazon resulting from aircraft leased to ~~Amazon~~ASI were determined using a Black-Scholes pricing model which considers various assumptions, including the Company’s common stock price, the volatility of the Company’s common stock, the expected dividend yield, exercise price and the risk-free interest rate (Level 2 inputs). The fair value of the stock warrant obligations for unvested stock warrants, conditionally ~~granted~~promised to Amazon for the execution of incremental, future aircraft leases, include additional assumptions including the expected exercise prices and the probabilities that future leases will occur (Level 3 inputs).

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


As of September 30, 2021		Fair Value Measurement Using						Total
As of September 30, 2022										As of September 30, 2022	Fair Value Measurement Using						Total
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3
Assets	Assets									Assets
Cash equivalents—money market	Cash equivalents—money market	$	—	$	25,041	$	—	$	25,041	Cash equivalents—money market	$	—	$	5,294	$	—	$	5,294

Interest rate swap										Interest rate swap	—		1,077		—		1,077
Total Assets	Total Assets	$	—	$	25,041	$	—	$	25,041	Total Assets	$	—	$	6,371	$	—	$	6,371
Liabilities	Liabilities									Liabilities
Interest rate swap		$	—	$	(6,425)	$	—	$	(6,425)

Stock warrant obligations	Stock warrant obligations	—		—		(72,667)		(72,667)		Stock warrant obligations	—		—		(715)		(715)
Total Liabilities	Total Liabilities	$	—	$	(6,425)	$	(72,667)	$	(79,092)	Total Liabilities	$	—	$	—	$	(715)	$	(715)


As of December 31, 2020		Fair Value Measurement Using						Total
As of December 31, 2021										As of December 31, 2021	Fair Value Measurement Using						Total
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3
Assets	Assets									Assets
Cash equivalents—money market	Cash equivalents—money market	$	—	$	20,389	$	—	$	20,389	Cash equivalents—money market	$	—	$	30,042	$	—	$	30,042

Total Assets	Total Assets	$	—	$	20,389	$	—	$	20,389	Total Assets	$	—	$	30,042	$	—	$	30,042
Liabilities	Liabilities									Liabilities
Interest rate swap	Interest rate swap	$	—	$	(13,414)	$	—	$	(13,414)	Interest rate swap	$	—	$	(3,603)	$	—	$	(3,603)
Stock warrant obligation		—		(9,058)		(94,416)		(103,474)
Stock warrant obligations										Stock warrant obligations	—		—		(915)		(915)
Total Liabilities	Total Liabilities	$	—	$	(22,472)	$	(94,416)	$	(116,888)	Total Liabilities	$	—	$	(3,603)	$	(915)	$	(4,518)

As a result of lower market interest rates compared to the stated interest rates of the Company’s fixed rate debt obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was approximately ~~$49.0~~$70.7 million ~~more~~less than the carrying value, which was ~~$1,369.2~~$1,369.6 million at September 30, ~~2021.~~2022. As of December 31, ~~2020,~~2021, the fair value of the Company’s debt obligations was approximately ~~$70.8~~$37.1 million less than the carrying value, which was ~~$1,479.1~~$1,299.4 million. The non-financial assets, including goodwill, intangible assets and property and equipment are measured at fair value on a non-recurring basis.

NOTE E—PROPERTY AND EQUIPMENT

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


		September 30,		December 31,
		2021		2020			September 30, 2022		December 31, 2021
Flight equipment	Flight equipment	$	3,196,849	$	2,856,142	Flight equipment	$	3,440,294	$	3,301,113
Ground equipment	Ground equipment	63,074		65,857		Ground equipment	$	68,762	64,641
Leasehold improvements, facilities and office equipment	Leasehold improvements, facilities and office equipment	38,749		36,193		Leasehold improvements, facilities and office equipment	$	39,714	38,769
Aircraft modifications and projects in progress	Aircraft modifications and projects in progress	271,098		231,451		Aircraft modifications and projects in progress	$	383,590	206,917
		3,569,770		3,189,643			$	3,932,360	3,611,440
Accumulated depreciation	Accumulated depreciation	(1,433,557)		(1,249,867)		Accumulated depreciation	$	(1,593,082)	(1,481,506)
Property and equipment, net	Property and equipment, net	$	2,136,213	$	1,939,776	Property and equipment, net	$	2,339,278	$	2,129,934

CAM owned aircraft with a carrying value of ~~$1,343.7~~$1,457.2 million and ~~$1,097.6~~$1,404.4 million that were under lease to external customers as of September 30, ~~2021,~~2022 and December 31, ~~2020,~~2021, respectively.

Aircraft and other long-lived assets are tested for impairment when circumstances indicate the carrying value of the assets may not be recoverable. To conduct impairment testing, the Company groups assets and liabilities at the lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset group are less than the carrying value. If impairment exists, an adjustment is recorded to write the assets down to fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined considering quoted market values, discounted cash flows or internal and external appraisals, as applicable. For assets held for sale, impairment is recognized when the fair value less the cost to sell the asset is less than the carrying value.

1715

NOTE F—DEBT OBLIGATIONS

Debt obligations consisted of the following (in thousands):


		September 30,		December 31,			September 30,	December 31,
		2021		2020			2022	2021
Revolving credit facility						Revolving credit facility	525,000	360,000
Senior Notes	Senior Notes	$	697,046	$	493,376	Senior Notes	577,974	697,162
Revolving credit facility		432,000		140,000
Unsubordinated term loans		—		612,169
Convertible debt		229,300		222,391
Convertible Notes						Convertible Notes	256,639	231,646
Other financing arrangements	Other financing arrangements	10,848		11,141		Other financing arrangements	10,030	10,555
Total debt obligations	Total debt obligations	1,369,194		1,479,077		Total debt obligations	1,369,643	1,299,363
Less: current portion	Less: current portion	(625)		(13,746)		Less: current portion	(637)	(628)
Total long term obligations, net	Total long term obligations, net	$	1,368,569	$	1,465,331	Total long term obligations, net	1,369,006	1,298,735

The Company ~~utilizes~~is party to a syndicated credit agreement ~~("Senior~~(as amended, the "Senior Credit Agreement") which ~~as of September 30, 2021, included unsubordinated~~includes the ability to execute term loans and a revolving credit facility. Prior to its amendment on April 6, 2021, the Senior Credit Agreement had a maturity date of November 2024 provided certain liquidity measures are maintained ~~through~~during 2024, an incremental accordion capacity based on debt ratios and a maximum revolver capacity of ~~$600.0~~$600 million. The interest rate is a pricing premium added to LIBOR based upon the ratio of the Company's debt to its earnings before interest, taxes, depreciation and amortization expenses ("EBITDA") as defined under the Senior Credit Agreement. As of September 30, 2022, the unused revolving credit facility available to the Company at the trailing twelve-month EBITDA level was $259.7 million with additional permitted indebtedness under the Senior Credit Agreement subject to compliance with other covenants.

On April 6, 2021, the Company ~~amended~~amended the Senior Credit Agreement ("Amended Credit Agreement"). The ~~Amended Credit Agreement:~~amendment (i) temporarily increased the aggregate amount of the revolving credit facility from $600 million to $1 billion, and subsequently decreased the aggregate amount to ~~$800.0~~$800 million on April 13, 2021, (ii) ~~permits~~permitted increases of the revolving credit facility commitments and/or new tranches of ~~terms~~term loans in an aggregate principal amount equal to the sum of $400 million plus the principal amount of indebtedness that could be incurred at the time of the increase that would not cause the Secured Leverage Ratio (as defined in the ~~Amended~~Senior Credit Agreement) to exceed 3.25 to 1.00 on a pro forma basis, (iii) modified the maturity date of the agreement from November 30, 2024, to April 6, 2026, with such extension of the maturity date being subject to (1) at the election of the ~~Lenders,~~lenders, five ~~one year~~one-year extensions and (2) an earlier springing maturity date of July 12, 2024, if, on such date, (a) more than ~~$75,000,000~~$75.0 million in aggregate principal amount of the ~~Company’s 1.125% senior convertible notes due 2024~~Convertible Notes (as defined below) remain outstanding and (b) the Company has less than ~~$375,000,000~~$375.0 million of liquidity at such time, (iv) removed the Collateral to Total Exposure Ratio (as defined in the ~~agreements)~~Senior Credit Agreement) as a financial covenant, and (v) ~~prepaid~~required the ~~entire outstanding~~Company to repay the balance of all term loans outstanding at the time of the amendment.

On October 19, 2022, the Company amended the Senior Credit Agreement. This amendment i) increased the aggregate amount of the revolving credit facility from $800 million to $1 billion, ii) extended the maturity date of the agreement from April 6, 2026 to October 19, 2027, iii) replaced LIBOR with SOFR as an interest rate benchmark, iv) reduced the collateral to outstanding loan ratio to 1.15:1.00 from 1.25:1:00, v) permits cash dividends and share repurchases provided the secured leverage ratio is less than 3.00 to 1.00 and the total leverage ratio is less than 3.50 to 1.00, and removed the annual limitation on cash dividends and share repurchases which was $100 million.

On January 28, 2020, ~~the Company, through a subsidiary,~~CAM completed a debt offering of ~~$500.0~~$500 million in senior unsecured notes ~~(the~~(together with the "Additional Notes" referred to below, the “Senior Notes”). that were guaranteed by ATSG and certain of its other subsidiaries. The Senior Notes were sold only to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the ~~“Securities~~“1933 Act”), and certain investors pursuant to Regulation S under the Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a fixed rate of 4.75% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2020. The Senior Notes ~~will~~ mature on February 1, 2028. The indenture for the Senior Notes ~~contain~~contains customary events of default and certain covenants which are generally no more restrictive than those set forth in the Senior Credit Agreement. The net proceeds of ~~$495.0~~$495 million from the Senior Notes were used to pay down the revolving credit

facility. The Senior Notes do not require principal payments until maturity but prepayments are allowed without penalty beginning February 1, 2025.

On April 13, 2021, ~~the Company, through a subsidiary,~~CAM completed its offering of ~~$200.0~~$200 million of additional ~~notes ("Additional Notes") under the existing~~ Senior ~~Notes.~~Notes that were guaranteed by ATSG and certain of its subsidiaries. The ~~Additional~~additional Senior Notes are fully fungible with the original Senior Notes, treated as a single class for all purposes under the indenture governing all the ~~existing notes~~Senior Notes with the same terms ~~as those of the existing notes~~ (other than issue date and issue price). The proceeds of $205.5 million, net of scheduled interest payable, were used, in conjunction with draws from the revolving credit facility to repay the unsubordinated term loans. Upon retirement of the unsubordinated term loans, the ~~company~~Company expensed debt issuance costs of $6.5 million related to the unsubordinated term loans.

~~As of~~During the nine month period ended September 30, ~~2021, the unused revolving credit facility available to~~2022, the Company repurchased Senior Notes having a principal value of $120.0 million in the open market at ~~the trailing twelve month EBITDA level was $353.3 million, and additional permitted indebtedness under~~a 5.5% reducing the Senior ~~Credit Agreement subject~~Notes carrying value to ~~compliance with other covenants,~~$578.0 million. The Company recognized a net pre-tax gain of $4.5 million, net of fees, which was ~~limited to $250.0 million.~~recorded under net gain of financial instruments on the income statement during the corresponding period.

The balance of the Senior Notes is net of debt issuance costs of ~~$8.1~~$5.7 million and ~~$6.6~~$7.8 million as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. ~~The balance of the unsubordinated term loan was net of debt issuance costs of $7.0 million as of December 31, 2020.~~ 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 as of September 30, 2022, the LIBOR based financing for the revolving credit facility ~~bears a~~bear variable interest ~~rate~~rates of ~~1.09%. The Senior Notes bears a fixed rate of 4.75%~~4.1%.

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 certain collateral coverage ratios set forth in the Senior Credit Agreement. 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 calendar year, provided the Company's total debt to EBITDA ratio is under 3.50 times and the secured debt to EBITDA ratio is under 3.0 times, after giving effect to the dividend or repurchase. The Senior Credit Agreement contains covenants, including a maximum permitted total ~~EBITDA~~debt to ~~debt ratio,~~EBITDA, a fixed charge covenant ratio requirement, and limitations on certain additional indebtedness and on guarantees of indebtedness. 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~~ATSG issued $258.8 million aggregate principal amount of 1.125% ~~Convertible Senior Notes~~convertible senior notes due 2024 ("Convertible Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Convertible Notes bear interest at a rate of 1.125% per year payable semi-annually in arrears on April 15 and October 15 each ~~year.~~year, beginning April 15, 2018. The Convertible Notes mature on October 15, 2024, unless repurchased or converted in accordance with their terms prior to such date. The Convertible Notes are unsecured indebtedness, subordinated to the Company's existing and future secured indebtedness and other liabilities, including trade payables.

Conversion of the Convertible Notes can only occur upon satisfaction of certain conditions and during certain periods, beginning in any calendar quarter commencing after December 31, 2017, 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 Convertible 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 Company has the right to settle the Convertible 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~~31.35 shares of common ~~shares~~stock per $1,000 principal amount of Convertible 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 Convertible Notes) occurs, the Company will, in certain circumstances, increase the conversion rate for a specified period of time.

The conversion feature of the Convertible Notes required bifurcation from the principal amount under the applicable accounting guidance. On January 1, 2022 the Company adopted ASU 2020-06 using the modified retrospective approach as discussed in Note A which recombined the value of the previously bifurcated embedded feature with the convertible note and eliminated the discount. The carrying value of the Company's convertible debt is shown below (in thousands):


	September 30,	December 31,
	2022	2021
Principal value, Convertible Notes, due 2024	258,750	258,750
Unamortized issuance costs	(2,111)	(2,889)
Unamortized discount	—	(24,215)
Convertible debt	256,639	231,646

In conjunction with the Convertible Notes, the Company purchased convertible note hedges under privately negotiated transactions for $56.1 million, having the same number of the Company's shares of common ~~shares, 8.1~~stock (8.1 million ~~shares~~shares) and the same strike price ~~of $31.90,~~($31.90) that underlie the Convertible 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 Convertible 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 Convertible Notes outstanding with cash. The Convertible 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 net proceeds from the issuance of the Convertible Notes was 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.

September 30, December 31,
2021 2020
Principal value, Convertible Senior Notes, due 2024 258,750 258,750
Unamortized issuance costs (3,144) (3,894)
Unamortized discount (26,306) (32,465)
Convertible debt 229,300 222,391

In conjunction with the offering of the Convertible 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 Stockholders' Equity in the Company’s consolidated balance sheets was $38.5 million. These warrants could result in 8.1 million additional shares of the Company's common stock, if the Company's traded market price exceeds the strike price which is $41.35 per share and is subject to certain adjustments under the terms of the warrant transactions. The warrants could have a dilutive effect on the computation of earnings per share to the extent that the average traded market price of the Company's common shares for a reporting period exceeds the strike price.

NOTE G—DERIVATIVE INSTRUMENTS

The ~~Company's Senior Credit Agreement required the~~ Company ~~to maintain~~maintains derivative instruments for protection from fluctuating interest ~~rates, for at least twenty-five percent of the outstanding balance of the term loan issued in November 2018.~~rates. The table below provides information about the Company’s interest rate swaps ~~(in~~(dollars in thousands):


				September 30, 2021		December 31, 2020					September 30, 2022				December 31, 2021
Expiration Date	Expiration Date	Stated Interest Rate		Notional Amount	Market Value (Liability)	Notional Amount	Market Value (Liability)	Expiration Date	Stated Interest Rate		Notional Amount		Market Value (Liability)		Notional Amount		Market Value (Liability)
May 5, 2021		1.090	%	—	—	13,125	(41)
May 30, 2021		1.703	%	—	—	13,125	(80)
December 31, 2021		2.706	%	133,125	(889)	138,750	(3,551)
March 31, 2022	March 31, 2022	1.900	%	50,000	(454)	50,000	(1,116)	March 31, 2022	1.900	%	$	—	$	—	$	50,000	$	(222)
March 31, 2022	March 31, 2022	1.950	%	75,000	(701)	75,000	(1,722)	March 31, 2022	1.900	%	—		—		75,000		(341)
March 31, 2023	March 31, 2023	2.425	%	135,000	(4,381)	140,625	(6,904)	March 31, 2023	2.425	%	127,500		1,077		133,125		(3,041)

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 net gains on derivatives of ~~$2.2~~$0.6 million and ~~$7.0~~$4.7 million for the three and nine month periods ending September 30, ~~2021,~~2022, respectively, compared to a net ~~gain~~gains of ~~$2.5~~$2.3 million and ~~a net loss of $7.7~~$4.8 million for the corresponding periods of ~~2020.~~2021. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.

NOTE H—COMMITMENTS AND CONTINGENCIES

~~CARES Act and~~ Payroll Support Programs

During 2020, two of the Company's airline subsidiaries, OAI and ATI, received government funds totaling $75.8 million pursuant to payroll support program agreements under the Coronavirus Aid, Relief, and Economic Security Act ~~(“CARES~~(the “CARES Act”). In Februaryof 2021, OAI was approved for $37.4 million of additional non-repayable government funds pursuant to a payroll support program agreement under ~~Subtitle A of Title IV of Division N of~~ the Consolidated Appropriations Act, 2021 (the “PSP Extension Law”). This grant was subsequently increased by $5.6 million. Further, in April 2021, OAI was approved for $40.0 million of additional non-repayable government ~~grants~~ funds pursuant to a payroll support program agreement under ~~section 7301 of~~ the American Rescue Plan Act of 2021 (the ~~“American Act”~~"American Rescue Plan").

The three programs are structured in a substantially similar manner. These grants are not required to be repaid if the Company complies with the provisions of the payroll support program agreements under the CARES Act, the PSP Extension Law and the American ~~Act and the payroll support program agreements.~~Rescue Plan. The grants are recognized over the periods in which the Company recognizes the related expenses for which the grants are intended to compensate. The Company ~~recognizes~~recognized the grants as contra-expense during the periods in which passenger flight operations and combi flight operations ~~are~~levels were expected to be negatively impacted by the pandemic. During the three month and nine month periods ended September 30, 2021, the Company recognized $30.3 million and $96.6 million of the grants, respectively. The Company ~~expects to recognize~~recognized all of ~~grant~~the CARES Act funds ~~into earnings~~ by ~~December 31,~~the end of 2021. ~~As of September 30, 2021, grants approved and received but not recognized totaled $15.0 million.~~

In conjunction with the payroll support program agreements under the ~~airlines~~CARES Act, OAI and ATI agreed on behalf of themselves and ABX to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through September 30, 2020. Thereafter, OAI ~~further~~ agreed as a condition of receiving grants under the PSP Extension Law and the American Rescue Plan to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through March 31, 2021, and September 30, ~~2021. The airlines~~2021, respectively. Under the CARES Act, OAI and ATI agreed to limit, on behalf of themselves and certain ~~of their~~ affiliates, executive compensation through March 24, 2022; maintain certain air transportation service through March 1, 2022 as may be required by the ~~U.S. Department of Transportation~~DOT pursuant to its authority under the CARES Act; and maintain certain internal controls and records relating to the funds and comply with certain reporting requirements. OAI further agreed as a condition of receiving grants under the PSP Extension Law and thereafter the American Rescue Plan, to limit executive compensation through October 1, 2022 and April 1, ~~2023.~~2023, respectively. In addition, the Company ~~may not pay~~agreed to refrain from paying dividends or ~~repurchase~~repurchasing its shares through September 30, 2022. The Company has repurchased approximately 1.6 million shares of its common stock since the restrictions expired on September 30, 2022.

Lease Commitments

The Company leases property, ~~eight~~ aircraft, aircraft engines and other types of equipment under operating leases. The Company's airlines operate ten freighter aircraft provided by customers and four passenger aircraft leased from external companies. Property leases include hangars, warehouses, offices and other space at certain airports with fixed rent payments and lease terms ranging from one month to six 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 lease 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 fixed rent payments and terms of one month to five years.

The Company records the initial right-to-use asset and lease liability at the present value of lease payments scheduled during the lease term. For the nine month period ending September 30, 2022 and 2021, non-cash transactions to recognize right-to-use assets and corresponding liabilities for new leases were $15.9 million and $8.3 million, ~~compared to $26.4 million for the corresponding period of 2020.~~respectively. Unless the rate implicit in the lease is readily determinable, the Company discounts the lease payments using an estimated incremental borrowing rate at the time of lease commencement. The Company estimates the incremental borrowing rate based on the information available at the lease commencement date, including the rate the Company could borrow for a similar amount, over a similar lease term with similar collateral. The Company's weighted-average discount rate for operating leases at September 30, ~~2021~~2022 was ~~2.51%~~2.4% compared to ~~2.9%~~2.4% at December 31, ~~2020.~~2021. 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~~The weighted-average remaining lease term is ~~3.9~~3.3 years and ~~4.5~~3.8 years as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

For the nine month periods ~~ended~~ending September 30, ~~2021~~2022 and ~~2020,~~2021, cash payments against operating lease liabilities were ~~$15.4~~$16.9 million and ~~$12.8~~$15.4 million, respectively. As of September 30, ~~2021,~~2022, the maturities of operating lease liabilities are as follows (in thousands):


		Operating Leases			Operating Leases
Remaining 2021		$	4,884
2022		18,017
Remaining 2022				Remaining 2022	$	6,000
2023	2023	16,339		2023	22,216
2024	2024	12,841		2024	17,006
2025	2025	9,080		2025	12,302
2026 and beyond		3,591
2026				2026	6,734
2027 and beyond				2027 and beyond	541
Total undiscounted cash payments	Total undiscounted cash payments	64,752		Total undiscounted cash payments	64,799
Less: amount representing interest	Less: amount representing interest	(2,999)		Less: amount representing interest	(2,339)
Present value of future minimum lease payments	Present value of future minimum lease payments	61,753		Present value of future minimum lease payments	62,460
Less: current obligations under leases	Less: current obligations under leases	17,292		Less: current obligations under leases	21,879
Long-term lease obligation	Long-term lease obligation	$	44,461	Long-term lease obligation	$	40,581

Purchase Commitments

The Company has agreements with vendors for the conversion of Boeing 767-300, Airbus A321 and Airbus A330 passenger aircraft into a standard configured freighter aircraft. The conversions primarily consist of the installation of a standard cargo door and loading system. As of September 30, ~~2021,~~2022, the Company owned ~~fifteen~~fourteen Boeing 767-300 aircraft and ~~one Airbu~~sseven Airbus A321-200 aircraft that were in or awaiting the modification process. As of September 30, ~~2021,~~2022, the Company has agreements to purchase ~~twelve~~seventeen more Boeing 767-300 aircraft, two more Airbus A321 passenger aircraft and ~~two~~six Airbus ~~321-200~~A330 passenger aircraft ~~through~~through 2024. As of September 30, ~~2021,~~2022, the Company's commitments to acquire and complete the conversion of these aircraft totaled $781.7 million, including estimated payments of $441.1 million through 2023 and ~~convert them totaled $412.8 million.~~the remaining payments through 2026. Actual conversion payments will be based on the achievement of progress milestones.

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~~Employees Under Collective Bargaining Agreements

~~In addition~~As of September 30, 2022, the flight crewmember employees of ABX, ATI and OAI and flight attendant employees of ATI and OAI were represented by the labor unions listed below:


Airline	Labor Agreement Unit	Percentage of the Company’s Employees
ABX	International Brotherhood of Teamsters	5.9%
ATI	Air Line Pilots Association	9.9%
OAI	International Brotherhood of Teamsters	5.9%
ATI	Association of Flight Attendants	0.8%
OAI	Association of Flight Attendants	5.6%

The labor agreements with ATI 's flight crew members and Omni's flight crew members are amendable at this time. Under the Railway Labor Act, as amended, airline labor agreements do not expire, so the existing contract remains in effect throughout the negotiation process.

Hangar Foam Discharge

On August 7, 2022 the fire suppression system at one of the Company's aircraft maintenance hangars in Wilmington, Ohio malfunctioned and discharged a significant amount of expansive foam. The event impacted employees, three aircraft and equipment in and around the hangar at the time of discharge. The hangar resumed operations after approximately three weeks while the cause of the incident was investigated and the hangar was cleaned and restored. While one aircraft was returned to service, the timeframes needed to return two of the aircraft and related engines to operating condition are not known at this time. The Company maintains insurance for employee claims, remediation expenses, property and equipment damage, customer claims and business interruption subject to customary deductibles and policy limits. The anticipated insurance recoveries related to clean-up expenses, remediation, part repairs and property damages are recorded when receipt is probable. Insurance recoveries in excess of the net book value of the damaged operating assets and for business interruption claims are recorded when all contingencies related to the ~~foregoing matters,~~claim have been resolved. Through September 30, 2022 the Company has recognized charges in operating income, net of recorded insurance recoveries, of $1.0 million for employee coverage, property damage, clean-up and repairs. Work to determine the extent of the damages, business disruption losses, other claims and insurance recoveries is ~~also~~ongoing.

Other

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

~~Employees Under Collective Bargaining Agreements~~

~~As of September 30, 2021, the flight crewmember employees of ABX, ATI and 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~~	~~4.8%~~
~~ATI~~	~~Air Line Pilots Association~~	~~9.2%~~
~~OAI~~	~~International Brotherhood of Teamsters~~	~~6.2%~~
~~ATI~~	~~Association of Flight Attendants~~	~~0.6%~~
~~OAI~~	~~Association of Flight Attendants~~	~~5.8%~~

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 crewmembers, which is unfunded. Benefits for covered individuals terminate upon reaching age 65 under the post-retirement healthcare plans.

The accounting and valuation for these post-retirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long term nature of these benefit payouts increases the sensitivity of certain estimates of our post-retirement obligations. 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.

ABX’s net periodic benefit costs for its defined benefit pension plans and post-retirement healthcare plans ~~for both continuing and discontinued operations~~ are as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
Pension Plans Post-Retirement Healthcare Plan Pension Plans Post-Retirement Healthcare Plan
2021 2020 2021 2020 2021 2020 2021 2020
Service cost $ — $ — $ 24 $ 35 — — 72 104
Interest cost 5,597 6,970 10 23 16,791 20,910 30 68
Expected return on plan assets (11,875) (11,168) — — (35,625) (33,504) — —
Amortization of net loss 1,764 941 47 31 5,292 2,823 141 93
Net periodic benefit cost (income) loss $ (4,514) $ (3,257) $ 81 $ 89 $ (13,542) $ (9,771) $ 243 $ 265


	Three Months Ended September 30,								Nine Months Ended September 30,
	Pension Plans				Post-Retirement Healthcare Plan				Pension Plans				Post-Retirement Healthcare Plan
	2022		2021		2022		2021		2022		2021		2022		2021
Service cost	$	—	$	—	$	19	$	24	—		—		57		72
Interest cost	6,075		5,597		15		10		18,098		16,791		44		30
Expected return on plan assets	(11,738)		(11,875)		—		—		(35,215)		(35,625)		—		—
Amortization of net (gain) loss	1,002		1,764		11		47		1,628		5,292		34		141
Net periodic benefit cost (income)	$	(4,661)	$	(4,514)	$	45	$	81	$	(15,489)	$	(13,542)	$	135	$	243

During the nine month period ending September 30, ~~2021,~~2022, the Company contributed ~~$1.8~~$1.5 million to the pension plans.

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. Income taxes recorded through September 30, ~~2021~~2022 have been estimated utilizing a rate of 23% ~~rate~~ based upon year-to-date income and projected results for the full year. The recognition of discrete tax items, such as the conversion of employee stock awards ~~the issuance of stock warrants~~ and other items, have an impact on the effective rate during a period.

As a result, ~~of these differences in which expenses and benefits for tax purposes are different than required by generally accepted accounting principles,~~ the Company's effective tax rate for the first nine months of ~~2021~~2022 was ~~23.2%~~23%. The final effective tax rate for the year ~~2021~~2022 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, ~~stock warrant valuations,~~foreign earnings, 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~~tax assets, including its loss carryforwards, management does not expect to pay federal income taxes until ~~2024~~2026 or later. The Company may, ~~however,~~prior to such time, be required to pay some federal tax due to loss carryforward usage limitations and certain state and local income ~~taxes before then.~~

taxes.

2422

NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) includes the following items by components for the three and nine month periods ending September 30, ~~2021~~2022 and ~~2020~~2021 (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 June 30, 2020		(59,700)	(654)	(12)	(60,366)
Balance as of June 30, 2021						Balance as of June 30, 2021	$	(75,369)	$	(477)	$	(14)	$	(75,860)

Amounts reclassified from accumulated other comprehensive income:						Amounts reclassified from accumulated other comprehensive income:

Actuarial costs (reclassified to salaries, wages and benefits)						Actuarial costs (reclassified to salaries, wages and benefits)	1,764		47		—		1,811

Income Tax (Expense) or Benefit						Income Tax (Expense) or Benefit	(402)		(11)		—		(413)
Other comprehensive income (loss), net of tax						Other comprehensive income (loss), net of tax	1,362		36		—		1,398
Balance as of September 30, 2021						Balance as of September 30, 2021	$	(74,007)	$	(441)	$	(14)	$	(74,462)

Balance as of January 1, 2021						Balance as of January 1, 2021	(78,093)		(549)		(14)		(78,656)

Amounts reclassified from accumulated other comprehensive income:	Amounts reclassified from accumulated other comprehensive income:					Amounts reclassified from accumulated other comprehensive income:

Actuarial costs (reclassified to salaries, wages and benefits)	Actuarial costs (reclassified to salaries, wages and benefits)	941	31	—	972	Actuarial costs (reclassified to salaries, wages and benefits)	5,292		141		—		5,433
Income Tax (Expense) or Benefit	Income Tax (Expense) or Benefit	(215)	(7)	—	(222)	Income Tax (Expense) or Benefit	(1,206)		(33)		—		(1,239)
Other comprehensive income, net of tax		726	24	—	750
Balance as of September 30, 2020		(58,974)	(630)	(12)	(59,616)
Other comprehensive income (loss), net of tax						Other comprehensive income (loss), net of tax	4,086		108		—		4,194
Balance as of September 30, 2021						Balance as of September 30, 2021	(74,007)		(441)		(14)		(74,462)

Balance as of January 1, 2020		(61,152)	(702)	(12)	(61,866)
							Defined Benefit Pension		Defined Benefit Post-Retirement		Foreign Currency Translation		Total
Balance as of June 30, 2022						Balance as of June 30, 2022	$	(61,348)	$	(211)	$	(20)	$	(61,579)

Amounts reclassified from accumulated other comprehensive income:	Amounts reclassified from accumulated other comprehensive income:					Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits)	Actuarial costs (reclassified to salaries, wages and benefits)	2,823	93	—	2,916	Actuarial costs (reclassified to salaries, wages and benefits)	1,002		11		—		1,013
Income Tax (Expense) or Benefit	Income Tax (Expense) or Benefit	(645)	(21)	—	(666)	Income Tax (Expense) or Benefit	(229)		(2)		—		(231)
Other comprehensive income, net of tax		2,178	72	—	2,250
Balance as of September 30, 2020		(58,974)	(630)	(12)	(59,616)
Other comprehensive income (loss), net of tax						Other comprehensive income (loss), net of tax	773		9		—		782
Balance as of September 30, 2022						Balance as of September 30, 2022	$	(60,575)	$	(202)	$	(20)	$	(60,797)

Balance as of January 1, 2022						Balance as of January 1, 2022	(61,831)		$	(229)	(20)		(62,080)

Amounts reclassified from accumulated other comprehensive income:						Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits)						Actuarial costs (reclassified to salaries, wages and benefits)	1,628		$	34	—		1,662
Income Tax (Expense) or Benefit						Income Tax (Expense) or Benefit	(372)		$	(7)	—		(379)
Other comprehensive income (loss), net of tax						Other comprehensive income (loss), net of tax	1,256		$	27	—		1,283
Balance as of September 30, 2022						Balance as of September 30, 2022	(60,575)		$	(202)	(20)		(60,797)

Defined Benefit Pension Defined Benefit Post-Retirement Foreign Currency Translation Total
Balance as of June 30, 2021 (75,369) (477) (14) (75,860)
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits) 1,764 47 — 1,811
Income Tax (Expense) or Benefit (402) (11) — (413)
Other comprehensive income, net of tax 1,362 36 — 1,398
Balance as of September 30, 2021 (74,007) (441) (14) (74,462)
Balance as of January 1, 2021 (78,093) (549) (14) (78,656)
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits) 5,292 141 — 5,433
Income Tax (Expense) or Benefit (1,206) (33) — (1,239)
Other comprehensive income, net of tax 4,086 108 — 4,194
Balance as of September 30, 2021 (74,007) (441) (14) (74,462)

2523

NOTE L—STOCK-BASED COMPENSATION

~~The Company's~~ATSG's Board of Directors has granted stock incentive awards to certain employees and board members pursuant to a long term incentive ~~plan~~plans, the first of which was approved by ~~the Company's~~ stockholders in May 2005 and expired in May ~~2015.~~2015 and the second of which was approved by stockholders in May 2015 and was amended and restated by stockholders in May 2022. Employees have been awarded non-vested stock units with performance conditions, non-vested stock units with market conditions and non-vested time-based 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.~~years. Restrictions ~~could~~may 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~~ATSG common stock depending on performance and market conditions at the end of a specified service period, lasting approximately three years. The performance condition awards will be converted into ~~a number of shares of Company~~ATSG common 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~~ATSG common stock based on the appreciation of the ~~Company's~~common stock price compared to the NASDAQ Transportation Index. Board members ~~were~~have been granted time-based restricted stock unit awards ~~with vesting periods~~that vest after a period of ~~approximately six or~~ twelve months. The Company expects to settle all of the stock unit awards by issuing new shares of ATSG common stock. The table below summarizes stock-based award activity.


		Nine Months Ended							Nine Months Ended
		September 30, 2021			September 30, 2020				September 30, 2022			September 30, 2021
		Number of Awards	Weighted average grant-date fair value		Number of Awards	Weighted average grant-date fair value			Number of Awards	Weighted average grant-date fair value		Number of Awards	Weighted average grant-date fair value
Outstanding at beginning of period	Outstanding at beginning of period	1,085,023	$	17.14	963,832	$	17.67	Outstanding at beginning of period	978,188	$	17.49	1,085,023	$	17.14
Granted	Granted	273,845	26.65		437,054	18.85		Granted	283,467	35.44		273,845	26.65
Converted	Converted	(120,830)	25.40		(200,563)	19.87		Converted	(178,060)	22.15		(120,830)	25.40
Expired	Expired	(1,200)	26.60		(34,100)	19.40		Expired	(3,000)	40.02		(1,200)	26.60
Forfeited	Forfeited	(5,600)	23.31		(1,000)	18.90		Forfeited	(9,600)	26.74		(5,600)	23.31
Outstanding at end of period	Outstanding at end of period	1,231,238	$	18.41	1,165,223	$	17.69	Outstanding at end of period	1,070,995	$	21.32	1,231,238	$	18.41
Vested	Vested	357,499	$	9.26	353,023	$	8.25	Vested	322,156	$	9.76	357,499	$	9.26

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 ~~2021~~2022 was ~~$26.69,~~$33.84, 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 ~~2021~~2022 was ~~$26.50.~~$46.20. The market condition awards granted in 2022 were valued using a Monte Carlo simulation technique based on ~~volatility~~daily stock prices over three years ~~for the awards granted in 2021 using daily stock prices~~ and using the following variables:


			~~2021~~2022
Risk-free interest rate			~~0.3%~~2.5%
Volatility			~~39.7%~~38.3%

For the nine month ~~periods~~period ended September 30, ~~2021~~2022 and ~~2020,~~2021, the Company recorded expense of ~~$5.5~~$6.1 million and ~~$5.8~~$5.5 million, respectively, for stock incentive awards. At September 30, ~~2021,~~2022, there was ~~$8.6~~$10.7 million of unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average period of ~~1.3~~1.25 years. As of September 30, ~~2021,~~2022, none of the awards were convertible, ~~357,499~~322,156 units of the Board members' time-based awards had vested and none of the outstanding shares of the restricted stock had vested. These awards could result in ~~a maximum number~~the issuance of ~~1,527,488 additional outstanding~~up to 1,357,120 shares of ~~the Company’s~~ATSG common stock depending on service, performance and market results through December 31, ~~2023.~~2024.

2624

NOTE M—COMMON STOCK AND EARNINGS PER SHARE

Earnings per Share

On January 1, 2022 the Company adopted ASU 2020-06 as discussed in Note A. As a result, diluted earnings per share of common stock for the 2022 periods excludes interest charges related to the convertible debt and includes the number of shares that would have been converted at the beginning of the period under the "if-convert" method. The calculation of basic and diluted earnings per share of common ~~share~~stock are as follows (in thousands, except per share amounts):


		Three Months Ending				Nine Months Ending					Three Months Ended				Nine Months Ended
		September 30,				September 30,					September 30,				September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Numerator:	Numerator:									Numerator:
Earnings from continuing operations - basic	Earnings from continuing operations - basic	$	62,363	$	(5,745)	$	184,522	$	22,826	Earnings from continuing operations - basic	$	50,188	$	62,363	$	154,194	$	184,522
Gain from stock warrants revaluation, net of tax		—		—		(23,776)		—
Loss (gain) from stock warrants revaluation, net of tax										Loss (gain) from stock warrants revaluation, net of tax	(105)		—		(155)		(23,776)
Convertible debt interest charge net of tax										Convertible debt interest charge net of tax	763		—		2,285		—
Earnings from continuing operations - diluted	Earnings from continuing operations - diluted	$	62,363	$	(5,745)	$	160,746	$	22,826	Earnings from continuing operations - diluted	$	50,846	$	62,363	$	156,324	$	160,746

Denominator:	Denominator:									Denominator:
Weighted-average shares outstanding for basic earnings per share	Weighted-average shares outstanding for basic earnings per share	73,721		59,146		67,177		59,106		Weighted-average shares outstanding for basic earnings per share	73,998		73,721		73,956		67,177
Common equivalent shares:	Common equivalent shares:									Common equivalent shares:
Effect of stock-based compensation awards and warrants	Effect of stock-based compensation awards and warrants	3,022		—		8,100		757		Effect of stock-based compensation awards and warrants	6,637		3,022		6,913		8,100
Effect of convertible debt										Effect of convertible debt	8,111		—		8,111		—
Weighted-average shares outstanding assuming dilution	Weighted-average shares outstanding assuming dilution	76,743		59,146		75,277		59,863		Weighted-average shares outstanding assuming dilution	88,746		76,743		88,980		75,277
Basic earnings per share from continuing operations	Basic earnings per share from continuing operations	$	0.85	$	(0.10)	$	2.75	$	0.39	Basic earnings per share from continuing operations	$	0.68	$	0.85	$	2.08	$	2.75
Diluted earnings per share from continuing operations	Diluted earnings per share from continuing operations	$	0.81	$	(0.10)	$	2.14	$	0.38	Diluted earnings per share from continuing operations	$	0.57	$	0.81	$	1.76	$	2.14

Basic weighted average shares outstanding for purposes of basic earnings per share are less than the shares outstanding due to ~~478,739~~367,339 shares and ~~365,100~~478,739 shares of restricted stock for ~~2021~~2022 and ~~2020,~~2021, respectively, which are accounted for as part of diluted weighted average shares outstanding in diluted earnings per share.

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 D)C), if such warrants have an 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.

In conjunction with the offering of the Convertible Notes (see note F), the Company also sold warrants for ATSG common stock, subject to customary anti-dilution adjustments. The amount received for these warrants and recorded in Stockholders' Equity in the Company’s consolidated balance sheets was $38.5 million. These warrants may result in 8.1 million additional shares of common stock, if ATSG's traded market price exceeds the strike price which is $41.35 per share and is subject to certain adjustments under the terms of the warrant transactions.

2725

NOTE N—SEGMENT AND REVENUE INFORMATION

The Company operates in 2two reportable ~~segments.~~segments - CAM and ACMI Services. The CAM segment consists of the Company's aircraft and engine leasing operations. The ACMI Services segment consists of the Company's airline operations, including CMI agreements as well as ACMI, charter service and passenger service agreements that the Company has with its customers. The Company's aircraft maintenance services, aircraft modification services, ground services and other support services, are not large enough to constitute separate reportable segments and are combined in ~~All~~"All other." Intersegment revenues are valued at arms-length market rates.

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


		Three Months Ending				Nine Months Ending					Three Months Ended				Nine Months Ended
		September 30,				September 30,					September 30,				September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Total revenues:	Total revenues:									Total revenues:
CAM	CAM	$	92,931	$	76,268	$	264,802	$	225,301	CAM	$	109,496	$	92,931	$	326,075	$	264,802
ACMI Services	ACMI Services	330,906		300,189		851,338		871,958		ACMI Services	357,375		330,906		1,034,963		851,338
All other	All other	90,292		82,281		281,226		239,373		All other	108,423		90,292		318,837		281,226
Eliminate inter-segment revenues	Eliminate inter-segment revenues	(48,174)		(54,592)		(145,451)		(165,415)		Eliminate inter-segment revenues	(58,378)		(48,174)		(167,431)		(145,451)
Total	Total	$	465,955	$	404,146	$	1,251,915	$	1,171,217	Total	$	516,916	$	465,955	$	1,512,444	$	1,251,915
Customer revenues:	Customer revenues:									Customer revenues:
CAM	CAM	$	71,070	$	51,409	$	198,546	$	148,104	CAM	$	79,975	$	71,070	$	237,466	$	198,546
ACMI Services	ACMI Services	330,903		300,189		851,325		871,945		ACMI Services	357,319		330,903		1,034,881		851,325
All other	All other	63,982		52,548		202,044		151,168		All other	79,622		63,982		240,097		202,044
Total	Total	$	465,955	$	404,146	$	1,251,915	$	1,171,217	Total	$	516,916	$	465,955	$	1,512,444	$	1,251,915

ACMI Services revenues are generated from airline service agreements and are usually based on hours flown, the amount of aircraft operated and crew resources provided during a month. ACMI Services revenues are typically recognized over time using the invoice practical expedient as flight operations are performed for the customer. Certain agreements include provisions for incentive payments based upon on-time reliability. These incentives are measured on a monthly basis and recorded to revenue in the corresponding month earned. Under CMI agreements, the Company's airlines have an obligation to provide integrated services including flight crews, aircraft maintenance and insurance for the customer's cargo network. Under ACMI agreements, the Company's airlines are also obligated to provide aircraft. Under CMI and ACMI agreements, customers are generally responsible for aviation fuel, landing fees, navigation fees and certain other flight expenses. When functioning as the customers' agent for arranging such services, the Company records amounts reimbursable from the customer as revenues net of the related expenses as the costs are incurred. Under charter agreements, the Company's airline is obligated to provide full services for one or more flights having specific origins and destinations. Under charter agreements in which the Company's airline is responsible for fuel, airport fees and all flight services, the related costs are recorded in operating expenses. Any sales commissions paid for charter agreements are generally expensed when incurred because the amortization period is less than one year. 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.)

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. Services for airframe maintenance and aircraft modifications typically have project durations lasting a few weeks to a few months. Other 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 services are completed. For airframe maintenance, aircraft modifications and aircraft component repairs, contracts include assurance warranties that are not sold separately.

The Company records revenues and estimated earnings over time for its airframe maintenance and aircraft modification contracts using the costs to costs input method. For such services, the Company estimates the earnings on a contract as the difference between the expected revenue and estimated costs to complete a contract and recognizes revenues and earnings based on the proportion of costs incurred compared to the total estimated costs. Unexpected or abnormal costs that are not reflected in the price of a contract are excluded from calculations of progress toward contract obligations. The Company's estimates consider the timing and extent of the services, including the amount and rates of labor, materials and other resources required to perform the services. These production costs are specifically planned and monitored for regulatory compliance. The expenditure of these costs closely reflect the progress made toward completion of an airframe maintenance and aircraft modification project. The Company recognizes adjustments in estimated earnings on a contract under the cumulative catch-up method in which the impact of the adjustment on estimated earnings of a contract is recognized in the period the adjustment is identified.

The Company's ground services revenues include load transfer and sorting services, facility and equipment maintenance services. These revenues 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.

The Company's external customer revenues from other activities for the three and nine month periods ~~ended~~ending September 30, ~~2021~~2022 and ~~2020~~2021 are presented below (in thousands):


		Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
		September 30,				September 30,					September 30,				September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Aircraft maintenance, modifications and part sales	Aircraft maintenance, modifications and part sales	$	28,513	$	26,063	$	91,352	$	78,749	Aircraft maintenance, modifications and part sales	$	34,604	$	28,513	$	106,766	$	91,352
Ground services	Ground services	22,928		19,887		75,410		50,498		Ground services	28,204		22,928		80,275		75,410
Other, including aviation fuel sales	Other, including aviation fuel sales	12,541		6,598		35,282		21,921		Other, including aviation fuel sales	16,814		12,541		53,056		35,282
Total customer revenues for Other Activities		$	63,982	$	52,548	$	202,044	$	151,168
Total customer revenues										Total customer revenues	$	79,622	$	63,982	$	240,097	$	202,044

~~CAM's aircraft~~During the three and nine month periods ending September 30, 2022, the Company respectively recognized $5.8 million and $4.8 million of non lease ~~revenues are recognized as operating lease revenues on a straight-line basis over~~revenue that was reported in deferred revenue at the ~~term~~beginning of the ~~applicable~~respective period, compared to $1.1 million and $2.9 million in the respective corresponding periods of 2021. Current deferred revenue of $13.0 million and $8.3 million as of September 30, 2022 and December 31, 2021, respectively, for contracts with customers is derived from other activities as described above and CAM non lease ~~agreements. Customer~~revenues. Revenue related to deferred revenue will be recognized based on percentage of completion. Customers are required to pay deposits and may be required to make milestone payments for ~~leased aircraft~~these services resulting in deferred revenue. Long-term contract assets were $0.0 million and ~~equipment are typically paid monthly in advance.~~ $0.8 million as of September 30, 2022 and December 31, 2021, respectively.

CAM's leases do not contain residual guarantees. Approximately ~~15%~~12% of CAM's leases to external customers contain purchase options at projected market values. As of September 30, ~~2021,~~2022, minimum future payments from

external customers for leased aircraft and equipment were scheduled to be ~~$67.4~~$72.2 million for the remainder of ~~2021, $240.1~~2022, $247.5 million, ~~$196.1~~$197.3 million, ~~$145.5~~$183.4 million and ~~$132.4~~$157.5 million ~~respectively,~~ for ~~each of~~ the next 4 years ending December 31, ~~2025,~~2026, respectively, and ~~$372.1~~$361.9 million thereafter. ~~As of December 31, 2020, minimum future payments from~~CAM's external ~~customers~~customer revenues for ~~leased aircraft and equipment~~non-lease activities were ~~scheduled to be $222.4 million, $195.5 million, $150.5 million, $99.8~~$9.8 million and ~~$90.7~~$27.1 million ~~respectively,~~ for ~~each of the next 5 years ending December 31, 2025, and $202.2 million thereafter.~~

For customers that are not a governmental agency or department, the Company generally receives partial payment in advance of services, otherwise customer balances are typically paid within 30 to 60 days of service. During the three and nine month periods ending September 30, ~~2021, the Company recognized $1.1 million and $2.9 million of non lease revenue that was reported in deferred revenue at the beginning of the respective periods,~~2022, respectively, compared to ~~$4.7~~$2.3 million and ~~$2.8~~$9.2 million induring the respective corresponding periods of ~~2020. Deferred revenue was $2.7 million~~2021 for engine services and ~~$3.0 million at September 30, 2021 and December 31, 2020, respectively, for contracts with customers.~~the sale of spare engine parts.

~~Segment earnings, as used by the Company's management, includes an allocation of interest expense based on a reportable segments' assets.~~ The Company's other segment information from continuing operations is presented below (in thousands):


		Three Months Ending				Nine Months Ending					Three Months Ended				Nine Months Ended
		September 30,				September 30,					September 30,				September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Depreciation and amortization expense:	Depreciation and amortization expense:									Depreciation and amortization expense:
CAM	CAM	$	51,383	$	41,421	$	148,390	$	126,492	CAM	$	59,231	$	51,383	$	171,943	$	148,390
ACMI Services	ACMI Services	25,649		25,336		73,398		76,032		ACMI Services	23,447		25,649		72,885		73,398
All other	All other	719		1,217		2,647		3,083		All other	605		719		1,898		2,647
Total	Total	$	77,751	$	67,974	$	224,435	$	205,607	Total	$	83,283	$	77,751	$	246,726	$	224,435
Interest expense	Interest expense									Interest expense
CAM	CAM	9,408		9,747		28,303		29,709		CAM	7,908		9,408		21,837		28,303
ACMI Services	ACMI Services	4,672		4,803		13,668		15,749		ACMI Services	3,693		4,672		9,719		13,668
Government grants recognized
ACMI Service		30,322		21,726		96,626		31,547

Segment earnings (loss):	Segment earnings (loss):									Segment earnings (loss):
CAM	CAM	$	28,502	$	19,781	$	72,518	$	55,241	CAM	$	36,975	$	28,502	$	111,587	$	72,518
ACMI Services	ACMI Services	58,225		40,363		124,246		88,246		ACMI Services	25,265		58,225		69,267		124,246

All other	All other	(1,047)		(724)		2,503		(2,915)		All other	(1,182)		(1,047)		560		2,503

Net unallocated interest expense	Net unallocated interest expense	(371)		(797)		(1,995)		(2,133)		Net unallocated interest expense	(510)		(371)		(1,391)		(1,995)

Impairment of aircraft and related assets		—		—		—		(39,075)
Net gain (loss) on financial instruments	Net gain (loss) on financial instruments	(7,378)		(53,393)		37,797		(56,072)		Net gain (loss) on financial instruments	695		(7,378)		9,402		37,797
Debt issuance costs	Debt issuance costs	—		—		(6,505)		—		Debt issuance costs	—		—		—		(6,505)
Other non-service components of retiree benefit costs, net	Other non-service components of retiree benefit costs, net	4,457		2,897		13,370		8,693		Other non-service components of retiree benefit costs, net	4,635		4,457		15,411		13,370
Loss from non-consolidated affiliate	Loss from non-consolidated affiliate	(1,147)		(2,485)		(1,365)		(11,762)		Loss from non-consolidated affiliate	(954)		(1,147)		(5,577)		(1,365)
Pre-tax earnings from continuing operations	Pre-tax earnings from continuing operations	$	81,241	$	5,642	$	240,569	$	40,223	Pre-tax earnings from continuing operations	$	64,924	$	81,241	$	199,259	$	240,569

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


		September 30,		December 31			September 30,		December 31,
		2021		2020			2022		2021
Assets:	Assets:					Assets:
CAM	CAM	$	2,238,638	$	2,037,628	CAM	$	2,427,780	$	2,218,012
ACMI Services	ACMI Services	814,195		811,516		ACMI Services	959,801		872,311

All other	All other	169,341		152,601		All other	137,584		177,012
Total	Total	$	3,222,174	$	3,001,745	Total	$	3,525,165	$	3,267,335

During the first nine months of ~~2021,~~2022, the Company had capital expenditures for property and equipment of ~~$69.3~~$69.8 million and ~~$358.1~~$378.3 million for ~~the~~ ACMI Services and CAM, respectively.

3027

NOTE O—DISCONTINUED OPERATIONS

The Company's results of discontinued operations consist primarily of changes in liabilities related to self-insurance reserves for medical expenses and wage loss for former employees previously associated with ABX's former hub operations. For the nine month ended September 30, 2022 and 2021, pre-tax earnings from discontinued operations were $2.2 million and $3.1 million, respectively.

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

The following ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") 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~~MD&A describes the principal factors affecting ~~the~~our results of operations, financial condition, cash ~~flows,~~flow, liquidity and capital resources. ItThe MD&A should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") contained in this report and the audited consolidated financial statements and related notes prepared in accordance with GAAP contained in our ~~Annual Report on~~2021 Form ~~10-K for the year ended December 31, 2020.~~10-K.

~~INTRODUCTION~~BACKGROUND

We lease aircraft and provide airline operations, aircraft modification and maintenance services, ground services, and other support services to the air transportation and logistics industries. Through ~~the Company's~~ATSG'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 our aircraft leasing company (CAM) and three independently certificated airlines (ABX, ATI and OAI) ~~and an aircraft leasing company (CAM)~~.

At September 30, 2021, we owned 104 Boeing aircraft that were in revenue service. At September 30, 2021, CAM also owned fifteen Boeing 767-300 aircraft and one Airbus A321-200 aircraft either already undergoing or awaiting induction into the freighter conversion process. In addition to these aircraft, we leased four freighter aircraft provided by a customer and four passenger aircraft. Our largest customers are the U.S. Department of Defense ("DoD"), Amazon.com Services, LLC ("ASI"), successor to Amazon.com Services, Inc., a subsidiary of Amazon.com, Inc. ("Amazon") and DHL Network Operations (USA), Inc. and its affiliates ("DHL").

~~COVID-19~~

The health and safety of our employees is paramount. Our airline operations rely on flight crews, aircraft maintenance technicians, flight support personnel and aircraft loading personnel. We rely on a skilled workforce to perform aircraft maintenance. Similarly, we staff personnel near airports to sort customer packages, load aircraft and maintain related equipment. Maintaining the health of our employees during the COVID-19 pandemic is essential for us to operate safely and maintain our customers' networks. We have taken precautions to prevent, detect and limit the spread of the COVID-19 virus in the workplace.We have added extra precautions and redundancies related to crew reserves, employee travel protocols, sanitation and other measures. We have encouraged our employee to take precautions and have given our employees the opportunity to get vaccinated.

Our passenger flight operations have been and will continue to be impacted by the pandemic primarily as a result of certain international airport closures, flight cancellations and increased expenses. Our airlines have received government funding pursuant to payroll support programs of the federal government as described in Note H of the accompanying financial statements. A vendor that converts our aircraft into freighters informed us that supply chain disruptions have resulted in the delay of various parts and will delay the conversion of aircraft expected to be completed this year by several weeks. The pandemic has not had a significant adverse financial impact on our airline operations for customers' freight networks. We have not experienced a wide-spread outbreak at any of our employee locations.

A COVID-19 outbreak among our flight crews, at one of our maintenance facilities, at a critical vendor, at a customer sorting center, at an aircraft modification facility or at an airport could result in workforce shortages, facility closures, delayed aircraft deployments and additional flight cancellations. Additionally, the threat of COVID-19's continued spread, regulatory requirements and government restrictions could result in critical supply chain disruptions, a reduced workforce, reduced availability of contractors, scarcity of critical parts and delayed deliveries of parts and equipment. In such events, flight delays, additional revenue disruptions and additional costs would result.

~~Segments~~

We have two reportable segments: CAM, which leases Boeing 777, 767, and 757 aircraft and aircraft engines, and ACMI Services, which includes the cargo and passenger transportation operations of the three airlines. Our other business operations, which primarily provide support services to the transportation industry, include providing aircraft maintenance and modification services to customers, load transfer and sorting services as well as related equipment maintenance services. These operations do not constitute reportable segments and are reported together as Other Activities.

~~DoD~~

The DoD comprised 26% and 33% of our consolidated revenues during the nine month periods ending September 30, 2021 and 2020, respectively. Our airlines have been providing passenger and cargo airlift services to the U.S. DoD since the mid 1990's. Contracts with the U.S. Transportation Command ("USTC") are typically for a one-year period, however, the current passenger international charter contract has a two-year term with option periods, at the election of the DoD, through September 2024 and the contract with ATI to provide combi aircraft operations runs through December 2021. The decline in the percentage of revenues from the DoD primarily reflects the negative impact of the COVID-19 pandemic on our passenger flight operations and increased revenues from aircraft leases to other customers, including Amazon.

~~Amazon~~

Revenues from our commercial arrangements with ASI comprised approximately 35% and 29% of our consolidated revenues during the nine month periods ending September 30, 2021 and 2020, respectively. On March 8, 2016, we entered into an Air Transportation Services Agreement (as amended, the “ATSA”) with ASI pursuant to which we lease Boeing 767 freighter aircraft to ASI, operate the aircraft via our airline subsidiaries, perform maintenance services and provide ground handling services through our subsidiary, LGSTX. Under the ATSA, we operate aircraft based on pre-defined fees scaled for the number of aircraft hours flown, aircraft scheduled and flight crews provided to ASI for its network. The operating ~~term of the ATSA runs through March of 2026 and is thereafter subject to renewal provisions.~~

~~The table below summarizes aircraft lease placements and commitments with Amazon as of September 30, 2021.~~

Amazon Year of
# of Leases Commencement Expiration
Leased
Boeing 767-200 12 2016 2023
Boeing 767-300 2 2016 2026
Boeing 767-300 6 2017 2027
Boeing 767-300 6 2019 2029
Boeing 767-300 5 2020 2030
Boeing 767-300 8 2021 2031
Lease Commitments
Boeing 767-300 3 2021 2031

In conjunction with the execution of the ATSA and its amendments, the Company and Amazon entered into an Investment Agreement (the 2016 Investment Agreement) and a Stockholders Agreement on March 8, 2016 and a second Investment Agreement on December 20, 2018 (the 2018 Investment Agreement). Pursuant to these Investment Agreements, the Company issued warrants to Amazon in conjunction with aircraft leases. Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting guidance for financial instruments. The fair value of the warrants issued or issuable to Amazon are recorded as a lease incentive asset and are amortized against revenues over the duration of the aircraft leases. The Company's earnings are impacted by the fair value re-measurement of the Amazon warrants classified in liabilities at the end of each reporting period, customer incentive amortization and the related income tax effects. For income tax calculations, the value and timing of related tax deductions will differ from the guidance described below for financial reporting.

~~For additional information about the Amazon warrants, see Note C to the accompanying financial statements in this report.~~

~~DHL~~

DHL accounted for 13% and 12% of the Company's consolidated revenues, excluding directly reimbursed revenues, during the nine month periods ending September 30, 2021 and 2020, respectively. Under a CMI agreement with DHL, ABX operates and maintains aircraft based on pre-defined fees scaled for the number of aircraft hours flown, aircraft scheduled and flight crews provided to DHL for its network. Under the pricing structure of the CMI agreement, ABX is responsible for complying with FAA airworthiness directives, the cost of Boeing 767 airframe maintenance and certain engine maintenance events for the aircraft leased to DHL that it operates. As of September 30, 2021, CAM leased 12 Boeing 767 aircraft to DHL comprised of four Boeing 767-200 aircraft and eight Boeing 767-300 aircraft, expiring between 2022 and 2028. Eight of the 12 Boeing 767 aircraft were being operated by our airlines for DHL. We also operated four CAM-owned Boeing 757 aircraft under other operating arrangements with DHL during the first half of 2020. DHL terminated operating agreements for three of the Boeing 757 aircraft in mid 2020 and the last one during the first quarter of 2021.

In May 2021, CAM reached an agreement with DHL to lease four more Boeing 767-300 converted freighter to DHL, each for a term of seven years. One of these leases began in the third quarter of 2021. The remaining three aircraft leases are expected to begin in 2022.

~~RESULTS OF OPERATIONS~~

~~Summary~~

~~External customer revenues from continuing operations increased~~ by $61.8 million, or 15%, to $466.0 million and $80.7 million, or 7%, to $1,251.9 million for the three and nine month periods ended September 30, 2021 compared to the corresponding periods of 2020. Customer revenues increased in 2021 for aircraft leasing and flying for our customers' package delivery networks, and passenger revenues increased during the third quarter of 2021 compared to the previous year period. Passenger revenues for the first nine months of 2021 were negatively impacted by the COVID-19 pandemic more so than the revenues for the first nine months of 2020.

Consolidated net earnings from continuing operations were $62.4 million and $184.5 million for the three and nine month periods ending September 30, 2021, respectively, compared to net losses of $5.7 million and net earnings of $22.8 million for the corresponding periods of 2020. The pre-tax earnings from continuing operations were $81.2 million and $240.6 million for the three and nine month periods ending September 30, 2021, respectively, compared to pre-tax earnings of $5.6 million and $40.2 million for the corresponding periods of 2020. Earnings were affected by the following specific events or adjustments that do not directly reflect our underlying operations among the periods presented.

•Pre-tax earnings included losses of $7.4 million and gains of $37.8 million for the three and nine month periods ended September 30, 2021, respectively, for the re-measurement of financial instruments, including warrant obligations granted to Amazon. This compares to pre-tax losses for re-measurement of financial instruments of $53.4 million and $56.1 million for the corresponding periods of 2020.

•Pre-tax earnings were reduced by $5.8 million and $17.3 million for the three and nine month periods ended September 30, 2021, respectively, for the amortization of customer incentives given to ASI in the form of warrants, compared to $5.3 million and $15.0 million for the corresponding periods of 2020.

•~~Pre-tax earnings from continuing operations included~~ ~~gains~~ ~~of $4.5 million and $13.4 million for the three and nine month periods ended September 30, 2021, respectively, for the non-service components of retiree benefit plans compared to~~ ~~gains~~ ~~of $2.9 million and $8.7 million for the corresponding periods of 2020.~~

•Pre-tax earnings for the three and nine month periods ended September 30, 2021, included losses of $1.1 million and $1.4 million, respectively, for the Company's share of development costs for a joint venture and the partial sale of an airline investment, compared to losses of $2.5 million and $11.8 million for the corresponding periods of 2020.

•~~Pre-tax earnings for the nine month period ended September 30, 2020, included an impairment of $39.1 million for our four Boeing 757 freighter aircraft and related assets.~~

•~~Pre-tax earnings for the nine month period ended September 30, 2021, included a charge of $6.5 million to write-off debt issuance costs in conjunction with the repayment of term loans.~~

•During the three and nine month periods ended September 30, 2021, the Company recognized $30.3 million and $96.6 million, respectively, of government grants from payroll support program agreements during the pandemic compared to $21.7 million and $31.5 million for the corresponding periods of 2020.

After removing the effects of these items, adjusted pre-tax earnings from continuing operations, a non-GAAP measure (a definition and reconciliation of adjusted pre-tax earnings from continuing operations follows), were $60.8 million and $117.9 million for the three and nine month periods ended September 30, 2021, respectively, compared to $42.2 million and $121.9 million for the corresponding periods of 2020. Adjusted pre-tax earnings from continuing operations, which excludes the recognition of COVID-19 related government grants, increased by $18.6 million and decreased by $4.0 million for the three and nine month periods ended September 30, 2021 compared to the corresponding periods of 2020. Improved earnings during the third quarter of 2021 reflect additional aircraft leases, increased operations for customer delivery networks and increased block hours for passenger operations driven primarily by Afghanistan evacuation flights. Lower earnings for the first nine months of the year, primarily reflect the lower level of passenger operations during the first six months of 2021 compared to the corresponding period of 2020. During 2020, the DoD and other government agencies contracted for special airlift capacity and missions which did not reoccur at the same levels during the first six months of 2021.

Pre-tax segment earnings for CAM increased $8.7 million and $17.3 million for the three and nine month periods ended September 30, 2021, respectively, compared to the corresponding periods of 2020, driven by 13 more aircraft under lease to external customers since October 1, 2020. Pre-tax segment earnings for ACMI Services, which includes government grants, increased $17.9 million and $36.0 million during the three and nine month periods ended September 30, 2021, respectively, compared to the corresponding periods of 2020, as reduced passenger flying due to COVD-19 was offset by the recognition of additional pandemic-related government grants and additional revenues for customer delivery networks.

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

Three Months Ending Nine Months Ending
September 30, September 30,
2021 2020 2021 2020
Revenues from Continuing Operations:
CAM
Aircraft leasing and related services $ 97,960 $ 80,976 $ 279,813 $ 238,930
Lease incentive amortization (5,029) (4,708) (15,011) (13,629)
Total CAM 92,931 76,268 264,802 225,301
ACMI Services 330,906 300,189 851,338 871,958
Other Activities 90,292 82,281 281,226 239,373
Total Revenues 514,129 458,738 1,397,366 1,336,632
Eliminate internal revenues (48,174) (54,592) (145,451) (165,415)
Customer Revenues $ 465,955 $ 404,146 $ 1,251,915 $ 1,171,217
Pre-Tax Earnings (Loss) from Continuing Operations:
CAM, inclusive of interest expense $ 28,502 $ 19,781 $ 72,518 $ 55,241
ACMI Services, inclusive of government grants and interest expense 58,225 40,363 124,246 88,246
Other Activities (1,047) (724) 2,503 (2,915)
Net unallocated interest expense (371) (797) (1,995) (2,133)
Impairment of aircraft and related assets — — — (39,075)
Net financial instrument re-measurement (loss) gain (7,378) (53,393) 37,797 (56,072)
Debt issuance costs — — (6,505) —
Other non-service components of retiree benefits gains, net 4,457 2,897 13,370 8,693
Loss from non-consolidated affiliate (1,147) (2,485) (1,365) (11,762)
Pre-Tax Earnings (Loss) from Continuing Operations 81,241 5,642 240,569 40,223
Add other non-service components of retiree benefit (gains) costs, net (4,457) (2,897) (13,370) (8,693)
Remove government grants (30,322) (21,726) (96,626) (31,547)
Add impairment of aircraft and related assets — — — 39,075
Add loss for non-consolidated affiliates 1,147 2,485 1,365 11,762
Add debt issuance costs — — 6,505 —
Add customer incentive amortization 5,798 5,291 17,295 15,044
Remove (gain) add net loss on financial instruments 7,378 53,393 (37,797) 56,072
Adjusted Pre-Tax Earnings from Continuing Operations (Non-GAAP) $ 60,785 $ 42,188 $ 117,941 $ 121,936

Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding the following: (i) settlement charges and other non-service components of retiree benefit costs; (ii) gains and losses for the fair value re-measurement of financial instruments; (iii) customer incentive amortization; (iv) the start-up costs of a non-consolidated joint venture; (v) the charge off of debt issuance costs; and (vi) the sale of an airline investment. 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. In addition, we also exclude the recognition of government grants from adjusted pre-tax earnings to highlight the varying impact of the grants on our operating results. Management uses adjusted pre-tax earnings to compare the performance of core operating results between periods. Presenting this measure provides investors 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.

~~Aircraft Fleet Summary~~

Our fleet of cargo and passenger aircraft is summarized in the following table as of September 30, 2021 and December 31, 2020. Our freighters, converted from passenger aircraft, utilize standard shipping containers and can be deployed into regional cargo markets more economically than larger capacity aircraft, newly built freighters or other competing alternatives. At September 30, 2021, the Company owned fifteen Boeing 767-300 aircraft that were either already undergoing or awaiting induction into the freighter conversion process.

~~Aircraft fleet activity during the first nine months of 2021 is summarized below:~~

•CAM completed the modification of seven Boeing 767-300 freighter aircraft purchased in the previous year and began to lease all seven of these aircraft to external customers under multi-year leases. ATI operates five of these aircraft for a customer.

•OAI returned one Boeing 767-300 passenger aircraft to CAM. CAM converted this passenger aircraft into a standard freighter configuration. This aircraft was leased to an external customer under a multi-year lease.

•~~ATI returned three Boeing 767-300 freighter aircraft to CAM. CAM leased all three of these aircraft to an external customer under a multi-year lease. ATI operates these aircraft for the customer.~~

•External customers returned five Boeing 767-200 freighter aircraft to CAM. Three of these aircraft were leased to other external customers under multi-year leases. One of the aircraft is being prepped for lease to another external customer later in 2021.

•CAM purchased fourteen Boeing 767-300 passenger aircraft for the purpose of converting the passenger aircraft into a standard freighter configuration. These aircraft are expected to be leased to external customers during 2021 and 2022.

•CAM purchased one Airbus A321-200 passenger aircraft for the purpose of converting the passenger aircraft into a standard freighter configuration. This aircraft is expected to be leased to an external customer during 2022.

•~~ATI returned the last Boeing 757-200 freighter aircraft to CAM and the aircraft was retired.~~

•~~ATI began to operate a customer provided Boeing 767-300 freighter aircraft and ABX began to operate a customer provided Boeing 767-200 freighter aircraft.~~

September 30, 2021 December 31, 2020
ACMI
Services CAM Total ACMI
Services CAM Total
In-service aircraft
Aircraft owned
Boeing 767-200 Freighter 5 26 31 5 28 33
Boeing 767-200 Passenger 2 — 2 2 — 2
Boeing 767-300 Freighter 2 56 58 5 45 50
Boeing 767-300 Passenger 6 — 6 7 — 7
Boeing 777-200 Passenger 3 — 3 3 — 3
Boeing 757-200 Freighter — — — 1 — 1
Boeing 757-200 Combi 4 — 4 4 — 4
Total 22 82 104 27 73 100
Operating lease
Boeing 767-200 Passenger 1 — 1 1 — 1
Boeing 767-300 Passenger 3 — 3 3 — 3
Boeing 767-200 Freighter 1 — 1 — — —
Boeing 767-300 Freighter 3 — 3 2 — 2
Total 8 — 8 6 — 6
Other aircraft
Owned Boeing 767-300 under modification — 15 15 — 8 8
Owned Airbus A321-200 under modification — 1 1 — — —
Owned Boeing 767 available or staging for lease — 2 2 — — —

As of September 30, 2021, ABX, ATI and OAI were leasing 22 in-service aircraft internally from CAM for use in ACMI Services. Of CAM's 26 externally leased Boeing 767-200 freighter aircraft, 12 were leased to ASI and operated by ABX or ATI, one was leased to DHL and operated by ABX, three were leased to DHL and were being operated by a DHL-affiliated airline and ten were leased to other external customers. Of the 56 externally leased Boeing 767-300 freighter aircraft, 27 were leased to ASI and operated by ABX or ATI, seven were leased to DHL and operated by ABX, one was leased to DHL and is being operated by a DHL-affiliated airline and 21 were leased to other external customers. The carrying values of the total in-service fleet as of September 30, 2021 and December 31, 2020 were $1,641.8 million and $1,535.3 million, respectively.

~~CAM Segment~~segments:

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

~~As of September 30, 2021~~ CAM currently leases Boeing 767, 757 and 2020, CAM had 82 and 69 aircraft under lease to external customers, respectively. CAM's revenues grew by $16.7 million and $39.5 million for the three and nine month periods ended September 30, 2021, respectively, compared to the corresponding periods of 2020, primarily as a result of additional aircraft leases. Revenues from external customers totaled $71.1 million and $198.5 million for the three and nine month periods ended September 30, 2021, respectively, compared to $51.4 million and $148.1 million for the corresponding periods of 2020. CAM's revenues from the Company's airlines totaled $21.9 million and $66.3 million for the three and nine month periods ended September 30, 2021, respectively, compared to $24.9 million and $77.2 million for the corresponding periods of 2020. CAM's aircraft leasing and related services revenues, which exclude customer lease incentive amortization, increased $17.0 million and $40.9 million for the three and nine month periods ended September 30, 2021 compared to the corresponding periods of 2020, primarily as a result of

new aircraft leases in 2021. Since October 1, 2020, CAM has added eleven Boeing 767-300 aircraft to its portfolio and placed all eleven Boeing 767-300 aircraft with external customers under long-term leases.

CAM's pre-tax segment earnings, inclusive of internally allocated interest expense, were $28.5 million and $72.5 million for the three and nine month periods ended September 30, 2021, respectively, compared to $19.8 million and $55.2 million for the corresponding periods of 2020. Increased pre-tax earnings reflect the eleven aircraft placed into service since October 1, 2020. The pre-tax earnings are inclusive of increased depreciation expense of $10.0 million and $21.9 million for the three and nine month periods ended September 30, 2021, respectively, compared to the corresponding periods of 2020 driven by the addition of seven additional Boeing aircraft in the first nine months of 2021 compared to the first nine months of 2020.

~~In addition to the fifteen Boeing 767-300~~777 aircraft and ~~one Airbus A321-200~~ aircraft which were in the freighter modification process at September 30, 2021, CAM also has agreements to purchase twelve more Boeing 767-300 aircraft and two more Airbus A321-200 aircraft and expects to complete their modification from a passenger to freighter configuration. We expect to place at least four more B767-300 freighters under long-term leases in the fourth quarter of 2021, bringing the planned total number of leased B767-300 freighters for 2021 to fifteen, comprised of eleven newly modified Boeing 767-300 freighters and four re-deployed Boeing 767-300 freighters, including eleven to Amazon and four to other external customers. CAM has also secured access to 70 additional modification slots with conversion vendors. 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 aircraft are redeployed when leases expire. CAM's future operating results will also be impacted by the additional amortization of warrant incentives as incremental long-term aircraft leases to ASI commence.engines.

ACMI Services

~~The ACMI Services segment provides airline~~ includes the cargo and passenger transportation operations ~~to its customers, typically~~of our three airlines. Our airlines operate under contracts ~~providing for~~to provide a combination of aircraft, crews, maintenance, insurance and aviation fuel. Our customers are typically responsible for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the airline. Aircraft charter agreements, including those for the DoD, usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price.

Our other business operations, which primarily provide support services to the transportation industry, include providing aircraft maintenance and modification services to customers, cargo load transfer and sorting services as well as related equipment maintenance services. These operations do not constitute separate reportable segments.

At September 30, 2022, we owned 110 Boeing aircraft that were in revenue service. We also owned fourteen Boeing 767-300 aircraft and seven Airbus 321-200 aircraft either already undergoing or awaiting induction into the freighter conversion process at September 30, 2022. In addition to these aircraft, we leased four passenger aircraft from third parties and operated ten freighter aircraft provided by customers for whom we provide services under CMI agreements.

Due to the strong demand for medium widebody and narrow body freighters and as part of our continued growth strategy to expand and diversify our fleet, during 2021 we secured additional aircraft conversion slots over the next few years. We continue to work closely with Israel Aerospace Industries and have forged new conversion relationships with Boeing and Elbe Flugzeugwerke (“EFW”). Further, we perform our own conversions of the Airbus A321 aircraft through a joint venture arrangement.

Customers

Our largest customers are ASI, which is a subsidiary of Amazon, the DoD and DHL.

Revenues from our commercial arrangements with ASI comprised approximately 34% and 35% of our consolidated revenues during the nine month periods ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we leased 42 Boeing 767 freighter aircraft to ASI with lease expirations between 2023 and 2031 and we operate those aircraft for ASI. The aircraft lease terms typically range from 5 to 10 years. We operate six other Boeing 767 aircraft provided by ASI. We also provide ground services and aircraft maintenance services to ASI.

DHL comprised 12% and 13% of our consolidated revenues during the nine month periods ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we leased 14 Boeing 767 freighter aircraft to DHL comprised of three Boeing 767-200 aircraft and eleven Boeing 767-300 aircraft, with expirations between 2023 and 2029. Under a separate CMI agreement, we operate ten of the Boeing 767 aircraft that DHL leases from the Company and two Boeing 767 aircraft that DHL provides. We provide DHL with scheduled maintenance services under the agreement which is subject to renewal in May of 2028. 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 network. We also provide additional air cargo transportation services for DHL through ACMI agreements in which we provide the aircraft, crews, maintenance and insurance under a single contract. Further, beginning in third quarter of 2022, we began to operate the first two of four Boeing 767 aircraft provided by DHL under an additional CMI agreement which currently runs through August of 2027.

The DoD comprised 29% and 26% of our consolidated revenues during the nine month periods ended September 30, 2022 and 2021 respectively, derived primarily from operating passenger and combi charter flights. We utilize our fleet of fourteen passenger aircraft to operate troop movement flights for the DoD. We also operate our four combi aircraft for the DoD, which are capable of simultaneously carrying cargo and passengers on the main deck. We have been providing services to the DoD since the 1990’s, typically under one year agreements.

RESULTS OF OPERATIONS

Revenue and Earnings Summary

External customer revenues from continuing operations increased by $51.0 million, or 11%, to $516.9 million and $260.5 million, or 21%, to $1,512.4 million during the first three and nine months of 2022 compared to the same periods in 2021. Customer revenues increased during the first nine months of 2022, particularly for contracted airline services, aircraft leasing and aviation fuel sales, compared to the previous year's period. Nine additional aircraft have been placed under customer leases since October 1, 2021.

Consolidated net earnings from continuing operations were $50.2 million and $154.2 million for the three and nine month periods ended September 30, 2022, respectively, compared to $62.4 million and $184.5 million for the corresponding periods of 2021. The pre-tax earnings from continuing operations were $64.9 million and $199.3 million for the three and nine month periods ended September 30, 2022, respectively, compared to $81.2 million and $240.6 million for the corresponding periods of 2021. Earnings were affected by the following specific events and certain adjustments that do not directly reflect our underlying operations among the periods presented.

•Pre-tax earnings from continuing operations included net gains of $0.7 million and $9.4 million for the three and nine month periods ended September 30, 2022, respectively for gains related to the repurchase of debt as well as financial instrument valuations, including warrant obligations granted to Amazon. This compares to pre-tax net losses for remeasurement of financial instruments of $7.4 million and gains of $37.8 million for the corresponding periods of 2021.

•Pre-tax earnings from continuing operations were reduced by $5.8 million and $17.4 million for the three and nine month periods ended September 30, 2022, respectively, for the amortization of customer

incentives given to Amazon in the form of warrants, compared to $5.8 million and $17.3 million for the corresponding periods of 2021.

•Pre-tax earnings from continuing operations included gains of $4.6 million and $15.4 million for the three and nine month periods ended September 30, 2022, respectively, for non-service components of retiree benefit plans compared to net gains of $4.5 million and $13.4 million for the corresponding periods of 2021.

•Pre-tax earnings from continuing operations included losses of $1.0 million and $5.6 million for the three and nine month periods ended September 30, 2022, respectively, for the Company's share of joint venture results, including engineering costs to development aircraft modifications, compared to losses of $1.1 million and $1.4 million for the corresponding periods of 2021.

•Pre-tax earnings for the nine month period September 30, 2021 included a one-time charge of $6.5 million to write-off debt issuance costs in conjunction with the restructuring of the Company's debt obligations.

•During the three and nine months period ended September 30, 2021, the Company recognized $30.3 million and $96.6 million, respectively, of government grants from the CARES Act, PSP Extension Law and the American Rescue Plan. No government grants were recognized during the nine month period ended September 30, 2022.

•Pre-tax earnings from continuing operations included losses of $1.0 million, net of related insurance recoveries, for both the three and nine month periods ended September 30, 2022, for the costs of employee coverage, property damage, clean-up and repairs which occurred as a direct result of a foam release after a hangar's fire suppression system malfunctioned.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenues from Continuing Operations:
CAM
Aircraft leasing and related services	$	114,526	$	97,960	$	341,164	$	279,813
Lease incentive amortization	(5,030)		(5,029)		(15,089)		(15,011)
Total CAM	109,496		92,931		326,075		264,802
ACMI Services	357,375		330,906		1,034,963		851,338
Other Activities	108,423		90,292		318,837		281,226
Total Revenues	575,294		514,129		1,679,875		1,397,366
Eliminate internal revenues	(58,378)		(48,174)		(167,431)		(145,451)
Customer Revenues	$	516,916	$	465,955	$	1,512,444	$	1,251,915


Pre-Tax Earnings from Continuing Operations:
CAM, inclusive of interest expense	$	36,975	$	28,502	$	111,587	$	72,518
ACMI Services, inclusive of government grants and interest expense	25,265		58,225		69,267		124,246
Other Activities	(1,182)		(1,047)		560		2,503
Net unallocated interest expense	(510)		(371)		(1,391)		(1,995)
Net financial instrument re-measurement gain (loss)	695		(7,378)		9,402		37,797
Other non-service components of retiree benefits costs, net	4,635		4,457		15,411		13,370
Loss from non-consolidated affiliate	(954)		(1,147)		(5,577)		(1,365)
Debt issuance cost	—		—		—		(6,505)
Pre-Tax Earnings from Continuing Operations	64,924		81,241		199,259		240,569
Add other non-service components of retiree benefit costs, net	(4,635)		(4,457)		(15,411)		(13,370)
Less government grants	—		(30,322)		—		(96,626)
Add charges for non-consolidated affiliates	954		1,147		5,577		1,365
Add lease incentive amortization	5,822		5,798		17,442		17,295
Add net (gain) loss on financial instruments	(695)		7,378		(9,402)		(37,797)
Add net charges for hangar foam incident	960		—		960		—
Add debt issuance cost	—		—		—		6,505
Adjusted Pre-Tax Earnings from Continuing Operations	$	67,330	$	60,785	$	198,425	$	117,941

Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings from continuing operations excluding the following: (i) settlement charges and other non-service components of retiree benefit costs; (ii) gains and losses from financial instrument valuations including warrants issued to Amazon; (iii) customer incentive amortization; and (iv) the start-up costs and expenses of a non-consolidated joint venture. We exclude these items when calculating adjusted pre-tax earnings because they are distinctly different in their predictability or not closely related to our on-going operating activities. We also excluded the recognition of government grants and charges, net of related insurance recoveries, resulting from the malfunction of a fire suppression system in an aircraft maintenance hangar, from adjusted earnings to improve comparability between periods. Management uses adjusted pre-tax earnings from continuing operations to compare the performance of core operating results between periods. Presenting this measure provides management and investors with a comparative metric of fundamental operations while highlighting changes to certain items among periods. Adjusted pre-tax earnings from continuing operations should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP.

The Company's earnings for the reported periods were impacted by the fair value re-measurement of the Amazon warrants classified in liabilities at the end of each reporting period, customer incentive amortization and the related income tax effects. The fair value of the warrants issued or issuable to Amazon were recorded as a customer incentive asset and are amortized against revenues over the duration of the aircraft leases. Our accounting for the warrants issued to Amazon has been determined in accordance with the financial reporting guidance for financial instruments. For additional information about the warrants issued to Amazon, see the accompanying notes to the financial statements included in this report.

Aircraft Fleet Summary

Our fleet of cargo and passenger aircraft is summarized in the following table as of September 30, 2022 and December 31, 2021. Our freighters, converted from passenger aircraft, utilize standard shipping containers and can be deployed into regional cargo markets more economically than larger capacity aircraft, newly built freighters or other competing alternatives. At September 30, 2022, we owned fourteen Boeing 767-300 aircraft and seven Airbus A321-200 aircraft that were either already undergoing or awaiting induction into the freighter conversion process.

Aircraft fleet activity during the first nine months of 2022 is summarized below:

•CAM completed the modification of five Boeing 767-300 freighter aircraft purchased in the previous year. The aircraft are leased to external customers under multi-year leases. Two of the aircraft are being operated by ABX for the customer.

•CAM purchased six Boeing 767-300 passenger aircraft for the purpose of converting the passenger aircraft into a standard freighter configuration. These aircraft are expected to be leased to external customers during 2023.

•OAI returned one Boeing 767-300 passenger aircraft to CAM. CAM expects to modify this aircraft into a standard freighter configuration and lease it to an external customer in 2023.

•CAM purchased six Airbus A321-200 passenger aircraft for the purpose of converting the passenger aircraft into a standard freighter configuration. These aircraft are expected to be leased to external customers during 2023.

•ATI began to operate two customer-provided Boeing 767-300 freighter aircraft.

•ABX began to operate two customer-provided Boeing 767-300 freighter aircraft.

•An external customer returned one Boeing 767-200 freighter aircraft to CAM. That aircraft has currently been removed from service.


	September 30, 2022			December 31, 2021
	ACMI Services	CAM	Total	ACMI Services	CAM	Total
In-service aircraft
Aircraft owned
Boeing 767-200 Freighter	5	25	30	5	26	31
Boeing 767-200 Passenger	2	—	2	2	—	2
Boeing 767-300 Freighter	2	64	66	2	59	61
Boeing 767-300 Passenger	5	—	5	6	—	6
Boeing 777-200 Passenger	3	—	3	3	—	3

Boeing 757-200 Combi	4	—	4	4	—	4

Total	21	89	110	22	85	107
Operating lease
Boeing 767-200 Passenger	1	—	1	1	—	1
Boeing 767-300 Passenger	3	—	3	3	—	3
Boeing 767-200 Freighter	2	—	2	2	—	2
Boeing 767-300 Freighter	8	—	8	4	—	4
Total	14	—	14	10	—	10
Other aircraft
Owned Boeing 767-300 under modification	—	14	14	—	12	12
Owned Airbus A321-200 under modification	—	7	7	—	1	1
Owned Boeing 767 available or staging for lease	—	1	1	—	1	1

As of September 30, 2022, ABX, ATI and OAI were leasing 21 in-service aircraft internally from CAM for use in ACMI Services. Of CAM's 25 externally leased Boeing 767-200 freighter aircraft, 12 were leased to ASI and operated by ABX or ATI, one was leased to DHL and operated by ABX, two were leased to DHL and were being operated by a DHL-affiliated airline and ten were leased to other external customers. Of the 64 externally leased Boeing 767-300 freighter aircraft, 30 were leased to ASI and operated by ATI, nine were leased to DHL and operated by ABX, two were leased to DHL and are being operated by a DHL-affiliated airline and 23 were leased to other external customers. The carrying values of the total in-service fleet as of September 30, 2022 and December 31, 2021 were $1,722.9 million and $1,693.0 million, respectively.

CAM Segment

CAM added nine Boeing 767-300 freighter aircraft to its portfolio since October 1, 2021. CAM grew its revenues by $16.6 million and $61.3 million during the first three and nine months of 2022, respectively, compared to the same periods in 2021.

As of September 30, 2022 and 2021, CAM had 89 and 82 aircraft under lease to external customers, respectively. Revenues from external customers totaled $80.0 million and $237.5 million for the three and nine months periods ended September 30, 2022, respectively, compared to $71.1 million and $198.5 million for the corresponding periods of 2021. Since October 1, 2021, CAM placed nine more Boeing 767-300 aircraft with external customers under long-term leases. Additionally, in October of 2021, CAM began to offer engine power coverage to lessees of CAM's General Electric powered Boeing 767-200 aircraft. Under this service, CAM is responsible for providing and maintaining engines for its lease customers as needed through a pool of engines. Revenues from external customers increased $6.7 million and $17.7 million for the three and nine months ended September 30, 2022 compared to the corresponding periods in 2021 for this engine service. Additionally, CAM generates earnings from the lease of spare engines and the sale of spare aircraft parts. CAM's revenues from the Company's airlines totaled $29.5 million and $88.6 million for the three and nine month periods ended September 30, 2022, compared to $21.9 million and $66.3 million for the corresponding periods in 2021.

CAM's pre-tax earnings from continuing operations, inclusive of internally allocated interest expense, were $37.0 million and $111.6 million for the three and nine month periods ended September 30, 2022 compared to $28.5 million and $72.5 million for the corresponding periods in 2021. Increased pre-tax earnings reflect the nine aircraft placed into service since October 1, 2021 and decreases in internally allocated interest expense of $1.5 million and $6.5 million for the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods of 2021 due to lower company-wide interest expense and debt. Additionally, CAM generates earnings from the lease of spare engines and the sale of spare aircraft parts.Increased pre-tax earnings were offset by increased depreciation of $7.8 million and $23.6 million for the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods of 2021 driven by the addition of aircraft.

In addition to the 14 Boeing 767-300 aircraft and seven Airbus A321-200 aircraft which were in the modification process at September 30, 2022, CAM has agreements to purchase seventeen more Boeing 767-300 aircraft, two more Airbus A321-200 aircraft and six Airbus A330 aircraft through 2024. CAM's future operating results will depend on its continuing ability to convert passenger aircraft into freighters within planned costs and within the timeframes required by customers. During the fourth quarter of 2022, we expect to lease to external customers at least three more newly modified Boeing 767-300 freighters and re-deploy one Boeing 767-200 freighter. CAM's future operating results will also depend on the timing and lease rates under which aircraft are redeployed when leases expire. Additionally, CAM's future operating results from engine power services will depend upon engine cycles operated, the number of engine overhauls and the severity of unscheduled maintenance events.

ACMI Services

Total revenues from ACMI Services increased ~~$30.7~~$26.5 million and ~~decreased $20.6~~$183.6 million during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared with the corresponding periods of 2021. Increased revenues for 2022 reflected a 16% increase in block hours flown for DoD troop movements particularly to ~~$330.9 million and $851.3 million~~Europe for the nine month period ended September 30, 2022, respectively, compared to the corresponding ~~periods of 2020. Combined revenues from contracted passenger and combi flights increased sharply during~~period in 2021, as well as ten additional freighter aircraft added to operations compared to the third quarter of 2021, ~~driven~~including six more customer-provided aircraft that are not owned by Afghanistan evacuation missions for the U.S government. Combined block hours flown for all passenger flights, including contracted commercial passenger and combi flights, for the three and nine month periods ending September 30, 2021,CAM. Revenues also increased ~~8% and decreased 16%, respectively,~~ ~~compared~~due to ~~the corresponding periods of 2020.~~ ~~Revenues for the first nine months of 2021 were impacted by the COVID-19 pandemic more so than the revenues for the first nine months of 2020.~~ ~~During 2020,~~fuel expenses that are billed through to the DoD and ~~other government agencies contracted for special airlift capacity and missions which did not occur at the same levels during 2021.~~

~~Overall billable block hours increased 17% and 10% for the three and nine month periods ending September 30, 2021, respectively, compared to the corresponding periods~~charter customers. The customer fuel portion of 2020 and reflect more freighter aircraft added since September 30, 2020. During the first nine months of 2021, we began to operate eight more CAM-owned Boeing 767-300 aircraft under the Amazon ATSA, one more customer provided Boeing 767-300 aircraft and one customer provided Boeing 767-200 aircraft. As of September 30, 2021, ACMI Services ~~included 77 in-service aircraft compared to 71 as of September 30, 2020.~~

~~ACMI Services had pre-tax segment earnings of $58.2~~revenue increased approximately $12.6 million and ~~$124.2~~$55.8 million during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared to ~~$40.4~~the corresponding periods in 2021. As of September 30, 2022 and 2021, ACMI Services included 87 and 77 in-service aircraft, respectively. Total customer block hours increased 3% and 10% for the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods in 2021, reflecting increases in block hours flown for DHL and Amazon. Block hours for the DoD increased during the nine month period ended September 30, 2022 compared to the previous year, however we operated fewer block hours for the DoD during the third quarter of 2022 compared to 2021, when we supported the evacuation of military and civilian personnel from Afghanistan.

ACMI Services had pre-tax earnings of $25.3 million and ~~$88.2~~$58.2 million for the three and nine month periods ended September 30, 2022, respectively, compared to $69.3 million and $124.2 million for the corresponding periods ~~of 2020~~in 2021, inclusive of internally allocated interest expense and the recognition of pandemic-related government grants of $30.3 million and $96.6 million, inrespectively. Pre-tax earnings, excluding the recognition of government grants, for the three and nine ~~months~~month periods ended September 30, ~~2021~~2022 declined $2.6 million and ~~$21.7~~improved $41.6 million, ~~and $31.5 million in~~respectively, compared to the corresponding periods of ~~2020.~~ 2021. The decline in earnings for the third quarter of 2022 reflects lower DoD block hours compared to the 2021 evacuation flights and increased operating expenses, particularly for flight crews and contracted maintenance services. Improved earnings for the nine month period of 2022 were a result of the increased number of aircraft in operations and more block hours compared to 2021. We experienced increased expense levels for crew premium pay and training, contract labor, aircraft positioning fuel and travel expenses compared to the prior year periods. Internally allocated interest expense decreased ~~by $0.1~~$1.0 million to $3.7 million and ~~$2.1~~decreased $3.9 million to $9.7 million for the three and nine month periods ended September 30, ~~2021, to $4.7 million and $13.7 million,~~2022, respectively, compared to the corresponding periods ~~in 2020. In addition to the increase in government grants recognized,~~of 2021.

Future profitability levels for ACMI Services ~~earnings increased during~~will depend on a number of factors, including the ~~third quarter~~impact of ~~2021 compared~~increasing inflation, potential COVID-19 outbreaks, customer flight schedules, crew member productivity and pay, rising employee wages and benefits, aircraft maintenance schedules, the severity and frequency of unscheduled maintenance events, the number of aircraft we operate and our ability to ~~the corresponding period of 2020 due primarily~~pass cost increases on to ~~increased revenues for customer delivery networks.~~customers.

3834

~~Earnings for the first nine months~~Recruiting, training and retaining employees and contractors are important factors to our success. Severe disruptions or shortages of ~~2021 were negatively impacted~~ by ~~lower DoD flying during the first six months of 2021 compared to 2020.~~

Due to the wind-down of Afghanistan-related evacuation operations, the level of passenger operations for the remainder of 2021 is expected to decline from third quarter 2021 levels. While difficult to predict, we expect revenues from passenger operations for the fourth quarter of 2021 to be similar to the level of fourth quarter 2020 passenger operations. ~~We expect Amazon to lease at least three more Boeing 767-300 freighter aircraft from CAM during the last quarter of 2021 and contract the operation of those aircraft through~~qualified employees could have a detrimental impact on our ~~existing ATSA. We also expect Amazon to contract with us to operate one more Amazon-provided aircraft under the ATSA during the fourth quarter of 2021.~~financial results.

Other Activities

We provide other support services to our ACMI Services customers and other airlines by leveraging our knowledge and capabilities developed for our own operations over the years. Through our FAA certificated maintenance and repair subsidiaries, we sell aircraft parts and provide aircraft maintenance and modification services. We also ~~arrange~~provide mail sorting, parcel handling and ~~perform~~ logistical support to USPS facilities and similar services ~~and package sorting services for~~to certain ASI hub and gateway locations in the U.S. We provide maintenance for ground equipment, facilities and material handling equipment and we resell aviation fuel in Wilmington, Ohio. Additionally, we provide flight training services. ~~Other activities include the cost of unallocated corporate expenses.~~

External customer revenues from all other activities increased ~~$11.4~~$15.6 million and ~~$50.9~~$38.1 million in the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods of 2021. Revenues from fuel sales were up $4.3 million and $17.7 million for the three and nine month periods ended September 30, ~~2021,~~2022, respectively, while revenues from aircraft maintenance services increased $6.1 million and $15.4 million for the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods of ~~2020. Broad revenue increases during the first nine months of 2021 were led by~~2021. Revenues from higher margin ground services ~~revenues which~~ increased ov~~er 49%~~$5.3 million and $4.9 million for the three and nine month periods ended September 30, 2022, respectively, compared to the ~~previous year period. The pre-tax~~corresponding periods during the prior year. Pre-tax earnings from other activities ~~increased $5.4~~decreased by $0.1 million ~~during~~ and $1.9 million for the three and nine month ~~period~~periods ended September 30, ~~2021, to $2.5 million,~~2022, respectively, compared to the ~~corresponding period~~ same periods last year. Lower earnings reflects disruptions to our aircraft hangar operations due to the malfunction of ~~2020~~the fire suppression system, as ~~a result~~well as the inflationary impacts, including the rising costs of ~~higher revenues.~~labor, versus the previous year.

Expenses from Continuing Operations

Salaries, wages and benefits expense increased ~~$19.5~~$21.9 million, or 15%, and ~~$58.0~~$62.9 million, or ~~16%,~~15% during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared to the corresponding periods of ~~2020, driven~~2021. While the number of total employees was flat compared to the previous year, salaries and wages have been impacted by higher ~~employee headcount for flight operations, maintenance operations~~wage rates, including more pilots, benefit costs, and package sorting services along with increased healthcare benefit costs. The total headcount increased 4% as of September 30, 2021, compared to September 30, 2020, including additional personnel for the two USPS mail contracts added since last year. Additionally, increases since July 1, 2020, include more flight crewmembers, aircraft maintenance technicians and other personnel to support additional flight operations for our customers' express cargo networks, primarily ASI. Salaries expense also increased due to an a~~mended collective bargaining agreement with the union for ABX's pilot employees, which went into effect at the beginning of 2021.~~overtime pay.

Depreciation and amortization expense increased ~~$9.8~~$5.5 million and ~~$18.8~~$22.3 million ~~during~~during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared to the corresponding periods of ~~2020.~~2021. The increase reflects incremental depreciation for ~~eleven Boeing 767-300 aircraft and~~nine additional aircraft ~~engines added to the operating fleet since October 1, 2020,~~ as well as ~~capitalized heavy maintenance and navigation technology upgrades.~~ ~~This increase in depreciation was offset by the retirement of the Boeing 757 freighter fleet and lower~~additional depreciation expense ~~on passenger aircraft~~for engines ~~due to reduced activity compared to the previous year. W~~ethat are now being serviced and maintained by CAM under engine power coverage arrangements. We expect depreciation expense to increase during future periods in conjunction with our fleet expansion, engine programs and capital spending plans.

Maintenance, materials and repairs expense decreased ~~$5.0~~by $2.2 million and ~~$2.5~~$15.0 million during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared to the corresponding periods of ~~2020. Decreased maintenance~~2021. Maintenance expense for the ~~first~~three and nine ~~months of~~month periods ended September 30, 2021 included $8.8 million and $27.2 million, respectively, for an engine power-by-the-cycle ("PBC") agreement that expired in September 2021. We are now maintaining these engines through time and material agreements with engine maintenance providers to replace the expired PBC agreement. The decline in PBC expense was offset by increases driven by ~~lower costs for engine repairs at our airlines offset~~ by increased flight ~~operations for our customers' express cargo networks and increased heavy maintenance.~~operations. The aircraft maintenance and material expenses can vary among periods due to the number of maintenance events and the scope of airframe checks that are performed.

Fuel expense increased by ~~$14.0~~$18.4 million and ~~$0.4~~$84.9 million during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared to the corresponding periods of ~~2020.~~2021. Fuel expense includes the cost of fuel to operate DoD charters, fuel used to position aircraft for service and for maintenance purposes, as well as the

cost of fuel sales. Fuel expense increased ~~during the first nine months of 2021 compared to 2020 primarily~~ due to the additional block hours ~~operated by our airlines~~for the DoD and due to increases in the price per gallon of aviation fuel compared to the previous ~~year periods.~~year. Aviation fuel rates increased approximately 70% and 58% per gallon for the three and nine month periods ended September 30, 2022, respectively, compared to the corresponding periods of 2021.

Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services, baggage handling services and other airport services. Contracted ground and aviation services ~~increased $1.8~~decreased

$3.3 million and ~~$7.5~~increased $1.5 million during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared to the corresponding periods of ~~2020. The increases were driven by additional~~2021. Contracted ground ~~equipment installation projects~~and aviation services vary with the level of passenger airline operations. Declines in these expense for ~~customers and higher fees for airport services~~the third quarter of 2022 correspond with the decline in passenger block hours compared to the ~~previous~~third quarter of 2021. The increases for the year ~~periods.~~correspond to increased flying volume.

Travel expense increased by ~~$4.7~~$4.9 million and ~~$2.6~~$20.7 million during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared to the corresponding periods of ~~2020. The increase in~~2021. In addition to the increased number of crew member and flying volumes, travel expense ~~during the first nine months of 2021 reflects an increase in employee travel~~increased due to ~~support~~significantly higher ~~block hours flown for customers, which increased 10%~~airfares and hotels rates compared to ~~2020.~~a year ago.

Landing and ramp expense, which includes the cost of deicing chemicals, increased by ~~$0.6~~$0.2 million and ~~$1.3~~$2.7 million during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared to the corresponding periods of ~~2020,~~2021, driven by increased ~~block hours~~flying volumes for our customers' express cargo networks.

~~Rent expense~~Other operating expenses increased by ~~$0.7~~$0.6 million and ~~$3.6~~$9.6 million during the three and nine month periods ended September 30, ~~2021,~~2022, respectively, compared to the corresponding periods of ~~2020 due to the lease of an additional passenger aircraft and facility rents for the two USPS facilities started in mid 2020.~~

Insurance expense increased by $0.1 million and $2.1 million during the three and nine month periods ended September 30, 2021, respectively, compared to the corresponding periods of 2020. Aircraft fleet insurance has increased due to additional aircraft operations and higher insurance rates during the first nine months of 2021 compared to 2020.

~~Other operating expenses decreased by $1.4 million and $1.2 million during the three and nine month periods ended September 30, 2021, respectively, compared to the corresponding periods of 2020.~~2021. Other operating expenses include professional fees, employee training, utilities, commission expense to our CRAF team for DoD revenues and other expenses.

Operating results included a pre-tax expense credit of $30.3 million and $96.6 million during the three and nine month periods ended September 30, 2021, respectively, ~~compared to $21.7 million and $31.5 million during the corresponding periods of 2020,~~ to recognize grants received from the U.S. government ~~for payroll support programs.~~under the CARES Act, PSP Extension Law and the American Rescue Plan. For additional information about ~~the government~~these grants, see Note H of the ~~accompanying~~unaudited condensed consolidated financial ~~statements.~~statements included in this report.

~~Non Operating~~Non-Operating Income, Adjustments and Expenses

Interest expense decreased by ~~$1.0~~$2.3 million and ~~$3.8~~$11.0 million for the three and nine months ended September 30, 2022 compared to the corresponding periods for 2021. Interest expense declined primary due to the adoption of Accounting Standards Update ("ASU") No. 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" and the effects of interest rates swaps. See Note G for additional information about the interest rate swaps. ASU No.2020-06 resulted in the elimination of the discount on the convertible notes and accordingly the reduction of discount amortization to interest expense. See Note A for additional information about ASU No. 2020-06. We expect interest expense to increase in future periods due to increases in our revolver balances as we expand CAM's fleet and increased interest rates which are derived from our Senior Credit Agreement.

During the second quarter of 2022 the company repurchased $120.0 million of its Senior Notes par value in the open market resulting in a net pre-tax gain of $4.5 million, net of fees, which was recorded under net gain on financial instruments on the income statement during the corresponding period. The Company recorded unrealized pre-tax gains on financial instrument re-measurements of $0.7 million and $9.4 million for the three and nine month periods ended September 30, ~~2021, respectively,~~2022, compared to the corresponding periods of 2020. Interest expense during the first nine months of 2021 decreased compared to 2020 due to lower interest rates on our borrowings under the Senior Credit Agreement and lower average debt balances outstanding during the year. During the second quarter of 2021, the Company recorded a pre-tax charge of $6.5 million to write-off the unamortized debt issuance costs of the Company's term loans which were repaid in full during April 2021.

~~The Company recorded unrealized~~ pre-tax losses ~~on financial instrument re-measurements~~ of $7.4 million and gains of $37.8 million ~~during the three and nine month periods ended September 30, 2021, respectively, compared to pre-tax losses of $53.4 million and $56.1 million~~ for the corresponding periods in 2021. The pre-tax gains for 2022 are primarily a result of ~~2020.~~the impact of higher market interest rates on the interest rate derivatives that we held. (See Note G for additional information about the interest rate derivatives.). The pre-tax gains ~~and losses include the results~~for 2021 are primarily a result of re-valuing ~~as of September 30, 2021 and 2020, the fair value of~~ the stock warrants granted to Amazon. ~~Generally, the~~The warrant ~~value increases~~values generally increase or ~~decreases~~decrease with corresponding increases or decreases in the ATSG share price during the measurement period. ~~Warrant gains for~~Additionally, the ~~first nine months~~value of ~~2021 reflect an 18% decrease~~certain warrants depends partially on the probability that such warrants will vest upon the execution of aircraft leases. Increases in the ~~traded price~~probability of ~~ATSG shares.~~warrants vesting results in higher liabilities and losses. In December 2021, most of the outstanding warrants were reclassified from liabilities to paid in capital and are no longer subject to periodic reevaluation. (See Note C for additional information about the Amazon warrants.)

~~Non-service~~Non service components of retiree benefits ~~were a~~resulted in net ~~gain~~gains of ~~$4.5~~$4.6 million and ~~$13.4~~$15.4 million for the three and nine month periods ended September 30, ~~2021, respectively,~~2022 compared to ~~$2.9~~net gains of $4.5 million and ~~$8.7~~$13.4 million for the corresponding periods of ~~2020.~~2021. The ~~non-service~~non service component gain and losses of retiree benefits are ~~actuarially~~ determined by actuaries and include the amortization of unrecognized gains and losses stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. ~~Non-service~~

Non service components of retiree benefits can vary significantly from one year to the next based on investment results and changes in discount rates used to account for defined benefit retirement plans.

The provision for income taxes for interim periods is based on management's best estimate of the effective income tax rate expected to be applicable for the current year, plus any adjustments arising from changes in the estimated amount of taxable income related to prior periods. Income taxes recorded through September 30, ~~2021~~2022 have been estimated utilizing a 23% rate based upon year-to-date income ~~and~~ projected results for the full year. The recognition of discrete tax items such as the conversion of employee stock awards, ~~officer's~~officer compensation, the issuance of stock warrants and other items have an impact on the effective rate during a period.

The effective ~~tax~~ rate from continuing operations for both the three and nine month periods ended September 30, ~~2021~~2022 was 23%. The effective tax rate is affected by ~~changes in valuation allowances and other~~the discrete tax items in which ~~expenses~~expense and benefits for tax purposes are different than required by generally accepted accounting principles. The effective tax rate before including the effects of the warrant ~~re-measurements,~~re-measurement, incentive amortizations and the other adjustments for adjusted pre-tax earnings from continuing operations (see items in the table above) was 23% for both the three and nine month periods ended September 30 2022, respectively. The effective tax rate before including the effects of the warrants was 24% for both the three and nine month periods ended September 30, 2021. ~~The effective tax rate before including the effects of the warrants was 25% and 23% for the three and nine month periods ended September 30, 2020, respectively.~~

Discontinued Operations

The financial results of discontinued operations primarily reflect ~~pension,~~ workers' compensation cost adjustments and other benefits for former employees previously associated with ABX's former hub operations pursuant to which ABX performed package sorting services for DHL. ~~Pre-tax gains~~Gains related to the former sorting operations were ~~$3.1~~$2.2 million for the first nine months of ~~2021~~2022, compared to ~~$5.4~~$3.1 million for ~~2020. Pre-tax earnings~~the corresponding period of 2021. Gains during 2022 and 2021 ~~and 2020~~ were primarily a result of reductions in self-insurance reserves for former employee ~~claims and pension credits.~~benefit claims.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Net cash generated from operating activities totaled $398.1 million and $429.2 million for the nine month periods ended September 30, 2022 and ~~$423.3~~2021, respectively. Cash flows from operating activities included $83.0 million ~~for~~from government payroll support programs during the first nine months of 2021. The decrease in ~~2021~~government grant support was offset by improved cash flows generated from additional aircraft leases to customers and ~~2020, respectively.~~increased operating levels under the ACMI Services segment. Cash ~~receipts~~flows from operations can vary among periods depending on the ~~U.S. government for COVID-19~~ ~~payroll support programs~~ ~~were $83.0 million and $75.4 million for~~timing of customer payments received as well as vendor payments we make at the ~~first nine month~~end of ~~2021 and 2020 respectively (see Note H to the accompanying financial statements).~~a period. Cash outlays for pension contributions were ~~$1.8~~$1.5 million and ~~$8.2~~$1.8 million for the first nine months of 2022 and 2021, ~~and 2020,~~ respectively.

Capital spending levels were ~~primarily~~substantially the result of aircraft modification costs and the acquisition of aircraft for freighter modification. Cash payments for capital expenditures were $448.4 million and $428.1 million ~~and $394.3 million for~~in the first nine months of 2022 and 2021, respectively. Capital expenditures in the first nine months of 2022 included $303.0 million for the acquisition of six Boeing 767-300 aircraft, six Airbus A321-200 aircraft and ~~2020, respectively.~~freighter modification costs; $135.0 million for required heavy maintenance; and $10.4 million for other equipment. Capital expenditures in the first nine months of 2021 included $278.5 million for the acquisition of 14 Boeing 767-300 aircraft, one Airbus A321-200 aircraft and freighter modification costs; $140.9 million for required heavy maintenance; and $8.7 million for other equipment. ~~Capital expenditures in~~

During the first nine months of ~~2020 included $273.4~~2022 and 2021, we contributed $16.5 million and $2.5 million, respectively, to our two joint-ventures. Our joint-venture with Precision Aircraft Solutions, LLC, developed a passenger-to-freighter conversion program for Airbus A321-200 aircraft and our joint-venture with GA Telesis Engine Services, LLC will provide engine tear-down services to harvest and sell engine parts.

Net cash provided by financing activities was $47.8 million and $7.6 million for the ~~acquisition~~nine months ended September 30, 2022 and 2021, respectively. During the first nine months of ~~eight~~2022, we made debt payments of $345.5 million, we drew $510.0 million from the revolving credit facility and we paid $115.2 million to retire Senior Notes. During the first nine months of 2021, we made debt principal payments of $1,758.0 million and we drew $1,430.6 million from the revolving credit facility. During the first nine months of 2021, we received $207 million in proceeds from the issuance of Additional Senior Notes as well as received $132 million from Amazon for the exercise of warrants for the Company's stock.

Commitments

As of September 30, 2022, the Company had 21 aircraft that were in or awaiting modification to a freighter configuration. Additionally, we placed non-refundable deposits and have agreements to purchase 17 more Boeing 767-300 passenger aircraft, two more Airbus 321-200 and six Airbus A330 aircraft through 2024. We expect to purchase additional aircraft for modification in 2023. The Company outsources a significant portion of the aircraft freighter modification ~~costs; $65.3 million for required heavy maintenance;~~process to non-affiliated third parties. The modification process primarily consists of the installation of a standard cargo door and ~~$55.6 million for other equipment, including the purchases of aircraft engines and rotables.~~loading system. We estimate that total capital expenditures for ~~2021~~2022 will ~~total at least $530~~be approximately $625 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.

~~During~~Liquidity

At September 30, 2022, the ~~first nine months~~Company had $54.5 million of ~~2021~~cash balances and ~~2020, we contributed $2.5~~$259.7 million ~~and $9.1 million, respectively, to a joint-venture with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft.~~

Net cash provided by financing activities was $7.6 million during the first nine months of 2021 compared to $14.3 million used in financing activities in 2020. Financing activities include $132 million remitted by Amazon on May 7, 2021 to exercise warrants for the Company's common stock, as described in Note C of the accompanying financial statements. During the first nine months in 2021, we made debt principal payments of $1,758.0 million which included payments of $619.1 million to repay the entire balance of all term loans and payments of $1,138.9 million to the revolving credit facility. Our financing activities during the first nine months in 2020 included a debt

~~offering of a $200 million add-on to our senior unsecured notes. During the first nine months in 2021, we drew $1,430.6 million~~available from the ~~revolving credit facility. The proceeds from the senior notes add-on, the funds received from Amazon and draws on~~unused portion of the revolving credit facility ~~resulted in the retirement of the term loans and a larger outstanding balance~~ under the revolving credit agreement. During the first nine months in 2020, we drew $80.0 million from the revolving credit facility. Our financing activities during the first nine months in 2020 included a debt offering of $500 million in senior unsecured notes which was used to pay down the revolving credit facility in 2020. Our borrowing activities were necessary to purchase and modify aircraft for deployment into air cargo markets.

~~Commitments~~

The Company outsources a significant portion of the aircraft freighter modification process to third parties. The modification primarily consists of the installation of a standard cargo door and loading system. As of September 30, 2021, the Company had sixteen aircraft that were in or awaiting the modification process. We have agreements to purchase twelve more Boeing 767-300 passenger aircraft and two Airbus 321-200 passenger aircraft. We have contracted with third parties for future modifications of Boeing 767-300, Airbus A321 and Airbus A330 passenger aircraft. We expect to finance the capital expenditures from current cash balances, future operating cash flows and the Senior Credit Agreement. For additional information about the Company's aircraft modification obligations, see Note H of the accompanying financial statements in this report.

Since August 3, 2017, the Company has been part of a joint-venture with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. Approval of a supplemental type certificate from the FAA was granted in April 2021 and aircraft conversions have begun. We expect to make contributions to the joint-venture, equal to the Company's 49% ownership percentage, as may be needed for inventory and other working capital needs during 2021.

~~Liquidity~~

At September 30, 2021, the Company had $49.8 million of cash balances. We believe that the Company's current cash balances and forecasted cash flows provided from its customer leases, operating agreements and government grants 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.~~

The Company has a Senior Credit Agreement with a consortium of banks. Borrowings under the Senior Credit Agreement are collateralized by certain Company-owned aircraft. The Company has also issued unsecured Senior Notes in unregistered offerings pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Senior Credit Agreement and Senior Notes are described in Note F of the accompanying financial statements. In April and May 2021, we made changes to the Company's debt structure which resulted in the extension of repayment maturities, a reduction in collateralized borrowings outstanding, an increase to fixed rate debt, and increased borrowing capacity subject to certain conditions.

The Senior Credit Agreement was amended on April 6, 2021 ("Amended Credit Agreement"), to temporarily increase the maximum amount of the Company's revolving credit facility from $600 million to $1 billion and, thereafter, reduce the maximum amount on April 13, 2021, to $800 million. In addition, the amendment modified the maturity date of the agreement from November 30, 2024, to April 6, 2026, and effected other changes as described in Note F of the accompanying financial statements. ~~In conjunction~~We expect our operations to continue to generate significant net cash in-flows after deducting required spending of approximately $195 million for heavy maintenance and other sustaining capital expenditures during fiscal year 2022. To expand our fleet, we estimate that capital expenditures for aircraft purchases and freighter modifications will total $430 million for fiscal year 2022. We believe that the Company's current cash balance, forecasted cash flows provided from its customer leases and operating agreements, combined with ~~the amendment, we prepaid the entire outstanding balance of all term loans at the time of the amendment.~~

On January 8, 2020, the Company, through a subsidiary, issued $500 million of Senior Notes. The Senior Notes are senior unsecured obligations that bear interest at a rate of 4.75% per year, and mature on February 1, 2028. On April 13, 2021, the Company, through a subsidiary, completed an offering of $200 million of additional Senior Notes ("Additional Notes"). The Additional Notes are fully fungible with the previously-issued Senior Notes, treated as a single class for all purposesborrowing availability under ~~the indenture governing the Senior Notes with the same terms as those of the previously-issued Senior Notes (other than issue date and issue price) and mature on February 1, 2028.~~

~~The~~its Senior Credit Agreement, ~~is collateralized by~~will be sufficient to fund the expansion and maintenance of our fleet ~~of Boeing 777, 767~~while meeting our contractual obligations, other commitments and ~~757 freighter aircraft. Under~~working capital requirements for at least the ~~terms of the Senior Credit Agreement,~~next twelve months. In October 2022, we are required to maintain collateral coverage equal to 125% of the outstanding balances of the term loans and the total funded revolving credit facility. The minimum collateral coverage which must be maintained is 50% of the outstanding balance of the term loan plus the revolving credit

~~facility commitment. As mentioned above, in conjunction with the amendment to the Senior Credit Agreement done on April 6, 2021, the Company paid off the entire outstanding balance of all term loans.~~

Under the Senior Credit Agreement, the Company is subject to covenants and warranties that are usual and customary including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization expenses) ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default including unspecified events that may have a material adverse effect on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replaceamended the Senior Credit Agreement. ~~The Senior Notes contain customary events of default~~See Note F for additional information.

Continued global disruptions in supply chains and ~~covenants which are generally no more restrictive than those set forth in the Senior Credit Agreement.~~

~~As of September 30, 2021, the unused revolving credit facility totaled $353.3 million~~labor shortages may delay aircraft modification projects, pushing contractual obligations into later periods, and additional permitted indebtedness under the Senior Credit Agreement, subject to compliance with other covenants, was limited to $250.0 million. Additional debt or lower EBITDA may result in higher interest rates. Under the Senior Credit Agreement, interest rates are adjusted quarterly basedcould have an impact on the ~~prevailing LIBOR or prime rates and a ratio~~projected amount of the Company's outstanding debt level to EBITDA. At the Company's current debt-to-EBITDA ratio, the Senior Notes bear a fixed interest rate of 4.75% and the revolving credit facility bears a variable interest rate of 1.09%.

~~Off-Balance Sheet Arrangements~~

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2021 and 2020, 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.capital expenditures.

CRITICAL ACCOUNTING ~~POLICIES AND~~ ESTIMATES

~~“Management’s Discussion~~The MD&A and ~~Analysis of Financial Condition and Results of Operations,” as well as~~ certain other 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.~~GAAP. The preparation of ~~these~~the 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.~~applied. On an ongoing basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves, valuation of spare parts inventory, useful lives, salvage values and impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed by management 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. By their nature, these judgments are subject to uncertainty. 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.

Except as provided in Note A, our critical accounting policies and estimates have not changed materially from those disclosed in our 2021 Form 10-K.

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 its customers.

~~No changes~~Market risks have ~~occurred to the market risks the Company faces since information about~~not materially changed from those ~~risks was~~ disclosed in ~~item~~Item 7A of the Company's ~~2020 Annual Report on form 10-K filed with the Securities and Exchange Commission on March 1, 2021.~~2021 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of September 30, ~~2021,~~2022, the Company carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls

There were no changes in ~~internal~~the Company's "internal control over financial ~~reporting~~reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during ~~the~~its most recently completed fiscal ~~year~~quarter ended September 30, 2022 that has materially affected, or isare reasonably likely to materially affect, ~~the Company's~~its internal control over financial reporting.

4439

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 ~~2020 Annual Report~~2021 Form 10-K.

In addition to the risks previously disclosed, the recent outbreak of war in Ukraine and the emergence of COVID-19 variants in China and other countries may result in further supply chain disruptions. These matters, coupled with inflationary pressures, could have an impact on ~~Form 10-K, filed with~~overall economic conditions as well as the ~~Securities~~Company's operations and ~~Exchange Commission~~financial results.

As disclosed in Note H of this report, on ~~March 1, 2021.~~ August 7, 2022 the fire suppression system discharged at one of our aircraft maintenance hangars in Wilmington, Ohio, impacting employees, three aircraft, and equipment in and around the hangar. We expect that employee claims, property and equipment damage, customer claims and certain costs of business interruption will be covered by insurance, subject to customary deductibles and policy limits. However, our operating results may be impacted by losses and liabilities that are not covered by our insurance. Additionally, property losses will be recognized as they become known to us and related expenses as they are incurred, however insurance proceeds may not be recognized until later periods. As a result, the impact on our earnings may vary from period to period. The timeframes needed to return all aircraft and engines to operating condition are not known at this time. If some or all of these assets remain inoperable for an extended period of time, our operating results could be negatively impacted.

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 of ATSG authorized the ~~Company to~~ repurchase of up to $50.0 million of ATSG's outstanding common stock. In May 2016, the Board of Directors amended the Company's common stock repurchase program ~~increasing~~to increase the maximum repurchase amount ~~that management may repurchase~~ from $50.0 million to $100.0 ~~million of outstanding common stock.~~million. In February 2018, the Board of Directors increased the repurchase authorization from $100.0 million to $150.0 million (less amounts previously repurchased). The ~~Board's~~ authorization does not require the ~~Company to~~ repurchase of a specific number of shares or establish a time frame for any repurchase and the Board of Directors may terminate the repurchase program at any time. Repurchases may be made from time to time in the open market or in privately negotiated transactions. There is no expiration date for the repurchase program. There were no repurchases made during the third quarter of ~~2021.~~2022. As of September 30, ~~2021,~~2022, the Company had repurchased 6,592,349 shares and the maximum dollar value of shares that could then be purchased under the program was $61.3 million.

The share repurchase program ~~has been~~was suspended until the CARES Act, PSP Extension Law and American ~~Act~~Rescue Plan restrictions on the repurchase of shares ~~have lapsed.~~lapsed after September 30, 2022. For more information, see Note H of the accompanying consolidated financial statements in this report.

On March 5, 2021, Amazon exercised warrants for 865,548 shares of the Company's common stock through a cashless exercise by forfeiting 480,047 warrants from the 2016 Investment Agreement as payment. For the cashless exchange, ATSG shares were valued at $27.27 per share, its volume-weighted average price for the previous 30 trading days immediately preceding March 5, 2021. Also on March 5, 2021, Amazon notified the Company of its intent to exercise warrants from the 2016 Investment agreement for 13,562,897 shares of the Company's common stock by paying $132.0 million of cash to the Company. This exercise was contingent upon the approval of the United States Department of Transportation, and the expiration or termination of any applicable waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. After receiving all required regulatory approvals and clearances, Amazon remitted the funds to the Company on May 7, 2021 and the Company issued the corresponding shares of common stock, completing the warrant exercise. These funds were used to pay down the balance of the Company's revolving credit facility. The shares were issued to Amazon without registration under the Securities Act of 1933, as amended (the “1933 Act”), pursuant to exemptions from registration under Section 4(2) of the 1933 Act and Regulation D promulgated by the Securities and Exchange Commission under the 1933 Act.

4540

ITEM 6. EXHIBITS

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


Exhibit No.			Description of Exhibit

			~~Instruments defining the rights of security holders~~

~~4.1~~			~~Supplemental Indenture, dated as of April 13, 2021, among Cargo Aircraft Management, Inc., the guarantors party thereto, and Regions Bank, an Alabama state banking corporation, as trustee.~~ ~~(2)~~

			Material Contracts

10.1			~~Payroll Support Program Extension Agreement, dated February 2, 2021, by and between Omni Air international, LLC and the U.S. Department of Treasury under Subtitle A of Title IV of Division N~~Summary of the ~~Consolidated Appropriations Act, 2021~~Key Terms and Conditions of the Air Transport Services Group, Inc. Amended and Restated 2015 Long-Term Incentive Plan. ~~. (3)~~(1)

10.2			~~Amendment to Investment Agreement, dated as of March 5, 2021, by and between~~ Air Transport Services Group, Inc., Amended and ~~Amazon.com, Inc.~~Restated 2015 Long-Term Incentive Plan. ~~(3)~~(1)

10.3			~~Third Amended~~Letter agreement setting out a compensation arrangement between Mike Berger, Chief Commercial Officer, and ~~Restated Credit Agreement, dated as of April 6, 2021, by and among Cargo Aircraft Management, Inc., as borrower,~~ Air Transport Services Group, Inc., the lenders and other financial institutions from time to time a party thereto, Trust Bank, as administrative agent and a lender, Bank of America, N.A., JPMorgan Chase Bank, N.A., and PNC Bank, National Association, as co-syndication agents and Regions Bank, as documentation agent. dated May 10, 2022~~(1)~~. (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			~~Inline~~ XBRL Instance Document ~~(the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)~~

101.SCH			~~Inline~~ XBRL Taxonomy Extension Schema Document

101.CAL			~~Inline~~ XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			~~Inline~~ XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			~~Inline~~ XBRL Taxonomy Extension Labels Linkbase Document

101.PRE			~~Inline~~ XBRL Taxonomy Extension Presentation Linkbase Document

104			Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

____________________

(1)Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on ~~April 6, 2021.~~June 1, 2022.

(2)Incorporated by reference to the Company's Form ~~8-K filed with the Securities and Exchange Commission on April 13, 2021.~~

~~(3)Incorporated by reference to the Company's Quarterly Report on Form~~ 10-Q filed with the Securities and Exchange Commission on ~~May 10, 2021.~~August 9, 2022.

4641

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/ RICHARD F. CORRADO

Richard F. Corrado

Chief Executive Officer (Principal Executive Officer)

Date:

November ~~8, 2021~~9, 2022

/S/ QUINT O. TURNER

Quint O. Turner

Chief Financial Officer (Principal Financial Officer

Date:

November ~~8, 2021~~9, 2022

and Principal Accounting Officer)



		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	42
	Unaudited Condensed Consolidated Balance Sheets	42
	Unaudited Condensed Consolidated Statements of Operations	53
	Unaudited Condensed Consolidated Statements of Comprehensive Income	64
	Unaudited Condensed Consolidated Statements of Stockholders' Equity	75
	Unaudited Condensed Consolidated Statements of Cash Flows	97
	Notes to Unaudited Condensed Consolidated Financial Statements	108
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3128
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4438
Item 4.	Controls and Procedures	4439

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	4540
Item 1A.	Risk Factors	4540
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4540
Item 6.	Exhibits	4641
SIGNATURES		4742


			Page
Note A - Summary of Financial Statement Preparation and Significant Accounting Policies			119
Note B - Goodwill, Intangibles and Equity Investments			1210
Note C - Significant Customers			1311
Note D - Fair Value Measurements			1614
Note E - Property and Equipment			1715
Note F - Debt Obligations			1816
Note G - Derivative Instruments			2018
Note H - Commitments and Contingencies			2018
Note I - Pension and Other Post-Retirement Benefit Plans			2321
Note J - Income Taxes			2422
Note K - Accumulated Other Comprehensive Income (Loss)			2423
Note L - Stock-Based Compensation			2624
Note M - Common Stock and Earnings Per Share			2725
Note N - Segment and Revenue Information			26
Note O - Discontinued Operations			28


		Amazon	Year of
		# of Leases	Commencement	Expiration
Leased
	Boeing 767-200	12	2016	2023
	Boeing 767-300	2	2016	2026
	Boeing 767-300	6	2017	2027
	Boeing 767-300	6	2019	2029
	Boeing 767-300	5	2020	2030
	Boeing 767-300	8	2021	2031

Lease Commitments
	Boeing 767-300	3	2021	2031