Air Methods (AIRM) 10-Q 2013 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ­­­­­­­­                                                                                   June 30, 2013

OR

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

For the transition period from _________________________________________ to _________________________________________        

Commission file number 0-16079

AIR METHODS CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware	84-0915893
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
7301 South Peoria, Englewood, Colorado	80112
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code (303) 792-7400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No  o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated Filer x                                                                                                                           Accelerated Filer o

Non-accelerated Filer o  (Do not check if a smaller reporting company)Smaller reporting company o

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

The number of shares of Common Stock, par value $.06, outstanding as of August 1, 2013, was 38,891,086.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements (unaudited)
		Consolidated Balance Sheets – June 30, 2013 and December 31, 2012	1
		Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012	3
		Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012	4
		Notes to Unaudited Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
	Item 4.	Controls and Procedures	18
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	19
	Item 1A.	Risk Factors	19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
	Item 3.	Defaults upon Senior Securities	19
	Item 4.	Mine Safety Disclosures	19
	Item 5.	Other Information	19
	Item 6.	Exhibits	19
SIGNATURES			20

PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Air Methods Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

(unaudited)

	June 30,			December 31,
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	5,747			3,818
Current installments of notes receivable		455			4
Receivables:
Trade, net (note 4)		222,495			232,929
Refundable income taxes		4,692			3,944
Other		4,233			2,838
Total receivables		231,420			239,711
Inventories		43,347			40,789
Work-in-process on medical interiors and products contracts		3,909			2,335
Assets held for sale		7,004			9,290
Costs and estimated earnings in excess of billings on uncompleted contracts		1,293			585
Prepaid expenses and other (note 6)		16,501			10,273
Total current assets		309,676			306,805
Property and equipment:
Land		251			251
Flight and ground support equipment		486,869			417,303
Aircraft under capital leases		280,024			343,079
Aircraft rotable spare parts		44,360			54,176
Buildings and office equipment		45,560			44,785
		857,064			859,594
Less accumulated depreciation and amortization		(252,365	)		(262,356	)
Net property and equipment		604,699			597,238
Goodwill (note 2)		120,694			120,029
Notes and other receivables, less current installments		111			113
Intangible assets, net of accumulated amortization of $10,586 and $8,019 at June 30, 2013 and December 31, 2012, respectively		64,834			66,817
Other assets		27,461			27,861
Total assets	$	1,127,475			1,118,863

 (Continued)

1

Air Methods Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS, Continued

(Amounts in thousands, except share and per share amounts)

(unaudited)

	June 30,		December 31,
	2013		2012
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable	$	2,616		3,570
Current installments of long-term debt		28,200		23,796
Current installments of obligations under capital leases		31,962		39,343
Accounts payable		16,071		15,847
Deferred revenue		2,094		4,506
Billings in excess of costs and estimated earnings on uncompleted contracts		506		392
Accrued wages and compensated absences		19,354		21,614
Due to third party payers		7,072		6,426
Deferred income taxes		7,471		11,797
Other accrued liabilities		18,268		16,161
Total current liabilities		133,614		143,452
Long-term debt, less current installments		425,751		380,682
Obligations under capital leases, less current installments		156,422		200,337
Deferred income taxes		72,335		61,684
Other liabilities		23,127		33,098
Total liabilities		811,249		819,253
Stockholders’ equity (note 3):
Preferred stock, $1 par value. Authorized 15,000,000 shares, none issued		--		--
Common stock, $.06 par value. Authorized 70,500,000 shares; issued 39,145,353 and 38,967,105 shares at June 30, 2013 and December 31, 2012, respectively; outstanding 38,891,086 and 38,761,462 shares at June 30, 2013 and December 31, 2012, respectively		2,333		2,324
Additional paid-in capital		107,732		104,585
Retained earnings		206,161		192,701
Total stockholders’ equity		316,226		299,610
Total liabilities and stockholders’ equity	$	1,127,475		1,118,863

See accompanying notes to unaudited consolidated financial statements.

2

Air Methods Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended June 30,						Six Months Ended  June 30,
	2013			2012			2013			2012
Revenue:
Patient transport revenue, net of provision for contractual discounts (note 4)	$	258,898			251,131			452,722			447,579
Provision for uncompensated care (note 4)		(109,955	)		(93,937	)		(195,947	)		(162,809	)
Patient transport revenue, net		148,943			157,194			256,775			284,770
Air medical services contract revenue		54,535			56,272			108,993			110,840
Sales of medical interiors and products		4,976			7,516			9,410			14,748
Tourism and charter revenue		15,992			--			26,383			--
Other		1,759			1,498			3,873			2,936
		226,205			222,480			405,434			413,294
Operating expenses:
Flight centers		84,291			78,553			169,443			157,535
Aircraft operations		40,490			36,223			77,953			73,107
Cost of medical interiors and products sold		4,411			5,918			8,956			10,315
Tourism operating expenses		12,160			--			20,001			--
Depreciation and amortization		19,887			20,943			40,009			41,822
Loss (gain) on disposition of assets, net		(233	)		30			208			(211	)
General and administrative		28,767			25,549			57,290			50,424
		189,773			167,216			373,860			332,992
Operating income		36,432			55,264			31,574			80,302
Other income (expense):
Interest expense		(5,177	)		(5,272	)		(9,979	)		(10,865	)
Other, net		328			998			615			1,928
Income before income taxes		31,583			50,990			22,210			71,365
Income tax expense		(12,434	)		(19,577	)		(8,750	)		(27,478	)
Net income	$	19,149			31,413			13,460			43,887
Basic income per common share (note 5)	$	.49			.81			.35			1.14
Diluted income per common share (note 5)	$	.49			.81			.34			1.13
Weighted average number of common shares outstanding – basic		38,882,681			38,577,855			38,857,034			38,479,389
Weighted average number of common shares outstanding – diluted		39,136,155			38,857,575			39,140,492			38,817,633

See accompanying notes to unaudited consolidated financial statements.

3

Air Methods Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

	Six Months Ended June 30,
	2013			2012
Cash flows from operating activities:
Net income	$	13,460			43,887
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		40,009			41,822
Deferred income tax expense		6,775			4,462
Stock-based compensation		2,053			1,039
Tax benefit from exercise of stock options		(527	)		(1,626	)
Loss (gain) on disposition of assets, net		208			(211	)
Unrealized loss on derivative instrument		140			242
Changes in assets and liabilities, net of effects of acquisitions:
Decrease (increase) in prepaid expenses and other current assets		(9,826	)		8,864
Decrease (increase) in receivables		8,335			(37,555	)
Increase in inventories		(4,132	)		(3,112	)
Decrease (increase) in costs in excess of billings		(708	)		739
Increase (decrease) in accounts payable, other accrued liabilities, and other liabilities		(2,748	)		16,770
Decrease in deferred revenue and billings in excess of costs		(2,298	)		(1,846	)
Net cash provided by operating activities		50,741			73,475
Cash flows from investing activities:
Acquisition of OF Air Holdings Corporation		--			(3,176	)
Acquisition of property and equipment		(17,310	)		(2,573	)
Buy-out of previously leased aircraft		(36,568	)		(36,686	)
Proceeds from disposition and sale of equipment and assets held for sale		10,964			27,901
Decrease (increase) in notes receivable and other assets		(2,303	)		187
Net cash used in investing activities		(45,217	)		(14,347	)

 (Continued)

4

Air Methods Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(Amounts in thousands)

(unaudited)

	Six Months Ended June 30,
	2013			2012
Cash flows from financing activities:
Proceeds from issuance of common stock, net	$	576			3,872
Tax benefit from exercise of stock options		527			1,626
Borrowings under line of credit		44,370			58,738
Payments under line of credit		(73,527	)		(40,008	)
Payments for financing costs		(168	)		(62	)
Proceeds from long-term debt		90,400			--
Payments of long-term debt and notes payable		(11,770	)		(8,357	)
Payments of capital lease obligations		(54,003	)		(50,779	)
Net cash used in financing activities		(3,595	)		(34,970	)
Increase in cash and cash equivalents		1,929			24,158
Cash and cash equivalents at beginning of period		3,818			3,562
Cash and cash equivalents at end of period	$	5,747			27,720
Interest paid in cash during the period	$	9,509			10,603
Income taxes paid in cash during the period	$	2,239			2,960

Non-cash investing and financing activities:

In the six months ended June 30, 2013, the Company entered into notes payable of $2,616 to finance the purchase of aircraft which were held in property and equipment pending permanent lease financing as of June 30, 2013, and into capital leases of $2,707 to finance the purchase of aircraft. The Company also settled notes payable of $3,570 in exchange for the aircraft securing the debt.

In the six months ended June 30, 2012, the Company entered into notes payable of $3,022 to finance the purchase of aircraft which were held in property and equipment pending permanent lease financing as of June 30, 2012, and into capital leases of $38,544 to finance the purchase of aircraft. The Company also settled notes payable of $27,940 in exchange for the aircraft securing the debt.

See accompanying notes to unaudited consolidated financial statements.

5

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(unaudited)

(1)           Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the unaudited condensed consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2012.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company considers its critical accounting policies involving more significant judgments and estimates to be those related to revenue recognition, deferred income taxes, valuation of long-lived assets, and fair values of assets acquired and liabilities assumed in business combinations. Actual results could differ from those estimates.

(2)           Acquisition of Sundance Helicopters, Inc.

On December 31, 2012, the Company acquired all of the outstanding common stock of Sundance Helicopters, Inc., and all of the aircraft owned by two affiliated entities (collectively, Sundance) for a purchase price of approximately $46.3 million, subject to final determination of certain working capital adjustments, as defined in the agreement, as of the acquisition date. In addition, the purchase agreement also provides for an additional amount to be paid to the sellers if certain aircraft maintenance expense targets are achieved. In the first quarter of 2013, the Company revised its estimate of the increase to the purchase price for both of these adjustments to $843,000, compared to $906,000 estimated as of December 31, 2012. The final calculation of amounts due under these provisions is subject to review by the sellers, and payment of any additional amounts due is expected to be made in the third quarter of 2013. The purchase price was financed primarily through borrowings under the Company’s Amended and Restated Revolving Credit, Term Loan and Security Agreement.

The allocation of the purchase price was as follows (amounts in thousands):

	Allocation at December 31, 2012		Adjustments			Revised Allocation
Aircraft	$	34,420		--			34,420
Amortizable intangible assets		5,735		(593	)		5,142
Goodwill		3,509		665			4,174
Other equipment		901		--			901
Deferred tax asset		1,286		450			1,736
Working capital accounts, net		1,379		(585	)		794
Purchase price	$	47,230		(63	)		47,167

The Company is still evaluating the aircraft spare parts inventory, verifying open repair orders with aircraft parts vendors and other liabilities relating to pre-acquisition events, and reviewing accounts receivable for collectibility. Therefore, the allocation of the purchase price is still subject to adjustment.

6

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(3)           Stockholders’ Equity

Changes in stockholders’ equity for the six months ended June 30, 2013, consisted of the following (amounts in thousands except share amounts):

	Shares
	Outstanding		Amount
Balances at January 1, 2013		38,761,462	$	299,610
Issuance of common shares for options exercised		69,251		576
Stock-based compensation		60,373		2,053
Tax benefit from exercise of stock options		--		527
Net income		--		13,460
Balances at June 30, 2013		38,891,086	$	316,226

 (4)           Revenue Recognition

Trade receivables are presented net of allowances for contractual discounts and uncompensated care. The Company determines its allowances for contractual discounts and uncompensated care based on estimated payer mix, payer reimbursement schedules, and historical collection experience. The allowances are reviewed monthly and adjusted periodically based on actual collections. Billings are charged off against the uncompensated care allowance when it is probable that the receivable will not be recovered. The allowance for contractual discounts is related primarily to Medicare and Medicaid patients. The allowance for uncompensated care is related primarily to receivables recorded for self-pay patients.

The Company has not changed its discount policies related to self-pay patients or deductible and copayment balances for insured patients during either 2013 or 2012. The allowance for uncompensated care was 44.9% of receivables from non-governmental payers as of June 30, 2013, compared to 40.1% at December 31, 2012, and 39.3% at June 30, 2012. The increase in the allowance percentage in 2013 compared to 2012 reflects a deterioration in the payer mix.

The Company recognizes patient transport revenue at its standard rates for services provided, regardless of expected payer. In the period that services are provided and based upon historical experience, the Company records a significant provision for uncompensated care related to uninsured patients who will be unable or unwilling to pay for the services provided and a provision for contractual discounts related to Medicare and Medicaid transports. Air medical services contract revenue consists of monthly fees and hourly flight fees billed to hospitals or other institutions under exclusive operating agreements. These fees are earned regardless of when, or if, the institution is reimbursed for these services by its patients, their insurers, or the federal government. As a result, the Company does not maintain an allowance or provision for uncompensated care for air medical services contract revenue and related receivables. Patient transport revenue, net of provision for contractual discounts but before provision for uncompensated care, by major payer class, was as follows (amounts in thousands):

	For quarter ended June 30,				For six months ended June 30,
	2013		2012		2013		2012
Third-party payers	$	196,163		196,825		339,003		344,649
Self-pay		62,735		54,306		113,719		102,930
Total	$	258,898		251,131		452,722		447,579

7

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(5)           Income per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by all common shares outstanding during the period and dilutive potential common shares.

The reconciliation of basic to diluted weighted average common shares outstanding is as follows:

	2013		2012
For quarter ended June 30:
Weighted average number of common shares outstanding – basic		38,882,681		38,577,855
Dilutive effect of:
Common stock options		208,773		259,839
Unvested restricted stock		44,701		19,881
Weighted average number of common shares outstanding – diluted		39,136,155		38,857,575
For six months ended June 30:
Weighted average number of common shares outstanding – basic		38,857,034		38,479,389
Dilutive effect of:
Common stock options		236,134		320,412
Unvested restricted stock		47,324		17,832
Weighted average number of common shares outstanding – diluted		39,140,492		38,817,633

Common stock options totaling 45,000 were not included in the diluted shares outstanding for the quarter ended June 30, 2013, because their effect would have been anti-dilutive. Common stock options totaling 1,800 were not included in the diluted shares outstanding for the quarter and six months ended June 30, 2012, because their effect would have been anti-dilutive. Historical share amounts in this footnote have been adjusted to reflect the impact of a three-for-one stock split effected in December 2012.

 (6) Fair Value of Financial Instruments

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosures about how fair value is determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be grouped based on the type of inputs used in measuring fair value as follows:

Level 1:	quoted prices in active markets for identical assets or liabilities;
Level 2:	quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
Level 3:	unobservable inputs, such as discounted cash flow models or valuations.

In the first quarter of 2012, the Company adopted Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable, and accrued liabilities:

The carrying amounts approximate fair value because of the short maturity of these instruments.

8

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(6) Fair Value of Financial Instruments, continued

Derivative instruments:

The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through the use of short-term purchased call options. Financial derivative instruments covering fuel purchases are included in prepaid expenses and other current assets at fair value. Fair value is determined based on quoted prices in active markets for similar instruments and is classified as Level 2 in the fair value hierarchy. The fair value of all fuel derivative instruments included in prepaid expenses and other current assets was $4,000 at June 30, 2013 and $0 at December 31, 2012. The Company’s financial derivatives do not qualify for hedge accounting, and, therefore, realized and non-cash mark to market adjustments are included in aircraft operations expense in the Company’s statement of income. Aircraft operations expense included non-cash mark to market derivative losses of $23,000 and $140,000 for the quarter and six months ended June 30, 2013, respectively, compared to non-cash mark to market losses of $269,000 and $242,000 for the quarter and six months ended June 30, 2012, respectively. There were no cash settlements under the terms of the agreements in 2013 or  2012.

Long-term debt:

The fair value of long-term debt is classified as Level 3 in the fair value hierarchy because it is determined based on the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent in those cash flows. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities and on recent transactions, the fair value of long-term debt as of June 30, 2013, is estimated to be $454,954,000, compared to carrying value of $453,951,000. The fair value of long-term debt as of December 31, 2012, was estimated to be $406,856,000, compared to a carrying value of $404,478,000.

 (7) Business Segment Information

Summarized financial information for the Company’s operating segments is shown in the following table (amounts in thousands). Amounts in the “Corporate Activities” column represent corporate headquarters expenses, corporate income tax expense, and results of insignificant operations. Effective September 1, 2012, the Company combined two of its operating segments, Community-Based Services (CBS) and Hospital-Based Services (HBS), into a single operating segment reporting to the President of Air Medical Services. The decision to combine CBS and HBS delivery models for air medical transportation services was made in order to improve efficiency and communication between regional management. In addition, with increasing conversion of HBS contracts into CBS operations and the development of alternative delivery models in partnering with hospitals to provide air medical transportation services, the lines between the two delivery models have become less distinct.CBS and HBS segment results for prior periods have been combined in the following table to reflect the new segment definition. The Company does not allocate assets between all operating segments for internal reporting and performance evaluation purposes. Operating segments and their principal products or services are as follows:

● Air Medical Services (AMS) - provides air medical transportation services to the general population as an independent service and to hospitals or other institutions under exclusive operating agreements. Services include aircraft operation and maintenance, medical care, dispatch and communications, and medical billing and collection.

● United Rotorcraft (UR) Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers.

● Tourism – provides helicopter tours and charter flights, primarily focusing on Grand Canyon tours. Segment was established with the acquisition of Sundance in December 2012.

9

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(7)           Business Segment Information, continued

For quarter ended June 30:	AMS			UR			Tourism			Corporate Activities			Intersegment Eliminations			Consolidated
2013
External revenue	$	205,241			4,910			15,992			62			--			226,205
Intersegment revenue		--			2,530			--			--			(2,530	)		--
Total revenue		205,241			7,440			15,992			62			(2,530	)		226,205
Operating expenses, excluding depreciation & amortization		(143,613	)		(6,912	)		(13,932	)		(7,878	)		2,449			(169,886	)
Depreciation & amortization		(18,325	)		(433	)		(729	)		(400	)		--			(19,887	)
Interest expense		(4,198	)		--			(273	)		(706	)		--			(5,177	)
Other income, net		289			--			--			39			--			328
Income tax expense		--			--			--			(12,434	)		--			(12,434	)
Segment net income (loss)	$	39,394			95			1,058			(21,317	)		(81	)		19,149
2012
External revenue	$	214,984			7,450			--			46			--			222,480
Intersegment revenue		--			3,779			--			--			(3,779	)		--
Total revenue		214,984			11,229			--			46			(3,779	)		222,480
Operating expenses, excluding depreciation & amortization		(131,420	)		(9,517	)		--			(8,825	)		3,489			(146,273	)
Depreciation & amortization		(20,249	)		(358	)		--			(336	)		--			(20,943	)
Interest expense		(5,150	)		--			--			(122	)		--			(5,272	)
Other income, net		968			--			--			30			--			998
Income tax expense		--			--			--			(19,577	)		--			(19,577	)
Segment net income (loss)	$	59,133			1,354			--			(28,784	)		(290	)		31,413

For six months ended June 30:
2013
External revenue	$	369,647		9,331		26,383		73		--		405,434
Intersegment revenue		--		4,301		--		--		(4,301	)	--
Total revenue		369,647		13,632		26,383		73		(4,301	)	405,434
Operating expenses, excluding depreciation & amortization		(284,674	)	(13,210	)	(23,419	)	(16,580	)	4,032		(333,851	)
Depreciation & amortization		(37,034	)	(858	)	(1,318	)	(799	)	--		(40,009	)
Interest expense		(8,204	)	--		(493	)	(1,282	)	--		(9,979	)
Other income, net		543		--		--		72		--		615
Income tax expense		--		--		--		(8,750	)	--		(8,750	)
Segment net income (loss)	$	40,278		(436	)	1,153		(27,266	)	(269	)	13,460
2012
External revenue	$	398,577		14,671		--		46		--		413,294
Intersegment revenue		--		13,545		--		--		(13,545	)	--
Total revenue		398,577		28,216		--		46		(13,545	)	413,294
Operating expenses, excluding depreciation & amortization		(264,177	)	(21,059	)	--		(16,513	)	10,579		(291,170	)
Depreciation & amortization		(40,502	)	(667	)	--		(653	)	--		(41,822	)
Interest expense		(10,550	)	(1	)	--		(314	)	--		(10,865	)
Other income, net		1,858		--		--		70		--		1,928
Income tax expense		--		--		--		(27,478	)	--		(27,478	)
Segment net income (loss)	$	85,206		6,489		--		(44,842	)	(2,966	)	43,887

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ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning the integration of Sundance; our possible or assumed future results; flight volume and collection rates for patient transports; size, structure and growth of our air medical services and products markets; continuation and/or renewal of air medical services contracts; acquisition of new and profitable UR Division contracts; impact of the Patient Protection and Affordable Care Act and other changes in laws and regulations; and other matters. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report, as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements.

Overview

We provide air medical transportation services throughout the United States and design, manufacture, and install medical aircraft interiors and other aerospace products for domestic and international customers. We also provide tourism operations in the Grand Canyon and Las Vegas areas. Our divisions, or business segments, are organized according to the type of service or product provided and consist of the following:

● Air Medical Services (AMS) - provides air medical transportation services to the general population as an independent service (also called community-based services) and to hospitals or other institutions under exclusive operating agreements (also called hospital-based services). Patient transport revenue consists of flight fees billed directly to patients, their insurers, or governmental agencies, and cash flow is dependent upon collection from these individuals or entities.Air medical services contract revenue consists of fixed monthly fees (approximately 80% of total contract revenue) and hourly flight fees (approximately 20% of total contract revenue) billed to hospitals or other institutions. In the first six months of 2013, the AMS Division generated 91% of our total revenue, compared to 96% in the first six months of 2012.

● United Rotorcraft (UR) Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers. The UR Division generated 2% of our total revenue in the six months ended June 30, 2013, compared to 4% in 2012.

● Tourism Division – provides helicopter tours and charter flights, primarily focusing on Grand Canyon tours. The division was started with the acquisition of Sundance Helicopters, Inc., (Sundance) in December 2012. In the six months ended June 30, 2013, the Tourism Division generated 7% of our total revenue.

See Note 7 to the consolidated financial statements included in Item 1 of this report for operating results by segment.

We believe that the following factors have the greatest impact on our results of operations and financial condition:

● Flight volume. Almost all patient transport and tourism revenue and approximately 20% of AMS contract revenue are derived from flight fees. By contrast, 82% of our costs primarily associated with flight operations (including salaries, aircraft ownership costs, hull insurance, and general and administrative expenses) incurred during the first six months of 2013 are mainly fixed in nature. While flight volume is affected by many factors, including competition and the effectiveness of marketing and business development initiatives, the greatest single variable in quarterly comparatives has historically been weather conditions. Adverse weather conditions—such as fog, high winds, or heavy precipitation—hamper our ability to operate our aircraft safely and, therefore, result in reduced flight volume. Total patient transports for community-based locations were approximately 13,800 and 25,700 for the quarter and six months ended June 30, 2013, respectively, compared to approximately 15,100 and 27,800 for the quarter and six months ended June 30, 2012, respectively. Patient transports for community-based locations open longer than one year (Same-Base Transports) were approximately 13,000 and 24,300 in the quarter and six months ended June 30, 2013, respectively, compared to approximately 14,700 and 27,100 in the quarter and six months ended June 30, 2012, respectively. Cancellations due to unfavorable weather conditions for community-based locations open longer than one year were 883 and 1,310 higher in the quarter and six months ended June 30, 2013, compared to 2012. Requests for community-based services decreased by 6.7% and 6.5% for the quarter and six months ended June 30, 2013, respectively, for bases open greater than one year. Extreme weather conditions may cause a reduction in flight demand as well as in the number of completed flights.

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● Reimbursement per transport. We respond to calls for air medical transports without pre-screening the creditworthiness of the patient and are subject to collection risk for services provided to insured and uninsured patients. Medicare and Medicaid also receive contractual discounts from our standard charges for flight services. Patient transport revenue is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. Net reimbursement per patient transport is primarily a function of price, payer mix, and timely and effective collection efforts. Both the pace of collections and the ultimate collection rate are affected by the overall health of the U.S. economy, which impacts the number of indigent patients and funding for state-run programs, such as Medicaid. Medicaid reimbursement rates in many jurisdictions have remained well below the cost of providing air medical transportation. In addition, the collection rate is impacted by changes in the cost of healthcare and health insurance; as the cost of healthcare increases, health insurance coverage provided by employers may be reduced or eliminated entirely, resulting in an increase in the uninsured population. Most of the significant provisions of the Patient Protection and Affordable Care Act are not scheduled to take effect until 2014, and the impact on our reimbursement rates is, therefore, unknown. Net reimbursement per transport increased 3.6% in the first quarter of 2013 anddecreased 2.5% in the six months ended June 30, 2013, compared to 2012, attributed to a change in payer mix, described below. Provisions for contractual discounts and estimated uncompensated care related to patient transport revenue are as follows:

	For quarters ended June 30,						For six months ended  June 30,
	2013			2012			2013			2012
Gross billings		100	%		100	%		100	%		100	%
Provision for contractual discounts		46	%		43	%		47	%		44	%
Provision for uncompensated care		23	%		21	%		23	%		20	%

Although price increases generally increase the net reimbursement per transport from insurance payers, the amount per transport collectible from private patient payers, Medicare, and Medicaid does not increase proportionately with price increases. Therefore, depending upon overall payer mix, price increases will usually result in an increase in the percentage of uncollectible accounts. The number of transports covered by insurance decreased from 34.0% and 33.9% of total transports for the quarter and six months ended June 30, 2012, respectively, to 31.9% and 32.3% of total transports for the quarter and six months ended June 30, 2013, respectively, with most of the decrease moving to Medicare. Although we have not yet experienced significant increased limitations in the amount reimbursed by insurance companies, continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our standard rates.

● Aircraft maintenance. AMS and Tourism operations are directly affected by fluctuations in aircraft maintenance costs. Proper operation of the aircraft by flight crews and standardized maintenance practices can help to contain maintenance costs. Increases in spare parts prices from original equipment manufacturers tend to be higher for aircraft which are no longer in production. Two models of aircraft within our fleet, representing 14% of the rotor wing fleet, are no longer in production and are, therefore, susceptible to price increases which outpace general inflationary trends. In addition, on-condition components are more likely to require replacement with age. Since January 1, 2012, we have taken delivery of eight new aircraft and have commitments to take delivery of 48 additional aircraft through the end of 2015. We have replaced discontinued models and other older aircraft with the new aircraft, as well as provided capacity for base expansion. Replacement models of aircraft typically have higher ownership costs than the models targeted for replacement but lower maintenance costs. Total aircraft maintenance expense, excluding maintenance on Sundance aircraft, increased 16.0% and 8.6% for the quarter and six months ended June 30, 2013, compared to the quarter and six months ended June 30, 2012, respectively. Total flight hours for AMS operations decreased 9.4% and 7.3% for the quarter and six months ended June 30, 2013, respectively, compared to 2012. The increase in maintenance costs is primarily attributable to higher engine overhaul costs on one model of aircraft mostly due to erosion damage and to a greater number of heavy airframe inspections on two models of aircraft due to timing of inspection events driven by hours flown and age of aircraft.

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● Competitive pressures from low-cost providers. We are recognized within the industry for our standard of service and our use of cabin-class aircraft. Many of our competitors utilize aircraft with lower ownership and operating costs and do not require a similar level of experience for aviation and medical personnel. Reimbursement rates established by Medicare, Medicaid, and most insurance providers are not contingent upon the type of aircraft used or the experience of personnel. However, we believe that higher quality standards help to differentiate our service from competitors and, therefore, lead to higher utilization.

● Employee recruitment and relations. The ability to deliver quality services is partially dependent upon our ability to hire and retain employees who have advanced aviation, nursing, and other technical skills. In addition, hospital contracts typically contain minimum certification requirements for pilots and mechanics. Employees who meet these standards are in great demand and are likely to remain a limited resource in the foreseeable future. Our AMS pilots are represented by a collective bargaining unit and are covered under a collective bargaining agreement which is effective through December 31, 2013. Other employee groups may also elect to be represented by unions in the future.

Results of Operations

We reported net income of $19,149,000 and $13,460,000 for the quarter and six months ended June 30, 2013, respectively, compared to $31,413,000 and $43,887,000 for the quarter and six months ended June 30, 2012, respectively. The results for 2013 include the impact of the Sundance acquisition which closed in December 2012. Same-Base Transports were 11.7% and 10.3% lower in the quarter and six months ended June 30, 2013, compared to 2012, while net reimbursement per patient transport increased 3.6% in the first quarter of 2013 but decreased 2.5% in the six months ended June 30, 2013, compared to 2012, primarily as a result of a change in payer mix.

Air Medical Services

Patient transport revenue is recorded net of provisions for contractual discounts and uncompensated care and decreased $8,251,000, or 5.2%, and $27,995,000, or 9.8%, for the quarter and six months ended June 30, 2013, compared to 2012, for the following reasons.

● Increase of 3.6% and decrease of 2.5% in net reimbursement per transport for the quarter and six months ended June 30, 2013, respectively, compared to 2012, due to the benefit of recent price increases net of the deterioration in payer mix described above.

● Decreases of 1,718, or 11.7%, and 2,799, or 10.3%, in Same-Base Transports for the quarter and six months ended June 30, 2013, respectively, compared to 2012. Cancellations due to unfavorable weather conditions for bases open longer than one year were 883 and 1,310 higher in the quarter and six months ended June 30, 2013, respectively, compared to 2012. Requests for community-based services decreased by 6.7% and 6.5% for the quarter and six months ended June 30, 2013, respectively, for bases open greater than one year.

● Incremental net revenue of $9,224,000 and $13,719,000 for the quarter and six months ended June 30, 2013, respectively, generated from the addition of eighteen new bases, including three bases resulting from the conversion of AMS contract customers to community-based operations, during or subsequent to the first six months of 2012.

● Closure of nine bases during or subsequent to the first six months of 2012, due to insufficient flight volume, resulting in decreases in net revenue of approximately $3,225,000 and $5,506,000 during the quarter and six months ended June 30, 2013, respectively.

Air medical services contract revenue decreased $1,737,000, or 3.1%, and $1,847,000, or 1.7%, for the quarter and six months ended June 30, 2013, compared to 2012, for the following reasons:

● Cessation of service under eight contracts and the conversion of two contracts to community-based operations during or subsequent to the first six months of 2012, resulting in decreases in net revenue of approximately $4,244,000 and $8,689,000 for the quarter and six months ended June 30, 2013, respectively.

● Incremental net revenue of $2,449,000 and $6,434,000 for the quarter and six months ended June 30, 2013, generated from the addition of three new AMS contracts and the expansion under five contracts to additional bases of operation during or subsequent to the first six months of 2012.

● Decreases of 11.4% and 9.2% in flight volume for the quarter and six months ended June 30, 2013, respectively, for all contracts excluding new contracts, contract expansions, and closed contract described above.

● Annual price increases in the majority of contracts based on stipulated contractual increases or changes in the Consumer Price Index or spare parts prices from aircraft manufacturers.

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Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $5,738,000, or 7.3%, and $11,908,000, or 7.6%, for the quarter and six months ended June 30, 2013, respectively, compared to 2012, for the following reasons:

● Increases of approximately $5,617,000 and $10,350,000 for the quarter and six months ended June 30, 2013, respectively, for the addition of personnel to staff new base locations described above.

● Decreases of approximately $2,844,000 and $5,456,000 for the quarter and six months ended June 30, 2013, respectively, due to the closure of base locations described above.

● Increases in salaries for merit pay raises.

Aircraft operating expenses increased $4,267,000, or 11.8%, and $4,846,000, or 6.6%, for the quarter and six months ended June 30, 2013, respectively, compared to 2012. Aircraft operating expenses consist of fuel, insurance, and maintenance costs and generally are a function of the size of the fleet, the type of aircraft flown, and the number of hours flown. The change in costs is due to the following:

● Increases in AMS aircraft maintenance expense of $3,838,000, or 16.0%, to $27,865,000 for the second quarter of 2013 and $4,349,000, or 8.6%, to $54,950,000 for the six months ended June 30, 2013, compared to the prior year. Total AMS flight volume decreased 9.4% and 7.3% for the quarter and six months ended June 30, 2013, respectively, compared to prior year. Costs incurred for engine overhauls on two models of aircraft increased by approximately $2.2 million and $3.8 million in the quarter and six months ended June 30, 2013, compared to 2012, primarily due to erosion damage. We expect to mitigate the impact of erosion with the installation of engine barrier filters as operations permit. In addition, during the quarter and six months ended June 30, 2013, compared to 2012, we had nearly three times as many heavy airframe inspections on two models of aircraft due to timing of inspection events driven by hours flown and age of aircraft.

● Increases of approximately 1.8% and 9.4% in the cost of aircraft fuel per hour flown for AMS for the quarter and six months ended June 30, 2013, respectively. Total AMS fuel costs decreased $553,000 to $6,637,000 and $196,000 to $12,490,000 for the quarter and six months ended June 30, 2013, respectively, compared to 2012. During both 2013 and 2012 we had commodity call options to protect against aircraft fuel price increases greater than 20%, covering approximately 75% of our anticipated fuel consumption for 2013 and essentially all of our fuel consumption for 2012. Fuel expense included non-cash mark to market derivative losses of $23,000 and $140,000 for the quarter and six months ended June 30, 2013, respectively, compared to losses of $269,000 and $242,000 for the quarter and six months ended June 30, 2012, respectively. We received no cash settlements under the agreements in either 2013 or 2012. Excluding the impact of the fuel derivative agreements, the cost of aircraft fuel per hour flown increased 5.4% and 10.3% in the quarter and six months ended June 30, 2013, respectively.

● Expense of $2,000,000 for the quarter and six months ended June 30, 2013, related to hull and liability insurance retention. The retention exposure was triggered by hull claims incurred during the second quarter of 2013.

Medical Interiors and Products

Medical interiors and products revenue decreased $2,540,000, or 33.8%, and $5,338,000, or 36.2%, for the quarter and six months ended June 30, 2013, respectively, compared to 2012. Significant projects in process during 2013 included work under two contracts to produce a total of 53 multi-mission interiors for the U.S. Army’s HH-60M helicopter and three aircraft interiors for commercial customers. Revenue by product line for the quarter and six months ended June 30, 2013, was as follows:

● $3,183,000 and $5,992,000 – governmental entities

● $1,793,000 and $3,418,000 – commercial customers

Significant projects in process during 2012 included fifty multi-mission interiors for the U.S. Army’s HH-60M helicopter and eight aircraft interior kits for commercial customers. Revenue by product line for the quarter and six months ended June 30, 2012, was as follows:

● $3,199,000 and $6,232,000 – governmental entities

● $4,317,000 and $8,516,000 – commercial customers

Cost of medical interiors and products decreased $1,507,000, or 25.5%, and $1,359,000, or 13.2%, for the quarter and six months ended June 30, 2013, respectively, as compared to the prior year, due primarily to the decrease in sales volume. This impact was offset in part by warranty costs of $394,000 and $857,000 for the quarter and six months ended June 30, 2013, respectively, related to previously installed aircraft interiors. Cost of medical interiors and products also includes certain fixed costs, such as administrative salaries and facilities rent, which do not vary with volume of sales and which are absorbed by both projects for external customers and interdivisional projects.

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Tourism

Tourism and charter revenue totaled $15,992,000 and $26,383,000 for the quarter and six months ended June 30, 2013, respectively, and consists of fees earned for the transport of passengers primarily for tours of the Grand Canyon. During the quarter and six months ended June 30, 2013, we transported approximately 62,400 and 102,200 passengers, respectively, on tourism flights. Due to weather and traditional vacation schedules, flight volume for tourist operations tends to be lower during the first quarter than during the remaining quarters of the year. Based upon pre-acquisition Sundance flight data, approximately 60% of annual revenue from tourism operations has been earned during the second and third quarters of a calendar year.

Tourism operating expenses consist primarily of pilot and mechanic salaries and benefits; aircraft maintenance, fuel, and insurance; landing fees; commissions; and cost of tour amenities. Expenses totaled $12,160,000 and $20,001,000 for the quarter and six months ended June 30, 2013, respectively, and typically vary with passenger count, flight volume, and number and type of aircraft. Based on pre-acquisition operating results for Sundance, tourism operating expenses have historically averaged approximately 75% of tourism and charter revenue.

General Expenses

Depreciation and amortization expense decreased $1,056,000, or 5.0%, and $1,813,000, or 4.3%, for the quarter and six months ended June 30, 2013, compared to 2012. Since March 31, 2012, we have bought out 72 aircraft which were previously leased under capital lease obligations and which had total depreciable basis of $123 million. Aircraft under capital leases are amortized over the terms of the underlying leases with no assigned salvage value. Aircraft which are owned directly are depreciated over a 25-year life, based on the year of manufacture, with a 25% salvage value. As a result, the buyout of aircraft from capital lease obligations contributed to a decrease in depreciation in 2013. The decrease was offset in part by $729,000 and $1,318,000 in depreciation and amortization related to Sundance’s assets during the quarter and six months ended June 30, 2013, respectively.

General and administrative (G&A) expenses increased $3,218,000, or 12.6%, and $6,866,000, or 13.6%, for the quarter and six months ended June 30, 2013, respectively, compared to 2012. G&A expenses include executive management, legal, accounting and finance, billing and collections, information services, human resources, aviation management, pilot training, dispatch and communications, AMS program administration, and Tourism customer service and reservations. Total G&A expenses related to Sundance operations were $1,775,000 and $3,421,000 for the quarter and six months ended June 30, 2013, respectively. Excluding the impact of Sundance, G&A expenses increased 5.6% and 6.8% in the quarter and six months ended June 30, 2013, respectively, compared to 2012, reflecting certain business development and government relations initiatives and increases in salaries. In addition, board of directors compensation increased $202,000 and $720,000 in the quarter and six months ended June 30, 2013. These increases were offset in part by decreases of $2,668,000 and $4,173,000 in incentive compensation accruals related to our financial performance during the quarter and six months ended June 30, 2013, respectively, compared to 2012.

Interest expense decreased $95,000, or 1.8%, and $886,000, or 8.2%, for the quarter and six months ended June 30, 2013, compared to 2012, primarily due to the retirement of $37.4 million in capital lease obligations subsequent to March 31, 2012, and to regularly scheduled payments of long-term debt and capital lease obligations. The weighted average effective interest rate on retired capital lease obligations was approximately 4.6%. The resulting decrease in interest expense was offset in part by an additional $100 million term loan under our senior credit facility originated in December 2012, new term loans originated during 2013 totaling $90.4 million, and average balances of $46.3 million and $57.7 million against our line of credit during the quarter and six months ended June 30, 2013, respectively, compared to $23.8 million and $20.6 million during the quarter and six months ended June 30, 2012, respectively. The additional term loan and increased borrowings against the line of credit were used primarily to fund the acquisition of Sundance and payment of a special dividend in December 2012. The average interest rate was 2.0% on the term loan and 2.1% on the line of credit in 2013, compared to 2.4% and 3.1%, respectively, in 2012.

Income tax expense was $12,434,000 and $8,750,000 in the quarter and six months ended June 30, 2013, respectively, compared to $19,577,000 and $27,478,000 in the quarter and six months ended June 30, 2012, respectively. The effective tax rate for 2013 was approximately 39.4%, compared to 38.5% in 2012. The effective rate for 2013 increased primarily because of an increase in certain permanent book-tax differences. Changes in our effective tax rate areaffected by the apportionment of revenue and income before taxesfor the various jurisdictions in which we operate and by changing tax laws and regulations in those jurisdictions.

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Liquidity and Capital Resources

Our working capital position as of June 30, 2013, was $176,062,000, compared to $163,353,000 at December 31, 2012. Cash generated by operations was $50,741,000 in 2013, compared to $73,475,000 in 2012, reflecting the results of operations described above. Receivables decreased during 2013 by $8.3 million, reflecting the decrease in net revenue described above. Days’ sales outstanding (DSO’s) related to patient transports, measured by comparing net patient transport revenue for the annualized previous three-month and six-month periods to outstanding open net accounts receivable, were as follows:

	As of June 30, 2013		As of December 31, 2012		As of June 30, 2012
Three-month measurement		99		106		99
Six-month measurement		115		106		109

DSO’s calculated using a three-month measurement period are more significantly impacted by seasonality in revenue than DSO’s using the six-month measurement period. The increase in DSO’s using the six-month measurement is largely attributed to increases in claims processing timeframes for one insurance payer. The increase in processing time is not expected to have an adverse effect on the collection rates from this payer.

In 2012, we were refunded approximately $9.1 million of aircraft deposits upon taking delivery of the aircraft and arranging permanent financing for the purchase. In the second quarter of 2012, we increased our accrual for current income taxes payable approximately $16.8 million based on estimated 2012 taxable income.

Cash used by investing activities totaled $45,217,000 in 2013 compared to $14,347,000 in 2012. In 2013 we bought out 34 previously leased aircraft for $36.6 million and sold five aircraft for $9.8 million. Equipment acquisitions in 2013 also included the purchase of three aircraft for $6.2 million. Equipment acquisitions in 2012 included the buy-out of 20 previously leased aircraft for approximately $36.7 million. Five of these aircraft were subsequently sold for approximately $21.1 million and leased back under capital leases.

Financing activities used $3,595,000 in 2013 compared to $34,970,000 in 2012. The primary uses of cash in both 2013 and 2012 were regularly scheduled payments of long-term debt and capital lease obligations and capital lease buyouts. During 2013, we originated 33 notes secured by aircraft to finance lease buyouts, retire variable rate debt, and finance the acquisition of two aircraft. The notes have ten-year terms and a weighted average fixed interest rate of 3.7%. Lease buyouts in 2012 were funded primarily through borrowings under our line of credit and cash from current operations.

We currently intend to exercise early lease buyout options on up to fifteen aircraft totaling approximately $37.1 million prior to the end of 2013. We expect to finance approximately $26.9 million of the buyouts with aircraft financiers under long-term notes and to fund the balance with internally generated cash flow or availability under the line of credit. We expect to use additional cash generated by operations in 2013 to, among other uses, pay down long-term debt with variable interest rates.

Critical Accounting Policies

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an on-going basis, management evaluates our estimates and judgments, including those related to revenue recognition, deferred income taxes, and valuation of long-lived assets and goodwill. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.

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Revenue Recognition

Revenue relating to tourism and charter flights is recognized upon completion of the services. Fixed contract revenue under our operating agreements with hospitals is recognized monthly over the terms of the agreements. Revenue relating to patient transports is recognized upon completion of the services and is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. We have from time to time experienced delays in reimbursement from third-party payers. In addition, third-party payers may disallow, in whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, determinations of medical necessity, or the need for additional information. Laws and regulations governing Medicare and Medicaid programs are very complex and subject to interpretation. We also provide services to patients who have no insurance or other third-party payer coverage. There can be no guarantee that we will continue to experience the same collection rates that we have in the past. If actual future collections are more or less than those projected by management, adjustments to allowances for contractual discounts and uncompensated care may be required. Based on related patient transport revenue for the six months ended June 30, 2013, a change of 100 basis points in the percentage of estimated contractual discounts and uncompensated care would have resulted in a change of approximately $8,585,000 in flight revenue.

Revenue related to fixed fee medical interior and products contracts is recorded as costs are incurred using the percentage of completion method of accounting. We estimate the percentage of completion based on costs incurred to date as a percentage of an estimate of the total costs to complete the project. Losses on contracts in process are recognized when determined. If total costs to complete a project are greater or less than estimated, the gross margin on the project may be greater or less than originally recorded under the percentage of completion method.

Deferred Income Taxes

In preparation of the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciable assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. We then assess the likelihood that deferred tax assets will be recoverable from future taxable income in the respective federal or state jurisdiction as appropriate and record a valuation allowance for those amounts we believe are not likely to be realized. We consider estimated future taxable income, tax planning strategies, and the expected timing of reversals of existing temporary differences in assessing the need for a valuation allowance against deferred tax assets. Establishing or increasing a valuation allowance in a period increases income tax expense. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. The effect on deferred income tax assets and liabilities of a change in statutory tax rates applicable to the Company is also recognized in income in the period of the change. We evaluate the recognition and measurement of uncertain tax positions based on the facts and circumstances surrounding the tax position and applicable tax law and other tax pronouncements. Changes in our estimates of uncertain tax positions would be recognized as an adjustment to income tax expense in the period of the change.

Long-lived Assets Valuation

In accounting for long-lived assets, we make estimates about the expected useful lives, projected residual values and the potential for impairment. Estimates of useful lives and residual values of aircraft are based upon actual industry experience with the same or similar aircraft types and anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations and changes in our maintenance program or operations could result in changes to these estimates. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. Our cash flow estimates are based on historical results adjusted for estimated current industry trends, the economy, and operating conditions.

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Goodwill Valuation

The Company’s goodwill relates to seven acquisitions and has been allocated to our reporting units. We evaluate goodwill annually in accordance with ASU No. 2011-08, Testing for Goodwill Impairment, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Factors considered include overall economic conditions within our markets, access to capital, changes in the cost of operations, the financial performance of the Company, and change in our stock price during the year. Based upon our qualitative assessment of factors impacting the value of goodwill as of December 31, 2012, we determined that it was not likely that the fair value of any reporting unit was less than its carrying amount and that a quantitative assessment of goodwill was not necessary. Changes in these factors or a sustained decline in general economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risk at June 30, 2013, from that reported in our Annual Report on Form 10-K for the year ended December 31, 2012.

Item 4.     Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted to the Securities and Exchange Commission (the Commission) under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officers (referred to in this report as the Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Management, under the supervision and with the participation of the Certifying Officers, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2013, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of June 30, 2013, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1.     Legal Proceedings

Not Applicable

Item 1A.     Risk Factors

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2012.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3.     Defaults upon Senior Securities

Not Applicable

Item 4.     Mine Safety Disclosures

Not Applicable

Item 5.     Other Information

Not Applicable

Item 6.     Exhibits

31.1 Chief Executive Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Chief Financial Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 Certification adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements 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 METHODS CORPORATION
Date:  August 9, 2013	By	/s/Aaron D. Todd
		Aaron D. Todd
		Chief Executive Officer

Date:  August 9, 2013	By	/s/ Trent J. Carman
		Trent J. Carman
		Chief Financial Officer

Date:  August 9, 2013	By	/s/ Sharon J. Keck
		Sharon J. Keck
		Chief Accounting Officer

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