Air Methods (AIRM) 10-Q 2014 Q3 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 September 30, 2014

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 October 31, 2014, was 39,205,446.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets – September 30, 2014 and December 31, 2013	1
		Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013	3
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	4
		Notes to Unaudited Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19
	Item 4.	Controls and Procedures	20
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	21
	Item 1A.	Risk Factors	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3.	Defaults upon Senior Securities	21
	Item 4.	Mine Safety Disclosures	21
	Item 5.	Other Information	21
	Item 6.	Exhibits	21
SIGNATURES			22

PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

	September 30,			December 31,
	2014			2013
Assets
Current assets:
Cash and cash equivalents	$	16,832			9,862
Receivables:
Trade, net (note 4)		296,301			237,856
Refundable income taxes		--			11,863
Other		3,136			953
Total receivables		299,437			250,672
Inventories		45,108			47,804
Work-in-process on medical interiors and products contracts		4,640			5,313
Assets held for sale		7,945			5,103
Costs and estimated earnings in excess of billings on uncompleted contracts		1,509			2,888
Refundable deposits		8,560			8,459
Prepaid expenses and other (note 6)		10,804			10,449
Total current assets		394,835			340,550
Property and equipment:
Land		251			251
Flight and ground support equipment		653,049			584,059
Aircraft under capital leases		212,461			246,752
Aircraft rotable spare parts		41,895			41,391
Buildings and office equipment		59,075			51,601
		966,731			924,054
Less accumulated depreciation and amortization		(270,440	)		(259,212	)
Net property and equipment		696,291			664,842
Goodwill (note 2)		128,737			128,121
Intangible assets, net of accumulated amortization of $17,922 and $13,397 at September 30, 2014 and December 31, 2013, respectively		85,096			88,215
Other assets		30,686			30,813
Total assets	$	1,335,645			1,252,541

 (Continued)

1

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS, Continued

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

(unaudited)

	September 30,			December 31,
	2014			2013
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable	$	2,729			2,616
Current installments of long-term debt		44,640			39,415
Current installments of obligations under capital leases		25,717			29,116
Accounts payable		19,813			20,431
Deferred revenue		3,063			3,463
Billings in excess of costs and estimated earnings on uncompleted contracts		1,179			2,232
Accrued wages and compensated absences		24,266			24,346
Due to third party payers		7,196			7,789
Deferred income taxes		19,530			13,748
Other accrued liabilities		26,425			19,162
Total current liabilities		174,558			162,318
Long-term debt, less current installments		483,713			477,038
Obligations under capital leases, less current installments		107,213			131,249
Deferred income taxes		98,275			86,131
Other liabilities		16,263			19,733
Total liabilities		880,022			876,469
Redeemable non-controlling interests		6,747			8,113
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 39,423,253 and 39,301,407 shares at September 30, 2014 and December 31, 2013, respectively; outstanding 39,205,446 and 39,064,437 shares at September 30, 2014 and December 31, 2013, respectively		2,348			2,343
Additional paid-in capital		118,720			112,890
Retained earnings		328,385			253,098
Accumulated other comprehensive loss		(577	)		(372	)
Total stockholders’ equity		448,876			367,959
Total liabilities and stockholders’ equity	$	1,335,645			1,252,541

See accompanying notes to unaudited condensed consolidated financial statements.

2

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(unaudited)

	Three Months Ended September 30,						Nine Months Ended  September 30,
	2014			2013			2014			2013
Revenue:
Patient transport revenue, net of provision for contractual discounts (note 4)	$	315,459			283,709			864,101			736,431
Provision for uncompensated care (note 4)		(125,089	)		(105,916	)		(358,429	)		(301,863	)
Patient transport revenue, net		190,370			177,793			505,672			434,568
Air medical services contract revenue		44,278			49,750			134,829			158,743
Tourism and charter revenue		33,941			16,002			89,709			42,385
Medical interiors and products revenue		6,237			5,616			21,461			15,026
Dispatch and billing service revenue		2,992			3,224			7,754			7,097
		277,818			252,385			759,425			657,819
Operating expenses:
Flight centers		94,461			89,431			270,232			258,874
Air medical aircraft operations		35,456			35,565			101,195			113,518
Tourism operating expenses		22,989			9,242			58,465			29,243
Cost of medical interiors and products sold		5,960			5,289			19,177			14,245
Cost of dispatch and billing services		2,430			2,156			7,354			5,156
Depreciation and amortization		20,121			19,781			60,910			59,790
Loss on disposition of assets, net		77			118			1,290			326
General and administrative		35,913			28,292			103,702			82,582
		217,407			189,874			622,325			563,734
Operating income		60,411			62,511			137,100			94,085
Other income (expense):
Interest expense		(5,341	)		(5,190	)		(16,439	)		(15,169	)
Other, net		322			349			588			964
Income before income taxes		55,392			57,670			121,249			79,880
Income tax expense		(21,552	)		(22,065	)		(47,433	)		(30,815	)
Net income		33,840			35,605			73,816			49,065
Less net income attributable to redeemable non-controlling interests		123			--			420			--
Net income attributable to Air Methods Corporation and subsidiaries	$	33,717			35,605			73,396			49,065
Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustments		(251	)		--			(205	)		--
Comprehensive income	$	33,466			35,605			73,191			49,065
Basic income per common share (note 5)	$	.91			.91			1.92			1.26
Diluted income per common share (note 5)	$	.90			.91			1.91			1.25
Weighted average number of common shares outstanding – basic		39,168,873			38,933,915			39,146,609			38,882,943
Weighted average number of common shares outstanding – diluted		39,343,405			39,194,532			39,329,121			39,228,113

See accompanying notes to unaudited condensed consolidated financial statements.

3

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net income	$	73,816			49,065
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		60,910			59,790
Deferred income tax expense		17,926			13,780
Stock-based compensation		2,866			2,789
Tax benefit from exercise of stock options		(1,779	)		(2,173	)
Loss on disposition of assets, net		1,290			326
Unrealized loss on derivative instrument		70			143
Loss from equity method investee		738			--
Changes in assets and liabilities, net of effects of acquisitions:
Increase in prepaid expenses and other current assets		(526	)		(4,395	)
Decrease (increase) in receivables		(48,791	)		2,298
Decrease (increase) in inventories		3,369			(7,991	)
Decrease (increase) in costs in excess of billings		1,379			(1,883	)
Increase in accounts payable, other accrued liabilities, and other liabilities		6,718			4,572
Decrease in deferred revenue and billings in excess of costs		(1,453	)		(2,506	)
Net cash provided by operating activities		116,533			113,815
Cash flows from investing activities:
Acquisition of subsidiaries (note 2)		(3,182	)		(1,435	)
Acquisition of property and equipment		(87,965	)		(41,279	)
Buy-out of previously leased aircraft		(17,296	)		(51,403	)
Proceeds from disposition and sale of equipment and assets held for sale		12,637			17,266
Increase in other assets		(660	)		(5,206	)
Net cash used in investing activities		(96,466	)		(82,057	)

 (Continued)

4

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(Amounts in thousands)

(unaudited)

	Nine Months Ended September 30,
	2014			2013
Cash flows from financing activities:
Proceeds from issuance of common stock	$	1,190			1,397
Tax benefit from exercise of stock options		1,779			2,173
Borrowings under line of credit		30,000			54,370
Payments under line of credit		(42,000	)		(101,370	)
Proceeds from long-term debt		54,503			120,480
Payments for financing costs		(81	)		(221	)
Payments of long-term debt and notes payable		(30,603	)		(20,274	)
Payments of capital lease obligations		(27,983	)		(72,972	)
Proceeds from non-controlling interests		98			--
Net cash used in financing activities		(13,097	)		(16,417	)
Increase in cash and cash equivalents		6,970			15,341
Cash and cash equivalents at beginning of period		9,862			3,818
Cash and cash equivalents at end of period	$	16,832			19,159
Interest paid in cash during the period	$	15,862			14,589
Income taxes paid in cash during the period	$	12,244			2,544

Non-cash investing and financing activities:

In the nine months ended September 30, 2014, the Company entered into notes payable of $2,729 to finance the purchase of aircraft which were held in property and equipment pending permanent financing as of September 30, 2014, and into capital leases of $548 to finance the purchase of equipment. The Company also settled notes payable of $2,616 in exchange for the aircraft securing the debt.

In the nine months ended September 30, 2013, the Company entered 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.

See accompanying notes to unaudited condensed 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 condensed consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The 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, 2013.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) 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 Subsidiaries

On December 13, 2013, via a newly formed subsidiary, Blue Hawaiian Holdings, LLC, the Company acquired 100% of the membership interests of Helicopter Consultants of Maui, LLC (doing business as Blue Hawaiian Helicopters) and certain of its affiliates (collectively, BHH) for a cash purchase price of $66.8 million, subject to final determination of working capital, as defined in the merger agreement, as of the closing date. At December 31, 2013, the Company had recorded a liability of $2,282,000 for the estimated increase to the purchase price for the change in working capital. The liability was revised to $3,182,000 during the first quarter of 2014 and paid during the second quarter. No further amounts are due to the sellers. The former owners of BHH hold a 10% ownership interest in Blue Hawaiian Holdings, LLC, which the Company can redeem at any time for a price based on BHH’s current operating results. Between June 13, 2015, and December 13, 2015, the former owners of BHH can require the Company to redeem their 10% ownership interest for a price based on the same formula. The purchase price was financed primarily through borrowings under the Company’s Amended and Restated Revolving Credit, Term Loan and Security Agreement with a commercial bank group.

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

	Allocation at December 31, 2013			Adjustments		Revised Allocation
Aircraft	$	33,440			--		33,440
Amortizable intangible assets		24,525			--		24,525
Goodwill		5,985			590		6,575
Other equipment and leasehold improvements		5,183			--		5,183
Working capital accounts, net		5,964			310		6,274
Total net assets	$	75,097			900		75,997
Redeemable non-controlling interest		(6,065	)		--		(6,065	)
Purchase price	$	69,032			900		69,932

The Company does not expect further adjustments to the purchase price allocation.

6

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(3)          Stockholders’ Equity

Changes in stockholders’ equity for the nine months ended September 30, 2014, consisted of the following (amounts in thousands except share amounts):

	Shares
	Outstanding		Amount
Balances at January 1, 2014		39,064,437	$	367,959
Issuance of common shares for options exercised		90,347		1,190
Stock-based compensation		50,662		2,866
Tax benefit from exercise of stock options		--		1,779
Forfeiture of unvested restricted shares and related dividends		--		8
Adjustments to redeemable non-controlling interests		--		1,883
Other comprehensive income		--		(205	)
Net income attributable to Air Methods Corporation and subsidiaries		--		73,396
Balances at September 30, 2014		39,205,446	$	448,876

 (4)         Patient Transport 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 2014 or 2013. The allowance for uncompensated care was 39.7% of receivables from all payers, excluding Medicare and Medicaid, as of September 30, 2014, compared to 39.2% at December 31, 2013, and 44.2% at September 30, 2013. Receivables from private insurance providers accounted for 65% of receivables from all payers, excluding Medicare and Medicaid, as of September 30, 2014, compared to 60% as of December 31, 2013, and 61% as of September 30, 2013. The remainder of receivables from all payers, excluding Medicare and Medicaid, are attributable to self-pay patients.

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.

7

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(4)          Patient Transport Revenue Recognition, continued

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 September 30,				For nine months ended September 30,
	2014		2013		2014		2013
Third-party payers	$	243,022		213,500		655,741		552,502
Self-pay		72,437		70,209		208,360		183,929
Total	$	315,459		283,709		864,101		736,431

 (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.

In accordance with FASB ASC 480-10-S99, Distinguishing Liabilities from Equity, and solely for the purpose of calculating earnings per share, net income was increased by $1,871,000 and $1,883,000 for the quarter and nine months ended September 30, 2014, respectively, for an adjustment to the value of redeemable non-controlling interests.

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

	2014		2013
For quarter ended September 30:
Weighted average number of common shares outstanding – basic		39,168,873		38,933,915
Dilutive effect of:
Common stock options		83,064		201,661
Unvested restricted stock		83,520		58,956
Unvested performance share units		7,948		--
Weighted average number of common shares outstanding – diluted		39,343,405		39,194,532
For nine months ended September 30:
Weighted average number of common shares outstanding – basic		39,146,609		38,882,943
Dilutive effect of:
Common stock options		108,952		285,534
Unvested restricted stock		73,560		59,636
Unvested performance share units		--		--
Weighted average number of common shares outstanding – diluted		39,329,121		39,228,113

Common stock options totaling 47,500 and performance share units totaling 105,512 were not included in the diluted shares outstanding for the nine months ended September 30, 2014, because their effect would have been anti-dilutive. Common stock options totaling 45,000 were not included in the diluted shares outstanding for the quarter and nine months ended September 30, 2013, because their effect would have been anti-dilutive.

8

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

 (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.

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.

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 $0 at September 30, 2014, and December 31, 2013. 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 $6,000 and $70,000 for the quarter and nine months ended September 30, 2014, respectively, compared to $3,000 and $143,000 for the quarter and nine months ended September 30, 2013, respectively. There were no cash settlements under the terms of the agreements in 2014 or  2013.

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 September 30, 2014, is estimated to be $526,353,000, compared to a carrying value of $528,353,000. The fair value of long-term debt as of December 31, 2013, was estimated to be $513,436,000, compared to a carrying value of $516,453,000.

(7) New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The ASU requires that performance targets in these situations be accounted for as performance conditions and should not be reflected in the calculation of the grant-date fair value of the award. The ASU also specifies requirements for recognition of associated compensation cost. The ASU is effective for periods beginning after December 15, 2014, with earlier adoption permitted. The Company expects to adopt ASU 2014-12 prospectively and does not expect the implementation to have a material effect on its financial position or results of operations.

9

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(7) New Accounting Pronouncements, continued

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The ASU is effective for the Company for periods beginning after December 15, 2016, and early adoption is not permitted. The ASU permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

(8) 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. The Company does not allocate assets between 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.

● Tourism – provides helicopter tours and charter flights, primarily focusing on Grand Canyon and Hawaiian Island tours.

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

10

Air Methods Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

(8)           Business Segment Information, continued

For quarter ended September 30:	AMS			Tourism			UR			Corporate Activities			Intersegment Eliminations			Consolidated
2014
External revenue	$	237,640			33,941			6,151			86			--			277,818
Intersegment revenue		--			--			2,305			--			(2,305	)		--
Total revenue		237,640			33,941			8,456			86			(2,305	)		277,818
Operating expenses, excluding depreciation & amortization		(153,415	)		(27,963	)		(8,193	)		(9,672	)		1,957			(197,286	)
Depreciation & amortization		(17,257	)		(1,746	)		(598	)		(520	)		--			(20,121	)
Interest expense		(3,964	)		(742	)		--			(635	)		--			(5,341	)
Other income (expense), net		435			1			--			(114	)		--			322
Income tax expense		--			--			--			(21,552	)		--			(21,552	)
Segment net income (loss)		63,439			3,491			(335	)		(32,407	)		(348	)		33,840
Less net income (loss) attributable to non-controlling interests		(44	)		167			--			--			--			123
Net income (loss) attributable to Air Methods Corporation and subsidiaries	$	63,483			3,324			(335	)		(32,407	)		(348	)		33,717
2013
External revenue	$	230,767			16,002			5,597			19			--			252,385
Intersegment revenue		--			--			2,120			--			(2,120	)		--
Total revenue		230,767			16,002			7,717			19			(2,120	)		252,385
Operating expenses, excluding depreciation & amortization		(145,068	)		(11,212	)		(7,324	)		(8,558	)		2,069			(170,093	)
Depreciation & amortization		(18,184	)		(681	)		(455	)		(461	)		--			(19,781	)
Interest expense		(4,222	)		(280	)		--			(688	)		--			(5,190	)
Other income (expense), net		311			--			(2	)		40			--			349
Income tax expense		--			--			--			(22,065	)		--			(22,065	)
Segment net income (loss)	$	63,604			3,829			(64	)		(31,713	)		(51	)		35,605

For nine months ended September 30:
2014
External revenue	$	648,229		89,709		21,401		86		--		759,425
Intersegment revenue		--		--		9,363		--		(9,363	)	--
Total revenue		648,229		89,709		30,764		86		(9,363	)	759,425
Operating expenses, excluding depreciation & amortization		(440,078	)	(72,158	)	(28,160	)	(29,178	)	8,159		(561,415	)
Depreciation & amortization		(52,671	)	(4,966	)	(1,733	)	(1,540	)	--		(60,910	)
Interest expense		(12,221	)	(2,095	)	--		(2,123	)	--		(16,439	)
Other income (expense), net		1,248		4		--		(664	)	--		588
Income tax expense		--		--		--		(47,433	)	--		(47,433	)
Segment net income (loss)		144,507		10,494		871		(80,852	)	(1,204	)	73,816
Less net income (loss) attributable to non-controlling interests		(130	)	550		--		--		--		420
Net income (loss) attributable to Air Methods Corporation and subsidiaries	$	144,637		9,944		871		(80,852	)	(1,204	)	73,396
2013
External revenue	$	600,414		42,385		14,928		92		--		657,819
Intersegment revenue		--		--		6,421		--		(6,421	)	--
Total revenue		600,414		42,385		21,349		92		(6,421	)	657,819
Operating expenses, excluding depreciation & amortization		(429,742	)	(34,631	)	(20,534	)	(25,138	)	6,101		(503,944	)
Depreciation & amortization		(55,218	)	(1,999	)	(1,313	)	(1,260	)	--		(59,790	)
Interest expense		(12,426	)	(773	)	--		(1,970	)	--		(15,169	)
Other income (expense), net		854		--		(2	)	112		--		964
Income tax expense		--		--		--		(30,815	)	--		(30,815	)
Segment net income (loss)	$	103,882		4,982		(500	)	(58,979	)	(320	)	49,065

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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 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,” “may,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results; flight volume, collection rates, and days’ sales outstanding for patient transports; size, structure and growth of our air medical services, aerial tourism, and products markets; continuation and/or renewal of hospital contracts; acquisition of new and profitable UR Division contracts; impact of the Patient Protection and Affordable Care Act (PPACA) 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 and around the Grand Canyon and Hawaiian Islands. 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 nine months ended September 30, 2014, the AMS Division generated 85% of our total revenue, compared to 91%  in 2013.

● Tourism Division – provides helicopter tours and charter flights, primarily focusing on Grand Canyon and Hawaiian Island tours. In the nine months ended September 30, 2014, the Tourism Division generated 12% of our total revenue, compared to 6% in 2013.

● 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 3% of our total revenue in the nine months ended September 30, 2014, compared to 2% in 2013.

See Note 8 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, 84% of AMS operating costs incurred during the nine months ended September 30, 2014, 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, high heat, 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 15,800 and 43,700 for the quarter and nine months ended September 30, 2014, respectively, compared to approximately 14,800 and 40,800 for the quarter and nine months ended September 30, 2013, respectively. Patient transports for community-based locations open longer than one year (Same-Base Transports) were approximately 13,900 and 39,300 in the quarter and nine months ended September 30, 2014, respectively, compared to approximately 14,200 and 38,700 in the quarter and nine months ended September 30, 2013, respectively. Cancellations due to unfavorable weather conditions for community-based locations open longer than one year were 60 higher and 717 lower in the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Requests for community-based services increased by 0.5% and 2.4% for the quarter and nine months ended September 30, 2014, respectively, for bases open longer than one year.

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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. PPACA is intended to decrease the number of uninsured Americans and reduce health care costs. We believe that the movement from self-pay patients to Medicaid in our payer mix for 2014 compared to 2013 is attributable to the expansion of Medicaid eligibility under PPACA. To date, PPACA has not resulted in an increase in the percentage of transports covered by private insurance.

Net reimbursement per transport decreased 0.1% and increased 7.6% in the quarter and nine months ended September 30, 2014, compared to 2013, attributable to recent price increases net of a deterioration in payer mix, as shown below:

	For quarters ended September 30,						For nine months ended September 30,
	2014			2013			2014			2013
Private insurance carriers		32.6	%		34.2	%		31.5	%		32.8	%
Medicare		32.4	%		31.7	%		33.6	%		33.1	%
Medicaid		23.6	%		20.1	%		22.9	%		20.6	%
Self-pay patients		11.4	%		14.0	%		12.0	%		13.5	%

Collections as a percentage of gross charges from private insurers decreased from 74.6% in the third quarter of 2013 to 73.5% in the third quarter of 2014, and from 74.8% for the nine months ended September 30, 2013, to 74.2% for the nine months ended September 30, 2014. The majority of the decrease in private insurance collection rates is due to an increase in the percentage of transports covered by a government-sponsored insurance plan which reimburses at significantly lower rates than other private insurance plans and typically does not increase reimbursement when we increase prices.

Provisions for contractual discounts and estimated uncompensated care related to patient transport revenue are as follows:

	For quarters ended September 30,						For nine months ended  September 30,
	2014			2013			2014			2013
Gross billings		100	%		100	%		100	%		100	%
Provision for contractual discounts		51	%		47	%		51	%		47	%
Provision for uncompensated care		20	%		20	%		20	%		22	%

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. Although certain insurance companies have not increased their reimbursement rates proportionately with recent price increases to the same extent they have with previous price increases, we have not yet experienced significant increased limitations in the amount reimbursed by private insurers taken as a whole. Continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our historical collection rates.

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● 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, representing 10% of our 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, 2013, we have taken delivery of 21 new aircraft and have commitments to take delivery of fifty additional aircraft through the end of 2017. 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 AMS aircraft maintenance expense increased 1.5% and decreased 11.0% for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Total flight volume for all AMS operations decreased 3.2% and 4.6% for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. The change in maintenance expense reflects normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts.

● Competitive pressures from low-cost providers. We are recognized within the industry for our higher 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, 2016. Other employee groups may also elect to be represented by unions in the future.

Results of Operations

We reported net income of $33,717,000 and $73,396,000 for the quarter and nine months ended September 30, 2014, respectively, compared to $35,605,000 and $49,065,000 for the quarter and nine months ended September 30, 2013, respectively. The results for 2014 include the impact of the BHH acquisition which closed in December 2013. Same-Base Transports were 2.6% lower and 1.6% higher in the quarter and nine months ended September 30, 2014, respectively, compared to 2013, while net reimbursement per patient transport decreased 0.1% and increased 7.6% in the quarter and nine months ended September 30, 2014, respectively, compared to 2013, primarily as a result of recent price increases net of changes in payer mix.

Air Medical Services

Patient transport revenue is recorded net of provisions for contractual discounts and uncompensated care and increased $12,577,000, or 7.1%, and $71,104,000, or 16.4%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013, for the following reasons:

● Decrease of 0.1% and increase of 7.6% in net reimbursement per transport for the quarter and nine months ended September 30, 2014, respectively, compared to 2013, due to the benefit of recent price increases net of the deterioration in payer mix and collection rate described above.

● Decrease of 370, or 2.6%, and increase of 604, or 1.6%, in Same-Base Transports for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Cancellations due to unfavorable weather conditions for locations open longer than one year were 60 higher and 717 lower in the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Requests for community-based services increased 0.5% and 2.4% for the quarter and nine months ended September 30, 2014, respectively, for bases open longer than one year.

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● Incremental net revenue of $23,377,000 and $53,433,000 for the quarter and nine months ended September 30, 2014, respectively, generated from the addition of 36 new bases, including fourteen bases resulting from the conversion of hospital contracts, during either 2014 or 2013.

● Closure of eighteen bases during either 2014 or 2013, resulting in decreases in net revenue of approximately $4,586,000 and $14,306,000 during the quarter and nine months ended September 30, 2014, respectively.

Air medical services contract revenue decreased $5,472,000, or 11.0%, and $23,914,000, or 15.1%, for the quarter and nine months ended September 30, 2014, for the following reasons:

● Cessation of service under eleven contracts and the conversion of eight contracts to community-based operations, during either 2014 or 2013, resulting in decreases in revenue of approximately $7,269,000 and $30,770,000 for the quarter and nine months ended September 30, 2014, respectively.

● Incremental net revenue of $1,071,000 and $2,579,000 for the quarter and nine months ended September 30, 2014, generated from the addition of one new AMS contract and expansion under two other contracts to additional bases of operation during either 2014 or 2013.

● Decrease of 0.1% and increase of 1.2% in flight volume for the quarter and nine months ended September 30, 2014, respectively, for all contracts excluding new contracts, contract expansions, and closed contracts 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.

Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $5,030,000, or 5.6%, and $11,358,000, or 4.4%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013, for the following reasons:

● Increases of approximately $8,935,000 and $22,497,000 for the quarter and nine months ended September 30, 2014, respectively, for the addition of personnel to staff new base locations described above.

● Decreases of approximately $7,456,000 and $25,466,000 for the quarter and nine months ended September 30, 2014, respectively, due to the closure of base locations described above.

● Increases in salaries for merit pay raises.

Air medical aircraft operating expenses decreased $109,000, or 0.3%, and $12,323,000, or 10.9%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. 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:

● Increase of $381,000, or 1.5%, to $24,965,000 and decrease of $8,712,000, or 11.0%, to $70,823,000 in AMS aircraft maintenance expense for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Total flight volume for AMS operations decreased 3.2% and 4.6% for the quarter and nine months ended September 30, 2014, respectively, compared to prior year. The change in maintenance expense reflects normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts.

● Decreases of 1.9% and 4.4% in the cost of aircraft fuel per hour flown for AMS for the quarter and nine months ended September 30, 2014, respectively. Total AMS fuel costs increased $362,000, or 5.6%, to $6,788,000 and $372,000, or 2.0%, to $19,288,000 for the quarter and nine months ended September 30, 2014, respectively, compared to 2013.

● Credit of $1,066,000 for the nine months ended September 30, 2014, earned based on the amount of hull insurance claims for the policy period ended June 30, 2014, and recorded during the second quarter of 2014. The nine months ended September 30, 2013, included expense of $2,000,000 related to hull and liability insurance retention triggered by hull claims incurred during the second quarter of 2013.

Tourism

Tourism and charter revenue increased $17,939,000, or 112.1%, and $47,324,000, or 111.7%, for the quarter and nine months ended September, 2014, respectively, compared to 2013. During the quarter and nine months ended September 30, 2014, respectively, we transported approximately 125,500 and 326,100 passengers on tourism flights, compared to 64,400 and 166,600 in the quarter and nine months ended September 30, 2013, respectively. BHH generated revenue of $15,044,000 and $42,506,000 transporting approximately 54,500 and 151,300 passengers in the quarter and nine months ended September 30, 2014, respectively.

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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 and typically vary with passenger count, flight volume, and number and type of aircraft. Expenses increased $13,747,000, or 148.7%, and $29,222,000, or 99.9%, for the quarter and nine months ended September 30, 2014, respectively, primarily related to the acquisition of BHH. BHH operating expenses totaled $9,817,000 and $26,766,000 for the quarter and nine months ended September 30, 2014, respectively. Excluding the effect of BHH, tourism aircraft maintenance expense increased $1,821,000, or 89.0%, and decreased $917,000, or  9.7%, for the quarter and nine months ended September 30, 2014, respectively. We incurred costs for seven and sixteen engine overhauls for these aircraft in the quarter and nine months ended September 30, 2014, compared to two and nine engine overhauls in the quarter and nine months ended September 30, 2013, primarily due to normal fluctuations in the timing of overhaul cycles.

United Rotorcraft Division

Medical interiors and products revenue increased $621,000, or 11.1%, and $6,435,000, or 42.8%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Significant projects in process during 2014 included work on 24 multi-mission interiors for the U.S. Army’s HH-60M helicopter, 35 interiors for an older generation of the U.S. Army’s Black Hawk helicopter, and fifteen aircraft interiors for commercial customers. Revenue by product line for the quarter and nine months ended September 30, 2014, was as follows:

● $3,982,000 and $13,891,000 – governmental entities

● $2,255,000 and $7,570,000 – commercial customers

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 eight aircraft medical interiors for commercial customers. Revenue by product line for the quarter and nine months ended September 30, 2013, was as follows:

● $2,752,000 and $8,744,000 – governmental entities

● $2,864,000 and $6,282,000 – commercial customers

Cost of medical interiors and products increased $671,000, or 12.7%, and $4,932,000, or 34.6%, for the quarter and nine months ended September 30, 2014, respectively, as compared to the prior year, due primarily to the change in sales volume. 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.

General Expenses

Depreciation and amortization expense increased $340,000, or 1.7%, and $1,120,000, or 1.9%, for the quarter and nine months ended September 30, 2014, compared to 2013. From the fourth quarter of 2013 through the third quarter of 2014, we placed 21 aircraft with a total depreciable basis of $59 million into service. Depreciation and amortization related to BHH’s assets also totaled $869,000 and $2,553,000 for the quarter and nine months ended September 30, 2014, respectively. These increases were offset in part by the buy-out of previously leased aircraft. Since March 31, 2013, we have bought out 38 aircraft which were previously leased under capital lease obligations and which had total depreciable basis of $72 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 buy-out of aircraft from capital lease obligations resulted in a decrease in depreciation in 2014.

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General and administrative (G&A) expenses increased $7,621,000, or 26.9%, and $21,120,000, or 25.6%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. G&A expenses include executive management, 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 BHH operations were $2,325,000 and $6,638,000 for the quarter and nine months ended September 30, 2014. Excluding the impact of BHH, G&A expenses increased 18.7%  and 17.5% in the quarter and nine months ended September 30, 2014, compared to 2013, reflecting branding and marketing initiatives for both air medical services and tourism, as well as the addition of senior management positions to enhance the company’s ability to implement its growth strategy. Since March 31, 2013, we have converted eight AMS contracts to community-based operations, resulting in fourteen additional bases and contributing to an increase in billing and collections, dispatch, and AMS program administration requirements. In addition, equity compensation and incentive compensation accruals related to our financial performance increased $1,457,000 and $5,688,000 during the quarter and nine months ended September 30, 2014, respectively, compared to 2013.

Interest expense increased $151,000, or 2.9%, and $1,270,000, or 8.4%, for the quarter and nine months ended September 30, 2014, compared to 2013, primarily due to an additional $60 million term loan under our senior credit facility originated in December 2013 to finance the purchase of BHH and new term loans totaling $137.0 million with a weighted average interest rate of 4.1% originated subsequent to March 31, 2013, to fund the retirement of capital leases and the purchase of aircraft. The resulting increase in interest expense was offset in part by decreased borrowings against our line of credit, the retirement of $17.7 million in capital lease obligations with a weighted average effective interest rate of 4.7% subsequent to March 31, 2013, and to regularly scheduled payments of long-term debt and capital lease obligations.

Income tax expense was $21,552,000 and $47,433,000, at effective tax rates of 38.9%, and 39.1%, for the quarter and nine months ended September 30, 2014, respectively, compared to $22,065,000 and $30,815,000, at effective tax rates of 38.3%, and 38.6%, for the quarter and nine months ended September 30, 2013, respectively. Changes in our effective tax rate are affected by the apportionment of revenue and income before taxes for the various jurisdictions in which we operate and by changing tax laws and regulations in those jurisdictions.

Liquidity and Capital Resources

Our working capital position as of September 30, 2014, was $220,277,000, compared to $178,232,000 at December 31, 2013. Cash generated by operations was $116,533,000 in 2014, compared to $113,815,000 in 2013. Receivables increased during 2014 by $48.8 million, reflecting the increase in net patient transport revenue described above. In addition, days’ sales outstanding (DSO’s) related to patient transports, measured by comparing net patient transport revenue for the annualized previous six-month period to outstanding open net accounts receivable, were 116 at September 30, 2014, compared to 104 at December 31, 2013, and 100 at September 30, 2013.

The increase in DSO’s at September 30, 2014, is primarily attributed to additional time taken by private insurers, especially one private insurance company and one government-sponsored insurance plan, to review claims and related documentation prior to processing. Excluding the impact of these two payers, DSO’s at September 30, 2014, would have been 112. The increases in processing times for these two payers are expected to be temporary and are not expected to decrease the ultimate collection rate from either of these two payers.

Cash used by investing activities totaled $96,466,000 in 2014 compared to $82,057,000 in 2013. Equipment acquisitions in 2014 included the buy-out of thirteen previously leased aircraft for approximately $17.3 million, the purchase of twenty aircraft for approximately $65.1 million, and $7.5 million for aircraft interiors. We also sold twenty aircraft for $12.5 million. In 2013 we bought out 43 previously leased aircraft for $51.4 million and disposed of ten aircraft for $16.1 million. Equipment acquisitions in 2013 also included the purchase of eleven aircraft for $28.1 million.

Financing activities used $13,097,000 in 2014 compared to $16,417,000 in 2013. The primary uses of cash in both 2014 and 2013 were regularly scheduled payments of long-term debt and capital lease obligations and capital lease buy-outs. During 2014, we originated seventeen notes primarily to finance the acquisition of aircraft. During 2013, we originated 44 notes secured by aircraft to finance lease buy-outs, retire variable rate debt, and finance the acquisition of three aircraft.

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We currently intend to exercise early lease buy-out options on up to five additional aircraft leases totaling approximately $10.2 million prior to the end of 2014. We expect to finance the buy-outs with aircraft financiers under long-term notes and with internally generated cash flow or availability under the line of credit.

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.

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 nine months ended September 30, 2014, a change of 100 basis points in the percentage of estimated contractual discounts and uncompensated care would have resulted in a change of approximately $17,675,000 in patient transport 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.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The ASU is effective for the Company for periods beginning after December 15, 2016, and early adoption is not permitted. The ASU permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

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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.

Goodwill Valuation

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, our financial performance, 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, 2013, 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 September 30, 2014, from that reported in our Annual Report on Form 10-K for the year ended December 31, 2013.

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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 September 30, 2014, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of September 30, 2014, 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, 2013.

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

10.1	Form of Performance Based Share Unit Award Agreement
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:  November 7, 2014	By	/s/ Aaron D. Todd
		Aaron D. Todd
		Chief Executive Officer
Date:  November 7, 2014	By	/s/ Trent J. Carman
		Trent J. Carman
		Chief Financial Officer
Date:  November 7, 2014	By	/s/ Sharon J. Keck
		Sharon J. Keck
		Chief Accounting Officer

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