UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
------------------------------------------------
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
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AIR METHODS CORPORATION
-----------------------
(Exact name of Registrant as Specified in Its Charter)
Delaware 84-0915893
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check
one):
Large accelerated Filer [ ] Accelerated Filer [X] Non-accelerated Filer [ ]
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 July 28,
2006, was 11,761,613.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Unaudited Financial Statements
Consolidated Balance Sheets - June 30, 2006 and December 31, 2005 1
Consolidated Statements of Operations for the three and six
months ended June 30, 2006 and 2005 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2006 and 2005 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURES 21
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
-------------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 2,778 3,218
Current installments of notes receivable 79 65
Receivables:
Trade 157,901 129,107
Less allowance for doubtful accounts (61,010) (45,540)
-------------------------
96,891 83,567
Other 2,138 2,524
-------------------------
Total receivables 99,029 86,091
-------------------------
Inventories 9,819 9,197
Work-in-process on medical interiors and products contracts 2,030 762
Assets held for sale 11,221 6,446
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,599 3,548
Deferred income taxes 2,525 1,133
Prepaid expenses and other 2,452 2,051
-------------------------
Total current assets 133,532 112,511
-------------------------
Property and equipment:
Land 251 441
Flight and ground support equipment 148,238 143,342
Furniture and office equipment 13,133 13,354
-------------------------
161,622 157,137
Less accumulated depreciation and amortization (68,468) (63,607)
-------------------------
Net property and equipment 93,154 93,530
-------------------------
Goodwill 6,485 6,485
Notes receivable, less current installments 100 99
Other assets, net of accumulated amortization of $3,258 and
$2,773 at June 30, 2006 and December 31, 2005, respectively 8,058 8,907
-------------------------
Total assets $ 241,329 221,532
=========================
(Continued)
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
---------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable $ 11,221 6,446
Current installments of long-term debt 7,789 9,399
Current installments of obligations under capital leases 818 657
Accounts payable 9,553 8,405
Deferred revenue 1,928 3,913
Billings in excess of costs and estimated earnings on
uncompleted contracts 552 332
Accrued wages and compensated absences 5,519 7,217
Due to third party payers 2,472 1,858
Other accrued liabilities 8,514 7,445
---------------------------
Total current liabilities 48,366 45,672
Long-term debt, less current installments 67,089 57,704
Obligations under capital leases, less current installments 529 688
Deferred income taxes 19,641 19,997
Other liabilities 10,905 11,260
---------------------------
Total liabilities 146,530 135,321
---------------------------
Stockholders' equity (note 3):
Preferred stock, $1 par value. Authorized 5,000,000
shares, none issued -- --
Common stock, $.06 par value. Authorized 16,000,000
shares; issued 11,761,613 and 11,605,590 shares at
June 30, 2006, and December 31, 2005, respectively 706 696
Additional paid-in capital 68,404 66,219
Retained earnings 25,689 19,296
---------------------------
Total stockholders' equity 94,799 86,211
---------------------------
Total liabilities and stockholders' equity $ 241,329 221,532
===========================
See accompanying notes to unaudited consolidated financial statements.
2
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------
Revenue:
Flight revenue $ 103,795 85,865 191,626 152,823
Sales of medical interiors and products 1,334 1,800 2,903 3,324
Parts and maintenance sales and services 106 20 142 46
Other, net 647 -- 562 --
---------------------------------------------------
105,882 87,685 195,233 156,193
---------------------------------------------------
Operating expenses:
Flight centers 32,972 26,531 64,321 52,277
Aircraft operations 19,621 16,809 36,831 31,738
Aircraft rental 5,365 4,482 10,369 8,762
Medical interiors and products sold 542 1,153 1,413 1,996
Cost of parts and maintenance sales and services 9 18 43 65
Depreciation and amortization 3,194 2,971 6,365 5,868
Bad debt expense 26,758 16,236 43,165 26,347
Loss on disposition of assets, net -- 274 -- 381
General and administrative 10,021 9,065 19,848 17,828
---------------------------------------------------
98,482 77,539 182,355 145,262
---------------------------------------------------
Operating income 7,400 10,146 12,878 10,931
Other income (expense):
Interest expense (1,470) (1,525) (2,826) (3,418)
Loss on early extinguishment of debt -- (3,104) -- (3,104)
Other, net 394 (40) 740 333
---------------------------------------------------
Income before income taxes 6,324 5,477 10,792 4,742
Income tax expense (2,511) (2,153) (4,399) (1,886)
---------------------------------------------------
Net income $ 3,813 3,324 6,393 2,856
===================================================
Basic income per common share (note 2) $ .32 .30 .55 .26
===================================================
Diluted income per common share (note 2) $ .31 .29 .52 .25
===================================================
Weighted average number of common shares outstanding -
basic 11,760,986 11,029,421 11,698,504 11,013,912
===================================================
Weighted average number of common shares outstanding -
diluted 12,318,161 11,519,944 12,300,428 11,511,675
===================================================
See accompanying notes to unaudited consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------
2006 2005
--------------------------
Cash flows from operating activities:
Net income $ 6,393 $ 2,856
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization expense 6,365 5,868
Bad debt expense 43,165 26,347
Deferred income tax expense (benefit) (1,748) 1,876
Stock-based compensation 186 --
Tax benefit from exercise of stock options (833) --
Loss (gain) on retirement and sale of equipment, net (562) 381
Loss on early extinguishment of debt -- 3,104
Changes in assets and liabilities:
Decrease in prepaid expenses and other current assets 272 139
Increase in receivables (56,103) (32,129)
Increase in parts inventories (622) (410)
Decrease (increase) in work-in-process on medical interiors and costs in (1,319) 1,599
excess of billings
Increase in accounts payable, other accrued liabilities, and other
liabilities 1,910 633
Increase (decrease) in deferred revenue and billings in excess of costs (1,465) 152
--------------------------
Net cash provided (used) by operating activities (4,361) 10,416
--------------------------
Cash flows from investing activities:
Acquisition of property and equipment (6,663) (3,664)
Proceeds from disposition and sale of equipment and assets held for sale 1,803 1,070
Decrease in notes receivable and other assets 97 298
--------------------------
Net cash used by investing activities (4,763) (2,296)
--------------------------
(Continued)
4
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------
2006 2005
------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net $ 1,176 166
Tax benefit from exercise of stock options 833 --
Net borrowings under line of credit 11,939 5,594
Proceeds from issuance of long-term debt 2,749 20,000
Payments for debt issue costs (80) (365)
Payments of long-term debt (7,586) (26,591)
Debt retirement costs -- (1,380)
Payments of capital lease obligations (347) (307)
------------------------------
Net cash provided (used) by financing activities 8,684 (2,883)
------------------------------
Increase (decrease) in cash and cash equivalents (440) 5,237
Cash and cash equivalents at beginning of period 3,218 2,603
------------------------------
Cash and cash equivalents at end of period $ 2,778 7,840
==============================
Interest paid in cash during the year $ 2,506 3,743
==============================
Income taxes paid in cash during the year $ 2,927 43
==============================
Non-cash investing and financing activities:
In the six months ended June 30, 2006, the Company settled notes payable of
$6,446 in exchange for the aircraft securing the debt. The Company also entered
into notes payable of $11,221 to finance the purchase of aircraft which are held
for sale as of June 30, 2006.
In the six months ended June 30, 2006, the Company entered into a note payable
of $673 to finance insurance policies and into capital lease obligations of $349
to finance the purchase of equipment.
In the six months ended June 30, 2005, the Company settled notes payable of
$5,105 in exchange for the aircraft securing the debt. The Company also settled
a note payable totaling $85 by applying a purchase deposit against it and
entered into a note payable of $396 to finance insurance policies and into a
capital lease obligation of $81 to finance the purchase of equipment.
In the six months ended June 30, 2005, the Company wrote off $1,724 in debt
origination costs and note discount related to the retirement of its
subordinated debt.
See accompanying notes to unaudited consolidated financial statements.
5
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
-----------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the consolidated financial
statements for the respective periods. Interim results are not necessarily
indicative of results for a full year. The 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, 2005.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. The Company
considers its critical accounting policies involving more significant
judgments and estimates to be those related to revenue recognition,
uncollectible receivables, deferred income taxes, and depreciation and
residual values. Actual results could differ from those estimates.
(2) 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 and dilutive potential common shares outstanding during the period.
The reconciliation of basic to diluted weighted average common shares
outstanding is as follows:
2006 2005
---------- ----------
FOR QUARTER ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 11,760,986 11,029,421
Dilutive effect of:
Common stock options 477,800 26,275
Common stock warrants 79,375 464,248
----------------------
Weighted average number of common shares outstanding - diluted 12,318,161 11,519,944
======================
FOR SIX MONTHS ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 11,698,504 11,013,912
Dilutive effect of:
Common stock options 516,198 32,269
Common stock warrants 85,726 465,494
----------------------
Weighted average number of common shares outstanding - diluted 12,300,428 11,511,675
======================
Common stock options of 55,000 were not included in the diluted income
per share calculation for the quarter and six months ended June 30, 2006,
because their effect would have been anti-dilutive. Common stock options of
774,500 were not included in the diluted income per share calculation for
the quarter and six months ended June 30, 2005, because their effect would
have been anti-dilutive.
6
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the six months ended June 30,
2006, consisted of the following (amounts in thousands except share
amounts):
Shares
Outstanding Amount
--------------------
Balances at January 1, 2006 11,605,590 $86,211
Issuance of common shares for options and warrants
exercised 156,023 1,176
Tax benefit from exercise of stock options -- 833
Stock-based compensation -- 186
Net income -- 6,393
---------------------
Balances at June 30, 2006 11,761,613 $94,799
=====================
(4) STOCK-BASED COMPENSATION
------------------------
Effective January 1, 2006, the Company implemented FASB Statement No. 123R
(Statement 123R), Accounting for Stock-Based Compensation, an amendment of
FASB Statement No. 123, adopting the modified prospective method of
implementation. Statement 123R requires recognition of the grant-date fair
value of stock options and other equity-based compensation issued to
employees in the income statement. Under the modified prospective method,
compensation cost has been recognized in the financial statements beginning
with the effective date based on the requirements of Statement 123R for all
share-based payments granted after that date and based on the requirements
of Statement 123 for all unvested awards granted prior to the effective
date of Statement 123R. During the quarter and six months ended June 30,
2006, the Company recognized $107,000 and $185,000, respectively, in
compensation expense related to outstanding stock options. Total
unrecognized compensation cost related to unvested stock-based awards as of
June 30, 2006, was $1,132,000 and is expected to be recognized over the
remaining weighted average vesting term of 2.5 years. Any future excess tax
benefits derived from the exercise of stock options will be recorded
prospectively and reported as cash flows from financing activities in
accordance with FAS 123R.
Prior to January 1, 2006, the Company accounted for its employee stock
compensation plans as prescribed under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB Opinion 25). Because
the Company granted its options at or above market value, no compensation
cost was recognized relating to the plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
provisions of Statement 123, the Company's net income and income per share
would have been reduced to the pro forma amounts indicated below for the
quarter and six months ended June 30, 2005 (amounts in thousands, except
per share amounts):
As Reported Pro Forma
-----------------------
Quarter ended June 30, 2005:
Net income $ 3,324 3,248
Basic income per share .30 .29
Diluted income per share .29 .28
Six months ended June 30, 2005:
Net income $ 2,856 2,705
Basic income per share .26 .25
Diluted income per share .25 .23
7
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) STOCK-BASED COMPENSATION, CONTINUED
-----------------------------------
The Company has a Stock Option Plan (the Plan) which provides for the
granting of incentive stock options (ISO's) and nonqualified stock options
(NSO's), stock appreciation rights, and supplemental stock bonuses. Under
the Plan, 3,500,000 shares of common stock are reserved for options.
Generally, the options granted under the Plan have an exercise price equal
to the market value on the date of grant, vest in three equal installments
beginning one year from the date of grant, and expire five years from the
date of grant. However, option grants to certain officers and employees in
2004 included 460,000 options which vest after five years and expire six
years from the date of grant.
The Company also has a Nonemployee Director Stock Option Plan (the
Director Plan) which authorizes the grant of NSO's to purchase an aggregate
of 300,000 shares of common stock to nonemployee directors of the Company.
Through 2004, each nonemployee director completing one fiscal year of
service received a five-year option to purchase 10,000 shares, exercisable
at the then current market value of the Company's common stock. All options
under this plan were vested immediately upon issue.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The Company uses historical
option exercise data for similar employee groups, as well as the vesting
period and contractual term, to estimate the expected term of options
granted; the expected term represents the period of time that options
granted are expected to be outstanding. Expected volatility is based on
historical volatility of the Company's stock. The risk-free rate for
periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant. During the quarter
and six months ended June 30, 2006, options to purchase 55,000 shares of
stock were granted at a weighted average fair value of $9.46. The following
assumptions were used in valuing the grant: expected term of 3.5 years;
expected volatility of 36%; risk-free interest rate of 4.89%; and dividend
yield of 0%. No options were granted during the quarter and six months
ended June 30, 2005.
The following is a summary of option activity under the Plan and the
Director Plan during the six months ended June 30, 2006:
Weighted- Aggregate
Average Intrinsic
Weighted Remaining Value
Average Contractual (amounts in
Shares Exercise Price Life (Years) thousands)
--------- --------------- ------------ -------------
Outstanding at December 31, 2005 961,522 $ 8.48
Granted 55,000 28.70
Exercised (131,023) 7.67
Canceled (75,000) 8.98
---------
Outstanding at June 30, 2006 810,499 9.94 3.1 $ 13,162
=========
Exercisable at June 30, 2006 362,500 8.15 2.4 6,537
=========
During the six months ended June 30, 2006 and 2005, options to purchase
131,023 and 37,048 shares were exercised with aggregate intrinsic values
totaling approximately $2,352,000 and $110,000, respectively.
8
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) 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 Hospital-Based Model (HBM),
Products, and Corporate Activities for internal reporting and performance
evaluation purposes. Operating segments and their principal products or
services are as follows:
- Community-Based Model (CBM) - provides air medical transportation
services to the general population as an independent service in 18
states. Services include aircraft operation and maintenance, medical
care, dispatch and communications, and medical billing and collection.
- Hospital-Based Model (HBM) - provides air medical transportation
services to hospitals in 26 states under exclusive operating
agreements. Services include aircraft operation and maintenance.
- Products Division - designs, manufactures, and installs aircraft
medical interiors and other aerospace and medical transport products
for domestic and international customers.
Products Corporate Intersegment
FOR QUARTER ENDED JUNE 30: CBM HBM Division Activities Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------
2006
External revenue $ 75,433 28,505 1,334 610 -- 105,882
Intersegment revenue -- -- 2,908 -- (2,908) --
-------------------------------------------------------------------------
Total revenue 75,433 28,505 4,242 610 (2,908) 105,882
-------------------------------------------------------------------------
Operating expenses (40,179) (25,501) (2,990) (2,174) 2,314 (68,530)
Depreciation & amortization (1,596) (1,406) (108) (84) -- (3,194)
Bad debt expense (25,834) (924) -- -- -- (26,758)
Interest expense (771) (677) -- (22) -- (1,470)
Other income, net 375 -- -- 19 -- 394
Income tax expense -- -- -- (2,511) -- (2,511)
-------------------------------------------------------------------------
Segment net income (loss) $ 7,428 (3) 1,144 (4,162) (594) 3,813
=========================================================================
Total assets $ 99,506 N/A N/A 143,987 (2,164) 241,329
=========================================================================
2005
External revenue $ 60,577 25,308 1,800 -- -- 87,685
Intersegment revenue -- -- 1,658 -- (1,658) --
-------------------------------------------------------------------------
Total revenue 60,577 25,308 3,458 -- (1,658) 87,685
-------------------------------------------------------------------------
Operating expenses (34,704) (20,222) (2,531) (2,062) 1,187 (58,332)
Depreciation & amortization (1,547) (1,243) (115) (66) -- (2,971)
Bad debt expense (15,885) (351) -- -- -- (16,236)
Interest expense (793) (704) -- (28) -- (1,525)
Loss on early extinguishment of debt -- -- -- (3,104) -- (3,104)
Other income, net 233 -- -- (273) -- (40)
Income tax expense -- -- -- (2,153) -- (2,153)
-------------------------------------------------------------------------
Segment net income (loss) $ 7,881 2,788 812 (7,686) (471) 3,324
=========================================================================
Total assets $ 74,901 N/A N/A 132,610 (2,164) 205,347
=========================================================================
9
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) BUSINESS SEGMENT INFORMATION, CONTINUED
---------------------------------------
Products Corporate Intersegment
FOR SIX MONTHS ENDED JUNE 30: CBM HBM Division Activities Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------
2006
External revenue $136,658 55,062 2,903 610 -- 195,233
Intersegment revenue -- -- 6,152 -- (6,152) --
-------------------------------------------------------------------------
Total revenue 136,658 55,062 9,055 610 (6,152) 195,233
-------------------------------------------------------------------------
Operating expenses (76,748) (49,642) (6,483) (4,718) 4,766 (132,825)
Depreciation & amortization (3,248) (2,744) (215) (158) -- (6,365)
Bad debt expense (41,607) (1,558) -- -- -- (43,165)
Interest expense (1,499) (1,276) -- (51) -- (2,826)
Other, net 668 -- -- 72 -- 740
Income tax expense -- -- -- (4,399) -- (4,399)
-------------------------------------------------------------------------
Segment net income (loss) $ 14,224 (158) 2,357 (8,644) (1,386) 6,393
=========================================================================
Total assets $ 99,506 N/A N/A 143,987 (2,164) 241,329
=========================================================================
2005
External revenue $105,195 47,674 3,324 -- -- 156,193
Intersegment revenue -- -- 4,445 -- (4,445) --
-------------------------------------------------------------------------
Total revenue 105,195 47,674 7,769 -- (4,445) 156,193
-------------------------------------------------------------------------
Operating expenses (66,539) (39,786) (5,852) (4,374) 3,504 (113,047)
Depreciation & amortization (2,944) (2,591) (206) (127) -- (5,868)
Bad debt expense (25,993) (354) -- -- -- (26,347)
Interest expense (1,769) (1,596) -- (53) -- (3,418)
Loss on early extinguishment of debt -- -- -- (3,104) -- (3,104)
Other income, net 459 -- -- (126) -- 333
Income tax expense -- -- -- (1,886) -- (1,886)
-------------------------------------------------------------------------
Segment net income (loss) $ 8,409 3,347 1,711 (9,670) (941) 2,856
=========================================================================
Total assets $ 74,901 N/A N/A 132,610 (2,164) 205,347
=========================================================================
10
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 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; size,
structure and growth of our air medical services and products markets; flight
volume and collection rates for CBM operations; continuation and/or renewal of
HBM contracts; acquisition of new and profitable Products Division contracts;
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. Our divisions, or business
segments, are organized according to the type of service or product provided and
consist of the following:
- - Community-Based Model (CBM) - provides air medical transportation services
to the general population as an independent service. 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. In the first six months of 2006 the CBM Division generated 70%
of our total revenue, compared to 67% in the first six months of 2005.
- - Hospital-Based Model (HBM) - provides air medical transportation services
to hospitals throughout the U.S. under exclusive operating agreements.
Revenue consists of fixed monthly fees (approximately 62% of total contract
revenue) and hourly flight fees (approximately 38% of total contract
revenue) billed to hospital customers. The division also has two contracts,
both expansions of contracts with hospital-based customers, for which it
bills patients or insurers directly and is at risk for collection from
these parties. In the six months ended June 30, 2006, the HBM Division
generated 28% of our total revenue, compared to 31% in the six months ended
June 30, 2005.
- - Products Division - designs, manufactures, and installs aircraft medical
interiors and other aerospace and medical transport products for domestic
and international customers. The Products Division generated 2% of our
total revenue in the six months ended June 30, 2006 and 2005.
See Note 5 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. Fluctuations in flight volume have a greater impact on CBM
operations than HBM operations because 100% of CBM revenue is derived from
hourly flight fees, as compared to 38% of HBM revenue. By contrast,
approximately 58% of our costs primarily associated with flight operations
(including salaries, aircraft ownership costs, hull insurance, and general
and administrative expenses) 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 has historically been weather conditions. Adverse
weather conditions-such as fog, high winds, or heavy precipitation-hamper
our ability to operate our aircraft safely and, therefore, result in
reduced flight volume. Total patient transports for CBM operations were
approximately 8,900 and 16,500 for the quarter and six months ended June
30, 2006, respectively, compared to approximately 8,600 and 15,300 for the
quarter and six months ended June 30, 2005, respectively. Patient
transports for CBM bases open longer than one year (Same-Base Transports)
were approximately 8,400 and 15,800 in the quarter and six months ended
June 30, 2006, respectively, compared to approximately 8,400 and 14,900 in
the quarter and six months ended June 30, 2005, respectively. Cancellations
due to unfavorable weather conditions for CBM bases open longer than one
year were 435, or 12.0%, lower in the first six months of 2006, compared to
the first six months of 2005, with most of the improvement experienced in
the first quarter.
11
- - REIMBURSEMENT PER TRANSPORT. Net reimbursement per transport for CBM and
HBM at-risk operations is primarily a function of price, payer mix, and
timely and effective collection efforts. Both the pace of collections and
the ultimate collection rate are affected by the overall health of the U.S.
economy, which impacts the number of indigent patients and funding for
state-run programs such as Medicaid. Medicaid reimbursement rates in many
jurisdictions have remained well below the cost of providing air medical
transportation. In addition, the collection rate is impacted by changes in
the cost of healthcare and health insurance; as the cost of healthcare
increases, health insurance coverage provided by employers may be reduced
or eliminated entirely, resulting in an increase in the uninsured
population. We respond to calls for air medical transports without
pre-screening the creditworthiness of the patient. Bad debt expense is
estimated during the period the related services are performed based on
historical collection experience. The provision is adjusted as required
based on actual collections in subsequent periods. We have increased
average prices for our CBM operations a total of 27.5% since March 2005,
contributing to an increase of 11.1% in net revenue after bad debt expense
per transport in the six months ended June 30, 2006, compared to the six
months ended June 30, 2005. The total provision for expected uncollectible
amounts, including contractual discounts for Medicare/Medicaid and bad
debts, increased from 46.3% and 45.8% of related gross flight revenue for
the quarter and six months ended June 30, 2005, respectively, to 50.7% and
52.4% for the quarter and six months ended June 30, 2006, respectively.
Although price increases generally increase the net reimbursement per
transport from insurance payers, the amount per transport collectible from
private patient payers and 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.
- - AIRCRAFT MAINTENANCE. Both CBM and HBM 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. Five models of aircraft within our fleet, representing 37%
of the rotor wing fleet, are no longer in production and are, therefore,
susceptible to price increases which outpace general inflationary trends.
In addition, on-condition components are more likely to require replacement
with age. We entered into two long-term purchase commitments in 2004 for a
total of 25 aircraft and into two additional purchase commitments in 2005
for a total of ten aircraft. The majority of new aircraft delivered under
these commitments is expected to replace the discontinued models and other
older aircraft over the next five to seven years. As of June 30, 2006, we
had taken delivery of fifteen aircraft under these commitments. Replacement
models of aircraft typically have higher ownership costs than the models
targeted for replacement but lower maintenance costs. Total maintenance
expense for CBM and HBM operations increased 15.1% and 14.7% in the quarter
and six months ended June 30, 2006, respectively, compared to 2005, while
total flight volume for CBM and HBM operations increased 2.9% and 7.4% over
the same periods. The number of engine events, including overhauls,
increased approximately 10.8% in the first six months of 2006 compared to
the first six months of 2005.
- - COMPETITIVE PRESSURES FROM LOW-COST PROVIDERS. We are recognized within the
industry for our standard of service and our use of cabin-class aircraft.
Many of our regional 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. Deploying
multiple aircraft in a market may also serve as a barrier to entry for
lower cost providers.
- - 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. In September 2003, our pilots voted to be represented by a
collective bargaining unit, and we signed a collective bargaining agreement
(CBA) on March 31, 2006. The agreement is effective January 1, 2006,
through April 30, 2009. Significant changes from our previous wage rates or
benefits include increases in initial base pay rates; increase in pay for
overtime shifts from regular pay rates to 1.5 times regular pay rates; and
changes in our contributions to defined contribution retirement plans (401k
plans). Previously, under one 401k plan, we contributed 2% of gross pay for
all eligible employees and matched 60% of the employees' contributions up
to 6% of their gross pay. Under the other plan, we matched 30% of the
employees' contributions up to 6% of their gross pay. The CBA provides for
Company contributions up to 5.6% of gross pay to both 401k plans, depending
on the level of each
12
employee's participation. We recorded approximately $2,113,000 and
$3,767,000 in incremental salary and benefit costs during the quarter and
six months ended June 30, 2006, respectively, as a result of implementing
the CBA provisions. Other employee groups may also elect to be represented
by unions in the future.
RESULTS OF OPERATIONS
We reported net income of $3,813,000 and $6,393,000 for the quarter and six
months ended June 30, 2006, respectively, compared to $3,324,000 and $2,856,000
for the quarter and six months ended June 30, 2005, respectively. Net income for
the quarter and six months ended June 30, 2005, included a loss on early
extinguishment of debt of $3,104,000 (with a tax effect of approximately
$1,211,000). Operating income was $7,400,000 and $12,878,000 for the quarter and
six months ended June 30, 2006, respectively, compared to $10,146,000 and
$10,931,000 for the quarter and six months ended June 30, 2005, respectively.
Net reimbursement (revenue after Medicare/Medicaid discounts and bad debt
expense) for CBM operations improved 6.6% and 11.1% for the quarter and six
months ended June 30, 2006, respectively, compared to the prior year, while
Same-Base Transports for both CBM and HBM bases remained relatively constant.
The improvement in net reimbursement during 2006 was offset in part by increases
in the cost of aircraft maintenance and in salaries and benefits, primarily as a
result of the implementation of the CBA.
FLIGHT OPERATIONS - COMMUNITY-BASED MODEL AND HOSPITAL-BASED MODEL
FLIGHT REVENUE increased $17,930,000, or 20.9%, and $38,803,000, or 25.4%, for
the quarter and six months ended June 30, 2006, respectively, compared to 2005.
Flight revenue is generated by both CBM and HBM operations and is recorded net
of contractual allowances under agreements with third-party payers and
Medicare/Medicaid discounts.
- - CBM - Flight revenue increased $14,894,000, or 24.6%, to $75,451,000 for
the second quarter of 2006 and $31,565,000, or 30.0%, to $136,721,000 for
the six months ended June 30, 2006, for the following reasons:
- Average price increases of approximately 27.5% for all CBM operations
since March 2005, including 6.5% in mid-June 2006.
- Incremental revenue of $6,676,000 and $10,200,000 for the quarter and
six months ended June 30, 2006, respectively, generated from the
addition of fourteen new CBM bases either during or subsequent to the
first six months of 2005 and from the provision of air medical
transportation services in Gulfport, Mississippi, in the aftermath of
Hurricane Katrina, pursuant to a contract with the State of
Mississippi.
- Closure of one base during the first quarter of 2005 and two
bases in the first quarter of 2006, resulting in decreases in revenue
of approximately $1,168,000 and $2,475,000 for the quarter and six
months ended June 30, 2006.
- Increase in Same-Base Transports. Excluding the impact of the new
bases and base closures discussed above, total flight volume for all
CBM operations for the six months ended June 30, 2006, increased 859
transports, or 5.8%, compared to the prior year. Cancellations due to
unfavorable weather conditions for CBM bases open longer than one year
were 435, or 12.0%, lower in the first six months of 2006, compared to
the first six months of 2005, with most of the improvement experienced
in the first quarter. Same-Base Transports were relatively unchanged
in the second quarter of 2006 compared to 2005.
- Decrease caused by a change in payer mix to a higher percentage of
Medicare/Medicaid transports, resulting in higher contractual
discounts which are offset against flight revenue. Contractual
discounts were 27.5% and 28.9% of related flight revenue in the
quarter and six months ended June 30, 2006, respectively, compared to
27.0% and 27.9% in the quarter and six months ended June 30, 2005,
respectively. See discussion of total provision for uncollectible
accounts, including contractual discounts and bad debt expense, below
under Bad Debt Expense.
- - HBM - Flight revenue increased $3,036,000, or 12.0%, to $28,344,000 for the
second quarter of 2006 and $7,238,000, or 15.2%, to $54,905,000 for the six
months ended June 30, 2006, for the following reasons:
- Incremental revenue of $1,338,000 and $3,270,000, for the quarter
and six months ended June 30, 2006, respectively, from the addition of
two new bases and the expansion of five contracts either during or
subsequent to the first quarter of 2005.
- Discontinuation of service under one contract during the second
quarter of 2006, resulting in a decrease in revenue of approximately
$220,000 in the quarter and six months ended June 30, 2006.
- Annual price increases in the majority of contracts based on changes
in the Consumer Price Index and in hull insurance rates.
13
- Decrease of 3.7% in flight volume for the quarter ended June 30,
2006, compared to 2005, for all contracts excluding the new contracts
and contract expansions discussed above. Flight volume was relatively
unchanged in the six months ended June 30, 2006, compared to 2005.
FLIGHT CENTER COSTS (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased $6,441,000, or 24.3%, and $12,044,000, or
23.0%, for the quarter and six months ended June 30, 2006, respectively,
compared to 2005. Changes by business segment are as follows:
- - CBM - Flight center costs increased $4,320,000, or 25.1%, to $21,564,000
for the second quarter of 2006 and $7,620,000, or 22.4%, to $41,579,000 for
the six months ended June 30, 2006, for the following reasons:
- Increases of approximately $2,783,000 and $4,304,000 for the quarter
and six months ended June 30, 2006, respectively, for the addition of
personnel to staff new base locations described above.
- Decreases of approximately $494,000 and $1,189,000 for the quarter and
six months ended June 30, 2006, respectively, due to the closure of
base locations described above.
- Increases of approximately $1,271,000 and $1,975,000 in pilot salaries
and benefits for the quarter and six months ended June 30, 2006,
respectively, related to the implementation of the CBA effective
January 1, 2006.
- Increases in salaries for merit pay raises.
- Increases in our cost of medical insurance premiums.
- - HBM - Flight center costs increased $2,121,000, or 22.9%, to $11,408,000
for the second quarter of 2006 and $4,424,000, or 24.2%, to $22,742,000 for
the six months ended June 30, 2006, primarily due to the following:
- Approximately $360,000 and $892,000 for the quarter and six months
ended June 30, 2006, respectively, for the addition of personnel to
staff new base locations described above.
- Increases of approximately $842,000 and $1,792,000 in pilot salaries
and benefits for the quarter and six months ended June 30, 2006,
related to the implementation of the CBA effective January 1, 2006.
- Increases in salaries for merit pay raises.
- Increases in our cost of medical insurance premiums.
AIRCRAFT OPERATING EXPENSES increased $2,812,000, or 16.7%, and $5,093,000, or
16.0%, for the quarter and six months ended June 30, 2006, respectively, in
comparison to the quarter and six months ended June 30, 2005. 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 increase in costs is due to the following:
- - Addition of fifteen helicopters for CBM operations and ten for HBM
operations either during or subsequent to the first six months of 2005,
resulting in increases of approximately $447,000 and $839,000 for the three
and six months ended June 30, 2006, respectively.
- - Increases of approximately 19.4% and 19.2% in the cost of aircraft fuel per
hour flown for the quarter and six months ended June 30, 2006,
respectively.
- - Decrease in hull insurance rates effective July 2005.
- - Changes in flight volume for both CBM and HBM as described above.
- - Increases in the number of engine and transmission events, including
overhauls, experienced during the quarter and six months ended June 30,
2006, compared to the prior year.
- - Annual price increases in the cost of spare parts and overhauls, most of
which exceeded the rate of inflation.
AIRCRAFT RENTAL EXPENSE increased $883,000, or 19.7%, and $1,607,000, or 18.3%,
for the quarter and six months ended June 30, 2006, respectively, in comparison
to the quarter and six months ended June 30, 2005. Incremental rental expense
for twenty leased aircraft added to our fleet, either during or subsequent to
the first six months of 2005, totaled $1,209,000 and $2,276,000 in the quarter
and six months ended June 30, 2006, respectively. The increase for new aircraft
was offset in part by refinancing twelve aircraft at lower lease rates during
the last three quarters of 2005.
BAD DEBT EXPENSE increased $10,522,000, or 64.8%, and $16,818,000, or 63.8%, for
the quarter and six months ended June 30, 2006, respectively, compared to 2005
due in part to the increase in related flight revenue. Bad debt expense as a
percentage of related net flight revenue also increased from 26.4% and 24.7% in
the quarter and six months ended June 30, 2005, to 34.6% and 30.9% in the
quarter and six months ended June 30, 2006. Flight revenue is recorded net of
Medicare/Medicaid discounts. The total provision for expected uncollectible
amounts, including contractual discounts and bad debts, increased from 46.3% and
45.8% of related flight revenue in the quarter and six months ended June 30,
2005, to 52.4% and 50.7% in the quarter and six months ended June 30, 2006. The
increase in reserves was attributed in
14
part to a shift in payer mix in the second quarter of 2006 from insured patients
to uninsured and Medicaid coverage, as well as to lower than anticipated
collections on other accounts. In addition, although price increases generally
increase the net reimbursement per transport from insurance providers, the
amount per transport collectible from private patient payers and 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. Bad debt expense related
to the Products Division was not significant in either 2006 or 2005.
PRODUCTS DIVISION
SALES OF MEDICAL INTERIORS AND PRODUCTS decreased $466,000, or 25.9%, and
$421,000, or 12.7%, for the quarter and six months ended June 30, 2006,
respectively, compared to 2005. Significant projects in 2006 included continued
production of eleven Multi-Mission Medevac Systems for the U. S. Army's HH-60L
Black Hawk helicopter and 21 litter systems for the U.S. Army's Medical
Evacuation Vehicle (MEV), which were nearly completed as of June 30, 2006.
Production of five modular, medical interior kits for commercial customers was
completed during the first two quarters of 2006, and six other kits were still
in process as of June 30, 2006. Revenue by product line for the quarter and six
months ended June 30, 2006, was as follows::
- - $555,000 and $1,561,000 - manufacture of multi-mission interiors
- - $611,000 and $1,028,000 - manufacture and installation of modular, medical
interiors
- - $168,000 and $314,000 - design and manufacture of other aerospace products
In the first quarter of 2005, we completed production of eleven HH-60L units and
nineteen MEV litter systems. In the second quarter of 2005, we continued
production of two HH60L units and began production of eleven additional HH60L
units and 21 MEV units. Other significant projects in 2005 included production
of a multi-mission interior for a Sikorsky FIREHAWK helicopter for the Los
Angeles County Fire Department and two modular medical interiors for a
commercial customer. Revenue by product line for the quarter and six months
ended June 30, 2005, was as follows::
- - $803,000 and $1,589,000 - manufacture of multi-mission interiors
- - $398,000 and $802,000 - manufacture and installation of modular, medical
interiors
- - $599,000 and $933,000 - design and manufacture of other aerospace products
COST OF MEDICAL INTERIORS AND PRODUCTS decreased $611,000, or 53.0%, and
$583,000, or 29.2%, for the quarter and six months ended June 30, 2006,
respectively, as compared to the previous year, consistent with the change in
sales volume. In addition, the average net margin earned on projects during 2006
was 32.3% for the second quarter and 37.3% for the six-month period compared to
24.2% for the second quarter and 26.6% for the six-month period in 2005,
primarily due to the change in product mix.
GENERAL EXPENSES
DEPRECIATION AND AMORTIZATION EXPENSE increased $223,000, or 7.5%, and $497,000,
or 8.5%, for the quarter and six months ended June 30, 2006, respectively,
compared to 2005, primarily as a result of upgrades to aircraft, engines, and
avionics systems and the purchase of rotable equipment and a new dispatch,
flight tracking, and medical field data software system and related hardware.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSES increased $956,000, or 10.5%, and
$2,020,000, or 11.3%, for the quarter and six months ended June 30, 2006,
respectively, compared to 2005. G&A expenses include executive management,
accounting and finance, billing and collections, information services, human
resources, aviation management, pilot training, dispatch and communications, and
CBM program administration. We increased the number of personnel in the billing
and collections function due to the increase in flight volume and, in the
short-term, to accommodate the transition of accounts from the Bountiful billing
office to the San Bernardino billing office. Consolidation of the billing
function into the San Bernardino office is expected to be completed in the third
quarter. Program administration costs also increased 16.4% and 11.2% for the
quarter and six months ended June 30, 2006, to manage the growth in CBM
operations. We increased staffing in our Information Services department to
support the expanded information technology infrastructure and scheduled
software systems upgrades. G&A expenses were 9.5% and 10.2% of revenue for the
quarter and six months ended June 30, 2006, respectively, compared to 10.3% and
11.4% of revenue for the quarter and six months ended June 30, 2005,
respectively.
15
INTEREST EXPENSE decreased $55,000, or 3.6%, and $592,000, or 17.3%, in the
quarter and six months ended June 30, 2006, respectively, compared to 2005,
primarily as a result of regularly scheduled payments of long-term debt and
decreased borrowings against the Company's line of credit. The average balance
outstanding against the line was approximately $15.6 million and $12.5 million
during the three and six months ended June 30, 2006, respectively, compared to
$18.3 million and $17.8 million during the three and six months ended June 30,
2005, respectively. In addition, in May 2005 we repaid $23 million in
subordinated debt, which had an effective interest rate of 16.2% during 2005,
with the proceeds of $20 million in term loans which bore interest at an
effective rate of approximately 9.0% during 2006. The remainder of the repayment
was funded by draws against the line of credit.
LOSS ON EARLY EXTINGUISHMENT OF DEBT for the quarter and six months ended June
30, 2005, totaled $3,104,000 and related to the repayment of $23 million in
subordinated debt in May 2005. We wrote off approximately $1,724,000 in debt
origination costs and note discount related to the subordinated debt and paid a
prepayment penalty of $1,380,000 to the holders of the subordinated debt.
INCOME TAX EXPENSE was $2,511,000 and $4,399,000 in the quarter and six months
ended June 30, 2006, respectively, and $2,153,000 and $1,886,000 in the quarter
and six months ended June 30, 2005, respectively. The effective tax rate was
approximately 41% for 2006, compared to approximately 40% for 2005. The higher
effective tax rate in 2006 is the result of an increase in certain permanent
book-tax differences.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital position as of June 30, 2006, was $85,166,000, compared to
$66,839,000 at December 31, 2005. The change in working capital position is
primarily attributable to the following:
- - Increase of $12,938,000 in net receivables consistent with increased
revenue for the CBM and HBM divisions and increased net reimbursement for
CBM operations. In addition, days' sales outstanding for CBM operations,
measured by comparing net revenue after bad debt for the annualized
previous 3-month period to outstanding open net accounts receivable,
increased from 119 days at December 31, 2005, to 130 days at June 30, 2006.
The increase in days' sales outstanding is primarily due to an initiative,
beginning in the fourth quarter of 2005 and continuing through the second
quarter of 2006, to centralize the billing and collection function into a
single location which we believe slowed the pace of collections
temporarily.
- - Decrease of $1,698,000 in accrued wages and compensated absences, primarily
because of the payment during the six months ended June 30, 2006, of
performance bonuses accrued as of December 31, 2005.
SOURCES AND USES OF CASH
We had cash and cash equivalents of $2,778,000 as of June 30, 2006, compared to
$3,218,000 at December 31, 2005. Operating activities used $4,361,000 in 2006,
compared to generating $10,416,000 in 2005. Receivable balances, net of bad debt
expense, increased $12,938,000 in 2006 compared to $5,782,000 in 2005,
reflecting continued growth in CBM and HBM revenue, improved net reimbursement
per transport for CBM operations, and the increase in days' sales outstanding
described above. Costs in excess of billings and work-in-process on medical
interiors increased $1,319,000 in 2006, compared to decreasing $1,599,000 in
2005. The balance of costs in excess of billings as of June 30, 2006, included
$3,318,000 related to HH60L units which will be billed later in 2006 when
completed units are shipped.
Cash used by investing activities totaled $4,763,000 in 2006 compared to
$2,296,000 in 2005. Equipment acquisitions in 2006 consist primarily of a $1.4
million aircraft and information systems hardware and software, as well as
medical interior and avionics installations. In 2006, we received $1.5 million
from the sale of land and buildings which had previously served as the
headquarters for Rocky Mountain Holdings, LLC, prior to the acquisition by the
Company in 2002. Equipment acquisitions in 2005 consisted primarily of rotable
equipment, medical and office equipment for new bases, and upgrades to aircraft,
engines, and avionics systems. In 2005 we received $463,000 in insurance
proceeds for an aircraft destroyed in an accident and sold an aircraft
previously classified as held for sale for $607,000.
16
Financing activities generated $8,684,000 in 2006 compared to using $2,883,000
in 2005. The primary use of cash in both 2006 and 2005 was regularly scheduled
payments of long-term debt and capital lease obligations. In 2006 these payments
were offset by draws against our line of credit and proceeds from the issuance
of common stock upon the exercise of stock options. In 2005, we used $20
million of term loan proceeds and additional draws against our line of credit to
fund the early repayment of $23 million in subordinated debt and the related
prepayment penalty of $1,380,000. We also paid $365,000 in debt issuance costs,
primarily associated with the amendment to our senior credit facility in May
2005.
In April 2006 we originated a note payable of $2,749,000 with interest at 6.66%
to refinance balloon payments due under other notes payable. The note is payable
through June 2011.
OUTLOOK FOR 2006
The statements contained in this Outlook are based on current expectations.
These statements are forward-looking, and actual results may differ materially.
We undertake no obligation to update any forward-looking statements.
Community-Based Model
In the first quarter of 2006, we began services under a one-year contract with a
military base in California and ceased operations at a base in Arizona. During
the second quarter of 2006, we opened three new bases in the southeast region,
two in the northeast region, and one in California. In July 2006, an HBM
contract in Florida converted to CBM operations, and we ceased operations at a
base in South Carolina. We expect to open two new bases in the northeast region
prior to the end of 2006. CBM flight volume at all other locations during 2006
is expected to be consistent with historical levels, subject to seasonal,
weather-related fluctuations. Effective June 6, 2006, we increased prices for
our CBM operations an average of approximately 6.5%.
Hospital-Based Model
During the second quarter of 2006, we began rotor wing operations in Montana
under a 3-year contract and discontinued operations under our contract in Puerto
Rico. We expect three other contracts to open satellite bases in 2006. Thirteen
hospital contracts are due for renewal in 2006, four of which have been renewed
for terms ranging from one to three years. We expect 2006 flight activity for
continuing hospital contracts to remain consistent with historical levels.
Products Division
As of June 30, 2006, eleven HH-60L units for the U.S. Army and six modular
medical interiors for commercial customers were in process. Remaining revenue
for all contracts in process is estimated at $2.2 million.
The current U.S. Army Aviation Modernization Plan defines a requirement for 180
HH-60L Multi-Mission Medevac units in total over an unspecified number of years.
We have already completed 28 HH-60L units under the program, in addition to the
eleven currently under contract. The U.S. Army has also forecasted a requirement
for a total of 119 MEV units over four years; we have previously delivered 82
units, in addition to the 21 units currently under contract. There is no
assurance that orders for additional units will be received in future periods.
All Segments
We expect to begin the implementation of new software for inventory tracking in
2006, with completion projected in 2007.
There can be no assurance that we will continue to maintain flight volume or
current levels of collections on receivables for CBM operations, successfully
complete planned expansions of CBM and HBM operations, renew operating
agreements for our HBM operations, or generate new profitable contracts for the
Products Division. Based on the anticipated levels of HBM and CBM flight
activity and the projects in process for the Products Division, we expect to
generate sufficient cash flow to meet our operational needs throughout the
remainder of 2006. We also have approximately $14,800,000 in borrowing capacity
available under our revolving credit facility as of June 30, 2006.
17
CRITICAL ACCOUNTING POLICIES
Our 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, uncollectible receivables,
deferred income taxes, and depreciation and residual values. 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
Fixed flight fee revenue under our operating agreements with hospitals is
recognized monthly over the terms of the agreements. Flight revenue relating to
patient transports is recognized upon completion of the services. Revenue and
accounts receivable are recorded net of estimated contractual allowances under
agreements with third-party payers (i.e., Medicare and Medicaid). Estimates of
contractual allowances are initially determined based on historical discount
percentages for Medicare and Medicaid patients and adjusted periodically based
on actual discounts. If actual discounts realized are more or less than those
projected by management, adjustments to contractual allowances may be required.
Based on related flight revenue for the six months ended June 30, 2006, a change
of 100 basis points in the percentage of estimated contractual discounts would
have resulted in a change of approximately $1,960,000 in flight revenue.
Revenue related to fixed fee medical interior and products contracts is recorded
as costs are incurred using the percentage of completion method of accounting.
We estimate the percentage of completion based on costs incurred to date as a
percentage of an estimate of the total costs to complete the project. Losses on
contracts in process are recognized when determined. If total costs to complete
a project are greater or less than estimated, the gross margin on the project
may be greater or less than originally recorded under the percentage of
completion method.
Uncollectible Receivables
We respond to calls for air medical transports without pre-screening the credit
worthiness of the patient. Uncollectible trade receivables are charged to
operations using the allowance method. Estimates of uncollectible receivables
are determined monthly based on historical collection rates and adjusted monthly
thereafter based on actual collections. If actual future collections are more or
less than those projected by management, adjustments to allowances for
uncollectible accounts may be required. There can be no guarantee that we will
continue to experience the same collection rates that we have in the past. Based
on related net flight revenue for the six months ended June 30, 2006, a change
of 100 basis points in the percentage of estimated uncollectible accounts would
have resulted in a change of approximately $1,398,000 in flight revenue.
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 and record a valuation allowance for
those amounts we believe are not likely to be realized. Establishing or
increasing a valuation allowance in a period increases income tax expense. 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. 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
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amount, an adjustment to the valuation allowance would increase income in the
period such determination was made.
Depreciation and Residual Values
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange and interest rates. All of our
sales and related receivables are payable in U.S. dollars. We are subject to
interest rate risk on our debt obligations and notes receivable, some of which
have fixed interest rates, except $18,794,000 outstanding against the line of
credit and $25,842,000 in notes payable. Based on the amounts outstanding at
June 30, 2006, the annual impact of a change of 100 basis points in interest
rates would be approximately $446,000. Interest rates on these instruments
approximate current market rates as of June 30, 2006.
Periodically we enter into interest rate risk hedges to minimize exposure to the
effect of an increase in interest rates. As of June 30, 2006, we were party to
one interest rate swap agreement. The swap agreement provides that we will pay a
3.62% fixed interest rate on $841,000 of notional principal and receive a
floating interest rate (LIBOR plus 2.50%) on the same amount of notional
principal from the counterparty.
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 under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified by the Commission's rules and forms, and that information is
accumulated and communicated to management, including the principal executive
and financial officers (referred to in this report as the Certifying Officers),
as appropriate to allow timely decisions regarding required disclosure.
Management, under the supervision and with the participation of the Certifying
Officers, evaluated the effectiveness of disclosure controls and procedures as
of June 30, 2006, pursuant to Rule 13a-15(b) under the Exchange Act. Based on
that evaluation, the Certifying Officers have concluded that, as of June 30,
2006, 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 as disclosed in our
annual report on Form 10-K for the year ended December 31, 2005, except as noted
below:
- - Employee unionization - In September 2003, our pilots voted to be
represented by a collective bargaining unit, and we signed a CBA on March
31, 2006. The agreement is effective January 1, 2006, through April 30,
2009. The CBA establishes procedures for training, addressing grievances,
discipline and discharge, among other matters, and defines vacation,
holiday, sick, health insurance, and other employee benefits. The CBA also
establishes wage scales, including adjustments for geographic locations,
covering each year of the agreement. Significant changes from our previous
wage rates or benefits include increases in initial base pay rates,
dependent upon each pilot's level of seniority; increase in pay for
overtime shifts from regular pay rates to 1.5 times regular pay rates; and
changes in our contributions to defined contribution retirement plans (401k
plans). Previously, under one 401k plan, we contributed 2% of gross pay for
all eligible employees and matched 60% of the employees' contributions up
to 6% of their gross pay. Under the other plan, we matched 30% of the
employees' contributions up to 6% of their gross pay. The CBA provides for
Company contributions up to 5.6% of gross pay to both 401k plans, depending
on the level of each employee's participation. We recorded approximately
$2,113,000 and $3,767,000 in incremental salary and benefit costs during
the quarter and six months ended June 30, 2006, respectively, as a result
of implementing the CBA provisions. Other employee groups may also elect to
be represented by unions in the future.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31.1 Chief Executive Officer Certification adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIR METHODS CORPORATION
Date: August 9, 2006 By /s/ Aaron D. Todd
------------------------------------
Aaron D. Todd
Chief Executive Officer
Date: August 9, 2006 By /s/ Trent J. Carman
------------------------------------
Trent J. Carman
Chief Financial Officer
Date: August 9, 2006 By /s/ Sharon J. Keck
------------------------------------
Sharon J. Keck
Chief Accounting Officer
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