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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 June 30, 2023
    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)
________________________________________________________________
Delaware26-1631624
(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 SymbolName of each exchange on which registered
Common Stock, par value $0.01 per share  ATSGThe Nasdaq Stock Market
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.
Large accelerated filer
  
Accelerated filerSmaller reporting company
Non-accelerated filerEmerging 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 August 7, 2023, there were 70,761,243 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.  
  
  
  
  
  
Item 2.  
Item 3.  
Item 4.  
PART II. OTHER INFORMATION
Item 1.  
Item 1A.  
Item 2.  
Item 6.  




FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
The financial information, including the financial statements, included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 (the "Form 10-Q") should be read in conjunction with the audited consolidated financial statements and notes thereto of Air Transport Services Group, Inc. ("ATSG") included in ATSG's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission ("SEC") on March 1, 2023 ("2022 Form 10-K").
The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding ATSG at www.sec.gov. Additionally, ATSG's filings with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, are available free of charge from our website at www.atsginc.com as soon as reasonably practicable after filing with the SEC.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. The Company wishes to take advantage of the safe harbor provisions of the Act.
This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part I, Item 2, contains forward-looking statements, within the meaning of Act. Except for historical information contained in this Form 10-Q, the matters discussed herein contain forward-looking statements that involve risks and uncertainties. Such statements are provided under the “safe harbor” protection of the Act.
Forward-looking statements include, but are not limited to, statements regarding anticipated operating results, prospects and levels of assets under management, technological developments, economic trends, expected transactions and similar matters. The words “may,” “believe,” “expect,” “anticipate,” “target,” “goal,” “project,” “estimate,” “guidance,” “forecast,” “outlook,” “will,” “continue,” “likely,” “should,” “hope,” “seek,” “plan,” “intend” and variations of such words and similar expressions identify forward-looking statements. Similarly, descriptions of the Company’s objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements are susceptible to a number of risks, uncertainties and other factors. While the Company believes that the assumptions underlying its forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, the Company’s actual results and experiences could differ materially from the anticipated results or other expectations expressed in its forward-looking statements.
A number of important factors could cause the Company’s actual results to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to: (i) unplanned changes in the market demand for its assets and services, including the loss of customers or a reduction in the level of services it performs for customers; (ii) its operating airlines’ ability to maintain on-time service and control costs; (iii) the cost and timing with respect to which it is able to purchase and modify aircraft to a cargo configuration; (iv) fluctuations in the Company’s traded share price and in interest rates, which may result in mark-to-market charges on certain financial instruments; (v) the number, timing, and scheduled routes of its aircraft deployments to customers; (vi) its ability to remain in compliance with key agreements with customers, lenders and government agencies; (vii) the impact of current supply chain constraints both within and outside the Unites States, which may be more severe or persist longer than it currently expects; (viii) the impact of a competitive labor market, which could restrict its ability to fill key positions; and (ix) changes in general economic and/or industry-specific conditions, including inflation. Other factors that could cause the Company’s actual results to differ materially from those indicated by such forward-looking statements are discussed in “Risk Factors” in Item 1A to the 2022 Form 10-K and are contained from time to time in ATSG’s other filings with the SEC, including its annual reports on Form 10-K and quarterly reports on Form 10-Q.
Readers should carefully review this Form 10-Q and should not place undue reliance on the Company’s forward-looking statements. The forward-looking statements were based on information, plans and estimates as of the date of


this Form 10-Q. New risks and uncertainties arise from time to time, and factors that the Company currently deems immaterial may become material, and it is impossible for the Company to predict these events or how they may affect it. Except as may be required by applicable law, the Company undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. The Company does not endorse any projections regarding future performance that may be made by third parties.

CERTAIN DEFINED TERMS IN THIS FORM 10-Q
ATSG and its subsidiaries may sometimes be referred to in this Form 10-Q individually or collectively as the “Company,” “we,” “our,” or “us.” ATSG’s outstanding common stock, par value $0.01 per share, is referred to in this Form 10-Q as “common stock,” “common shares,” “stock” or “shares.”





PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 June 30, 2023December 31, 2022
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and restricted cash$43,150 $27,134 
Accounts receivable, net of allowance of $1,186 in 2023 and $939 in 2022
218,312 301,622 
Inventory57,648 57,764 
Prepaid supplies and other32,387 31,956 
TOTAL CURRENT ASSETS351,497 418,476 
Property and equipment, net2,678,980 2,402,408 
Customer incentive69,109 79,650 
Goodwill and acquired intangibles487,534 492,642 
Operating lease assets60,808 74,070 
Other assets104,637 122,647 
TOTAL ASSETS$3,752,565 $3,589,893 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable$269,805 $192,992 
Accrued salaries, wages and benefits51,509 56,498 
Accrued expenses11,061 12,466 
Current portion of debt obligations645 639 
Current portion of lease obligations21,771 23,316 
Unearned revenue and grants38,654 21,546 
TOTAL CURRENT LIABILITIES393,445 307,457 
Long term debt1,514,737 1,464,285 
Stock obligations1,762 695 
Post-retirement obligations32,612 35,334 
Long term lease obligations40,032 51,575 
Other liabilities54,565 62,861 
Deferred income taxes272,208 255,180 
TOTAL LIABILITIES2,309,361 2,177,387 
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; 70,761,243 and 72,327,758 shares issued and outstanding in 2023 and 2022, respectively
708 723 
Additional paid-in capital951,463 986,303 
Retained earnings587,045 528,882 
Accumulated other comprehensive loss(96,012)(103,402)
TOTAL STOCKHOLDERS’ EQUITY1,443,204 1,412,506 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$3,752,565 $3,589,893 
See notes to the unaudited condensed consolidated financial statements.


AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months EndedSix Months Ended
 June 30,June 30,
 2023202220232022
REVENUES$529,339 $509,668 $1,030,434 $995,528 
OPERATING EXPENSES
Salaries, wages and benefits170,458 162,797 347,173 324,559 
Depreciation and amortization82,691 81,372 167,419 163,443 
Maintenance, materials and repairs50,436 39,407 94,269 75,116 
Fuel67,271 73,102 134,026 133,460 
Contracted ground and aviation services19,682 20,153 37,470 38,484 
Travel31,222 28,480 60,775 52,679 
Landing and ramp4,744 4,085 8,868 8,663 
Rent8,274 7,068 16,386 13,731 
Insurance2,684 2,326 5,232 4,878 
Other operating expenses22,136 20,361 41,652 40,204 
459,598 439,151 913,270 855,217 
OPERATING INCOME69,741 70,517 117,164 140,311 
OTHER INCOME (EXPENSE)
Interest income180 15 395 24 
Non-service component of retiree benefit (loss) gains(3,218)5,388 (6,436)10,776 
Net gain on financial instruments1,818 6,011 78 8,707 
Loss from non-consolidated affiliate(2,107)(3,220)(2,513)(4,623)
Interest expense(16,672)(9,461)(32,377)(20,860)
(19,999)(1,267)(40,853)(5,976)
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES49,742 69,250 76,311 134,335 
INCOME TAX EXPENSE(11,720)(15,040)(18,148)(30,329)
EARNINGS FROM CONTINUING OPERATIONS38,022 54,210 58,163 104,006 
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAXES 882  882 
NET EARNINGS$38,022 $55,092 $58,163 $104,888 
BASIC EARNINGS PER SHARE
Continuing operations$0.54 $0.73 $0.82 $1.41 
Discontinued operations 0.01  0.01 
TOTAL BASIC EARNINGS PER SHARE$0.54 $0.74 $0.82 $1.42 
DILUTED EARNINGS PER SHARE
Continuing operations$0.49 0.61 $0.73 1.18 
Discontinued operations 0.01  0.01 
TOTAL DILUTED EARNINGS PER SHARE$0.49 0.62 $0.73 1.19 
WEIGHTED AVERAGE SHARES
Basic70,722 73,980 71,259 73,934 
Diluted79,515 89,449 81,276 89,098 

See notes to unaudited condensed consolidated financial statements.


AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
NET EARNINGS$38,022 $55,092 $58,163 $104,888 
OTHER COMPREHENSIVE INCOME:
Defined Benefit Pension3,665 241 7,370 483 
Defined Benefit Post-Retirement 9  18 
Foreign Currency Translation20  20  
TOTAL COMPREHENSIVE INCOME, net of tax$41,707 $55,342 $65,553 $105,389 

See notes to unaudited condensed consolidated financial statements.



AIR TRANSPORT SERVICES GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
 Common StockAdditional
Paid-in
Capital
Accumulated Earnings (Deficit)Accumulated
Other
Comprehensive
Income (Loss)
Total
 NumberAmount
BALANCE AT MARCH 31, 202274,337,226 $743 $1,035,029 $380,097 $(61,829)$1,354,040 
Stock-based compensation plans
Grant of restricted stock(1,200)   
Issuance of common shares, net of withholdings36,912 1 (90)(89)
Forfeited restricted stock(3,800)   
Amortization of stock awards and restricted stock2,200 2,200 
Total comprehensive income55,092 250 55,342 
BALANCE AT JUNE 30, 202274,369,138 $744 $1,037,139 $435,189 $(61,579)$1,411,493 
BALANCE AT DECEMBER 31, 202174,142,183 $741 $1,074,286 $309,430 $(62,080)$1,322,377 
Stock-based compensation plans
Grant of restricted stock109,200 1 (1) 
Issuance of common shares, net of withholdings122,255 2 (1,441)(1,439)
Forfeited restricted stock(4,500)   
Cumulative effect in change in accounting principle(39,559)20,871 (18,688)
Amortization of stock awards and restricted stock3,854 3,854 
Total comprehensive income104,888 501 105,389 
BALANCE AT JUNE 30, 202274,369,138 $744 $1,037,139 435,189 (61,579)$1,411,493 
See notes to the unaudited condensed consolidated financial statements.



AIR TRANSPORT SERVICES GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, cont.
(In thousands, except share data)
 Common StockAdditional
Paid-in
Capital
Accumulated Earnings (Deficit)Accumulated
Other
Comprehensive
Income (Loss)
Total
 NumberAmount
BALANCE AT MARCH 31, 202371,451,610 $715 $964,026 $549,023 $(99,697)$1,414,067 
Stock-based compensation plans
Grant of restricted stock265,361 3 (3) 
Issuance of common shares, net of withholdings(1,428) (25)(25)
Forfeited restricted stock(4,300)   
Purchase of common stock(950,000)(10)(15,096)(15,106)
Amortization of stock awards and restricted stock2,561 2,561 
Total comprehensive income38,022 3,685 41,707 
BALANCE AT June 30, 202370,761,243 $708 $951,463 $587,045 $(96,012)$1,443,204 
BALANCE AT DECEMBER 31, 202272,327,758 $723 $986,303 $528,882 $(103,402)$1,412,506 
Stock-based compensation plans
Grant of restricted stock265,361 3 (3) 
Issuance of common shares, net of withholdings122,724 2 (1,580)(1,578)
Forfeited restricted stock(4,600)   
Purchase of common stock(1,950,000)(20)(37,223)(37,243)
Amortization of stock awards and restricted stock3,966 3,966 
Total comprehensive income58,163 7,390 65,553 
BALANCE AT June 30, 202370,761,243 $708 $951,463 587,045 (96,012)$1,443,204 

See notes to the unaudited condensed consolidated financial statements.



AIR TRANSPORT SERVICES GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
 20232022
OPERATING ACTIVITIES:
Net earnings from continuing operations$58,163 $104,006 
Net earnings from discontinued operations 882 
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization178,735 175,820 
Pension and post-retirement9,490 648 
Deferred income taxes14,919 29,840 
Amortization of stock-based compensation3,966 3,854 
Loss from non-consolidated affiliates2,513 4,623 
Net (gain) loss on financial instruments(78)(8,707)
Changes in assets and liabilities:
Accounts receivable82,597 (54,861)
Inventory and prepaid supplies1,052 (5,639)
Accounts payable55,834 13,211 
Unearned revenue18,323 (9,660)
Accrued expenses, salaries, wages, benefits and other liabilities(15,166)10,439 
Pension and post-retirement balances(4,363)(12,698)
Other2,591 (1,549)
NET CASH PROVIDED BY OPERATING ACTIVITIES408,576 250,209 
INVESTING ACTIVITIES:
Expenditures for property and equipment(412,925)(294,210)
Proceeds from property and equipment10,445 154 
Acquisitions and investments in businesses(800)(16,545)
NET CASH (USED IN) INVESTING ACTIVITIES(403,280)(310,601)
FINANCING ACTIVITIES:
Principal payments on long term obligations(90,317)(295,310)
Proceeds from revolving credit facilities140,000 450,000 
Payments for financing costs(511) 
Repurchase of senior unsecured notes (115,204)
Purchase of common stock(36,874) 
Withholding taxes paid for conversion of employee stock awards(1,578)(1,439)
NET CASH PROVIDED BY FINANCING ACTIVITIES10,720 38,047 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS16,016 (22,345)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR27,134 69,496 
CASH AND CASH EQUIVALENTS AT END OF YEAR$43,150 $47,151 
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amount capitalized$20,238 $22,198 
Federal and state income taxes paid$6,513 $507 
SUPPLEMENTAL NON-CASH INFORMATION:
Accrued expenditures for property and equipment$77,412 $51,228 
See notes to unaudited condensed 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

Nature of Operations
ATSG is a holding company whose subsidiaries lease aircraft and provide contracted airline operations as well as other support services mainly to the air transportation, e-commerce and package delivery industries.
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 a combination of aircraft, crews, maintenance and insurance services for its customers' transportation network through crew, maintenance and insurance ("CMI") agreements and aircraft, crew, maintenance and insurance ("ACMI") agreements and through charter contracts in which aircraft fuel is also included. The Company's subsidiary, LGSTX Services, Inc. ("LGSTX") provides for the management of aircraft ground services.
In addition to its aircraft leasing and airline services, the Company offers a range of complementary services to delivery companies, freight forwarders, airlines and government customers. These include aircraft maintenance and modification services, aircraft parts supply, equipment maintenance services and load transfer and package sorting services.
Basis of Presentation
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with GAAP and such principles are applied on a basis consistent with the financial statements reflected in our 2022 Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring


adjustments, necessary for the fair presentation of the Company's results of operations and financial position for the periods presented. Due to seasonal fluctuations, among other factors common to the air cargo industry, the results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year or any interim period. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. The accounting estimates reflect the best judgment of the management, but actual results could differ materially from those estimates.
The accompanying unaudited condensed consolidated financial statements include the accounts of ATSG and its wholly-owned subsidiaries. Inter-company balances and transactions are eliminated. Investments in affiliates in which the Company has significant influence but does not exercise control are accounted for using the equity method of accounting. Under the equity method, the Company's share of the non-consolidated 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.
Accounting Standards Updates
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" ("ASU 2020-06"). This new standard removes the separation models for convertible debt with cash conversion or beneficial conversion features. It eliminates the "treasury stock" method for convertible instruments and requires application of the “if-converted” method for certain agreements. The Company adopted ASU 2020-06 on January 1, 2022 using the modified retrospective approach which resulted in the following adjustments:
(in thousands)December 31, 2021Adoption of ASU 2020-06January 1, 2022
Balance Sheet line item:
Principal value$(258,750)$ $(258,750)
Unamortized issuance cost$2,889 $ $2,889 
Unamortized discount$24,215 $(24,215)$ 
Convertible Debt$(231,646)$(24,215)$(255,861)
Net deferred tax liability$(217,291)$5,527 $(211,764)
Additional paid-in capital$(1,074,286)$39,559 $(1,034,727)
Retained earnings$(309,430)$(20,871)$(330,301)
After adopting ASU 2020-06, the Company's Convertible Notes due 2024 (as defined and discussed in Note F) are reflected entirely as a liability as the embedded conversion feature is no longer separately presented within stockholders' equity, which also eliminated the non-cash discount. Accordingly, earnings no longer reflect the discount amortization expense which was $6.4 million of interest expense, net of income taxes during 2021. After giving effect for the adoption, the effective interest rate on the Convertible Notes is 1.5%.
ASU 2020-06 requires the application of the more dilutive if-converted method when calculating the impact of the Convertible Notes on earnings per diluted share. The adoption of ASU 2020-06 does not change the accounting treatment of shares to be delivered by the convertible note hedges (see Note F) purchased by the Company that are designed to offset the shares issued to settle its Convertible Notes, which are anti-dilutive and not reflected in earnings per diluted share.




NOTE B—GOODWILL, INTANGIBLES AND EQUITY INVESTMENTS
The carrying amounts of goodwill by reportable segment are as follows (in thousands):
CAMACMI ServicesAll OtherTotal
Carrying value as of December 31, 2022$153,290 $234,571 $8,113 $395,974 
Carrying value as of June 30, 2023$153,290 $234,571 $8,113 $395,974 
The Company's acquired intangible assets are as follows (in thousands):
AirlineAmortizing
CertificatesIntangiblesTotal
Carrying value as of December 31, 2022$9,000 $87,668 $96,668 
Amortization— (5,108)(5,108)
Carrying value as of June 30, 2023$9,000 $82,560 $91,560 
The airline certificates have an indefinite life and therefore are not amortized. The Company amortizes finite-lived intangibles assets, including customer relationship and Supplemental Type Certificates ("STC") intangibles, over 4 to 17 remaining years.
Stock warrants issued to Amazon.com, Inc. (“Amazon”) (see Note C) as an incentive for a subsidiary of Amazon to lease aircraft from the Company are recorded as a lease incentive asset using their fair value at the time that the lessee has met its performance obligations and 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, 2022$79,650 
Amortization(10,541)
Carrying value as of June 30, 2023$69,109 
The Company has a 49% ownership in a joint-venture agreement with Precision Aircraft Solutions, LLC, to develop a passenger-to-freighter conversion program for Airbus A321-200 aircraft. In April of 2022, the Company acquired a 40% ownership interest in the joint-venture company GA Telesis Engine Services, LLC to provide engine tear-down services to harvest and sell engine parts. The Company accounts for its investment in these joint ventures under the equity method of accounting, in which the carrying value of each investment is reduced for the Company's share of the non-consolidated affiliates' operating results.
The carrying value of the joint ventures totaled $21.0 million and $18.9 million at June 30, 2023 and December 31, 2022, respectively, and are reflected in “Other Assets” in the Company’s consolidated balance sheets. The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis in accordance with GAAP. If the Company determines that an other-than-temporary decline in value has occurred, it recognizes an impairment loss, which is measured as the difference between the recorded carrying value and the fair value of the investment. The fair value is generally determined using an income approach based on discounted cash flows or using negotiated transaction values.



NOTE C—SIGNIFICANT CUSTOMERS
Three customers each account for a significant portion of the Company's consolidated revenues. The percentage of the Company's revenues for the Company's three largest customers, for the three and six month periods ending June 30, 2023 and 2022 are as follows:
Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
CustomerPercentage of RevenuePercentage of Revenue
U.S. Department of Defense ("DoD")32%29%30%29%
Amazon 34%34%34%34%
DHL 12%13%13%12%
The accounts receivable from the Company's three largest customers as of June 30, 2023 and December 31, 2022 are as follows (in thousands):
June 30, 2023December 31, 2022
CustomerAccounts Receivable
DoD$64,834 $125,156 
Amazon76,665 86,607 
DHL10,058 19,644 
DoD
The Company is a provider of cargo and passenger airlift services to the DoD. The Company's airlines are eligible to bid for military charter operations for passenger and cargo transportation through contracts awarded by the DoD. The airlines draw from the Company's fleet of Boeing 757 combi, Boeing 777 passenger, Boeing 767 passenger and Boeing 767 freighter aircraft for the DoD operations. The DoD awards flights to U.S. certificated airlines through annual contracts and through temporary "expansion" routes.
DHL
The Company has had long-term contracts with DHL Network Operations (USA), Inc. and its affiliates ("DHL") since August 2003. The Company leases Boeing 767 aircraft to DHL under both long-term and short-term lease agreements. Under a separate 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. As of June 30, 2023, the Company leased 12 Boeing 767 freighter aircraft to DHL comprised of one Boeing 767-200 aircraft and eleven Boeing 767-300 aircraft, with expirations between 2023 and 2028. Further, beginning in third quarter of 2022, the Company began to operate four Boeing 767 aircraft provided by DHL under an additional CMI agreement which currently runs through August of 2027.
Amazon
The Company has been providing freighter aircraft, airline operations and services for cargo handling and logistical support for ASI, successor to Amazon.com Services, Inc., a subsidiary of Amazon, since September 2015. On March 8, 2016, the Company entered into an Air Transportation Services Agreement (the “ATSA”) with ASI, pursuant to which CAM leases Boeing 767 freighter aircraft to ASI. The ATSA also provides for the operation of


aircraft by the Company’s airline subsidiaries, and the management of ground services by LGSTX. As of June 30, 2023, the Company leased 38 Boeing 767 freighter aircraft to ASI with lease expirations between 2023 and 2031.
Amazon Investment Agreement
In conjunction with the execution of the ATSA, the Company and Amazon entered into an Investment Agreement on March 8, 2016 (as amended, the “2016 Investment Agreement”) and a Stockholders Agreement on March 8, 2016. The 2016 Investment Agreement called for the Company to issue warrants in three tranches granting 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 and all of which are now fully vested, granted Amazon the right to purchase approximately 12.81 million ATSG common shares, with the first 7.69 million common shares vesting upon issuance on March 8, 2016, and the remaining 5.12 million common shares vesting as the Company delivered additional aircraft leased under the ATSA. The second tranche of warrants, which were issued and vested on March 8, 2018, granted Amazon the right to purchase approximately 1.59 million ATSG common shares. The third tranche of warrants vested on September 8, 2020, and granted Amazon the right to purchase an additional 0.5 million ATSG common shares to bring Amazon’s ownership, 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 was $9.73 per share, which represents the closing price of ATSG’s common shares on February 9, 2016. Each of the three tranches of warrants were exercisable in accordance with their terms through March 8, 2021 (subject to extension if regulatory approvals, exemptions, authorizations, consents or clearances have not been obtained by such date).
On March 5, 2021, Amazon exercised warrants from the 2016 Investment Agreement for 865,548 shares of ATSG's common stock through a cashless exercise by forfeiting 480,047 warrants from the 2016 Investment Agreement as payment. For the cashless exchange, ATSG shares were valued at $27.27 per share, its volume-weighted average price for the previous 30 trading days immediately preceding March 5, 2021. Also on March 5, 2021, Amazon notified the Company of its intent to exercise warrants from the 2016 Investment agreement for 13,562,897 shares of ATSG's common stock by paying $132.0 million of cash to the Company. This exercise was contingent upon the approval of the DOT, and the expiration or termination of any applicable waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. After receiving all required regulatory approvals and clearances, Amazon remitted the funds to the Company on May 7, 2021, and the Company issued the corresponding shares of ATSG's common stock, completing the warrant exercise.
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 to extend for an additional three years. The Company leased all ten of the 767-300 aircraft in 2020. In conjunction with the commitment for ten additional 767 aircraft leases, extensions of twenty existing Boeing 767 aircraft leases and the ATSA described above, Amazon and the Company entered into another Investment Agreement on December 20, 2018 (the "2018 Investment Agreement"). Pursuant to the 2018 Investment Agreement, the Company issued to Amazon warrants for 14.8 million ATSG common shares of ATSG. This group of warrants will expire if not exercised within seven years from their issuance date, in December of 2025 (subject to extension if regulatory approvals, exemptions, authorizations, consents or clearances have not been obtained by such date). The warrants have an exercise price of $21.53 per share.
On May 29, 2020, ASI 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 delivered in 2021. All twelve of these aircraft leases were for ten-year terms. Pursuant to the 2018 Investment Agreement, as a result of leasing 12 aircraft, Amazon was issued warrants for 7.0 million common shares, all of which have vested. These warrants will expire if not exercised by December 20, 2025 (subject to extension if regulatory approvals, exemptions, authorizations, consents or clearances have not been obtained by such date). The exercise price of these warrants is $20.40 per share.



Issued and outstanding warrants are summarized below as of June 30, 2023:
Common Shares in millions
Exercise priceVestedNon-VestedExpiration
2018 Investment Agreement$21.5314.80.0December 20, 2025
2018 Investment Agreement$20.407.00.0December 20, 2025
Additionally, Amazon can earn additional warrants for up to 2.9 million common shares under the 2018 Investment Agreement by leasing up to five more cargo aircraft from the Company before January 2026. Incremental warrants granted for ASI’s commitment to any such future aircraft leases will have an exercise price based on the volume-weighted average price of the Company's shares during the 30 trading days immediately preceding the contractual commitment for each lease.
For all outstanding warrants vested, Amazon may select a cashless conversion option. Assuming ATSG's stock price at the time of conversion is above the warrant exercise price, Amazon would receive fewer shares in exchange for any warrants exercised under the cashless option by surrendering the number of shares with a market value equal to the exercise price.
The Company resumed repurchases of its own shares during October 2022 in conjunction with the expiration of certain government restrictions stemming from the Coronavirus Aid, Relief and Economic Security Act. As the Company repurchases its own shares, Amazon has the option to sell shares of ATSG's common stock to the Company to maintain its ownership percentage of less than 19.9% of the Company's outstanding shares pursuant to the terms of the 2016 Investment Agreement, as amended. On October 7, 2022, Amazon sold 250,000 shares of ATSG's common stock back to the Company for cash of $5.9 million, pursuant to the terms of the 2016 Investment Agreement, as amended on March 5, 2021. Also on December 16, 2022, Amazon sold 260,000 shares of ATSG's common stock back to the Company for cash of $7.0 million. These transactions resulted in Amazon maintaining its ownership percentage of less than 19.9% of ATSG's outstanding common shares at the time.
The Company’s accounting for the warrants and the sale option have been determined in accordance with the financial reporting guidance for financial instruments. Warrants and the sale option are classified as liabilities and 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 June 30, 2023 and December 31, 2022, the Company's liabilities reflected warrants and Amazon sale options from the 2018 Amazon agreements having a fair value of $1.8 million and $0.7 million, respectively. During the three month and six month periods ended June 30, 2023, the re-measurements of warrants and sale options to fair value resulted in net non-operating losses of $0.3 million and $1.1 million before the effect of income taxes, respectively, compared to net non-operating gains of $0.1 million and $0.1 million in the corresponding periods in 2022.
The Company's earnings in future periods will be impacted by the re-measurements of warrant fair value, sale option fair value, amortizations of the lease incentive asset and the related income tax effects. For income tax calculations, the value and timing of related tax deductions will differ from the guidance described above for financial reporting.

NOTE D—FAIR VALUE MEASUREMENTS
The Company’s money market funds and interest rate swaps are reported on the Company’s consolidated balance sheets at fair values based on market values from comparable transactions. The fair value of the Company’s money market funds, Convertible Notes (as defined in Note F), convertible note hedges and interest rate swaps are based on observable inputs (Level 2) from comparable market transactions.
The fair value of the stock warrant obligations to Amazon resulting from aircraft leased to ASI were determined using a Black-Scholes pricing model which considers various assumptions, including ATSG's common stock price, the volatility of ATSG'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 fair value of the sale option for Amazon to sell back shares to the Company under certain conditions was determined based on future share repurchase scenarios. Judgement was applied to determine the number of shares that would be repurchased by the Company at a certain price and the probability of each scenario. There is uncertainty regarding the future stock price at the time of repurchase which affects the magnitude of the gain or loss recognized (Level 3 inputs).
The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
As of June 30, 2023Fair Value Measurement UsingTotal
 Level 1Level 2Level 3
Assets
Cash equivalents—money market$ $8,139 $ $8,139 
Interest rate swap 1,823  1,823 
Total Assets$ $9,962 $ $9,962 
Liabilities
Sale option— — (1,258)$(1,258)
Stock warrant obligations  (505)(505)
Total Liabilities$ $ $(1,763)$(1,763)

As of December 31, 2022Fair Value Measurement UsingTotal
 Level 1Level 2Level 3
Assets
Cash equivalents—money market$ $4,047 $ $4,047 
Interest rate swap 677  677 
Total Assets$ $4,724 $ $4,724 
Liabilities
Stock warrant obligations  (695)(695)
Total Liabilities$ $ $(695)$(695)
As a result of higher market interest rates compared to the stated interest rates of the Company’s fixed rate debt obligations, the fair value of the Company’s debt obligations, based on Level 2 observable inputs, was approximately $89.8 million less than the carrying value, which was $1,514.7 million at June 30, 2023. As of December 31, 2022, the fair value of the Company’s debt obligations was approximately $48.3 million less than the carrying value, which was $1,464.9 million. The non-financial assets, including goodwill, intangible assets and property and equipment are measured at fair value on a non-recurring basis.



NOTE E—PROPERTY AND EQUIPMENT
The Company's property and equipment consists primarily of cargo aircraft, aircraft engines and other flight equipment. Property and equipment, to be held and used, is summarized as follows (in thousands):
 
 June 30,
2023
December 31,
2022
Flight equipment$3,663,728 $3,506,134 
Ground equipment71,597 70,092 
Leasehold improvements, facilities and office equipment41,917 40,183 
Aircraft modifications and projects in progress680,944 445,633 
4,458,186 4,062,042 
Accumulated depreciation(1,779,206)(1,659,634)
Property and equipment, net$2,678,980 $2,402,408 
CAM owned aircraft with a carrying value of $1,476.4 million and $1,474.6 million that were under lease to external customers as of June 30, 2023 and December 31, 2022, respectively.

NOTE F—DEBT OBLIGATIONS
Debt obligations consisted of the following (in thousands):
 June 30, 2023December 31, 2022
Revolving credit facility670,000 620,000 
Senior notes578,334 578,094 
Convertible notes257,438 256,903 
Other financing arrangements9,610 9,927 
Total debt obligations1,515,382 1,464,924 
Less: current portion(645)(639)
Total long term obligations, net$1,514,737 $1,464,285 
The Company is a party to a syndicated credit agreement (as amended, the "Senior Credit Agreement") which includes the ability to execute term loans and a revolving credit facility. On October 19, 2022, the Company amended the Senior Credit Agreement. This amendment i) increased the aggregate amount of the revolving credit facility from $800 million to $1 billion, ii) extended the maturity date of the agreement from April 6, 2026 to October 19, 2027, iii) replaced LIBOR with SOFR as an interest rate benchmark, iv) reduced the collateral to outstanding loan ratio to 1.15:1.00 from 1.25:1:00, v) permits cash dividends and share repurchases provided the secured leverage ratio is less than 3.00 to 1.00 and the total leverage ratio is less than 3.50 to 1.00, and removed the annual limitation on cash dividends and share repurchases which was $100 million.
The interest rate is a pricing premium added to SOFR based upon the ratio of the Company's debt to its earnings before interest, taxes, depreciation and amortization expenses ("EBITDA") as defined under the Senior Credit Agreement. As of June 30, 2023, the unused revolving credit facility available to the Company at the trailing twelve-month EBITDA level was $418.6 million, and additional permitted indebtedness under the Senior Credit Agreement subject to compliance with other covenants.
On March 1, 2023, the Company entered into an additional revolving credit facility domiciled in Ireland (the "Irish Facility"). The terms and conditions of the Irish Facility are similar to the Senior Credit Agreement in the U.S. The Irish Facility has a maximum capacity of $100.0 million, including a $7.5 million letter of credit sub-facility, and has the ability to be upsized using the same accordion feature that is present in the Senior Credit Agreement. The maturity date of the Irish Facility is the same as the Senior Credit Agreement.


On January 28, 2020, CAM completed a debt offering of $500.0 million in senior unsecured notes (the “Senior Notes”) that were guaranteed by ATSG and certain of its other subsidiaries. The Senior Notes were sold only to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “1933 Act”), and certain investors pursuant to Regulation S under the Securities Act. The Senior Notes are senior unsecured obligations that bear interest at a fixed rate of 4.75% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2020. The Senior Notes will mature on February 1, 2028. The 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. On April 13, 2021, the Company, through a subsidiary, completed its offering of $200.0 million of additional notes ("Additional Notes") under the existing Senior Notes. The Additional Notes are fully fungible with the Senior Notes, treated as a single class for all purposes under the indenture governing the existing notes with the same terms as those of the existing notes (other than issue date and issue price).
During 2022, the Company repurchased Senior Notes having a principal value of $120.0 million in the open market at a 5.5% reducing the Senior Notes carrying value to $578.0 million. The Company recognized a net pre-tax gain of $4.5 million, net of fees, which was recorded under net gain of financial instruments on the income statement during the corresponding period.
The balance of the Senior Notes is net of debt issuance costs of $4.8 million and $5.4 million as of June 30, 2023 and December 31, 2022, respectively. Under the terms of the Senior Credit Agreement, interest rates are adjusted at least quarterly based on the Company's EBITDA, its outstanding debt level and prevailing SOFR or prime rates. At the Company's debt-to-EBITDA ratio as of June 30, 2023, the SOFR-based financing for the revolving credit facility bears a variable interest rate of 6.51%. The Senior Notes do not require principal payments until maturity but prepayments are allowed without penalty beginning February 1, 2025.
The Senior Credit Agreement is collateralized by certain of the Company's Boeing 777, 767 and 757 aircraft. Under the terms of the Senior Credit Agreement, the Company is required to maintain certain collateral coverage ratios set forth in the Senior Credit Agreement. The Senior Credit agreement limits the amount of dividends the Company can pay and the amount of common stock it can repurchase to $100.0 million during any calendar year, provided the Company's total debt to EBITDA ratio is under 3.50 times and the secured debt to EBITDA ratio is under 3.0 times, after giving effect to the dividend or repurchase. The Senior Credit Agreement contains covenants, including a maximum permitted total EBITDA to debt ratio, a fixed charge covenant ratio requirement, and limitations on certain additional indebtedness and on guarantees of indebtedness. The Senior Credit Agreement stipulates events of default, including unspecified events that may have material adverse effects on the Company. If an event of default occurs, the Company may be forced to repay, renegotiate or replace the Senior Credit Agreement.
In September 2017, ATSG 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 each year, beginning April 15, 2018. The Convertible Notes mature on October 15, 2024, unless repurchased or converted in accordance with their terms prior to such date. The Convertible Notes are unsecured indebtedness, subordinated to the Company's existing and future secured indebtedness and other liabilities, including trade payables. Conversion of the Convertible Notes can only occur upon satisfaction of certain conditions and during certain periods, beginning 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 for a cash repurchase price equal to the principal amount of the notes, plus any accrued and unpaid interest.
ATSG has the right to settle the Convertible Notes in cash, ATSG common shares or a combination of cash and ATSG common shares. 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, ATSG 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 ATSG common shares (8.1 million shares) and same strike price ($31.90) that underlie the Convertible Notes. The convertible note hedges are expected to reduce


the potential equity dilution with respect to ATSG's common shares, 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 conversion feature of the Convertible Notes required bifurcation from the principal amount under the applicable accounting guidance. On January 1, 2022 the Company adopted ASU 2020-06 using the modified retrospective approach as discussed in Note A which recombined the value of the previously bifurcated embedded feature with the convertible note and eliminated the discount. The carrying value of the Company's convertible debt is shown below (in thousands):
June 30, 2023December 31, 2022
Principal value, Convertible Senior Notes, due 2024$258,750 $258,750 
Unamortized issuance costs(1,312)(1,847)
Convertible debt$257,438 $256,903 
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 ATSG'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 the average traded market price of the Company's common shares for reporting periods exceeds the strike price.

NOTE G—DERIVATIVE INSTRUMENTS
The Company maintains derivative instruments for protection from fluctuating interest rates. The table below provides information about the Company’s interest rate swaps (in thousands):
  June 30, 2023December 31, 2022
Expiration DateStated
Interest
Rate
Notional
Amount
Market
Value
(Liability)
Notional
Amount
Market
Value
(Liability)
March 31, 20232.425 %  125,625 677 
March 31, 20263.793 %50,000 830   
March 31, 20263.836 %50,000 786   
June 30, 20264.257 %50,000 54   
June 30, 20264.185 %50,000 153   
The outstanding interest rate swaps are not designated as hedges for accounting purposes. The effects of future fluctuations in SOFR interest rates on derivatives held by the Company will result in the recording of unrealized gains and losses into the statement of operations. The Company recorded pre-tax gains on derivatives of $2.1 million and $1.1 million for the three and six month periods ended June 30, 2023, respectively, compared to gains of $1.4 million and $4.1 million for the corresponding periods in 2022. The liability for outstanding derivatives is recorded in other liabilities and in accrued expenses.



NOTE H—COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases property, aircraft, aircraft engines and other types of equipment under operating leases. The Company's airlines operate fifteen freighter aircraft provided by customers and four passenger aircraft leased from external companies. Property leases include hangars, warehouses, offices and other space at certain airports with fixed rent payments and lease terms ranging from one month to nine 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 six months ended June 30, 2023 and 2022, non-cash transactions to recognize right-to-use assets and corresponding liabilities for new leases were $1.0 million and $12.7 million, respectively. Unless the rate implicit in the lease is readily determinable, the Company discounts the lease payments using an estimated incremental borrowing rate at the time of lease commencement. The Company estimates the incremental borrowing rate based on the information available at the lease commencement date, including the rate the Company could borrow for a similar amount, over a similar lease term with similar collateral. The Company's weighted-average discount rate for operating leases at June 30, 2023 and December 31, 2022 was 3.5% and 3.2%, respectively. 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 4.1 years and 4.3 years as of June 30, 2023 and December 31, 2022, respectively.
For the six months ended June 30, 2023 and 2022, cash payments against operating lease liabilities were $13.2 million and $11.0 million, respectively. As of June 30, 2023, the maturities of operating lease liabilities are as follows (in thousands):
Operating Leases
2023$12,754 
202419,998 
202512,931 
20268,482 
20274,210 
2028 and beyond8,650 
Total undiscounted cash payments67,025 
Less: amount representing interest(5,222)
Present value of future minimum lease payments61,803 
Less: current obligations under leases21,771 
Long-term lease obligation$40,032 
Purchase Commitments
The Company has agreements with vendors for the conversion of Boeing 767-300, Airbus A321 and Airbus A330 passenger aircraft into a standard configured freighter aircraft. The conversions primarily consist of the installation of a standard cargo door and loading system. As of June 30, 2023, the Company owned twenty Boeing 767-300 aircraft and nine Airbus A321-200 aircraft that were in or awaiting the modification process. As of June 30, 2023, the Company has agreements to purchase nine more Boeing 767-300 passenger aircraft and seven Airbus A330-300 passenger aircraft through 2024. As of June 30, 2023, the Company's commitments to acquire and convert aircraft totaled $576.6 million, including estimated payments of $150.0 million through the remainder of


2023, with the remaining payments due from 2024 through 2026. Actual conversion payments will be based on the achievement of progress milestones.
Hangar Foam Discharge
On August 7, 2022 the fire suppression system at one of the Company's aircraft maintenance hangars in Wilmington, Ohio malfunctioned and discharged a significant amount of expansive foam. The event impacted employees, three aircraft and equipment in and around the hangar at the time of discharge. The hangar resumed operations after approximately three weeks while the cause of the incident was investigated and the hangar was cleaned and restored. While one aircraft was returned to service, the timeframes needed to return two of the aircraft and related engines to operating condition are not known at this time. The Company maintains insurance for employee claims, remediation expenses, property and equipment damage, customer claims and business interruption subject to customary deductibles and policy limits. The anticipated insurance recoveries related to clean-up expenses, remediation, part repairs and property damages are recorded when receipt is probable. Insurance recoveries in excess of the net book value of the damaged operating assets and for business interruption claims are recorded when all contingencies related to the claim have been resolved.
For the three and six month period ended June 30, 2023 the Company recognized charges in operating income for property damages and repairs, net of recorded insurance recoveries of less than $0.1 million. Through June 30, 2023, the Company has incurred $6.8 million for losses resulting from the incident and recorded $5.8 million for insurance recoveries. Insurance receivables were $3.3 million and $2.8 million as of June 30, 2023 and December 31, 2022, respectively.
Guarantees and Indemnifications
Certain leases and agreements of the Company contain guarantees and indemnification obligations to the lessor, or one or more other parties that are considered reasonable and customary (e.g., use, tax and environmental indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after expiration of the respective lease or agreement.
Other
In addition to the foregoing matters, the Company is also a party to legal proceedings in various federal and state jurisdictions from time to time arising out of the operation of the Company's business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, the Company believes that its ultimate liability, if any, arising from pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to our financial condition or results of operations.
Employees Under Collective Bargaining Agreements
As of June 30, 2023, 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:
AirlineLabor Agreement UnitPercentage of
the Company’s
Employees
ABXInternational Brotherhood of Teamsters5.2%
ATIAir Line Pilots Association9.5%
OAIInternational Brotherhood of Teamsters6.4%
ATIAssociation of Flight Attendants0.8%
OAIAssociation of Flight Attendants6.7%



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 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-sponsored defined benefit pension plans and post-retirement healthcare plans follows below. The accumulated benefit obligation reflects pension benefit obligations based on the actual earnings and service to-date of current employees.
ABX’s net periodic benefit costs for its defined benefit pension plans and post-retirement healthcare plans for the three and six month periods ended June 30, 2023 and 2022, are as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
 Pension PlansPost-Retirement Healthcare PlanPension PlansPost-Retirement Healthcare Plan
 20232022202320222023202220232022
Service cost$ $ $13 $19 $ $ $26 $38 
Interest cost8,631 6,011 33 15 17,262 12,022 66 30 
Expected return on plan assets(10,192)(11,738)  (20,384)(23,476)  
Amortization of net loss4,745 313  11 9,490 626  22 
Net periodic benefit cost (income)$3,184 $(5,414)$46 $45 $6,368 $(10,828)$92 $90 
During the six month period ending June 30, 2023, the Company made contributions to the pension plans of $1.2 million . The Company expects to contribute an additional $0.1 million during the remainder of 2023.

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 June 30, 2023 have been estimated utilizing a rate of 23.9% based upon year-to-date income and projected results for the full year. The recognition of discrete tax items, such as the conversion of employee stock awards, the issuance of stock warrants and other items, have an impact on the effective rate during a period.
As a result of these differences in which expenses and benefits for tax purposes are different than required by GAAP, the Company's effective tax rate for the six months ended June 30, 2023 was 23.8%. The final effective tax rate for the year 2023 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, cash payments for income taxes will be limited through 2025. The Company is required to pay some federal tax due to loss carryforward usage limitations and certain state and local income taxes.

NOTE K—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes the following items by components for the three and six month periods ended June 30, 2023 and 2022 (in thousands):
Defined Benefit PensionDefined Benefit Post-RetirementForeign Currency TranslationTotal
Balance as of March 31, 2022(61,589)(220)(20)(61,829)
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits)313 11  324 
Income Tax (Expense) or Benefit(72)(2) (74)
Other comprehensive income (loss), net of tax241 9  250 
Balance as of June 30, 2022(61,348)(211)(20)(61,579)
Balance as of January 1, 2022
Amounts reclassified from accumulated other comprehensive income:(61,831)(229)(20)(62,080)
Actuarial costs (reclassified to salaries, wages and benefits)626 22  648 
Income Tax (Expense) or Benefit(143)(4) (147)
Other comprehensive income (loss), net of tax483 18  501 
Balance as of June 30, 2022(61,348)(211)(20)(61,579)
Balance as of March 31, 2023(99,713)36 (20)(99,697)
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment  20 20 
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits)4,745   4,745 
Income Tax (Expense) or Benefit(1,080)  (1,080)
Other comprehensive income (loss), net of tax3,665  20 3,685 
Balance as of June 30, 2023(96,048)36  (96,012)
Balance as of January 1, 2023(103,418)36 (20)(103,402)
Other comprehensive income (loss) before reclassifications:
Foreign currency translation adjustment  20 20 
Amounts reclassified from accumulated other comprehensive income:
Actuarial costs (reclassified to salaries, wages and benefits)9,490   9,490 
Income Tax (Expense) or Benefit(2,120)  (2,120)
Other comprehensive income (loss), net of tax7,370  20 7,390 
Balance as of June 30, 2023(96,048)36  (96,012)



NOTE L—STOCK-BASED COMPENSATION
ATSG's Board of Directors has granted stock-based incentive awards to certain employees and directors 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 restricted stock, non-vested stock units with performance conditions, and non-vested stock units with market conditions. 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 grant date. The non-vested stock units will be converted into a number of ATSG common shares depending on the satisfaction of the performance conditions or market conditions at the end of a specified service period, which is typically three years from the grant date. The performance condition awards will be converted into a number of ATSG common shares 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 common shares depending on the appreciation of ATSG common shares compared to the Nasdaq Transportation Index. Directors have been granted time-based awards that vest after a period of twelve months. Under each of the stock-based incentive awards, the restrictions may lapse sooner than the stated settlement period upon (1) the participant's death or disability, (2) an employee participant's qualification for retirement or (3) a change in control, in the case of an employee participant under the 2015 long-term incentive plan, or a business combination, in the case of a director participant under the 2005 or 2015 long-term incentive plan. The Company expects to settle all of the stock unit awards by issuing new ATSG common shares. The table below summarizes award activity for the six months ended June 30, 2023 and 2022:
 Six Months Ended
 June 30, 2023June 30, 2022
 Number of
Awards
Weighted
average
grant-date
fair value
Number of
Awards
Weighted
average
grant-date
fair value
Outstanding at beginning of period929,205 $21.83 978,188 $17.49 
Granted577,598 21.35 283,467 35.44 
Converted(192,028)21.04 (170,560)22.09 
Expired(1,600)22.03 (3,000)40.02 
Forfeited(9,200)25.35 (9,000)26.06 
Outstanding at end of period1,303,975 $21.70 1,079,095 $21.34 
Vested346,565 $9.78 322,156 $9.76 
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 2023 was $20.78, 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 2023 was $23.28. The market condition awards granted in 2023 were valued using a Monte Carlo simulation technique based on daily stock prices over three years and using the following variables:
2023
Risk-free interest rate3.7%
Volatility37.1%
For the six months ended June 30, 2023 and 2022, the Company recorded expense of $4.2 million and $3.9 million respectively, for stock-based incentive awards. At June 30, 2023, there was $16.8 million of unrecognized expense related to the stock-based incentive awards that is expected to be recognized over a weighted-average period of 1.59 years. As of June 30, 2023, none of the awards were convertible, 346,565 units of the directors' time-based awards had vested and none of the outstanding shares of the restricted stock had vested. These awards could result in the issuance of a maximum number of 1,660,525 additional outstanding shares of ATSG's common stock depending on service, performance and market results through December 31, 2025.




NOTE M—COMMON STOCK AND EARNINGS PER SHARE
Earnings per Share
The calculation of basic and diluted earnings per common share is as follows (in thousands, except per share amounts):
Three Months EndedSix Months Ended
June 30,June 30,
 2023202220232022
Numerator:
Earnings from continuing operations - basic$38,022 $54,210 $58,163 $104,006 
Gain from stock warrants revaluation, net of tax$ $(107)$(148)$(50)
Convertible debt interest charge, net of tax$780 $762 $1,556 $1,522 
Earnings from continuing operations - diluted$38,802 $54,865 $59,571 $105,478 
Denominator:
Weighted-average shares outstanding for basic earnings per share70,722 73,980 71,259 73,934 
Common equivalent shares:
Effect of stock-based compensation awards and warrants682 7,358 1,906 7,053 
Effect of convertible debt8,111 8,111 8,111 8,111 
Weighted-average shares outstanding assuming dilution79,515 89,449 81,276 89,098 
Basic earnings per share from continuing operations$0.54 $0.73 $0.82 $1.41 
Diluted earnings per share from continuing operations$0.49 $0.61 $0.73 $1.18 
Basic weighted average shares outstanding for purposes of basic earnings per share are less than the shares outstanding due to 482,010 shares and 375,139 shares of restricted stock for 2023 and 2022, respectively, which are accounted for as part of diluted weighted average shares outstanding in diluted earnings per share.
The determination of diluted earnings per share requires the exclusion of the fair value re-measurement of the stock warrants recorded as a liability (see Note C), if such warrants have an anti-dilutive effect on earnings per share. The dilutive effect of the weighted-average diluted shares outstanding is calculated using the treasury method for periods in which equivalent shares have a dilutive effect on earnings per share. Under this method, the number of diluted shares is determined by dividing the assumed proceeds of the warrants recorded as a liability by the average stock price during the period and comparing that amount with the number of corresponding warrants outstanding.
In conjunction with the offering of the Convertible Notes (see note F), the Company also sold warrants for ATSG common stock, subject to customary anti-dilution adjustments. The amount received for these warrants and recorded in Stockholders' Equity in the Company’s consolidated balance sheets was $38.5 million. These warrants may result in 8.1 million additional shares of common stock, if ATSG's traded market price exceeds the strike price which is $41.35 per share and is subject to certain adjustments under the terms of the warrant transactions.

NOTE N—SEGMENT AND REVENUE INFORMATION
The Company operates in two reportable segments: CAM and ACMI Services. The CAM segment consists of the Company's aircraft and engine leasing operations. The ACMI Services segment consists of the Company's airline operations, including CMI agreements as well as ACMI, charter service and passenger service agreements that the Company has with its customers. The Company's aircraft maintenance services, aircraft modification services, ground services and other support services, are not large enough to constitute 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 EndedSix Months Ended
 June 30,June 30,