atsg-20200930

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, 2020

☐ 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 4, 2020, there were 59,589,770 shares of the registrant’s common stock outstanding.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets	4
	Unaudited Condensed Consolidated Statements of Operations	5
	Unaudited Condensed Consolidated Statements of Comprehensive Income	6
	Unaudited Condensed Consolidated Statements of Stockholders' Equity	7
	Unaudited Condensed Consolidated Statements of Cash Flows	9
	Notes to Unaudited Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 6.	Exhibits	47
SIGNATURES		49

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, 2019, filed with the Securities and Exchange Commission on March 2, 2020.

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

FORWARD LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). Words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms and expressions are intended to identify forward-looking statements. These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described in this report and in our 2019 Annual Report filed on Form 10-K with the Securities and Exchange Commission.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	September 30,		December 31,
	2020		2019
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and restricted cash	$	61,078	$	46,201
Accounts receivable, net of allowance of $1,170 in 2020 and $975 in 2019	149,804		162,870
Inventory	39,638		37,397
Prepaid supplies and other	22,916		20,323
TOTAL CURRENT ASSETS	273,436		266,791
Property and equipment, net	1,904,940		1,766,020
Customer incentive	131,634		146,678
Goodwill and acquired intangibles	519,079		527,654
Operating lease assets	53,151		44,302
Other assets	80,591		68,733
TOTAL ASSETS	$	2,962,831	$	2,820,178
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	142,173	$	141,094
Accrued salaries, wages and benefits	58,230		59,429
Accrued expenses	18,206		17,586
Current portion of debt obligations	13,742		14,707
Current portion of lease obligations	14,551		12,857
Unearned revenue and grants	65,832		17,566
TOTAL CURRENT LIABILITIES	312,734		263,239
Long term debt	1,466,844		1,469,677
Stock warrant obligations	210,319		383,073
Post-retirement obligations	22,946		36,744
Long term lease obligations	38,353		30,334
Other liabilities	49,814		49,293
Deferred income taxes	147,201		127,476
TOTAL LIABILITIES	2,248,211		2,359,836
Commitments and contingencies (Note H)
STOCKHOLDERS’ EQUITY:
Preferred stock, 20,000,000 shares authorized, including 75,000 Series A Junior Participating Preferred Stock	—		—
Common stock, par value $0.01 per share; 150,000,000 shares authorized; 59,589,770 and 59,329,431 shares issued and outstanding in 2020 and 2019, respectively	596		593
Additional paid-in capital	700,757		475,720
Retained earnings	72,883		45,895
Accumulated other comprehensive loss	(59,616)		(61,866)
TOTAL STOCKHOLDERS’ EQUITY	714,620		460,342
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,962,831	$	2,820,178

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
REVENUES	$	404,146	$	366,073	$	1,171,217	$	1,048,832
OPERATING EXPENSES
Salaries, wages and benefits	128,608		110,706		373,642		307,897
Depreciation and amortization	67,974		64,149		205,607		190,052
Maintenance, materials and repairs	48,767		41,496		134,148		125,501
Fuel	36,202		41,193		116,788		110,311
Contracted ground and aviation services	19,840		17,190		47,735		47,319
Travel	20,254		25,366		59,226		66,401
Landing and ramp	3,378		2,539		8,895		7,978
Rent	5,137		4,123		13,821		11,860
Insurance	3,119		1,833		7,295		5,601
Other operating expenses	18,623		16,712		49,577		50,763
Government grants	(21,726)		—		(31,547)		—
Impairment of aircraft and related assets	—		—		39,075		—
Transaction fees	—		—		—		373
	330,176		325,307		1,024,262		924,056
OPERATING INCOME	73,970		40,766		146,955		124,776
OTHER INCOME (EXPENSE)
Interest income	93		78		217		255
Non-service component of retiree benefit gains (costs)	2,897		(2,351)		8,693		(7,053)
Net (loss) gain on financial instruments	(53,393)		91,952		(56,072)		60,566
Loss from non-consolidated affiliate	(2,485)		(2,645)		(11,762)		(12,459)
Interest expense	(15,440)		(16,712)		(47,808)		(50,906)
	(68,328)		70,322		(106,732)		(9,597)

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	5,642		111,088		40,223		115,179
INCOME TAX EXPENSE	(11,387)		(6,003)		(17,397)		(14,092)
EARNINGS (LOSS) FROM CONTINUING OPERATIONS	(5,745)		105,085		22,826		101,087
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES	154		243		4,162		305
NET EARNINGS (LOSS)	$	(5,591)	$	105,328	$	26,988	$	101,392

BASIC EARNINGS PER SHARE
Continuing operations	$	(0.10)	$	1.78	$	0.39	$	1.72
Discontinued operations	0.01		0.01		0.07		—
TOTAL BASIC EARNINGS (LOSS) PER SHARE	$	(0.09)	$	1.79	$	0.46	$	1.72

DILUTED EARNINGS PER SHARE
Continuing operations	$	(0.10)	$	0.19	$	0.38	$	0.43
Discontinued operations	0.01		0.01		0.07		—
TOTAL DILUTED EARNINGS (LOSS) PER SHARE	$	(0.09)	$	0.20	$	0.45	$	0.43

WEIGHTED AVERAGE SHARES
Basic	59,146		58,919		59,106		58,889
Diluted	59,146		68,718		59,863		69,382

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020	2019
NET EARNINGS (LOSS)	$	(5,591)	$	105,328	26,988	101,392
OTHER COMPREHENSIVE INCOME (LOSS):
Defined Benefit Pension	726		2,965		2,178	9,189
Defined Benefit Post-Retirement	24		33		72	102
Foreign Currency Translation	—		(1)		—	1,473

TOTAL COMPREHENSIVE INCOME (LOSS), net of tax	$	(4,841)	$	108,325	29,238	112,156

See notes to 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
	Number	Amount
BALANCE AT JUNE 30, 2019	59,363,839	$	594	$	473,053	$	(19,243)	$	(83,595)	$	370,809
Stock-based compensation plans
Grant of restricted stock	7,500	—		—						—
Issuance of common shares, net of withholdings	(1,069)	—		(25)						(25)
Forfeited restricted stock	(1,700)	—		—						—
Amortization of stock awards and restricted stock				1,887						1,887
Total comprehensive income (loss)						105,328		2,997		108,325
BALANCE AT SEPTEMBER 30, 2019	59,368,570	$	594	$	474,915	$	86,085	$	(80,598)	$	480,996

BALANCE AT JANUARY 1, 2019	59,134,173	$	591	$	471,158	$	56,051	$	(91,362)	$	436,438
Stock-based compensation plans
Grant of restricted stock	151,300	2		(2)						—
Issuance of common shares, net of withholdings	86,097	1		(1,522)						(1,521)
Forfeited restricted stock	(3,000)	—		—						—
Cumulative effect in change in accounting principle						(71,358)				(71,358)
Amortization of stock awards and restricted stock				5,281						5,281
Total comprehensive income						101,392		10,764		112,156
BALANCE AT SEPTEMBER 30, 2019	59,368,570	$	594	$	474,915	$	86,085	$	(80,598)	$	480,996

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, cont.

(In thousands, except share data)


	Common Stock			Additional Paid-in Capital		Accumulated Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Number	Amount
BALANCE AT JUNE 30, 2020	59,589,770	$	596	$	477,829	$	78,474	$	(60,366)	$	496,533
Stock-based compensation plans
Grant of restricted stock	—	—		—						—
Issuance of common shares, net of withholdings	—	—		—						—
Forfeited restricted stock	—	—		—						—
Reclassification of warrant liability				221,093						221,093
Amortization of stock awards and restricted stock				1,835						1,835
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

BALANCE AT JANUARY 1, 2020	59,329,431	$	593	$	475,720	$	45,895	$	(61,866)	$	460,342
Stock-based compensation plans
Grant of restricted stock	201,400	2		(2)						—
Issuance of common shares, net of withholdings	59,439	1		(1,840)						(1,839)
Forfeited restricted stock	(500)	—		—						—
Reclassification of warrant liability				221,093						221,093
Amortization of stock awards and restricted stock				5,786						5,786
Total comprehensive income						26,988		2,250		29,238
BALANCE AT SEPTEMBER 30, 2020	59,589,770	$	596	$	700,757	$	72,883	$	(59,616)	$	714,620

See notes to condensed consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Nine Months Ended
	September 30,
	2020		2019
OPERATING ACTIVITIES:
Net earnings from continuing operations	$	22,826	$	101,087
Net earnings from discontinued operations	4,162		305
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	229,280		210,641
Pension and post-retirement	2,916		11,775
Deferred income taxes	17,728		14,036
Amortization of stock-based compensation	5,786		5,281
Loss from non-consolidated affiliates	11,762		12,458
Net loss (gain) on financial instruments	56,072		(60,566)
Impairment of aircraft	39,075		—
Changes in assets and liabilities:
Accounts receivable	13,066		13,842
Inventory and prepaid supplies	(8,927)		14
Accounts payable	13,466		(2,410)
Unearned revenue and grants	49,605		2,830
Accrued expenses, salaries, wages, benefits and other liabilities	(8,623)		5,129
Pension and post-retirement assets	(20,920)		(10,419)
Other	(3,990)		3,135
NET CASH PROVIDED BY OPERATING ACTIVITIES	423,284		307,138
INVESTING ACTIVITIES:
Expenditures for property and equipment	(394,295)		(336,944)
Proceeds from property and equipment	9,210		11,087
Acquisitions and investments in businesses, net of cash acquired	(9,053)		(21,762)

NET CASH USED IN INVESTING ACTIVITIES	(394,138)		(347,619)
FINANCING ACTIVITIES:
Principal payments on long term obligations	(584,923)		(38,906)
Proceeds from borrowings	80,000		70,000
Proceeds from bond issuance	500,000		—
Payments for financing costs	(7,507)		(1,081)
Other financing payments	—		(500)



Withholding taxes paid for conversion of employee stock awards	(1,839)		(1,521)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	(14,269)		27,992

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	14,877		(12,489)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	46,201		59,322
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	61,078	$	46,833

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amount capitalized	$	36,060	$	45,399
Federal and state income taxes paid	$	758	$	533
SUPPLEMENTAL NON-CASH INFORMATION:
Accrued expenditures for property and equipment	$	25,832	$	35,528

See notes to condensed to consolidated financial statements.

AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


			Page
Note A - Summary of Financial Statement Preparation and Significant Accounting Policies			11
Note B - Goodwill, Intangibles and Equity Investments			13
Note C - Significant Customers			14
Note D - Fair Value Measurements			16
Note E - Property and Equipment			17
Note F - Debt Obligations			18
Note G - Derivative Instruments			21
Note H - Commitments and Contingencies			21
Note I - Pension and Other Post-Retirement Benefit Plans			23
Note J - Income Taxes			24
Note K - Accumulated Other Comprehensive Income (Loss)			25
Note L - Stock-Based Compensation			26
Note M - Common Stock and Earnings Per Share			27
Note N - Segment and Revenue Information			28

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

Nature of Operations

Air Transport Services Group, Inc. is a holding company whose subsidiaries lease aircraft, provide contracted airline operations, ground services, aircraft modification and maintenance services and 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 leasing subsidiary, Cargo Aircraft Management, Inc. (“CAM”), leases aircraft to each of the Company's airlines as well as to non-affiliated airlines and other lessees. The Company's airlines, 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") certificates, to transport cargo 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 a customer's transportation network through customer "CMI" and "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 aircraft maintenance and modification services, equipment maintenance services and arranges load transfer and package sorting services for customers.

Basis of Presentation

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with GAAP and such principles are applied on a basis consistent with the financial statements reflected in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company’s results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the air cargo industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year or any interim period. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. The accounting estimates reflect the best judgment of management, but actual results could differ materially from those estimates.

The accompanying condensed consolidated financial statements include the accounts of Air Transport Services Group, Inc. and its wholly-owned subsidiaries. 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.

On February 1, 2019, the Company acquired a group of companies under common control, referred to as TriFactor. TriFactor resells material handling equipment and provides engineering design solutions for warehousing, retail distribution and e-commerce operations. Revenues and operating expenses include the activities of TriFactor for periods since its acquisition by the Company. The excess purchase price over the estimated fair value of net assets acquired was recorded as goodwill. The acquisition of TriFactor did not have a significant impact on the Company's financial statements or results of operations.

COVID-19 Uncertainties

In late 2019, an outbreak of a coronavirus, COVID-19, was identified in China and has since spread globally, becoming a pandemic. The pandemic has had an impact on our operations and financial results. Beginning in late February 2020, revenues were disrupted when customers cancelled scheduled passenger flights and aircraft maintenance services and the Company began to incur additional costs, including expenses to protect employees. Additionally, disruptions to the Company's operations, such as shortages of personnel, shortages of parts, maintenance delays, shortages of transportation and hotel accommodations for flight crews, facility closures and other issues may be caused by the pandemic.

The extent of the impact that the coronavirus pandemic will have on future financial and operational results will depend on developments, including the duration, spread, severity and any recurrence of the COVID-19 virus; the duration and scope of government orders and restrictions; and the extent of the pandemic on overall economic conditions. These are highly uncertain. If the coronavirus pandemic persists or reemerges or expectations of operating cash flows decline significantly, the value of airframes, engines and certain intangible assets could decline significantly. If such circumstances occur or appear likely to occur, the Company may need to impair the carrying value of certain recorded assets.

Currently, the pandemic has not had a significant adverse financial impact on the Company's leasing operations or its airline operations for customers' freight networks. Management believes that the Company's current cash balances and forecasted cash flows provided from its customer leases and operating agreements, combined with its Senior Credit Agreement, will be sufficient to fund operations, capital spending and scheduled debt payments for at least the next 12 months.

Accounting Standards Updates

Effective January 1, 2019, the Company adopted the FASB's ASU No. 2016-02, “Leases (Topic 842)” which superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease model that requires a company to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The Company adopted the standard using the modified retrospective approach that does not require the restatement of prior year financial statements. The adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations and consolidated statement of cash flows. The adoption of Topic 842 resulted in the recognition of ROU assets and corresponding lease liabilities as of January 1, 2019 in the amount of $52.6 million for leases classified as operating leases. Topic 842 also applies to the Company's aircraft lease revenues, however, the adoption of Topic 842 did not have a significant impact on the Company's accounting for its customer lease agreements.

The Company adopted the package of practical expedients and transition provisions available for expired or existing contracts, which allowed the Company to carryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification, and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Further, the Company elected the short-term lease exception policy, permitting it to exclude the recognition requirements for leases with terms of 12 months or less. See Note H for additional information about leases.

In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-based Payment Accounting" ("ASU 2018-07"). ASU 2018-07 amends ASC 718, "Compensation - Stock Compensation" ("ASC 718"), with the intent of simplifying the accounting for share-based payments granted to non-employees for goods and services and aligning the accounting for share-based payments granted to non-employees with the accounting for share-based payments granted to employees. The Company adopted ASU 2018-07 on January 1, 2019 using the modified retrospective approach as required. ASU 2018-07 replaced ASC 505-50, "Equity-Based Payments to Nonemployees" ("ASC 505-50") which was previously applied by the Company for warrants granted to Amazon.com, Inc. ("Amazon") as customer incentives. As a result of ASU 2018-07, the Company applied accounting guidance for financial instruments to the unvested warrants conditionally granted to Amazon in conjunction with an investment agreement reached with Amazon on December 22, 2018. Applying ASU 2018-07 as of January 1, 2019, through the modified retrospective approach, resulted in the recognition of $176.9 million for unvested warrant liabilities, $100.1 million for customer incentive assets and cumulative-effect adjustments of $71.4

million, net of tax, to reduce retained earnings for customer incentives that were not probable of being realized. The adoption of ASU 2018-07 on January 1, 2019 did not have an impact on the accounting for vested warrants.

The Company adopted "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ("ASU 2016-13") on January 1, 2020. Under ASU 2016-13, an entity is required to utilize an “expected credit loss model” on certain financial instruments, including trade receivables. This model requires an entity to estimate expected credit losses over the lifetime of the financial asset including trade receivables that are not past due. Operating lease receivables are not within the scope of Topic 326. The Company's adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements or related disclosures.

NOTE B—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS

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


	CAM		ACMI Services		All Other		Total
Carrying value as of December 31, 2019	$	153,290	$	234,571	$	8,113	$	395,974

Carrying value as of September 30, 2020	$	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, 2019	$	9,000	$	122,680	$	131,680
Amortization	—		(8,575)		(8,575)

Carrying value as of September 30, 2020	$	9,000	$	114,105	$	123,105

The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangibles assets, including customer relationship and STC intangibles, over 3 to 19 years.

Stock warrants issued to a lessee (see Note C) as an incentive are recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligations 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, 2019	$	146,678
Amortization	(15,044)
Carrying value as of September 30, 2020	$	131,634

In January 2014, the Company acquired a 25 percent equity interest 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. West leases two Boeing 767 aircraft from the Company.

In August, 2017 the Company entered into a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. The Company anticipates approval of a supplemental type certificate from the FAA in the fourth quarter of 2020. The Company expects to make contributions equal to its 49% ownership percentage of the program's total costs over the next two years. During the nine month periods ending September 30, 2020 and 2019, the Company contributed $9.1 million and

$9.8 million to the joint venture, respectively. The Company accounts for its investment in the aircraft conversion joint venture 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 affiliates' operating results.

The carrying value of West and the joint venture totaled $8.2 million and $10.9 million at September 30, 2020 and December 31, 2019, 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

DHL

The Company has had long-term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. Revenues from aircraft leases and related services performed for DHL were approximately 13% and 12% of the Company's consolidated revenues from continuing operations for the three and nine month periods ending September 30, 2020, respectively, compared to 13% and 14% for the corresponding periods of 2019. The Company’s balance sheets include accounts receivable from DHL of $11.0 million and $12.7 million as of September 30, 2020 and December 31, 2019, respectively.

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. The Company also provides ground equipment, such as power units, air starts and related maintenance services to DHL under separate agreements.

Amazon

The Company has been providing freighter aircraft and services for cargo handling and logistical support for Amazon.com Services, 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 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. The ATSA also provides for the operation of those aircraft by the Company’s airline subsidiaries, and the management of ground services by the Company's subsidiary LGSTX Services Inc. ("LGSTX"). The ATSA became effective on April 1, 2016 and had an original term of five years.

In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement on March 8, 2016. The 2016 Investment Agreement calls for the Company to issue warrants in three tranches which will grant Amazon the right to acquire up to 19.9% of the Company’s outstanding common shares as described below. The first tranche of warrants, issued upon the execution of the 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, grants Amazon the right to purchase approximately 1.59 million ATSG common shares. The third tranche of warrants vested on September 8, 2020, and grants Amazon the right to purchase an additional 0.5 million ATSG common shares to bring Amazon’s ownership, 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 to the warrants granted. The

exercise price of the 14.9 million warrants issued under the 2016 Investment Agreement is $9.73 per share, which represents the closing price of ATSG’s common shares on February 9, 2016.

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 grant was remeasured on September 8, 2020, and their fair value of $221 million was reclassified from balance sheet liabilities to paid-in-capital. This group of warrants for 14.9 million common shares of ATSG is fully vested and expires on March 8, 2021. Amazon has the option to settle the warrants for cash of $145 million and receive all 14.9 million shares, or it may choose a cashless settlement option and receive a lesser number of shares equivalent in market value of the stock's appreciation above the exercise price.

On December 22, 2018, the Company announced agreements with Amazon to 1) lease and operate ten additional Boeing 767-300 aircraft for ASI, 2) extend the term of the 12 Boeing 767-200 aircraft currently leased to ASI by two years to 2023 with an option for three more years, 3) extend the term of the eight Boeing 767-300 aircraft currently leased to ASI by three years to 2026 and 2027 with an option for three more years, and 4) extend the ATSA by five years through March 2026, with an option on the part of ASI to extend for an additional three years. Through September 30, 2020, the Company leased nine of the 10 aircraft to Amazon and the 10th lease was executed in October 2020. All ten of these aircraft leases are for ten years.

In conjunction with the commitment for ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and the ATSA described above, Amazon and the Company entered into another Investment Agreement on December 20, 2018. Pursuant to the 2018 Investment Agreement, Amazon was issued warrants for 14.8 million common shares, of which 13.9 million common shares have vested as existing leases were extended and nine additional aircraft leases were executed and added to the ATSA operations through September 30, 2020. The remaining warrants vested in October 2020 upon the execution of the lease for the 10th aircraft. As a result, under US GAAP, the value of the entire grant for 14.8 million common shares will be remeasured to fair value and reclassified from balance sheet liabilities to paid-in-capital. These warrants will expire if not exercised by December 20, 2025. They have an exercise price of $21.53 per share.

On May 29, 2020, Amazon agreed to lease twelve more Boeing 767-300 aircraft from the Company. The first of these leases began in the second quarter of 2020 with the remaining eleven to be delivered in 2021. All twelve of these aircraft leases will be for ten year terms. Pursuant to the 2018 Investment Agreement, Amazon was issued warrants for 7.0 million common shares of which 0.6 million common shares have vested. These warrants will expire if not exercised by December 20, 2025. The exercise price of these warrants is $20.40 per share.

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

Through the 2016 and 2018 Investment Agreements, Amazon can potentially own approximately 39.9% of the Company if all the issued and issuable warrants vest and are settled in full with cash. For all warrants vested, Amazon may select a cashless conversion option. Assuming 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. Instead, Amazon would receive a lesser number of shares equivalent in market value of the stock's appreciation above the strike price near the time of conversion. Outstanding warrants are summarized below as of September 30, 2020:


		Common Shares in millions
	Exercise price	Vested	Non-Vested	Expiration

2016 Investment Agreement	$9.73	14.9	0.0	March 8, 2021
2018 Investment Agreement	$21.53	13.9	0.9	December 20, 2025
2018 Investment Agreement	$20.40	0.6	6.4	December 20, 2025

The Company’s accounting for the warrants has been determined in accordance with the financial reporting guidance for financial instruments. Warrant obligations classified in 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.

As of September 30, 2020, the Company's liabilities reflected warrants from the 2018 Amazon agreements having a fair value of $210.3 million. As of December 31, 2019, the Company's liabilities reflected warrants from the 2016 Amazon agreements and the 2018 Amazon agreements having a fair value of $383.1 million. During the three and nine month periods ended September 30, 2020, the re-measurements of all the warrants to fair value resulted in net non-operating losses of $55.9 million and $48.3 million before the effect of income taxes, respectively, compared to gains of $93.4 million and 72.7 million for the corresponding periods of 2019.

Revenues from Amazon comprised approximately 29% and 29% of the Company's consolidated revenues from continuing operations for the three and nine month periods ending September 30, 2020, respectively, compared to 26% and 21% for the corresponding periods of 2019. The Company’s balance sheets include accounts receivable from Amazon of $42.5 million and $50.1 million as of September 30, 2020 and December 31, 2019, respectively.

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.

DoD

The Company is a provider of cargo and passenger airlift services to the DoD using its fleet of freighter, passenger and combi aircraft. Combi aircraft are capable of carrying cargo containers and passengers on the main flight deck at the same time. The DoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Revenues from services performed for the DoD were approximately 33% and 33% of the Company's total revenues from continuing operations for the three and nine months periods ended September 30, 2020, respectively, compared to 34% and 36% for the corresponding periods of 2019. The Company's balance sheets included accounts receivable from the DoD of $49.2 million and $44.5 million as of September 30, 2020 and December 31, 2019, respectively.

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 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 resulting from aircraft leased to Amazon 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 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, 2020	Fair Value Measurement Using						Total
	Level 1		Level 2		Level 3
Assets
Cash equivalents—money market	$	—	$	762	$	—	$	762

Total Assets	$	—	$	762	$	—	$	762
Liabilities
Interest rate swap	$	—	$	(15,861)	$	—	$	(15,861)
Stock warrant obligations	—		(151,126)		(59,193)		(210,319)
Total Liabilities	$	—	$	(166,987)	$	(59,193)	$	(226,180)


As of December 31, 2019	Fair Value Measurement Using						Total
	Level 1		Level 2		Level 3
Assets
Cash equivalents—money market	$	—	$	1,129	$	—	$	1,129
Interest rate swap	—		111		—		111
Total Assets	$	—	$	1,240	$	—	$	1,240
Liabilities
Interest rate swap	$	—	$	(8,237)	$	—	$	(8,237)
Stock warrant obligation	—		(340,767)		(42,306)		(383,073)
Total Liabilities	$	—	$	(349,004)	$	(42,306)	$	(391,310)

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 $21.0 million more than the carrying value, which was $1,480.6 million at September 30, 2020. As of December 31, 2019, the fair value of the Company’s debt obligations was approximately $2.7 million less than the carrying value, which was $1,484.4 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,
	2020		2019
Flight equipment	$	2,743,232	$	2,598,113
Ground equipment	63,697		59,628
Leasehold improvements, facilities and office equipment	35,635		33,649
Aircraft modifications and projects in progress	267,963		220,827
	3,110,527		2,912,217
Accumulated depreciation	(1,205,587)		(1,146,197)
Property and equipment, net	$	1,904,940	$	1,766,020

CAM owned aircraft with a carrying value of $1,036.8 million and $889.3 million that were under leases to external customers as of September 30, 2020 and December 31, 2019, 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.

During the second quarter, the Company decided to retire its four Boeing 757 freighter aircraft as a result of customer preferences for other aircraft types. Three of the Boeing 757 freighter airframes have been removed from service and are available for sale. One remains in service through 2020. The Pratt and Whitney engines that power these aircraft remain in use for lease to external customers. Separating the Boeing 757 freighters and engines while marketing the airframes, triggered a fair value assessment. As a result, an impairment charge totaling $39.1 million was recorded primarily to reflect the market value of these assets as well as other surplus engines and parts. Fair values were determined using Level 3 inputs based primarily on independent appraisals and recent market transactions as well as the Company’s assessment of existing market conditions based on industry knowledge.

NOTE F—DEBT OBLIGATIONS

Debt obligations consisted of the following (in thousands):


	September 30,		December 31,
	2020		2019
Unsubordinated term loan	$	615,686	$	626,277
Revolving credit facility	140,400		632,900

Senior notes	493,142		—
Convertible debt	220,128		213,461
Other financing arrangements	11,230		11,746
Total debt obligations	1,480,586		1,484,384
Less: current portion	(13,742)		(14,707)
Total long term obligations, net	$	1,466,844	$	1,469,677

The Company utilizes a syndicated credit agreement ("Senior Credit Agreement") which includes an unsubordinated term loan and a revolving credit facility. In November 2019, the Senior Credit Agreement was amended to increase the maximum revolver capacity from $645.0 million to $750.0 million, combine two terms loans into one loan and reduce the interest rate spread of the LIBOR based financing at various ratios of the Company's debt to its earnings before interest, taxes, depreciation and amortization expenses ("EBITDA"). This amendment also extended the agreement to November 2024 provided certain liquidity measures are maintained during 2024, and added incremental accordion capacity based on debt ratios. In January 2020, the Company chose to lower the maximum revolver capacity to $600.0 million in conjunction with the issuance of senior unsecured notes. As of September 30, 2020, the unused revolving credit facility available to the Company at the trailing twelve month EBITDA level was $445.7 million, and additional permitted indebtedness under the Senior Credit Agreement subject to compliance with other covenants, was limited to $250.0 million.

The balance of the unsubordinated term loan is net of debt issuance costs of $7.4 million and $8.7 million as of September 30, 2020 and December 31, 2019, respectively. The balance of the Senior Notes is net of debt issuance costs of $6.9 million as of September 30, 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, the LIBOR based financing for the unsubordinated term loan, Senior Notes and revolving credit facility bear variable interest rates of 1.65%, 4.75% and 1.65%, respectively.

The Senior Credit Agreement is collateralized by certain of the Company's Boeing 777, 767 and 757 aircraft. Under the terms of the Senior Credit Agreement, the Company is required to maintain collateral coverage equal to 115% of the outstanding balance of the term loan 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 of $600.0 million.

The Senior Credit Agreement limits the amount of dividends the Company can pay and the amount of common stock it can repurchase to $100.0 million during any calendar year, provided the Company's total debt to EBITDA ratio is under 3.50 times, after giving effect to the dividend or repurchase. The Senior Credit Agreement contains covenants, including a maximum permitted total debt to EBITDA ratio, a fixed charge covenant ratio requirement, 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.

On January 28, 2020, the Company, through a subsidiary, completed a debt offering of $500.0 million in senior unsecured notes (the “Senior Notes”). The Senior Notes were sold only to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and certain investors pursuant to Regulation S under the Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a rate of 4.75% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2020. The Senior Notes will mature on February 1, 2028. The Senior Notes contain customary events of default and certain covenants which are generally no more restrictive than those set forth in the Senior Credit Agreement. The net proceeds of $495.0 million from the Senior Notes were used to pay down the revolving credit facility. The Senior Notes do not require principal payments in 2020.

In September 2017, the Company issued $258.8 million aggregate principal amount of 1.125% 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, 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 and thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon the occurrence of certain fundamental changes, holders of the 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 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 common shares 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.

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 common shares, 8.1 million shares and same strike price of $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 conversion feature of the Convertible Notes required bifurcation from the principal amount under the applicable accounting guidance. Settlement provisions of the Convertible Notes and the convertible note hedges required cash settlement of these instruments until the Company's shareholders increased the number of authorized shares of common stock to cover the full number of shares underlying the Convertible Notes. As a result, the conversion feature of the Convertible Notes and the convertible note hedges were initially accounted for as liabilities and assets, respectively, and marked to market at the end of each period. The fair value of the note conversion obligation at issuance was $57.4 million.

On May 10, 2018, the Company's shareholders increased the number of authorized shares of common stock to cover the full number of shares underlying the Convertible Notes. The Company reevaluated the Convertible Notes and convertible note hedges under the applicable accounting guidance including ASC 815, "Derivatives and Hedging," and determined that the instruments, which meet the definition of derivative and are indexed to the Company's own stock, should be classified in shareholder's equity. On May 10, 2018, the fair value of the conversion feature of the Convertible Notes and the convertible note hedges of $51.3 million and $50.6 million, respectively, were reclassified to paid-in capital and are no longer remeasured to fair value.

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,
	2020	2019
Principal value, Convertible Senior Notes, due 2024	258,750	258,750
Unamortized issuance costs	(4,140)	(4,864)
Unamortized discount	(34,482)	(40,425)
Convertible debt	220,128	213,461

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 periods exceed the strike price.

NOTE G—DERIVATIVE INSTRUMENTS

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


			September 30, 2020		December 31, 2019
Expiration Date	Stated Interest Rate		Notional Amount	Market Value (Liability)	Notional Amount	Market Value (Liability)
May 5, 2021	1.090	%	15,000	(77)	20,625	111
May 30, 2021	1.703	%	15,000	(139)	20,625	(25)
December 31, 2021	2.706	%	140,625	(4,459)	146,250	(3,242)
March 31, 2022	1.900	%	50,000	(1,340)	50,000	(408)
March 31, 2022	1.950	%	75,000	(2,067)	75,000	(696)
March 31, 2023	2.425	%	142,500	(7,779)	148,125	(3,866)

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 a net gain on derivatives of $2.5 million and a net loss of $7.7 million for the three and nine month periods ending September 30, 2020, respectively, compared to net losses of $1.4 million and $12.1 million for the corresponding periods of 2019. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.

NOTE H—COMMITMENTS AND CONTINGENCIES

CARES Act

Two of the Company's airline subsidiaries, OAI and ATI, have been granted government funds totaling $75.4 million pursuant to payroll support program agreements under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The grants were received between May and September 2020. The grants are not required to be repaid if the Company complies with provisions of the CARES Act and the payroll support program agreements. 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 received $75.4 million of grant funds under the CARES Act payroll support program. The Company recognizes the grants as contra-expense during the periods in which passenger flight operations and combi flight operations levels are expected to be negatively impacted by the pandemic. During the three and nine month periods ended September 30, 2020, the Company recognized $21.7 million and $31.5 million, respectively, of the grants and deferred recognition of $43.9 million. The Company expects to recognize all of the CARES Act funds by June of 2021.

In conjunction with the payroll support program agreements, the airlines agreed to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through September 30, 2020; 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 pursuant to its authority under the CARES Act; and maintain certain internal controls and records relating to the CARES Act funds and comply with certain reporting requirements. In addition, the Company may not pay dividends or repurchase its shares through September 30, 2021.

Lease Commitments

The Company leases property, five aircraft, aircraft engines and other types of equipment under operating leases. Property leases include hangars, warehouses, offices and other space at certain airports with fixed rent payments and lease terms ranging from one month to 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, 2020, non-cash transactions to recognize right-to-use assets and corresponding liabilities for new leases were $26.4 million compared to $15.7 million for the corresponding period of 2019. 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, 2020 was 3.5% compared to 4.7% at December 31, 2019. Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Although not material, the amount of such options is reflected below in the maturity of operating lease liabilities table. Lease expense is recognized on a straight-line basis over the lease term. Our weighted-average remaining lease term is 4.4 years and 4.6 years as of September 30, 2020 and December 31, 2019, respectively.

For the nine month periods ended September 30, 2020 and 2019, cash payments against operating lease liabilities were $12.8 million and $15.5 million, respectively. As of September 30, 2020, the maturities of operating lease liabilities are as follows (in thousands):


	Operating Leases
Remaining 2020	$	4,378
2021	15,277
2022	11,291
2023	9,943
2024	8,776
2025 and beyond	7,303
Total undiscounted cash payments	56,968
Less: amount representing interest	(4,064)
Present value of future minimum lease payments	52,904
Less: current obligations under leases	14,551
Long-term lease obligation	$	38,353

The Company expects to lease one additional passenger aircraft and an additional facility commencing later in 2020 that is not reflected in the table above.

Purchase Commitments

The Company has agreements with Israel Aerospace Industries Ltd. ("IAI") for the conversion of Boeing 767 passenger aircraft into a standard configured freighter aircraft. The conversions primarily consist of the installation of a standard cargo door and loading system. As of September 30, 2020, the Company had nine aircraft that were in or awaiting the modification process. The Company had placed non-refundable deposits of $25.8 million to purchase six more Boeing 767-300 passenger aircraft through 2021. As of September 30, 2020, the Company's commitments to acquire and convert aircraft totaled $176.2 million through 2021.

Guarantees and Indemnifications

Certain leases and agreements of the Company contain guarantees and indemnification obligations to the lessor, or one or more other parties that are considered reasonable and customary (e.g. use, tax and environmental indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after expiration of the respective lease or agreement.

Other

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

Employees Under Collective Bargaining Agreements

As of September 30, 2020, 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	4.7%
ATI	Air Line Pilots Association	8.4%
OAI	International Brotherhood of Teamsters	7.0%
ATI	Association of Flight Attendants	0.7%
OAI	Association of Flight Attendants	7.6%

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.

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


	Three Months Ended September 30,								Nine Months Ended September 30,
	Pension Plans				Post-Retirement Healthcare Plan				Pension Plans				Post-Retirement Healthcare Plan
	2020		2019		2020		2019		2020		2019		2020		2019
Service cost	$	—	$	—	$	35	$	27	—		—		104		81
Interest cost	6,970		7,825		23		37		20,910		23,474		68		111
Expected return on plan assets	(11,168)		(9,477)		—		—		(33,504)		(28,431)		—		—
Amortization of net loss	941		3,882		31		43		2,823		11,646		93		129
Net periodic benefit (income) loss	$	(3,257)	$	2,230	$	89	$	107	$	(9,771)	$	6,689	$	265	$	321

During the nine month period ending September 30, 2020, the Company contributed $8.2 million to the pension plans. The Company expects to contribute an additional $2.7 million during the remainder of 2020.

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, 2020 have been estimated utilizing a 25% 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, assets impairments and other items which are not subject to tax, 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 2020 was a tax expense of 43.3%. The final effective tax rate for the year 2020 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, executive compensation and other items.

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

NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) includes the following items by components for the three and nine month periods ending September 30, 2020 and 2019 (in thousands):


	Defined Benefit Pension		Defined Benefit Post-Retirement		Foreign Currency Translation		Total
Balance as of June 30, 2019	$	(82,818)	$	(772)	$	(5)	$	(83,595)
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment	—		—		(1)		(1)
Amounts reclassified from accumulated other comprehensive income:
Recognition of foreign currency loss	—		—		—		—
Actuarial costs (reclassified to salaries, wages and benefits)	3,882		43		—		3,925
Income Tax (Expense) or Benefit	(917)		(10)		—		(927)
Other comprehensive income (loss), net of tax	2,965		33		(1)		2,997
Balance as of September 30, 2019	$	(79,853)	$	(739)	$	(6)	$	(80,598)

Balance as of January 1, 2019	$	(89,042)	$	(841)	$	(1,479)	$	(91,362)
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment	—		—		(12)		(12)
Amounts reclassified from accumulated other comprehensive income:
Recognition of foreign currency loss	—		—		2,253		2,253
Actuarial costs (reclassified to salaries, wages and benefits)	11,646		129		—		11,775
Income Tax Expense	(2,457)		(27)		(768)		(3,252)
Other comprehensive income, net of tax	9,189		102		1,473		10,764
Balance as of September 30, 2019	$	(79,853)	$	(739)	$	(6)	$	(80,598)


	Defined Benefit Pension		Defined Benefit Post-Retirement		Foreign Currency Translation		Total
Balance as of June 30, 2020	$	(59,700)	$	(654)	$	(12)	$	(60,366)


Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits)	941		31		—		972
Income Tax (Expense) or Benefit	(215)		(7)		—		(222)
Other comprehensive income (loss), net of tax	726		24		—		750
Balance as of September 30, 2020	$	(58,974)	$	(630)	$	(12)	$	(59,616)

Balance as of January 1, 2020	$	(61,152)	$	(702)	$	(12)	$	(61,866)


Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits)	2,823		93		—		2,916
Income Tax Expense	(645)		(21)		—		(666)
Other comprehensive income, net of tax	2,178		72		—		2,250
Balance as of September 30, 2020	$	(58,974)	$	(630)	$	(12)	$	(59,616)

NOTE L—STOCK-BASED COMPENSATION

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


	Nine Months Ended
	September 30, 2020			September 30, 2019
	Number of Awards	Weighted average grant-date fair value		Number of Awards	Weighted average grant-date fair value
Outstanding at beginning of period	963,832	$	17.67	969,928	$	15.89
Granted	437,054	18.85		302,596	23.22
Converted	(200,563)	19.87		(164,864)	17.48
Expired	(34,100)	19.40		(7,500)	23.78
Forfeited	(1,000)	18.90		(6,000)	23.73
Outstanding at end of period	1,165,223	$	17.69	1,094,160	$	17.58
Vested	353,023	$	8.25	337,060	$	8.04

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 2020 was $18.39, 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 2020 was $20.41. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 0.7% and a volatility of 35.0% based on volatility over three years using daily stock prices.

For the nine month periods ended September 30, 2020 and 2019, the Company recorded expense of $5.8 million and $5.3 million, respectively, for stock incentive awards. At September 30, 2020, there was $8.9 million of unrecognized expense related to the stock incentive awards that is expected to be recognized over a weighted-average period of 1.3 years. As of September 30, 2020, none of the awards were convertible, 353,023 units of the Board members' time-based awards had vested and none of the outstanding shares of the restricted stock had vested. These awards could result in a maximum number of 1,441,373 additional outstanding shares of the Company’s common stock depending on service, performance and market results through December 31, 2022.

NOTE M—COMMON STOCK AND EARNINGS PER SHARE

Earnings per Share

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


	Three Months Ending				Nine Months Ending
	September 30,				September 30,
	2020		2019		2020		2019
Numerator:
Earnings from continuing operations - basic	$	(5,745)	$	105,085	$	22,826	$	101,087
Gain from stock warrants revaluation, net of tax	—		(91,849)		—		(71,319)
Earnings from continuing operations - diluted	$	(5,745)	$	13,236	$	22,826	$	29,768

Denominator:
Weighted-average shares outstanding for basic earnings per share	59,146		58,919		59,106		58,889
Common equivalent shares:
Effect of stock-based compensation awards and warrants	—		9,799		757		10,493
Weighted-average shares outstanding assuming dilution	59,146		68,718		59,863		69,382
Basic earnings per share from continuing operations	$	(0.10)	$	1.78	$	0.39	$	1.72
Diluted earnings per share from continuing operations	$	(0.10)	0.19		0.38		0.43

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), 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.

The number of equivalent shares that were not included in weighted average shares outstanding assuming dilution because their effect would have been anti-dilutive, were 13.3 million and 9.7 million for the three and nine month periods ended September 30, 2020, respectively.

NOTE N—SEGMENT AND REVENUE INFORMATION

The Company operates in two reportable segments. The CAM segment consists of the Company's aircraft 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 services, are not large enough to constitute reportable segments and are combined in 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
	September 30,				September 30,
	2020		2019		2020		2019
Total revenues:
CAM	$	76,268	$	71,004	$	225,301	$	210,610
ACMI Services	300,189		272,188		871,958		785,082
All other	82,281		87,762		239,373		226,228
Eliminate inter-segment revenues	(54,592)		(64,881)		(165,415)		(173,088)
Total	$	404,146	$	366,073	$	1,171,217	$	1,048,832
Customer revenues:
CAM	51,409		42,007		148,104		123,569
ACMI Services	300,189		272,171		871,945		784,993
All other	52,548		51,895		151,168		140,270
Total	$	404,146	$	366,073	$	1,171,217	$	1,048,832

ACMI Services revenues are generated from airline service agreements and are typically based on hours flown, cycles operated, the number of aircraft operated and crew resources provided during a month. ACMI Services revenues are recognized over time using the invoice practical expedient as flight hours are performed for the customer. Certain agreements include provisions for incentive payments based upon on-time reliability. These incentives are measured on a monthly basis and recorded to revenue in the corresponding month earned. Under CMI agreements, the Company's airlines have an obligation to provide integrated services including flight crews, aircraft maintenance and insurance for the customer's cargo network. Under ACMI agreements, the Company's airlines are also obligated to provide aircraft. Under CMI and ACMI agreements, customers are generally responsible for aviation fuel, landing fees, navigation fees and certain other flight expenses. When functioning as the customers' agent for arranging such services, the Company records amounts reimbursable from the customer as revenues net of the related expenses as the costs are incurred. Under charter agreements, the Company's airline is obligated to provide full services for one or more flights having specific origins and destinations. Under charter agreements in which the Company's airline is responsible for fuel, airport fees and all flight services, the related costs are recorded in operating expenses. 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 September 30, 2020 and 2019 are presented below (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Aircraft maintenance, modifications and part sales	$	26,063	$	24,745	$	78,749	$	82,029
Ground services	19,887		20,728		50,498		50,441
Other, including aviation fuel sales	6,598		6,422		21,921		7,800
Total customer revenues	$	52,548	$	51,895	$	151,168	$	140,270

CAM's aircraft lease revenues are recognized as operating leases on a straight-line basis over the term of the applicable lease agreements. Customer payments for leased aircraft and equipment are typically paid monthly in advance. CAM's leases do not contain residual guarantees. Approximately 13% of CAM's leases to external customers contain purchase options at projected market values. As of September 30, 2020, minimum future payments from external customers for leased aircraft and equipment were scheduled to be $54.9 million for the remainder of 2020, $213.0 million, $185.0 million, $142.7 million, and $108.2 million, respectively, for each of the next four years ending December 31, 2024 and $291.4 million thereafter. As of December 31, 2019, minimum future payments from external customers for leased aircraft and equipment were scheduled to be $186.8 million, $178.2 million, $152.0 million, $110.1 million and $75.5 million, respectively, for each of the next 5 years ending December 31, 2024 and $186.2 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, 2020 and 2019, the Company recognized $4.7 million and $2.8 million of non lease revenue that was reported in deferred revenue at the beginning of the respective period, respectively, compared to $0.5 million and $2.8 million in the corresponding periods of 2019. Deferred revenue was $3.4 million and $3.0 million at September 30, 2020 and December 31, 2019, respectively, for contracts with customers.

Segment earnings, as used by the Company's management, includes an allocation of interest expense based on a reportable segments' assets. Segment earnings does not include asset impairment charges or the recognition of CARES Act grants. The Company's other segment information from continuing operations is presented below (in thousands):


	Three Months Ending				Nine Months Ending
	September 30,				September 30,
	2020		2019		2020		2019
Segment earnings (loss):
CAM	$	19,781	$	17,428	$	55,241	$	50,285
ACMI Services	18,637		4,375		56,699		17,658
All other	(724)		2,939		(2,915)		8,848
Net unallocated interest expense	(797)		(610)		(2,133)		(2,293)
Government grants	21,726		—		31,547		—
Impairment of aircraft and related assets	—		—		(39,075)		—
Other non-service components of retiree benefit costs, net	2,897		(2,351)		8,693		(7,053)
Net (loss) gain on financial instruments	(53,393)		91,952		(56,072)		60,566
Loss from non-consolidated affiliate	(2,485)		(2,645)		(11,762)		(12,459)
Transaction fees	—		—		—		(373)
Pre-tax earnings from continuing operations	$	5,642	$	111,088	$	40,223	$	115,179

Depreciation and amortization expense:
CAM	$	41,421	$	39,269	126,492		116,787
ACMI Services	25,336		24,171		76,032		71,131
All other	1,217		709		3,083		2,134
Total	$	67,974	$	64,149	$	205,607	$	190,052

Interest expense
CAM	9,747		9,494		29,709		28,838
ACMI Services	4,803		6,530		15,749		19,520

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,
	2020		2019
Assets:
CAM	$	1,997,276	$	1,857,687
ACMI Services	798,739		830,620
Discontinued operations	3,635		1,499
All other	163,181		130,372
Total	$	2,962,831	$	2,820,178

During the first nine months of 2020, the Company had capital expenditures for property and equipment of $63.2 million and $323.4 million for the ACMI Services and CAM, respectively.

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

The following Management’s Discussion and Analysis has been prepared with reference to the historical financial condition and results of operations of Air Transport Services Group, Inc., and its subsidiaries. Air Transport Services Group, Inc. and its subsidiaries may hereinafter individually and collectively be referred to as "the Company", "we", "our" or "us" from time to time. The following discussion and analysis describes the principal factors affecting the results of operations, financial condition, cash flows, liquidity and capital resources. It should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes prepared in accordance with accounting principles generally accepted in the United States of America contained in this report and our Annual Report on Form 10-K for the year ended December 31, 2019.

INTRODUCTION

We lease aircraft and provide airline operations, aircraft modification and maintenance services, ground services, and other support services to the air transportation and logistics industries. Through the Company's subsidiaries, we offer a range of complementary services to delivery companies, freight forwarders, e-commerce operators, airlines and government customers. Our principal subsidiaries include three independently certificated airlines (ABX, ATI and OAI) and an aircraft leasing company (CAM). CAM provides competitive aircraft lease rates by converting passenger aircraft into cargo freighters and offering them to customers under long-term leases.

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 aircraft maintenance and modification services, aviation fuel sales and ground services for load transfer, parcel sorting and related equipment maintenance. These operations do not constitute reportable segments and are reported together as Other Activities.

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").

Amazon

The Company has been providing freighter aircraft and services for cargo handling and logistical support for ASI since September 2015. Revenues from our commercial arrangements with ASI comprised approximately 29% and 21% of our consolidated revenues during the nine month periods ending September 30, 2020 and 2019, respectively. The increase in revenues reflects the expansion of the number of aircraft and services provided to ASI since September of 2019.

On March 8, 2016, we entered into an Air Transportation Services Agreement (the “ATSA”) with ASI pursuant to which CAM leased 20 Boeing 767 freighter aircraft to ASI, including 12 Boeing 767-200 freighter aircraft for a term of five years and eight Boeing 767-300 freighter aircraft for a term of seven years. The ATSA also provides for the operation of those aircraft by our airline subsidiaries for a term of five years, and the performance of ground handling services by our subsidiary, LGSTX Services Inc. ("LGSTX").

In December 2018, the Company announced agreements with Amazon to (1) lease and operate ten additional Boeing 767-300 aircraft for ASI, (2) extend the term of the 12 Boeing 767-200 aircraft currently leased to ASI by two years to 2023 with an option on the part of ASI to extend the lease term 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 on the part of ASI to extend the lease term for three more years and (4) extend the ATSA by five years through March 2026, with an option on the part of ASI to extend the term for an additional three years. In January 2019, we entered into lease amendments which formalized the lease extensions described in (2), (3) and (4) above. As of September 30, 2020, we had executed leases with ASI for nine of the ten Boeing 767-300 aircraft. We delivered the tenth aircraft in the fourth quarter of 2020. Further, on May 29, 2020, Amazon agreed to lease twelve more Boeing 767-300 aircraft from the Company. The first of these leases began in the second quarter of 2020 with the remaining eleven to be delivered in 2021. All of these additional Boeing 767-300 aircraft leases will be for ten years. Under the ATSA, we operate the 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.

In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement and a Stockholders Agreement on March 8, 2016. Pursuant to the Investment Agreement, the Company issued warrants in three tranches granting Amazon the right to acquire up to 19.9% of the Company’s pre-transaction outstanding common shares measured on a GAAP-diluted basis, adjusted for share issuances and repurchases by the Company following the date of the Investment Agreement and after giving effect to the warrants granted. These warrants, which total 14.9 million common shares for all three tranches, are fully vested, have an exercise price of $9.73 per share and will expire on March 9, 2021.

In conjunction with Amazon's commitment for ten additional Boeing 767-300 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and additional aircraft operations under the ATSA, Amazon and the Company entered into a new investment agreement on December 20, 2018 (the "2018 Investment Agreement"). Pursuant to the 2018 Investment Agreement, the Company issued additional warrants to Amazon for 14.8 million common shares, of which warrants for 13.9 million common shares had vested as of September 30, 2020 in conjunction with the leases that were extended and nine aircraft leases that had been executed and added to the ATSA operations. The remainder of these warrants vested when one more aircraft lease was executed during the fourth quarter of 2020. These warrants have an exercise price of $21.53 per share and will expire if not exercised by December 20, 2025.

In conjunction with Amazon's commitment in May of 2020 to lease twelve additional Boeing 767-300 aircraft, Amazon was issued warrants for 7.0 million common shares, pursuant to the 2018 Investment Agreement, of which 0.6 million common shares have vested. These warrants will expire if not exercised by December 20, 2025. The exercise price of these warrants is $20.40 per share

Through the 2016 and 2018 Investment Agreements, Amazon can potentially own approximately 39.9% of the Company if all issued and issuable warrants vest and are settled with cash. For all warrants vested, Amazon may select a cash exercise option or a cashless exercise option. Assuming ATSG’s stock price at the time of exercise is above the warrant exercise price, Amazon would receive fewer shares in exchange for any warrants exercised under the cashless option. Instead, Amazon would receive the number of ATSG shares equivalent in market value at the time of exercise to the appreciation above the exercise price of the warrants.

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. Warrants are accounted for as financial instruments, and accordingly, the fair value of the outstanding warrants that are classified in balance sheet liabilities are re-measured at the end of each reporting period. The Company's earnings are impacted by the fair value re-measurement of the warrants that are classified as 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 above for financial reporting. For additional information about the warrants, see Note C to the accompanying consolidated financial statements.

DoD

The Company's airlines have been providing services to the U.S. DoD since the 1990's. The Company's airlines provide passenger and cargo airlift services to the DoD. The DoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes. Under the contracts, we are responsible for all operating expenses including fuel, landing and ground handling expenses. We receive reimbursements from the U.S. Transportation Command of the DoD each month if the price of fuel paid by us for the flights exceeds a previously set peg price. The DoD comprised 33% and 36% of the Company's consolidated revenues during the nine month periods ending September 30, 2020 and 2019, respectively. The decline in the percentage of revenues from the DoD reflects the impact of Covid-19 and increased revenues from other customers.

DHL

The Company has had long-term contracts with DHL since August 2003. DHL accounted for 12% and 14% of the Company's consolidated revenues, during the first nine months of 2020 and 2019, respectively. As of September 30, 2020, the Company, through CAM, leased 14 Boeing 767 cargo aircraft to DHL comprised of seven Boeing 767-200 aircraft and seven Boeing 767-300 aircraft expiring between 2022 and 2024. Eight of the 14 Boeing 767 aircraft were being operated for DHL by the Company's airlines. We also operated four CAM-owned Boeing 757 aircraft under other operating arrangements with DHL during 2019 and the first half of 2020. During 2020, DHL terminated operating agreements for three of the Boeing 757 aircraft. The decline in the percentage of revenues from DHL primarily reflects the removal of the Boeing 757 operations and increased revenues from other customers compared to last year.

RESULTS OF OPERATIONS

Summary

The consolidated net losses from continuing operations were $5.7 million and net earnings of $22.8 million for the three and nine month periods ending September 30, 2020, respectively, compared to net earnings of $105.1 million and $101.1 million for the corresponding periods of 2019. The pre-tax earnings from continuing operations were $5.6 million and $40.2 million for the three and nine month periods ending September 30, 2020, respectively, compared to $111.1 million and $115.2 million for the corresponding periods of 2019. Earnings were affected by the following events and adjustments that do not directly reflect our underlying operations among the periods presented:

•On a pre-tax basis, earnings included net losses of $53.4 million and $56.1 million for the three and nine month periods ended September 30, 2020, respectively, for the re-measurement of financial instruments, primarily warrant obligations granted to Amazon. This compares to pre-tax gains for re-measurement of such financial instruments of $92.0 million and $60.6 million for the corresponding periods of 2019.

•Pre-tax earnings were reduced by $5.3 million and $15.0 million for the three and nine month periods ended September 30, 2020, respectively, for the amortization of customer incentives given to ASI in the form of warrants, compared to $4.3 million and $12.6 million for the corresponding periods of 2019.

•Pre-tax earnings from continuing operations included gains of $2.9 million and $8.7 million for the three and nine month periods ended September 30, 2020, respectively, for the non-service components of retiree benefit plans compared to losses of $2.4 million and $7.1 million for the corresponding periods of 2019.

•Pre-tax earnings for the three and nine month periods ended September 30, 2020 included losses of $2.5 million and $11.8 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 $2.6 million and $12.5 million for the corresponding periods of 2019.

•Pre-tax earnings for the first quarter of 2019 also included expense of $0.4 million for acquisition fees incurred during the Company's acquisition of OAI, along with related entities Advanced Flight Services, LLC; Omni Aviation Leasing, LLC; and T7 Aviation Leasing, LLC (collectively, "Omni").

•Pre-tax earnings for the nine month period ending September 30, 2020 was decreased by the impairment of $39.1 million for our four Boeing 757 freighter aircraft and related assets.

•During the three and nine month periods ending September 30, 2020, the Company recognized $21.7 million and $31.5 million of government grants from the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

After removing the effects of the items above, 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 $42.2 million and $121.9 million for the three and nine month periods ended September 30, 2020 compared to $28.5 million and $87.1 million for the corresponding periods of 2019. Adjusted pre-tax earnings from continuing operations improved by $13.7 million and $34.9 million for the three and nine month periods ended September 30, 2020 compared to the corresponding periods of 2019, driven by increased revenues primarily from CAM and the ACMI Services segments.

External customer revenues from continuing operations increased by $38.1 million, or 10%, to $404.1 million and $122.4 million, or 12%, to $1,171.2 million for the three and nine month periods ended September 30, 2020 compared to the corresponding periods of 2019. Customer revenues increased in 2020 for contracted airline services, charter flights, aircraft leasing and aviation fuel sales, compared to the previous year periods. Beginning in late February 2020, our revenues were disrupted due to the coronavirus pandemic. The DoD and other customers began canceling scheduled passenger flights as a result of the Covid pandemic. The decline in revenues from these cancellations was offset by an increase in flying for our customers' package delivery networks, and charter flight operations during 2020.

The health and safety of our employees is paramount. We have taken precautions to prevent, detect and limit the spread of the Covid virus in the workplace. These practices include daily temperature checks, requiring face masks, periodically sanitizing facilities, frequent cleaning of high touch surfaces, supporting remote working, travel restrictions, promoting social distancing and frequent hand washing, contact tracing, quarantining, and other practices prescribed by the Centers for Disease Control and Prevention. We have not experienced a wide-spread outbreak at any location. However, a coronavirus outbreak among our flight crews, at one of our maintenance facilities, at customer sorting centers or an airport could result in workforce shortages, facility closures and significant numbers of flight cancellations.

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,
	2020		2019		2020		2019
Revenues from Continuing Operations:
CAM
Aircraft leasing and related services	$	80,976	$	75,160	238,930		223,017
Lease incentive amortization	(4,708)		(4,156)		(13,629)		(12,407)
Total CAM	76,268		71,004		225,301		210,610
ACMI Services	300,189		272,188		871,958		785,082
Other Activities	82,281		87,762		239,373		226,228
Total Revenues	458,738		430,954		1,336,632		1,221,920
Eliminate internal revenues	(54,592)		(64,881)		(165,415)		(173,088)
Customer Revenues - non reimbursed	$	404,146	$	366,073	$	1,171,217	$	1,048,832

Pre-Tax Earnings (Loss) from Continuing Operations:
CAM, inclusive of interest expense	$	19,781	$	17,428	$	55,241	$	50,285
ACMI Services, inclusive of interest expense	18,637		4,375		56,699		17,658
Other Activities	(724)		2,939		(2,915)		8,848
Net unallocated interest expense	(797)		(610)		(2,133)		(2,293)
Government grants	21,726		—		31,547		—
Impairment of aircraft and related assets	—		—		(39,075)		—
Other non-service components of retiree benefits gains (costs), net	2,897		(2,351)		8,693		(7,053)
Net financial instrument re-measurement loss	(53,393)		91,952		(56,072)		60,566
Loss from non-consolidated affiliate	(2,485)		(2,645)		(11,762)		(12,459)
Transaction fees	—		—		—		(373)
Pre-Tax Earnings (Loss) from Continuing Operations	5,642		111,088		40,223		115,179
Add lease incentive amortization	5,291		4,334		15,044		12,585
Less government grants	(21,726)		—		(31,547)		—
Add impairment of aircraft and related assets	—		—		39,075		—
Add other non-service components of retiree benefit (gains) costs, net	(2,897)		2,351		(8,693)		7,053
Add net loss on financial instruments	53,393		(91,952)		56,072		(60,566)
Add charges for non-consolidated affiliates	2,485		2,645		11,762		12,459
Add transaction fees	—		—		—		373
Adjusted Pre-Tax Earnings from Continuing Operations	$	42,188	$	28,466	$	121,936	$	87,083

Adjusted pre-tax earnings from continuing operations, a non-GAAP measure, is pre-tax earnings excluding (i) settlement charges and other non-service components of retiree benefit costs, (ii) gains and losses for the fair value re-measurement of financial instruments, (iii) customer incentive amortization, (iv) the transaction fees related to the acquisition of Omni, (v) the start-up costs of a non-consolidated joint venture, and (vi) the partial 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. We also excluded the recognition of government grants from adjusted earnings to improve comparability between periods. Management uses adjusted pre-tax earnings to compare the performance of core operating results between periods. Presenting this measure provides investors with a comparative metric of fundamental operations while highlighting changes to certain items among periods. Adjusted pre-tax earnings should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP.

Aircraft Fleet

Our fleet of cargo and passenger aircraft is summarized in the following table as of September 30, 2020 and December 31, 2019. Our freighters, primarily 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, 2020, the Company owned nine 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 2020 is summarized below:

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

•CAM leased one Boeing 767-300 freighter aircraft purchased during 2020 to an external customer under a multi-year lease. ATI operates this aircraft for the customer.

•ABX returned one Boeing 767-200 freighter aircraft and one Boeing 767-300 freighter aircraft to CAM. CAM leased the Boeing 767-300 aircraft to an external customer under a multi-year lease.

•ATI returned three Boeing 757-200 freighter aircraft to CAM and the aircraft were retired.

•ATI returned one Boeing 767-300 freighter aircraft to CAM. CAM leased the Boeing 767-300 aircraft to an external customer under a multi-year lease. ATI operates this aircraft for the customer.

•An external customer returned one Boeing 737-400 freighter aircraft to CAM. CAM sold the Boeing 737-400 aircraft to another external customer during the second quarter of 2020.

•An external customer returned one Boeing 767-200 freighter aircraft to CAM. The aircraft is being prepped for lease to another external customer later in 2020.

•CAM leased one Boeing 767-200 freighter aircraft to an external customer under a multi-year lease.

•OAI began to lease one Boeing 767-300 passenger aircraft from an external lessor.

•CAM purchased two Boeing 767-300 freighter aircraft and six Boeing 767-300 passenger aircraft for the purpose of converting the passenger aircraft into a standard freighter configuration. The aircraft are expected to be leased to external customers during 2020 and 2021.


	September 30, 2020			December 31, 2019
	ACMI Services	CAM	Total	ACMI Services	CAM	Total
In-service aircraft
Aircraft owned
Boeing 767-200 Freighter	6	26	32	7	26	33
Boeing 767-200 Passenger	2	—	2	2	—	2
Boeing 767-300 Freighter	4	43	47	5	35	40
Boeing 767-300 Passenger	7	—	7	7	—	7
Boeing 777-200 Passenger	3	—	3	3	—	3
Boeing 757-200 Freighter	1	—	1	4	—	4
Boeing 757-200 Combi	4	—	4	4	—	4
Boeing 737-400 Freighter	—	—	—	—	1	1
Total	27	69	96	32	62	94
Operating lease
Boeing 767-200 Passenger	1	—	1	1	—	1
Boeing 767-300 Passenger	2	—	2	1	—	1
Boeing 767-300 Freighter	2	—	2	2	—	2
Total	5	—	5	4	—	4
Other aircraft
Owned Boeing 767-300 under modification	—	9	9	—	8	8


Owned Boeing 767 available or staging for lease	—	2	2	—	2	2

As of September 30, 2020, ABX, ATI and OAI were leasing 27 in-service aircraft internally from CAM. As of September 30, 2020, 39 of CAM's 69 Boeing 767 freighter aircraft were leased to customers and operated by ABX or ATI within ACMI Services. CAM leased the other 13 Boeing 767-200 freighter aircraft and 17 Boeing 767-300 aircraft to external customers, including six Boeing 767-200 aircraft to DHL that are being operated by a DHL-affiliated airline. The carrying values of the total in-service fleet as of September 30, 2020 and December 31, 2019 were $1,459.3 million and $1,387.6 million, respectively.

CAM Segment

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

As of September 30, 2020 and 2019, CAM had 69 and 58 aircraft under lease to external customers, respectively. CAM's revenues grew by $5.3 million and $14.7 million for the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding periods of 2019, primarily as a result of additional aircraft leases. Revenues from external customers totaled $51.4 million and $148.1 million for the three and nine month periods ended September 30, 2020, respectively, compared to $42.0 million and $123.6 million for the corresponding periods of 2019. CAM's revenues from the Company's airlines totaled $24.9 million and $77.2 million for the three and nine month periods ended September 30, 2020, respectively, compared to $29.0 million and $87.0 million for the corresponding periods of 2019. CAM's aircraft leasing and related services revenues, which exclude customer lease incentive amortization, increased $5.8 million and $15.9 million for the three and nine month periods ended September 30, 2020 compared to the corresponding periods of 2019, primarily as a result of new aircraft leases in 2020. Since October 1 2019, CAM has added eleven Boeing 767-300 aircraft to its lease portfolio.

CAM's pre-tax earnings, inclusive of internally allocated interest expense, were $19.8 million and $55.2 million for the three and nine month periods ended September 30, 2020, respectively, compared to $17.4 million and $50.3 million for the corresponding periods of 2019. Increased pre-tax earnings reflect the lease revenues for additional aircraft offset by a $0.3 million and $0.9 million increase in internally allocated interest expense due to higher asset levels during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding periods of 2019. The pre-tax earnings are inclusive of increased depreciation expense of $2.2 million and $9.7 million for the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding periods of 2019 driven by the addition of eleven Boeing aircraft added since September of 2019.

During the first nine months of 2020, CAM purchased six Boeing 767-300 passenger aircraft for freighter conversion and two Boeing 767-300 freighter aircraft, one of which went into service during the third quarter of 2020. As of September 30, 2020, all six of the Boeing 767-300 passenger aircraft purchased in 2020 and two of the passenger aircraft purchased in 2019 were being modified from passenger to freighter configuration. CAM expects three passenger aircraft to complete the conversion process and enter service, along with the one remaining purchased freighter aircraft, during the fourth quarter of 2020. In addition to the aircraft above, CAM has agreements to purchase six more passenger Boeing 767-300 aircraft and expects to complete their conversion through 2021. We have external customer commitments to lease 11 Boeing 767-300 aircraft and four more for which CAM is finalizing lease arrangements.

During 2020 CAM removed a Boeing 737 freighter and three Boeing 757 freighter aircraft from its active fleet. During the remainder of 2020, we expect to retire a Boeing 767-200 and sell one Boeing 767-300 aircraft that is currently under lease.

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. Potential supply chain disruptions, including workforce illness, parts shortages and transportation delays, which may be caused by the coronavirus pandemic could result in the delay of aircraft conversions. The timing and lease rates under which these aircraft are ultimately leased, redeployed or disposed of will impact CAM's future operating results. Additionally, CAM's future operating results will also be impacted by the amortization of additional warrants committed to Amazon in conjunction with agreements for additional long-term aircraft leases.

ACMI Services

The ACMI Services segment provides airline operations to its customers, typically under contracts providing for a combination of aircraft, crews, maintenance, insurance and aviation fuel. Our customers are typically responsible for supplying the necessary aviation fuel and cargo handling services and reimbursing our airline for other operating expenses such as landing fees, ramp expenses, certain aircraft maintenance expenses and fuel procured directly by the airline. Aircraft charter agreements, including those for the DoD, usually require the airline to provide full service, including fuel and other operating expenses for a fixed, all-inclusive price. As of September 30, 2020, ACMI Services included 71 in-service aircraft as follows:

•12 passenger aircraft and 15 freighter aircraft leased internally from CAM

•Eight CAM-owned freighter aircraft which are under lease to DHL and operated by ABX under the DHL CMI agreement

•30 CAM-owned freighter aircraft which are under lease to ASI and operated by ATI or ABX under the ATSA

•One CAM-owned freighter leased to a customer and operated by ATI

•Two freighter aircraft from an external lessor under lease to ASI and operated by ATI under the ATSA

•Three passenger aircraft leased from an external lessor

As of September 30, 2020, ACMI Services revenues included the operation of four more aircraft compared to September 30, 2019. Total revenues from ACMI Services increased $28.0 million and $86.9 million during the three and nine month periods ended September 30, 2020, respectively, to $300.2 million and $872.0 million compared to the corresponding periods of 2019. During the three and nine month periods ending September 30, 2020, billable block hours increased 13% and 20%, respectively.

Revenues for three and nine month periods ended September 30, 2020 were impacted by the coronavirus pandemic. In late February 2020, the DoD began canceling combi aircraft flights and in March, commercial customers began canceling scheduled passenger flights as a result of the coronavirus pandemic. Combined block hours flown for contracted commercial passenger and combi fights declined 37% and 67% for the second and third quarters of 2020, respectively, compared to the corresponding periods for the previous year due to the pandemic. The decline in revenues from these cancellations was mitigated by increased flying for customer e-commerce networks and passenger charter flights for the DoD and other governmental agencies, including flights to return people to the United States who were stranded abroad as a result of the pandemic. Operations during the second and third quarter of 2020 also included additional transoceanic flights to replace cargo capacity normally serviced in the belly-hold of passenger aircraft.

ACMI Services had pre-tax earnings of $18.6 million and $56.7 million during the three and nine month periods ended September 30, 2020, respectively, compared to $4.4 million and $17.7 million for the corresponding periods of 2019. Improved pre-tax results in 2020 compared to 2019 were primarily a result of expanded revenues from ASI and DHL and ad hoc passenger charters. ACMI Services benefited from reduced travel costs including lower airfares during the third quarter of 2020 compared to the third quarter of 2019. Internally allocated interest expense decreased by $1.7 million and $3.8 million for the three and nine month periods ended September 30, 2020, respectively, compared to 2019, to $4.8 million and $15.7 million for the corresponding periods of 2020.

In October 2020, Amazon leased one additional Boeing 767-300 freighter aircraft from CAM and contracted its operation to our airline through our existing ATSA. However, we expect our operating results to be significantly impacted by the coronavirus pandemic during the remainder of 2020 and potentially during subsequent quarters. The DoD has reduced normal personnel movements while most of our other passenger service customers have suspended their operations and demand for commercial passenger charters have significantly declined. During the second and third quarters 2020, the DoD and other government agencies contracted for special airlift capacity and missions which may not continue to occur near the same level in the months ahead. Similarly, customers may find alternatives for the incremental e-commerce routes we operated. While it is difficult to predict, we expect lower revenues from passenger operations during the fourth quarter of 2020 than we had in any other quarter of 2020.

Other Activities

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

External customer revenues from all other activities increased $0.7 million during the third quarter of 2020 compared to 2019 due to more aviation fuel sales as customer operations at the Wilmington, Ohio air hub expanded and more aircraft maintenance services due to the timing of customers maintenance schedules. External customer revenues for the first nine month of 2020 compared to the previous year increased $10.9 million primarily due to aviation fuel sales at ASI's hub in Wilmington, Ohio. While revenues also increased at two ASI gateways and a USPS mail facility which we operate, ground services revenues during 2020 included reductions for equipment and facility maintenance revenues compared to the first nine months of 2019 as customers chose to in-source some of these services. Revenues from aircraft maintenance and part sales declined during the first nine months of 2020 as passenger airlines have reduced their needs for services during the pandemic.

The pre-tax earnings from other activities decreased by $3.7 million and $11.8 million during the three and nine month periods ended September 30, 2020 to losses of $0.7 million and $2.9 million respectively compared to the corresponding periods of 2019. Reduced earnings for 2020 are a result of reduced revenues on aircraft maintenance services and the sales of aircraft parts. Additionally, we incurred start-up costs for USPS mail facility contracts we were awarded during 2020. These reductions were partially offset by additional aviation fuel sales which earn a lower margin.

Our customer base for aircraft maintenance revenues includes passenger airlines. We expect the adverse impact on our aircraft maintenance business to continue due to the coronavirus pandemic as passenger airlines reduce their

needs for scheduled heavy airframe maintenance. 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. A coronavirus outbreak at one of our maintenance facilities, or at customer sorting centers could result in workforce shortages and facility closures.

Expenses from Continuing Operations

Salaries, wages and benefits expense increased $17.9 million and $65.7 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding period of 2019 driven by higher employee headcount for flight operations, maintenance services and package sorting services. The total headcount increased 20% as of September 30, 2020 compared to September 30, 2019.

Depreciation and amortization expense increased $3.8 million and $15.6 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding period of 2019. The increase reflects incremental depreciation for eleven Boeing 767-300 aircraft and additional aircraft engines added to the operating fleet since October 1, 2019, as well as capitalized heavy maintenance and navigation technology upgrades. We expect depreciation expense to increase during future periods in conjunction with our fleet expansion and capital spending plans.

Maintenance, materials and repairs expense increased $7.3 million and $8.6 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding period of 2019. Increased maintenance expense for 2020 was driven by increased flight hours and higher costs for unscheduled engine repairs at our airlines. The aircraft maintenance and material expenses can vary among periods due to the number of maintenance events and the scope of airframe checks that are performed.

Fuel expense decreased by $5.0 million and increased by $6.5 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding periods of 2019. Fuel expense includes the cost of fuel to operate DoD charters, fuel used to position aircraft for service and for maintenance purposes, as well as the cost of fuel sales. Fuel expense decreased during the third quarter of 2020 compared to 2019 due to lower prices for aviation fuel during the pandemic. The increase in fuel during the first nine months of 2020 reflects increased sales of aviation fuel at the ASI air hub in Wilmington, Ohio since it opened in mid 2019.

Contracted ground and aviation services expense includes navigational services, aircraft and cargo handling services, baggage handling services and other airport services. Contracted ground and aviation services increased by $2.7 million and $0.4 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding period of 2019. Since mid 2019, certain customers chose to in-source some ground services that we had been performing on their behalf.

Travel expense decreased by $5.1 million and $7.2 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding period of 2019. The decrease in travel expense was due to less employee travel and the lower costs of air travel as airfares have fallen.

Landing and ramp expense, which includes the cost of deicing chemicals, increased by $0.8 million and $0.9 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding period of 2019.

Rent expense increased by $1.0 million and $2.0 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding period of 2019 due to increased rent expense for additional aircraft partially offset by lower facility rents during 2020.

Insurance expense increased by $1.3 million and $1.7 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding period of 2019. Aircraft fleet insurance has increased due to additional aircraft operations.

Asset impairment charges were recorded during the second quarter of 2020, in conjunction with management's decision to retire four Boeing 757 freighter aircraft. Three of the 757 airframes have been removed from service and are available for sale. One remains in service through 2020. Impairment charges totaling $39.1 million were recorded, primarily reflecting the fair value of these assets as well as other surplus engines and parts.

Operating results included a pre-tax contra expense of $21.7 million and $31.5 million during the three and nine month periods ended September 30, 2020 to recognize grants received from the U.S. government under the CARES Act. For additional information about the CARES Act grants, see Note H of the unaudited condensed consolidated financial statements included in this report.

Non Operating Income, Adjustments and Expenses

Interest expense decreased by $1.3 million and $3.1 million during the three and nine month periods ended September 30, 2020, respectively, compared to the corresponding periods in 2019. Interest expense during the first nine months of 2020 decreased compared to the previous year due to lower interest rates on our borrowings under the Senior Credit Agreement.

The Company recorded unrealized pre-tax losses on financial instrument re-measurements of $53.4 million and $56.1 million during the three and nine month periods ended September 30, 2020, respectively, compared to unrealized pre-tax net gains of $92.0 million and $60.6 million for the corresponding periods of 2019. The losses include the results of re-valuing, as of September 30, 2020 and 2019, the fair value of the stock warrants granted to Amazon. Generally, the warrant value increases or decreases with corresponding increases or decreases in the ATSG stock price during the measurement period. Additionally, the value of certain warrants depend partially on the probability that warrants will vest upon the execution of aircraft leases. Warrant losses for the first nine months of 2020 were primarily a result of a 7% increase in the traded value of ATSG shares.

Non-service components of retiree benefits were net gains of $2.9 million and $8.7 million for the three and nine month periods ended September 30, 2020, respectively, compared to net losses of $2.4 million and $7.1 million for the corresponding periods in 2019. The non-service component gains and losses of retiree benefits are actuarially determined and include the amortization of unrecognized gain and loss stemming from changes in assumptions regarding discount rates, expected investment returns and other retirement plan assumptions. Non-service components of retiree benefits can vary significantly from one year to the next based on investment results and changes in discount rates used to account for defined benefit retirement plans.

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, 2020 have been estimated utilizing a 25% 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.

The effective tax rate from continuing operations for the three and nine month periods ended September 30, 2020 were 202% and 43%, respectively. The effective tax rate is affected by the re-measurement of warrants, changes in valuation allowances and discrete tax items in which expenses 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, incentive amortizations and the other adjustments for adjusted pretax earnings from continuing operations (see items in table above) was 25% and 23% for the three and nine month periods ended September 30, 2020, respectively. The effective tax rate before including the effects of the warrants was 25% and 24% for the three and nine month periods ended September 30, 2019.

Discontinued Operations

The financial results of discontinued operations primarily reflect pension, workers' compensation cost adjustments and other benefits for former employees previously associated with ABX's former hub operations pursuant to which ABX performed package sorting services for DHL. Pre-tax gains related to the former sorting operations were $5.4 million for the first nine months of 2020 compared to $0.4 million for 2019. Pre-tax earnings during 2020 and 2019 were a result of reductions in self-insurance reserves for former employee claims and pension credits.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Net cash generated from operating activities totaled $423.3 million and $307.1 million for the first nine months in 2020 and 2019, respectively. Cash flows generated from operating activities during 2020 and 2019 were driven primarily by aircraft leases to customers and the ACMI Services segment. Operating cash flows increased $116.1 million for the first nine months of 2020 compared to the corresponding period of 2019. Operating cash flows for 2020 include the receipt of $75.4 million of grant funds from the CARES Act. Cash outlays for pension contributions were $8.2 million and $5.4 million for the first nine months of 2020 and 2019, respectively.

Capital spending levels were primarily the result of aircraft modification costs and the acquisition of aircraft for freighter modification. Cash payments for capital expenditures were $394.3 million and $336.9 million for the first nine months of 2020 and 2019, respectively. Capital expenditures in 2020 included $273.4 million for the acquisition of eight Boeing 767-300 aircraft and freighter modification costs; $65.3 million for required heavy maintenance; and $55.6 million for other equipment, including purchases of aircraft engines and rotables. Capital expenditures in the first nine months of 2019 included $247.9 million for the acquisition of nine Boeing 767-300 aircraft and freighter modification costs; $54.3 million for required heavy maintenance; and $34.7 million for other equipment, including purchases of aircraft engines and rotables.

During the first nine months of 2019, we paid $12.0 million to complete the acquisitions of Omni and TriFactor. During the first nine months of 2020 and 2019, we contributed $9.1 million and $9.8 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 used in financing activities was $14.3 million for the first nine months of 2020 compared to $28.0 million of net cash provided by financing activities in 2019. Our financing activities during the first nine months of 2020 included a debt offering of $500 million in senior unsecured notes (the “Senior Notes”). The Senior Notes were sold only to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and certain investors pursuant to Regulation S under the Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a rate of 4.750% 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 net proceeds from the Senior Notes were used to pay down the revolving credit facility.

During the first nine months of 2020, we drew a total of $80.0 million from the revolving credit facility and $70.0 million during the first nine months of 2019. Our borrowing activities were necessary to purchase and modify aircraft for lease deployment into air cargo markets.

Commitments

As of September 30, 2020, the Company had nine aircraft that were in, or awaiting, the freighter modification process. Additionally, we have agreed to purchase six more Boeing 767-300 aircraft through 2021. We estimate that capital expenditures for 2020 will total $485 million, of which the majority will be related to aircraft purchases and freighter modifications. Actual capital spending for any future period will be impacted by aircraft acquisitions, maintenance and modification processes. We expect to finance these capital expenditures from current cash balances, future operating cash flows and the Senior Credit Agreement. The Company outsources a significant portion of the aircraft freighter modification process to a non-affiliated third party. The modification process primarily consists of the installation of a standard cargo door and loading system. For additional information about the Company's aircraft modification obligations, see Note H of the accompanying financial statements.

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

Liquidity

We have a Senior Credit Agreement with a consortium of banks that includes an unsubordinated term loan of $615.7 million, net of debt issuance costs, and a revolving credit facility from which the Company has drawn $140.4 million, net of repayments, as of September 30, 2020. The Senior Credit Agreement expires in November 2024 if certain liquidity measures are not maintained during 2024 and contains an incremental accordion capacity based on debt ratios. As of September 30, 2020, the available unused revolving credit facility capacity totaled $445.7 million, and additional permitted indebtedness under the Senior Credit Agreement subject to compliance with other covenants, was limited to $250.0 million.

The Senior Credit Agreement is collateralized by our fleet of Boeing 777, 767 and 757 freighter aircraft. Under the terms of the Senior Credit Agreement, we are required to maintain collateral coverage equal to 115% of the outstanding balances of the term loan and the total funded revolving credit facility. The Senior Credit Agreement requires a minimum collateral coverage of 50% of the outstanding balance of the term loan plus the revolving credit facility commitment, which was $600.0 million.

Under the Senior Credit Agreement, the Company is subject to covenants and warranties that are usual and customary including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, as well as a total debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization expenses) ratio and a fixed charge coverage ratio. The Senior Credit Agreement stipulates events of default including unspecified events that may have a material adverse effect on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement. The Senior Notes contain customary events of default and covenants which are generally no more restrictive than those set forth in the Senior Credit Agreement.

Additional debt or lower EBITDA may result in higher interest rates. Under the Senior Credit Agreement, interest rates are adjusted quarterly based on the prevailing LIBOR or prime rates and a ratio of the Company's outstanding debt level to EBITDA. At the Company's current debt-to-EBITDA ratio, the unsubordinated term loans, the Senior Notes and the revolving credit facility bear variable interest rates of 1.65%, 4.75% and 1.65%, respectively.

At September 30, 2020, the Company had $61.1 million of cash balances. We believe that the Company's current cash balances and forecasted cash flows provided from its customer leases and operating agreements, combined with its Senior Credit Agreement, will be sufficient to fund operations, capital spending, scheduled debt payments and required pension funding for at least the next 12 months.

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, 2020 and 2019, we were not involved in any material unconsolidated SPE transactions.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

related to revenue recognition, post-retirement liabilities, bad debts, self-insurance reserves, valuation of spare parts inventory, useful lives, salvage values and impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances. Those factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

No changes have occurred to the market risks the Company faces since information about those risks was disclosed in item 7A of the Company's 2019 Annual Report on form 10-K filed with the Securities and Exchange Commission on March 2, 2020.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of September 30, 2020, the Company carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls

There were no changes in internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are currently a party to legal proceedings in various federal and state jurisdictions arising out of the operation of the Company's businesses. 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 2019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 2, 2020. The risk factors presented below update, and should be considered in addition to, the risk factors previously disclosed in Item 1A of the Company's 2019 Annual Report on form 10-K. Other risks that are currently unknown to management or are currently considered immaterial or unlikely, could also adversely affect the Company.

Our operating results have been and will continue to be impacted by the coronavirus pandemic.

In late 2019, an outbreak of a coronavirus (COVID-19) was identified in China and has since spread globally, becoming a pandemic. The pandemic has had an impact on our operations and financial results and is expected to continue to affect our operations and financial results. The extent of the impact that the coronavirus pandemic will have on our operations and financial results will depend on future developments, including the duration, spread, severity and any recurrence of the COVID-19 virus; the duration and scope of government orders and restrictions; and the extent of the impact of the pandemic on overall economic conditions. These are highly uncertain and cannot reasonably be predicted.

We expect that our operating results will be significantly impacted by the coronavirus pandemic during the remainder of 2020 and most likely during subsequent quarters. The DoD has reduced normal personnel movements while most of our other passenger service customers suspended their operations and demand for commercial passenger charters significantly declined. During the second and third quarters of 2020 the DoD and other government agencies contracted for special airlift capacity which may not be needed in the months ahead. As a result, we expect the revenues of ACMI Services to decline at least for the fourth quarter of 2020 compared to the previous quarter of 2020. It is difficult to reasonably predict when flights will resume, the frequency with which flights will resume, and the length of time necessary before passenger flights substantially recover to pre-pandemic levels. The economic downturn resulting from the coronavirus pandemic has also resulted in the reduction of demand for other types of services including aircraft maintenance services.

Some of our employees and employees of suppliers and service providers have tested positive for, or have been suspected of having, COVID-19. Additional instances of actual or perceived risk of infection among our employees, or our suppliers' or service providers’ employees, could further negatively impact our operations 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. In addition to our own employees, we rely on services from suppliers and customers to operate efficiently and safely. Measures restricting the ability of airport personnel or flight crews to work may result in the reductions of flights. Our operations could be negatively affected if our own personnel or those of our suppliers and customers are quarantined or sickened as a result of exposure to COVID-19, or if they are subject to governmental curfews or “shelter in place” health orders. A coronavirus outbreak at certain maintenance facilities, customer sorting centers or airports could result in workforce shortages or closures causing reduced revenues and higher expenses.

In addition to workforce shortages, the coronavirus pandemic may result in parts shortages, maintenance delays, shortages of transportation and hotel accommodations for flight crews, any of which could result in reduced revenues and additional expenses. Similarly, the effects of the coronavirus pandemic could result in the slower completion of aircraft freighter conversions which in turn would disrupt our aircraft leasing operations. Our

customer base for aircraft maintenance revenues includes passenger airlines. Our operating results have been impacted and may continue to be impacted by the coronavirus pandemic as passenger airlines reduce their needs for scheduled heavy airframe maintenance.

The pandemic may have a long term impact on the demand for aviation services and our operating results.

Due to the pandemic, passenger air travel has declined sharply and passenger airlines have temporarily removed much of their fleets from service. The demand for passenger air travel could remain low for an extended period of time and accordingly, the value of airframes and engines could decline for the foreseeable future. If the coronavirus pandemic persists or reemerges, our expectations of related operating cash flows could significantly decline. If such circumstances occur or appear likely to occur, we may need to impair the carrying value of certain recorded assets. If the coronavirus pandemic persists, we may need to terminate or furlough airline employees.

Conditions of the CARES Act

Two of the Company's airline subsidiaries, OAI and ATI, have been granted government funds totaling $75.4 million pursuant to the payroll support program agreement under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The funds were received in installments through September 2020. In conjunction with the payroll support program agreements, the airlines agreed to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through September 30, 2020; limit, on behalf of themselves and certain of their affiliates, executive compensation through March 24, 2022; maintain certain air transportation services through March 1, 2022, as may be required by the U.S. Department of Transportation pursuant to its authority under the CARES Act; and maintain certain internal controls and records relating to the CARES Act funds and comply with certain reporting requirements. In addition, we may not pay dividends or repurchase our shares through September 30, 2021. If we do not comply with the provisions of the CARES Act and the payroll support program agreements, the Company may be required to repay the government funds and also subject to other remedies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 5, 2014, the Board of Directors authorized the Company to repurchase up to $50.0 million of outstanding common stock. In May 2016, the Board amended the Company's common stock repurchase program increasing the amount that management may repurchase from $50.0 million to $100.0 million of outstanding common stock. In February 2018, the Board increased the authorization from $100.0 million to $150.0 million (less amounts previously repurchased). The Board's authorization does not require the Company to repurchase a specific number of shares or establish a time frame for any repurchase and the Board may terminate the repurchase program at any time. Repurchases may be made from time to time in the open market or in privately negotiated transactions. There is no expiration date for the repurchase program. There were no repurchases made during the third quarter of 2020. As of September 30, 2020, 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 suspended until the CARES Act restrictions on the repurchase of shares have lapsed. See “Conditions of the CARES Act.”

ITEM 6. EXHIBITS

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


Exhibit No.			Description of Exhibit
			Articles of Incorporation
3.1			Amended and Restated Bylaws of Air Transport Services Group, Inc. (2)

			Instruments defining the rights of security holders

4.1			Indenture, dated January 28, 2020, by and among Cargo Aircraft Management, Inc., Air Transport Services Group, Inc., the guarantors named therein and Regions Bank, as trustee. (1)

4.2			Form of 4.750% Senior Notes due 2028 (included in Exhibit 4.1). (1)


			Material Contracts

10.1			Fourth Amendment to Second Amended and Restated Credit Agreement, dated as of January 28, 2020, by and among Cargo Aircraft Management, Inc., as Borrower; Air Transport Services Group, Inc.; each of the financial institutions party thereto as Lenders; and SunTrust Bank, in its capacity as Administrative Agent. (1)

10.2			Payroll Support Program Agreement, dated May 20, 2020, by and between Omni Air International, LLC and the U.S. Department of Treasury under the Coronavirus Aid, Relief and Economic Security Act. (3)

10.3			Payroll Support Program Agreement, dated May 29, 2020, by and between Air Transport International, Inc. and the U.S. Department of Treasury under the Coronavirus Aid, Relief and Economic Security Act. (3)

10.4			Warrant to Purchase Common Stock, issued May 29, 2020, by and between Air Transport Services Group, Inc. and Amazon.com, Inc . Those portions of this Agreement marked with an [*] have been excluded because the information is both (i) not material and (ii) would be competitively harmful if publicly disclosed. (3)


			Certifications

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

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

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

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


101.INS			XBRL Instance Document

101.SCH			XBRL Taxonomy Extension Schema Document

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			XBRL Taxonomy Extension Labels Linkbase Document

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

____________________

(1)Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on January 28, 2020.

(2)Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on March 24, 2020.

(3)Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2020.

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 4, 2020

/S/ QUINT O. TURNER

Quint O. Turner

Chief Financial Officer (Principal Financial Officer

Date:

November 4, 2020

and Principal Accounting Officer)