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, 2015 |
OR
| ¨ | 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.
Yesx No ¨
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). Yesx No¨
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 ¨ |
| Non-accelerated Filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ¨ No x
The number of shares of Common Stock, par value $.06, outstanding as of October 30, 2015, was 39,302,674.
TABLE OF CONTENTS
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, | |||||||
| 2015 | 2014 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 14,963 | 13,165 | |||||
| Receivables: | ||||||||
| Trade, net (note 4) | 359,768 | 293,985 | ||||||
| Refundable income taxes | -- | 8,865 | ||||||
| Other | 3,481 | 4,802 | ||||||
| Total receivables | 363,249 | 307,652 | ||||||
| Inventories | 47,752 | 46,095 | ||||||
| Work-in-process on medical interiors and products contracts | 3,750 | 4,610 | ||||||
| Assets held for sale | 16,690 | 8,608 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 2,752 | 564 | ||||||
| Refundable deposits | 10,003 | 8,381 | ||||||
| Prepaid expenses and other (note 6) | 8,134 | 10,766 | ||||||
| Total current assets | 467,293 | 399,841 | ||||||
| Property and equipment: | ||||||||
| Land | 251 | 251 | ||||||
| Flight and ground support equipment | 790,447 | 697,444 | ||||||
| Aircraft under capital leases | 180,949 | 196,302 | ||||||
| Aircraft rotable spare parts | 36,668 | 38,050 | ||||||
| Buildings and office equipment | 61,983 | 57,983 | ||||||
| 1,070,298 | 990,030 | |||||||
| Less accumulated depreciation and amortization | (301,700 | ) | (268,049 | ) | ||||
| Net property and equipment | 768,598 | 721,981 | ||||||
| Goodwill (note 2) | 127,269 | 127,269 | ||||||
| Intangible assets, net of accumulated amortization of $25,221 and $19,282 at September 30, 2015 and December 31, 2014, respectively | 112,591 | 83,654 | ||||||
| Other assets | 33,919 | 28,560 | ||||||
| Total assets | $ | 1,509,670 | 1,361,305 | |||||
(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, | |||||||
| 2015 | 2014 | |||||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Notes payable | $ | 11,112 | 11,442 | |||||
| Current installments of long-term debt | 50,268 | 45,827 | ||||||
| Current installments of obligations under capital leases | 22,165 | 23,954 | ||||||
| Accounts payable | 19,674 | 17,393 | ||||||
| Deferred revenue | 3,740 | 4,409 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 1,804 | 1,313 | ||||||
| Accrued wages and compensated absences | 23,814 | 31,539 | ||||||
| Due to third party payers | 11,164 | 7,426 | ||||||
| Deferred income taxes | 16,267 | 21,427 | ||||||
| Other accrued liabilities | 35,281 | 15,537 | ||||||
| Total current liabilities | 195,289 | 180,267 | ||||||
| Long-term debt, less current installments | 522,672 | 466,839 | ||||||
| Obligations under capital leases, less current installments | 74,577 | 96,534 | ||||||
| Deferred income taxes | 134,046 | 122,715 | ||||||
| Other liabilities | 11,874 | 16,060 | ||||||
| Total liabilities | 938,458 | 882,415 | ||||||
| Redeemable non-controlling interests | 8,585 | 6,981 | ||||||
| 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 39,503,344 and 39,452,753 shares at September 30, 2015 and December 31, 2014, respectively; outstanding 39,302,674 and 39,228,948 shares at September 30, 2015 and December 31, 2014, respectively | 2,352 | 2,349 | ||||||
| Additional paid-in capital | 126,714 | 120,391 | ||||||
| Retained earnings | 434,997 | 349,805 | ||||||
| Accumulated other comprehensive loss | (1,436 | ) | (636 | ) | ||||
| Total stockholders' equity | 562,627 | 471,909 | ||||||
| Total liabilities and stockholders’ equity | $ | 1,509,670 | 1,361,305 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands, except share and per share amounts)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Revenue: | ||||||||||||||||
| Patient transport revenue, net of provision for contractual discounts (note 4) | $ | 403,122 | 314,525 | 1,049,765 | 860,266 | |||||||||||
| Provision for uncompensated care (note 4) | (180,280 | ) | (125,056 | ) | (482,847 | ) | (358,396 | ) | ||||||||
| Patient transport revenue, net | 222,842 | 189,469 | 566,918 | 501,870 | ||||||||||||
| Air medical services contract revenue | 40,329 | 44,278 | 119,743 | 134,829 | ||||||||||||
| Tourism and charter revenue | 36,212 | 33,941 | 98,877 | 89,709 | ||||||||||||
| Medical interiors and products revenue | 8,379 | 6,237 | 16,966 | 21,461 | ||||||||||||
| Dispatch and billing service revenue | 3,580 | 2,992 | 10,739 | 7,754 | ||||||||||||
| 311,342 | 276,917 | 813,243 | 755,623 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Flight centers | 100,649 | 93,970 | 293,060 | 267,986 | ||||||||||||
| Air medical aircraft operations | 32,876 | 34,897 | 101,445 | 98,143 | ||||||||||||
| Tourism operating expenses | 22,519 | 22,989 | 65,462 | 58,465 | ||||||||||||
| Cost of medical interiors and products sold | 6,712 | 5,960 | 13,442 | 19,177 | ||||||||||||
| Cost of dispatch and billing services | 3,467 | 2,430 | 9,378 | 7,354 | ||||||||||||
| Depreciation and amortization | 20,884 | 19,972 | 62,082 | 60,467 | ||||||||||||
| Loss (gain) on disposition of assets, net | 2,607 | (185 | ) | 2,876 | 1,028 | |||||||||||
| General and administrative | 39,351 | 35,602 | 108,698 | 102,734 | ||||||||||||
| 229,065 | 215,635 | 656,443 | 615,354 | |||||||||||||
| Operating income | 82,277 | 61,282 | 156,800 | 140,269 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (4,893 | ) | (5,342 | ) | (15,041 | ) | (16,439 | ) | ||||||||
| Other, net | (266 | ) | 322 | 1,270 | 588 | |||||||||||
| Income from continuing operations before income taxes | 77,118 | 56,262 | 143,029 | 124,418 | ||||||||||||
| Income tax expense | (30,235 | ) | (21,891 | ) | (55,864 | ) | (48,668 | ) | ||||||||
| Income from continuing operations | 46,883 | 34,371 | 87,165 | 75,750 | ||||||||||||
| Loss on discontinued operations, net of income taxes (note 2) | (29 | ) | (531 | ) | (378 | ) | (1,934 | ) | ||||||||
| Net income | 46,854 | 33,840 | 86,787 | 73,816 | ||||||||||||
| Less net income attributable to redeemable non-controlling interests | 202 | 123 | 684 | 420 | ||||||||||||
| Net income attributable to Air Methods Corporation and subsidiaries | $ | 46,652 | 33,717 | 86,103 | 73,396 | |||||||||||
| Other comprehensive income (loss), net of income taxes: | ||||||||||||||||
| Foreign currency translation adjustments | (340 | ) | (251 | ) | (800 | ) | (205 | ) | ||||||||
| Comprehensive income | $ | 46,312 | 33,466 | 85,303 | 73,191 | |||||||||||
(Continued)
3
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME, Continued
(Amounts in thousands, except share and per share amounts)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Income (loss) per common share (note 5): | ||||||||||||||||
| Basic: | ||||||||||||||||
| Continuing operations | $ | 1.17 | .92 | 2.18 | 1.97 | |||||||||||
| Discontinued operations | -- | (.01 | ) | (.01 | ) | (.05 | ) | |||||||||
| Net income | $ | 1.17 | .91 | 2.17 | 1.92 | |||||||||||
| Diluted: | ||||||||||||||||
| Continuing operations | $ | 1.16 | .91 | 2.17 | 1.96 | |||||||||||
| Discontinued operations | -- | (.01 | ) | (.01 | ) | (.05 | ) | |||||||||
| Net income | $ | 1.16 | .90 | 2.16 | 1.91 | |||||||||||
| Weighted average number of common shares outstanding – basic | 39,293,453 | 39,168,873 | 39,276,062 | 39,146,609 | ||||||||||||
| Weighted average number of common shares outstanding – diluted | 39,420,354 | 39,343,405 | 39,408,239 | 39,329,121 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 86,787 | 73,816 | |||||
| Loss from discontinued operations, net of income taxes | 378 | 1,934 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization expense | 62,082 | 60,467 | ||||||
| Deferred income tax expense | 6,397 | 17,998 | ||||||
| Stock-based compensation | 5,733 | 2,866 | ||||||
| Tax benefit from exercise of stock options | (184 | ) | (1,779 | ) | ||||
| Loss on disposition of assets, net | 2,876 | 1,028 | ||||||
| Unrealized loss on derivative instrument | 369 | 70 | ||||||
| Loss from equity method investee | 1,193 | 738 | ||||||
| Changes in assets and liabilities, net of effects of acquisitions: | ||||||||
| Decrease (increase) in prepaid expenses and other current assets | 641 | (551 | ) | |||||
| Increase in receivables | (56,549 | ) | (48,366 | ) | ||||
| Decrease (increase) in inventories | (797 | ) | 3,369 | |||||
| Decrease (increase) in costs in excess of billings | (2,188 | ) | 1,379 | |||||
| Increase in accounts payable, other accrued liabilities, and other liabilities | 18,770 | 6,860 | ||||||
| Decrease in deferred revenue and billings in excess of costs | (178 | ) | (1,453 | ) | ||||
| Net cash provided by continuing operating activities | 125,330 | 118,376 | ||||||
| Net cash used by discontinued operating activities | (100 | ) | (1,843 | ) | ||||
| Net cash provided by operating activities | 125,230 | 116,533 | ||||||
| Cash flows from investing activities: | ||||||||
| Acquisition of subsidiaries | -- | (3,182 | ) | |||||
| Acquisition of property and equipment | (95,494 | ) | (87,803 | ) | ||||
| Acquisition of hospital program | (43,481 | ) | -- | |||||
| Buy-out of previously leased aircraft | (9,519 | ) | (17,296 | ) | ||||
| Proceeds from disposition and sale of equipment and assets held for sale | 3,642 | 12,378 | ||||||
| Increase in other assets | (10,900 | ) | (660 | ) | ||||
| Net cash used by continuing investing activities | (155,752 | ) | (96,563 | ) | ||||
| Net cash provided by discontinued investing activities | 25 | 97 | ||||||
| Net cash used in investing activities | (155,727 | ) | (96,466 | ) | ||||
(Continued)
5
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Amounts in thousands)
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock | $ | 409 | $ | 1,190 | ||||
| Tax benefit from exercise of stock options | 184 | 1,779 | ||||||
| Borrowings under line of credit | 50,000 | 30,000 | ||||||
| Payments under line of credit | (50,000 | ) | (42,000 | ) | ||||
| Payments for financing costs | (4,472 | ) | (81 | ) | ||||
| Proceeds from long-term debt | 105,525 | 54,503 | ||||||
| Payments of long-term debt | (45,251 | ) | (30,603 | ) | ||||
| Payments of capital lease obligations | (24,100 | ) | (27,983 | ) | ||||
| Proceeds from non-controlling interests | -- | 98 | ||||||
| Net cash provided (used) by continuing financing activities | 32,295 | (13,097 | ) | |||||
| Net cash provided (used) by discontinued financing activities | -- | -- | ||||||
| Net cash provided (used) by financing activities | 32,295 | (13,097 | ) | |||||
| Increase in cash and cash equivalents | 1,798 | 6,970 | ||||||
| Cash and cash equivalents at beginning of period | 13,165 | 9,862 | ||||||
| Cash and cash equivalents at end of period | $ | 14,963 | $ | 16,832 | ||||
| Interest paid in cash during the period | $ | 14,366 | $ | 15,862 | ||||
| Income taxes paid in cash during the period | $ | 27,950 | $ | 12,244 | ||||
Non-cash investing and financing activities:
In the nine months ended September 30, 2015, the Company entered into non-interest-bearing notes payable of $11,112 to finance the purchase of aircraft which were held in property and equipment pending permanent financing as of September 30, 2015, and into capital leases of $354 to finance the purchase of equipment. The Company also settled non-interest-bearing notes payable of $11,442 in exchange for the aircraft securing the debt.
In the nine months ended September 30, 2014, the Company entered into non-interest-bearing 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 non-interest-bearing notes payable of $2,616 in exchange for the aircraft securing the debt.
See accompanying notes to unaudited condensed consolidated financial statements.
6
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, 2014.
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) | Discontinued Operations |
In July 2013, the Company acquired all of the outstanding common stock of American Jets, Inc., and all of the assets of an affiliated entity (collectively, AJI) for a purchase price of approximately $1.7 million. AJI provided long-range fixed wing medical transportation services based out of Florida. Because of operating losses generated in both 2014 and 2013, the Company made the decision during the fourth quarter of 2014 to discontinue all operations conducted by AJI, and all operations ceased in December 2014. Aircraft totaling $1.3 million used in AJI’s operations are included in assets held for sale in the consolidated balance sheet as of September 30, 2015. Goodwill of $1.5 million associated with AJI was written off during the fourth quarter of 2014. All other assets and liabilities associated with AJI are immaterial and were retained by the Company.
Results of operations for all periods have been reclassified to reflect discontinued operations presentation. Except where otherwise noted, all disclosures in footnotes to the condensed consolidated financial statements represent the results of continuing operations. The results of discontinued operations included in the condensed consolidated statements of comprehensive income were as follows (amounts in thousands):
| For quarters ended September 30, | For nine months ended September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Patient transport revenue, net | $ | -- | 901 | -- | 3,802 | |||||||||||
| Operating expenses: | ||||||||||||||||
| Depreciation and amortization | -- | 149 | -- | 443 | ||||||||||||
| Loss on disposition of assets | -- | 262 | 546 | 262 | ||||||||||||
| Other operating expenses | 36 | 1,360 | 71 | 6,266 | ||||||||||||
| Loss from discontinued operations before income taxes | (36 | ) | (870 | ) | (617 | ) | (3,169 | ) | ||||||||
| Income tax benefit | 7 | 339 | 239 | 1,235 | ||||||||||||
| Loss from discontinued operations | $ | (29 | ) | (531 | ) | (378 | ) | (1,934 | ) | |||||||
7
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, 2015, consisted of the following (amounts in thousands except share amounts):
| Shares | ||||||||
| Outstanding | Amount | |||||||
| Balances at January 1, 2015 | 39,228,948 | $ | 471,909 | |||||
| Issuance of common shares for options exercised | 33,840 | 409 | ||||||
| Stock-based compensation | 39,886 | 5,733 | ||||||
| Tax benefit from exercise of stock options | -- | 184 | ||||||
| Forfeiture of unvested restricted shares and related dividends | -- | 7 | ||||||
| Adjustments to redeemable non-controlling interests | -- | (918 | ) | |||||
| Other comprehensive loss | -- | (800 | ) | |||||
| Net income attributable to Air Methods Corporation and subsidiaries | -- | 86,103 | ||||||
| Balances at September 30, 2015 | 39,302,674 | $ | 562,627 | |||||
| (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 charitable care policies related to self-pay patients or deductible and copayment balances for insured patients during either 2015 or 2014. The allowance for uncompensated care was 47.3% of receivables from all payers, excluding Medicare and Medicaid, as of September 30, 2015, compared to 38.8% at December 31, 2014, and 39.7% at September 30, 2014. The increase in the allowance reflects a decrease in collections as a percentage of gross charges from third-party payers in 2015 compared to 2014.
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. 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, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Third-party payers | $ | 322,636 | 242,088 | 833,525 | 651,906 | |||||||||||
| Self-pay | 80,486 | 72,437 | 216,240 | 208,360 | ||||||||||||
| Total | $ | 403,122 | 314,525 | 1,049,765 | 860,266 | |||||||||||
8
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.
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 decreased by $800,000 and $918,000 for the quarter and nine months ended September 30, 2015, respectively, and 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:
| 2015 | 2014 | |||||||
| For quarter ended September 30: | ||||||||
| Weighted average number of common shares outstanding – basic | 39,293,453 | 39,168,873 | ||||||
| Dilutive effect of: | ||||||||
| Common stock options | 27,886 | 83,064 | ||||||
| Unvested restricted stock | 92,449 | 83,520 | ||||||
| Unvested performance share units | 6,566 | 7,948 | ||||||
| Weighted average number of common shares outstanding – diluted | 39,420,354 | 39,343,405 | ||||||
| For nine months ended September 30: | ||||||||
| Weighted average number of common shares outstanding – basic | 39,276,062 | 39,146,609 | ||||||
| Dilutive effect of: | ||||||||
| Common stock options | 35,752 | 108,952 | ||||||
| Unvested restricted stock | 95,489 | 73,560 | ||||||
| Unvested performance share units | 936 | -- | ||||||
| Weighted average number of common shares outstanding – diluted | 39,408,239 | 39,329,121 | ||||||
Common stock options totaling 573,732 and 566,752 were not included in the diluted shares outstanding for the three and nine months ended September 30, 2015, respectively, and performance share units totaling 68,340 were not included in the diluted shares outstanding for the three and nine months ended September 30, 2015, because their effect would have been anti-dilutive. 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.
9
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, 2015, and December 31, 2014. The Company’s financial derivatives do not qualify for hedge accounting, and, therefore, realized and non-cash mark to market adjustments are included in air medical aircraft operations and tourism operating expenses in the Company’s statements of comprehensive income. Operating expenses included non-cash mark to market derivative losses of $112,000 and $369,000 for the quarter and nine months ended September 30, 2015, respectively, compared to $6,000 and $70,000 for the quarter and nine months ended September 30, 2014, respectively. There were no cash settlements under the terms of the agreements in 2015 or 2014.
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, 2015, is estimated to be $575,212,000, compared to a carrying value of $572,940,000. The fair value of long-term debt as of December 31, 2014, was estimated to be $510,353,000, compared to a carrying value of $512,666,000.
10
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements, continued
(unaudited)
| (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. 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. |
| For quarter ended September 30: | AMS | Tourism | UR | Corporate Activities | Intersegment Eliminations | Consolidated | ||||||||||||||||||
| 2015 | ||||||||||||||||||||||||
| External revenue | $ | 266,751 | 36,212 | 8,379 | -- | -- | 311,342 | |||||||||||||||||
| Intersegment revenue | -- | -- | 4,803 | -- | (4,803 | ) | -- | |||||||||||||||||
| Total revenue | 266,751 | 36,212 | 13,182 | -- | (4,803 | ) | 311,342 | |||||||||||||||||
| Operating expenses, excluding depreciation & amortization | (160,200 | ) | (28,303 | ) | (11,127 | ) | (12,757 | ) | 4,206 | (208,181 | ) | |||||||||||||
| Depreciation & amortization | (17,412 | ) | (2,002 | ) | (873 | ) | (597 | ) | -- | (20,884 | ) | |||||||||||||
| Interest expense | (3,747 | ) | (783 | ) | -- | (366 | ) | 3 | (4,893 | ) | ||||||||||||||
| Other income (expense), net | 524 | -- | -- | (787 | ) | (3 | ) | (266 | ) | |||||||||||||||
| Income tax expense | -- | -- | -- | (30,235 | ) | -- | (30,235 | ) | ||||||||||||||||
| Income (loss) from continuing operations | 85,916 | 5,124 | 1,182 | (44,742 | ) | (597 | ) | 46,883 | ||||||||||||||||
| Loss on discontinued operations, net of tax | (29 | ) | -- | -- | -- | -- | (29 | ) | ||||||||||||||||
| Segment net income (loss) | 85,887 | 5,124 | 1,182 | (44,742 | ) | (597 | ) | 46,854 | ||||||||||||||||
| Less net income (loss) attributable to non-controlling interests | (22 | ) | 224 | -- | -- | -- | 202 | |||||||||||||||||
| Net income (loss) attributable to Air Methods Corporation and subsidiaries | $ | 85,909 | 4,900 | 1,182 | (44,742 | ) | (597 | ) | 46,652 | |||||||||||||||
| 2014 | ||||||||||||||||||||||||
| External revenue | $ | 236,739 | 33,941 | 6,151 | 86 | -- | 276,917 | |||||||||||||||||
| Intersegment revenue | -- | -- | 2,305 | -- | (2,305 | ) | -- | |||||||||||||||||
| Total revenue | 236,739 | 33,941 | 8,456 | 86 | (2,305 | ) | 276,917 | |||||||||||||||||
| Operating expenses, excluding depreciation & amortization | (151,792 | ) | (27,963 | ) | (8,193 | ) | (9,672 | ) | 1,957 | (195,663 | ) | |||||||||||||
| Depreciation & amortization | (17,108 | ) | (1,746 | ) | (598 | ) | (520 | ) | -- | (19,972 | ) | |||||||||||||
| Interest expense | (3,965 | ) | (742 | ) | -- | (635 | ) | -- | (5,342 | ) | ||||||||||||||
| Other income (expense), net | 435 | 1 | -- | (114 | ) | -- | 322 | |||||||||||||||||
| Income tax expense | -- | -- | -- | (21,891 | ) | -- | (21,891 | ) | ||||||||||||||||
| Income (loss) from continuing operations | 64,309 | 3,491 | (335 | ) | (32,746 | ) | (348 | ) | 34,371 | |||||||||||||||
| Loss on discontinued operations, net of tax | (531 | ) | -- | -- | -- | -- | (531 | ) | ||||||||||||||||
| Segment net income (loss) | 63,778 | 3,491 | (335 | ) | (32,746 | ) | (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 | $ | 63,822 | 3,324 | (335 | ) | (32,746 | ) | (348 | ) | 33,717 | ||||||||||||||
11
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)
| (7) | Business Segment Information, continued |
| For nine months ended September 30: | AMS | Tourism | UR | Corporate Activities | Intersegment Eliminations | Consolidated | ||||||||||||||||||
| 2015 | ||||||||||||||||||||||||
| External revenue | $ | 697,400 | 98,877 | 16,962 | 4 | -- | 813,243 | |||||||||||||||||
| Intersegment revenue | -- | -- | 17,923 | -- | (17,923 | ) | -- | |||||||||||||||||
| Total revenue | 697,400 | 98,877 | 34,885 | 4 | (17,923 | ) | 813,243 | |||||||||||||||||
| Operating expenses, excluding depreciation & amortization | (466,493 | ) | (80,239 | ) | (30,261 | ) | (33,748 | ) | 16,380 | (594,361 | ) | |||||||||||||
| Depreciation & amortization | (52,026 | ) | (5,791 | ) | (2,529 | ) | (1,736 | ) | -- | (62,082 | ) | |||||||||||||
| Interest expense | (11,169 | ) | (2,439 | ) | -- | (1,440 | ) | 7 | (15,041 | ) | ||||||||||||||
| Other income (expense), net | 2,339 | 3 | -- | (1,065 | ) | (7 | ) | 1,270 | ||||||||||||||||
| Income tax expense | -- | -- | -- | (55,864 | ) | -- | (55,864 | ) | ||||||||||||||||
| Income (loss) from continuing operations | 170,051 | 10,411 | 2,095 | (93,849 | ) | (1,543 | ) | 87,165 | ||||||||||||||||
| Loss on discontinued operations, net of tax | (378 | ) | -- | -- | -- | -- | (378 | ) | ||||||||||||||||
| Segment net income (loss) | 169,673 | 10,411 | 2,095 | (93,849 | ) | (1,543 | ) | 86,787 | ||||||||||||||||
| Less net income (loss) attributable to non-controlling interests | (82 | ) | 766 | -- | -- | -- | 684 | |||||||||||||||||
| Net income (loss) attributable to Air Methods Corporation and subsidiaries | $ | 169,755 | 9,645 | 2,095 | (93,849 | ) | (1,543 | ) | 86,103 | |||||||||||||||
| 2014 | ||||||||||||||||||||||||
| External revenue | $ | 644,427 | 89,709 | 21,401 | 86 | -- | 755,623 | |||||||||||||||||
| Intersegment revenue | -- | -- | 9,363 | -- | (9,363 | ) | -- | |||||||||||||||||
| Total revenue | 644,427 | 89,709 | 30,764 | 86 | (9,363 | ) | 755,623 | |||||||||||||||||
| Operating expenses, excluding depreciation & amortization | (433,550 | ) | (72,158 | ) | (28,160 | ) | (29,178 | ) | 8,159 | (554,887 | ) | |||||||||||||
| Depreciation & amortization | (52,228 | ) | (4,966 | ) | (1,733 | ) | (1,540 | ) | -- | (60,467 | ) | |||||||||||||
| Interest expense | (12,221 | ) | (2,095 | ) | -- | (2,123 | ) | -- | (16,439 | ) | ||||||||||||||
| Other income (expense), net | 1,248 | 4 | -- | (664 | ) | -- | 588 | |||||||||||||||||
| Income tax expense | -- | -- | -- | (48,668 | ) | -- | (48,668 | ) | ||||||||||||||||
| Income (loss) from continuing operations | 147,676 | 10,494 | 871 | (82,087 | ) | (1,204 | ) | 75,750 | ||||||||||||||||
| Loss on discontinued operations, net of tax | (1,934 | ) | -- | -- | -- | -- | (1,934 | ) | ||||||||||||||||
| Segment net income (loss) | 145,742 | 10,494 | 871 | (82,087 | ) | (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 | $ | 145,872 | 9,944 | 871 | (82,087 | ) | (1,204 | ) | 73,396 | |||||||||||||||
| (8) | New Accounting Pronouncements |
In September 2015, the FASB issued ASU No. 2015-16,Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are identified. An acquirer is also required to record the income effect of such adjustments in the same period, calculated as if the adjustment had been made at the acquisition date. The ASU also stipulates disclosure requirements for such adjustments. The ASU is effective for periods beginning after December 15, 2015, and is to be applied prospectively to adjustments occurring after the effective date. The Company does not expect the implementation to have a material effect on its financial position or results of operations.
In April 2015, the FASB issued ASU No. 2015-03,Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented as a deduction from the carrying amount of the related debt liability, consistent with debt discounts or premiums. Recognition and measurement guidance for debt issuance costs is not affected by this ASU. In August 2015, the FASB issued ASU No. 2015-15 to clarify the presentation of debt issuance costs for lines of credit. Both ASU’s are effective for periods beginning after December 15, 2015, and the Company does not expect the implementation to have a material effect on its financial position or results of operations.
12
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)
| (8) | 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. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU 2014-09 for public entities to annual periods beginning after December 15, 2017, although early adoption will be permitted as of the original effective date (i.e., for periods beginning after December 15, 2016). 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.
| (9) | Subsequent Event |
In November 2015, the Company entered into a definitive purchase agreement to acquire 100% of the membership interest of Tri-State Care Flight, LLC, an Arizona limited liability company, and subsidiary (collectively TSCF), for $222.5 million, subject to final determination of certain working capital adjustments as defined in the agreement. The acquisition is subject to regulatory approval and customary closing conditions and is expected to close during or prior to the first quarter of 2016. The Company expects to finance the acquisition through an additional term loan under its senior credit facility. TSCF provides air medical transportation services in the southwestern United States.
13
| 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,” 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; future maintenance costs; 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; statements concerning our intent to exercise early lease buy-out options on certain aircraft and the means of financing such buy-outs;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, 2015, the AMS Division generated 86% of our total revenue, compared to 85% in 2014. |
| · | Tourism Division – provides helicopter tours and charter flights, primarily focusing on Grand Canyon and Hawaiian Island tours. In the nine months ended September 30, 2015 and 2014, the Tourism Division generated 12% of our total revenue. |
| · | 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 nine months ended September 30, 2015, compared to 3% in 2014. |
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:
| · | Patient transport volume. Almost all patient transport 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, 2015, is 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 17,330 and 47,287 for the quarter and nine months ended September 30, 2015, respectively, compared to 15,796 and 43,731 for the quarter and nine months ended September 30, 2014, respectively. Patient transports for community-based locations open longer than one year (Same-Base Transports) were 15,829 and 42,852 in the quarter and nine months ended September 30, 2015, respectively, compared to 15,462 and 42,866 in the quarter and nine months ended September 30, 2014, respectively. Cancellations due to unfavorable weather conditions for community-based locations open longer than one year were 53 and 2,308 higher in the quarter and nine months ended September 30, 2015, respectively, compared to 2014. Requests for community-based services increased by 3.6% and 4.8% for the quarter and nine months ended September 30, 2015, respectively, for bases open longer than one year. |
14
| · | 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. The pace of collections is also impacted by additional time taken by private insurers to review claims and related documentation, including proof of medical necessity, prior to processing.One of the primary goals of PPACA is to decrease the number of uninsured Americans. We believe that the movement from self-pay patients to Medicaid in our payer mix shown below 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 increased 7.2% and 4.5% in the quarter and nine months ended September 30, 2015, compared to 2014, attributed to recent price increases net of deteriorations in payer mix and collection rate. Collections as a percentage of gross charges from private insurers decreased from 80.9% and 81.4% for the quarter and nine months ended September 30, 2014, to 75.7% and 77.2% for the quarter and nine months ended September 30, 2015. Payer mix, based on number of transports, was as follows:
| For quarters ended September 30, | For nine months ended September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Private insurance carriers | 27.8 | % | 29.1 | % | 27.0 | % | 27.7 | % | ||||||||
| Government-sponsored insurance plans | 3.6 | % | 3.5 | % | 3.8 | % | 3.8 | % | ||||||||
| Medicare | 33.9 | % | 32.4 | % | 34.8 | % | 33.6 | % | ||||||||
| Medicaid | 24.6 | % | 23.6 | % | 24.4 | % | 22.9 | % | ||||||||
| Self-pay patients | 10.1 | % | 11.4 | % | 10.0 | % | 12.0 | % | ||||||||
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, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Gross billings | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
| Provision for contractual discounts | 50 | % | 51 | % | 52 | % | 51 | % | ||||||||
| Provision for uncompensated care | 22 | % | 20 | % | 22 | % | 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. Certain insurance companies have also not increased their reimbursement rates proportionately with recent price increases to the same extent they did with previous price increases. Continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our historical collection rates.
| · | Tourism passenger count.Tourism revenue is entirely derived from passenger fees, but 74% of tourism operating costs incurred during the nine months ended September 30, 2015, was mainly fixed in nature. Passenger count is impacted by many variables, including weather, competition, and tour prices. Because international travelers account for a significant number of tourism customers, flight volume may also be impacted by worldwide economic conditions and international currency exchange rates. Total tourism passenger count increased to 134,157 and 361,306 in the quarter and nine months ended September 30, 2015, respectively, from 125,515 and 326,148 in the quarter and nine months ended September 30, 2014, respectively. |
15
| · | 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. One aircraft model, representing 8% of our rotor wing fleet, is no longer in production and is, 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, 2014, we have taken delivery of 38 new aircraft. During the first quarter of 2015, we entered into an agreement to take delivery of 200 Bell 407GXP helicopters beginning in 2016 over a ten-year term, subject to an early termination right exercisable by us. We also have commitments to take delivery of 23 other 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 0.2% and 14.0% for the quarter and nine months ended September 30, 2015, respectively, compared to 2014. Total flight volume for all AMS operations increased 5.7% and 1.9% for the quarter and nine months ended September 30, 2015, respectively, compared to 2014. Aircraft maintenance expense for the Tourism division decreased 8.3% and increased 20.2% in the quarter and nine months ended September 30, 2015, respectively, compared to 2014, corresponding to increases of 3.9% and 6.3% in total flight hours for the quarter and nine months ended September 30, 2015, respectively. The changes in maintenance expense reflect normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts. During the nine months ended September 30, 2015, we also incurred $2.6 million to remediate certification documentation issues related to Night Vision Imaging Systems (NVIS) installations in certain of our aircraft. We do not expect further costs related to this remediation effort. |
| · | 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 $46,652,000 and $86,103,000 for the quarter and nine months ended September 30, 2015, respectively, compared to $33,717,000 and $73,396,000 for the quarter and nine months ended September 30, 2014, respectively. Same-Base Transports were 2.4% higher in the quarter ended September 30, 2015, and unchanged for the nine months ended September 30, 2015, compared to 2014, while net reimbursement per patient transport increased 7.2% and 4.5% in the quarter and nine months ended September 30, 2015, respectively, compared to 2014, primarily as a result of recent price increases net of deteriorations in payer mix and collection rate.
Air Medical Services
Patient transport revenue is recorded net of provisions for contractual discounts and uncompensated care and increased $33,373,000, or 17.6%, and $65,048,000, or 13.0%, for the quarter and nine months ended September 30, 2015, respectively, compared to 2014, for the following reasons:
| · | Increases of 7.2% and 4.5% in net reimbursement per transport for the quarter and nine months ended September 30, 2015, respectively, compared to 2014, due to the benefit of recent price increases net of the deterioration in payer mix and collection rate described above. |
16
| · | Increase of 367, or 2.4%, and decrease of 14 in Same-Base Transports for the quarter and nine months ended September 30, 2015, respectively, compared to 2014. Cancellations due to unfavorable weather conditions for locations open longer than one year were 53 and 2,308 higher in the quarter and nine months ended September 30, 2015, respectively, compared to 2014. Requests for community-based services increased 3.6% and 4.8% for the quarter and nine months ended September 30, 2015, respectively, for bases open longer than one year. |
| · | Incremental net revenue of $19,987,000 and $55,035,000 for the quarter and nine months ended September 30, 2015, respectively, generated from the addition of 32 new bases, including fourteen bases resulting from the conversion of AMS contract customers to community-based operations, during either 2015 or 2014. |
| · | Closure of eleven bases during either 2015 or 2014, resulting in decreases in net revenue of approximately $1,993,000 and $4,647,000 during the quarter and nine months ended September 30, 2015, respectively. |
Air medical services contract revenuedecreased $3,949,000, or 8.9%, and $15,086,000, or 11.2%, for the quarter and nine months ended September 30, 2015, for the following reasons:
| · | Cessation of service under five contracts and the conversion of six contracts to community-based operations, during either 2015 or 2014, resulting in decreases in revenue of approximately $6,114,000 and $18,855,000 for the quarter and nine months ended September 30, 2015, respectively. |
| · | Incremental net revenue of $711,000 and $2,013,000 for the quarter and nine months ended September 30, 2015, generated from the addition of one new AMS contract and expansion under three other contracts to additional bases of operation during either 2015 or 2014. |
| · | Increase of 1.2% and decrease of 0.4% in flight volume for the quarter and nine months ended September 30, 2015, 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 $6,679,000, or 7.1%, and $25,074,000, or 9.4%, for the quarter and nine months ended September 30, 2015, respectively, compared to 2014, for the following reasons:
| · | Increases of approximately $8,306,000 and $25,314,000 for the quarter and nine months ended September 30, 2015, respectively, for the addition of personnel to staff new base locations described above. |
| · | Decreases of approximately $4,084,000 and $12,388,000 for the quarter and nine months ended September 30, 2015, respectively, due to the closure of base locations described above. |
| · | Increases in salaries for merit pay raises and in the cost of employee medical benefits. |
Air medical aircraft operating expensesdecreased $2,021,000, or 5.8%, and increased $3,302,000, or 3.4%, for the quarter and nine months ended September 30, 2015, respectively, compared to 2014. 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 of $47,000, or 0.2%, to $24,714,000 and $9,682,000, or 14.0%, to $78,907,000 in AMS aircraft maintenance expense for the quarter and nine months ended September 30, 2015, respectively, compared to 2014. Total flight volume for AMS operations increased 5.7% and 1.9% for the quarter and nine months ended September 30, 2015, respectively, compared to prior year. The change in maintenance expense reflects normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts. During the nine months ended September 30, 2015, we also incurred $2,635,000 to remediate certification documentation issues related to NVIS installations in certain of our aircraft. We do not expect further costs related to this remediation effort. |
| · | Decreases of 22.3% and 26.9% in the cost of aircraft fuel per hour flown for AMS for the quarter and nine months ended September 30, 2015, respectively. Total AMS fuel costs decreased $944,000, or 13.9%, to $5,844,000 and $3,989,000, or 20.7%, to $15,299,000 for the quarter and nine months ended September 30, 2015, respectively, compared to 2014. |
| · | Decreases in hull insurance rates effective July 2015 and 2014. |
Tourism
Tourism and charter revenue increased $2,271,000, or 6.7%, and $9,168,000, or 10.2%, for the quarter and nine months ended September 30, 2015, respectively, compared to 2014. During the quarter and nine months ended September 30, 2015, respectively, we transported 134,157 and 361,306 passengers on tourism flights, compared to 125,515 and 326,148 in the quarter and nine months ended September 30, 2014, respectively.
17
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 decreased $470,000, or 2.0%, and increased $6,997,000, or 12.0%, for the quarter and nine months ended September 30, 2015, respectively, in part due to the increase in the number of passengers, offset during the quarter by decreases in the cost of maintenance and fuel. Cost of tour amenities for our Grand Canyon operations increased $723,000, or 22.0%, and $2,013,000, or 26.2%, for the quarter and nine months ended September 30, 2015, respectively, primarily due to higher access fees charged by the Hualapai Tribe for certain attractions at the Grand Canyon effective May 2014 and to higher passenger volume. Tourism aircraft maintenance expense decreased $627,000, or 8.3%, to $6,961,000 and increased $3,736,000, or 20.2%, to $22,232,000 for the quarter and nine months ended September 30, 2015, respectively, reflecting increases of 3.9% and 6.3% in total flight hours for the quarter and nine months ended September 30, 2015, respectively, as well as normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts. The cost of aircraft fuel per hour flown decreased 37.8% and 28.5% for the quarter and nine months ended September 30, 2015 and 2014, respectively.
United Rotorcraft Division
Medical interiors and products revenueincreased $2,142,000, or 34.3%, and decreased $4,495,000, or 20.9%, for the quarter and nine months ended September 30, 2015, respectively, compared to 2014. Significant projects during 2015 included the completion of eighteen multi-mission interiors for the U.S. Army’s HH-60M helicopter and 26 interiors for an older generation of the U.S. Army’s Black Hawk helicopter, as well as work on six aircraft interiors for commercial customers. Revenue by product line for the quarter and nine months ended September 30, 2015, was as follows:
| · | $5,677,000 and $11,287,000 – governmental entities |
| · | $2,702,000 and $5,679,000 – commercial customers |
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 |
Cost of medical interiors and productsincreased $752,000, or 12.6%, and decreased $5,735,000, or 29.9%, for the quarter and nine months ended September 30, 2015, 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
General and administrative (G&A) expenses increased $3,749,000, or 10.5%, and $5,964,000, or 5.8%, for the quarter and nine months ended September 30, 2015, respectively, compared to 2014. 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. Since March 31, 2014, we have converted six 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. Equity and incentive compensation accruals related to our financial performance also increased $2,006,000 and $1,607,000 during the quarter and nine months ended September 30, 2015, respectively, compared to 2014.
Income tax expense was $30,235,000 and $55,864,000, at effective tax rates of 39.2%, and 39.1%, for the quarter and nine months ended September 30, 2015, respectively, compared to $21,891,000 and $48,668,000, at effective tax rates of 38.9%, and 39.1%, for the quarter and nine months ended September 30, 2014, respectively. 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 September 30, 2015, was $272,004,000, compared to $219,574,000 at December 31, 2014. Cash generated by continuing operations was $125,330,000 in 2015, compared to $118,376,000 in 2014, reflecting the results of operations described above. Receivables increased by $56.5 million during 2015, compared to $48.4 million during 2014, partly because of the new bases and AMS contract conversions discussed above. 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 133 at September 30, 2015, compared to 131 at June 30, 2015, and 116 at September 30, 2014. The increase in DSO’s is attributed in part to additional time taken by private insurers to review claims and related documentation, including proof of medical necessity, prior to processing. We do not expect the claims processing times for private insurers to improve in the near-term.
Cash used by continuing investing activities totaled $155,752,000 in 2015 compared to $96,563,000 in 2014. Equipment acquisitions in 2015 included the purchase of 23 aircraft for approximately $86.1 million and the buy-out of eight previously leased aircraft for $9.5 million. During 2015 we also acquired three aircraft, medical equipment, and certain other intangible assets totaling $43.5 million from a hospital customer in connection with converting the program to community-based operations. We sold seven aircraft for $3.5 million. 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 nineteen aircraft for $12.3 million.
Continuing financing activities generated $32,295,000 in 2015 compared to using $13,097,000 in 2014. The primary uses of cash in both 2015 and 2014 were regularly scheduled payments of long-term debt and capital lease obligations and capital lease buy-outs. During 2015 and 2014 we originated 28 and 17 notes, respectively, primarily to finance the acquisition of aircraft and capital lease buy-outs.
In August 2015 we amended our senior credit facility to provide for a $125 million revolving line of credit and term loans up to an aggregate of $650 million. The maturity date was extended to August 2020. At the time of the amendment, we also prepaid $12 million against our existing term loan under the credit facility.
We currently intend to exercise early lease buy-out options on up to seven aircraft totaling approximately $13.1 million during the fourth quarter of 2015. We expect to finance the buy-outs under long-term notes and with internally generated cash flow or availability under the line of credit.
In the first quarter of 2015, we entered into an agreement to purchase 200 Bell 407GXP helicopters totaling $882.6 million over a ten-year term beginning in 2016. In the event we exercise our right to termination for convenience or are prevented from taking or decline to take delivery of the aircraft for any other reason, we may forfeit nonrefundable deposits up to $6.3 million. We intend to use the new aircraft for base expansion opportunities as well as to replace older models of aircraft in the fleet. We plan to either sell the aircraft which are replaced, use them for spare parts, or redeploy them into the backup fleet.
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 nine months ended September 30, 2015, a change of 100 basis points in the percentage of estimated contractual discounts and uncompensated care would have resulted in a change of approximately $21,932,000 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. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU 2014-09 for public entities to annual periods beginning after December 15, 2017, although early adoption will be permitted as of the original effective date (i.e., for periods beginning after December 15, 2016). The ASU permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.
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.
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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, 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, 2014, 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. In the fourth quarter of 2014, we wrote off $1.5 million in goodwill related to discontinued operations of American Jets, Inc., as discussed more fully in Note 2 to the consolidated financial statements included in Item 1 of this report.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
There have been no material changes in market risk at September 30, 2015, from that reported in our Annual Report on Form 10-K for the year ended December 31, 2014.
| 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, 2015, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of September 30, 2015, 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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Not Applicable
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, 2014.
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
Not Applicable
| 10.1 | Third Amended and Restated Revolving Credit, Term Loan, and Security Agreement, dated August 21, 20151 |
| 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 |
| 1 | Filed as an exhibit to the Company’s Current Report on Form 8-K dated August 21, 2015, and incorporated herein by reference. |
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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 6, 2015 | By | /s/ Aaron D. Todd | |
| Aaron D. Todd | |||
| Chief Executive Officer | |||
| Date: November 6, 2015 | By | /s/ Trent J. Carman | |
| Trent J. Carman | |||
| Chief Financial Officer | |||
| Date: November 6, 2015 | By | /s/ Sharon J. Keck | |
| Sharon J. Keck | |||
| Chief Accounting Officer | |||
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