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, 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 (IRS Employer
of 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
--------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report: N/A
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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
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
27, 2006, was 11,805,613.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2006 and
December 31, 2005 (unaudited) 1
Consolidated Statements of Operations for the three and nine
months ended September 30, 2006 and 2005 (unaudited) 3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits 23
SIGNATURES 24
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 3,805 3,218
Current installments of notes receivable 161 65
Receivables:
Trade 163,757 129,107
Less allowance for doubtful accounts (57,267) (45,540)
------------------------------
106,490 83,567
Other 3,505 2,524
------------------------------
Total receivables 109,995 86,091
------------------------------
Inventories 10,120 9,197
Work-in-process on medical interiors and products contracts 1,945 762
Assets held for sale 19,627 6,446
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,303 3,548
Deferred income taxes 1,962 1,133
Prepaid expenses and other 2,507 2,051
------------------------------
Total current assets 153,425 112,511
------------------------------
Property and equipment:
Land 251 441
Flight and ground support equipment 153,856 143,342
Furniture and office equipment 13,484 13,354
------------------------------
167,591 157,137
Less accumulated depreciation and amortization (71,359) (63,607)
------------------------------
Net property and equipment 96,232 93,530
------------------------------
Goodwill 6,485 6,485
Notes receivable, less current installments 237 99
Other assets, net of accumulated amortization of $3,475 and $2,773
at September 30, 2006 and December 31, 2005, respectively 8,152 8,907
------------------------------
Total assets $ 264,531 221,532
==============================
(Continued)
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2006 2005
----------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable $ 19,165 6,446
Current installments of long-term debt 7,963 9,399
Current installments of obligations under capital leases 673 657
Accounts payable 9,643 8,405
Deferred revenue 1,987 3,913
Billings in excess of costs and estimated earnings on
uncompleted contracts 294 332
Accrued wages and compensated absences 8,895 7,217
Due to third party payers 2,474 1,858
Income taxes payable 3,596 860
Other accrued liabilities 6,297 6,585
----------------------------
Total current liabilities 60,987 45,672
Long-term debt, less current installments 67,373 57,704
Obligations under capital leases, less current installments 479 688
Deferred income taxes 19,625 19,997
Other liabilities 11,187 11,260
----------------------------
Total liabilities 159,651 135,321
----------------------------
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 11,805,613 and 11,605,590 shares at September 30,
2006, and December 31, 2005, respectively 708 696
Additional paid-in capital 68,877 66,219
Retained earnings 35,295 19,296
----------------------------
Total stockholders' equity 104,880 86,211
----------------------------
Total liabilities and stockholders' equity $ 264,531 221,532
============================
See accompanying notes to 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------
Revenue:
Flight revenue $ 114,517 88,094 306,143 240,917
Sales of medical interiors and products 1,374 2,415 4,277 5,739
Parts and maintenance sales and services 197 24 339 70
---------------------------------------------------
116,088 90,533 310,759 246,726
---------------------------------------------------
Operating expenses:
Flight centers 34,380 28,265 98,701 80,542
Aircraft operations 20,450 16,119 57,281 47,857
Aircraft rental 5,490 4,608 15,859 13,370
Medical interiors and products sold 674 1,626 2,087 3,622
Cost of parts and maintenance sales and services 225 23 268 88
Depreciation and amortization 3,239 3,022 9,604 8,890
Bad debt expense 25,568 17,834 68,733 44,181
Loss (gain) on disposition of assets, net 16 (5) (546) 376
Litigation settlement (1,417) -- (1,417) --
General and administrative 10,341 9,146 30,189 26,974
---------------------------------------------------
98,966 80,638 280,759 225,900
---------------------------------------------------
Operating income 17,122 9,895 30,000 20,826
Other income (expense):
Interest expense (1,522) (1,228) (4,348) (4,646)
Loss on early extinguishment of debt -- -- -- (3,104)
Other, net 452 361 1,192 694
---------------------------------------------------
Income before income taxes 16,052 9,028 26,844 13,770
Income tax expense 6,446 3,530 10,845 5,416
---------------------------------------------------
Net income $ 9,606 5,498 15,999 8,354
===================================================
Basic income per common share (note 2) $ .82 .50 1.36 .76
===================================================
Diluted income per common share (note 2) $ .78 .47 1.30 .72
===================================================
Weighted average number of common shares outstanding -
basic 11,774,700 11,034,754 11,724,182 11,020,936
===================================================
Weighted average number of common shares outstanding -
diluted 12,275,968 11,634,024 12,291,559 11,536,716
===================================================
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2006 2005
-----------------------------------
Cash flows from operating activities:
Net income $ 15,999 8,354
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 9,604 8,890
Bad debt expense 68,733 44,181
Deferred income tax expense (benefit) (1,201) 5,406
Stock-based compensation 311 --
Tax benefit from exercise of stock options (833) --
Loss (gain) on retirement and sale of equipment, net (546) 376
Loss on early extinguishment of debt -- 3,104
Changes in assets and liabilities:
Decrease in prepaid expenses and other current assets 217 300
Increase in receivables (92,637) (59,004)
Increase in inventories (923) (461)
Increase in work-in-process on medical interiors and costs in excess of billings (938) (578)
Increase in accounts payable, other accrued liabilities, and other
liabilities 7,000 4,327
Decrease in deferred revenue and billings in excess of costs (1,964) (714)
-----------------------------------
Net cash provided by operating activities 2,822 14,181
-----------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (13,228) (3,878)
Proceeds from disposition and sale of equipment 1,803 1,070
Increase in notes receivable and other assets (100) (341)
-----------------------------------
Net cash used by investing activities (11,525) (3,149)
-----------------------------------
(Continued)
4
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
2006 2005
------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net $ 1,526 235
Tax benefit from exercise of stock options 833 --
Net borrowings (repayments) under line of credit 14,057 (353)
Proceeds from issuance of long-term debt 2,749 20,000
Payments for debt issue costs (87) (431)
Payments of long-term debt (9,246) (28,171)
Debt retirement costs -- (1,380)
Payments of capital lease obligations (542) (469)
------------------------------------
Net cash provided (used) by financing activities 9,290 (10,569)
------------------------------------
Increase in cash and cash equivalents 587 463
Cash and cash equivalents at beginning of period 3,218 2,603
------------------------------------
Cash and cash equivalents at end of period $ 3,805 3,066
====================================
Interest paid in cash during the year $ 3,924 4,884
====================================
Income taxes paid in cash during the year $ 8,577 272
====================================
Non-cash investing and financing activities:
In the nine months ended September 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 $19,165 to finance the purchase of aircraft which
are held for sale as of September 30, 2006.
In the nine months ended September 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 nine months ended September 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 $346 by applying a purchase deposit against it
and entered into a note payable of $396 to finance insurance policies and into
capital lease obligations of $832 to finance the purchase of equipment.
In the nine months ended September 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 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 SEPTEMBER 30:
Weighted average number of common shares outstanding - basic 11,774,700 11,034,754
Dilutive effect of:
Common stock options 425,279 119,672
Common stock warrants 75,989 479,598
----------------------
Weighted average number of common shares outstanding - diluted 12,275,968 11,634,024
======================
FOR NINE MONTHS ENDED SEPTEMBER 30:
Weighted average number of common shares outstanding - basic 11,724,182 11,020,936
Dilutive effect of:
Common stock options 484,937 44,342
Common stock warrants 82,440 471,438
----------------------
Weighted average number of common shares outstanding - diluted 12,291,559 11,536,716
======================
Common stock options of 70,000 and 55,000 were not included in the
diluted income per share calculation for the quarter and nine months ended
September 30, 2006, respectively, because their effect would have been
anti-dilutive. Common stock options totaling 727,000 were not included in
the diluted income per share calculation for the nine months ended
September 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 nine months ended September
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 200,023 1,526
Tax benefit from exercise of stock options -- 833
Stock-based compensation -- 311
Net income -- 15,999
---------------------
Balances at September 30, 2006 11,805,613 $104,880
=====================
(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 in the income
statement of the grant-date fair value of stock options and other
equity-based compensation issued to employees. 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 nine
months ended September 30, 2006, the Company recognized $125,000 and
$311,000, respectively, in compensation expense related to outstanding
stock options. Total unrecognized compensation cost related to unvested
stock-based awards as of September 30, 2006, was $1,126,000 and is expected
to be recognized over the remaining weighted average vesting term of 2.3
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 nine months ended September 30, 2005 (amounts in thousands,
except per share amounts):
As Reported Pro Forma
-----------------------
Quarter ended September 30, 2005:
Net income $ 5,498 5,306
Basic income per share .50 .48
Diluted income per share .47 .46
Nine months ended September 30, 2005:
Net income $ 8,354 8,011
Basic income per share .76 .73
Diluted income per share .72 .69
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.
In August 2006, the Company's shareholders approved the 2006 Equity
Compensation Plan (2006 Plan) which provides for the granting of incentive
stock options, non-statutory stock options, shares of restricted stock,
stock appreciation rights and supplemental bonuses consisting of shares of
common stock, cash or a combination thereof to employees, directors, and
consultants. The maximum aggregate number of shares of common stock that
may be made subject to awards under the 2006 Plan is 600,000. The 2006 Plan
is administered by a committee of the Company's board of directors which
has discretion to set the exercise price and term of any option granted,
provided that the term may not exceed ten years. In the third quarter of
2006, one grant for 15,000 shares was awarded under the 2006 Plan.
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 between 5,000 and 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 nine
months ended September 30, 2006, options to purchase 70,000 shares of
stock, with exercise prices ranging from $22.62 to $28.70, were granted at
a weighted average fair value of $9.14. The following weighted average
assumptions were used in valuing the grants: expected term of 3.5 years;
expected volatility of 37%; risk-free interest rate of 4.83%; and dividend
yield of 0%. The weighted average fair value of options granted during the
nine months ended September 30, 2005, was $2.55 using the following
weighted average assumptions: expected term of 3 years; expected volatility
of 36%; risk-free interest rate of 4.0%; and dividend yield of 0%;.
8
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) STOCK-BASED COMPENSATION, CONTINUED
-----------------------------------
The following is a summary of option activity under all stock option
plans during the nine months ended September 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 70,000 27.40
Exercised (175,023) 7.74
Canceled (75,000) 8.98
---------
Outstanding at September 30, 2006 781,499 10.29 3.0 $ 10,678
=========
Exercisable at September 30, 2006 322,500 8.18 2.2 4,974
=========
During the nine months ended September 30, 2006 and 2005, options to
purchase 175,023 and 58,715 shares were exercised with aggregate intrinsic
values totaling approximately $2,999,000 and $180,000, respectively.
(5) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, to clarify the accounting for uncertainty in income taxes recognized
in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN
48 provides for recognition of a tax position in a company's financial
statements only if it is more likely than not that the position will be
sustained upon examination, based on the technical merits of the position.
The tax benefit of a tax position that meets the more-likely-than-not
recognition threshold is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement.
FIN 48 is effective for years beginning after December 15, 2006. The
Company has not yet determined the effect of FIN 48 on its financial
position or results of operations.
In September 2006, the Securities and Exchange Commission staff (SEC
staff) issued Staff Accounting Bulletin 108 (SAB 108), Financial Statements
- Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, providing guidance on
how prior year misstatements should be taken into consideration when
quantifying misstatements in current year financial statements for purposes
of determining whether the current year's financial statements are
materially misstated. SAB 108 requires a company to consider the impact of
all prior year misstatements reflected in the current year's balance sheet,
without consideration of the period in which the misstatement occurred, as
well as to consider the amount of the misstatement that occurred in the
current year in order to determine the materiality of the misstatement. SAB
108 is effective for years ending after November 15, 2006. The Company does
not expect implementation of the guidance in SAB 108 to have a material
effect on its financial position or results of operations.
In September 2006, the FASB issued FASB Statement No. 157 (Statement
157), Fair Value Measurements. Statement 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. It applies under other accounting pronouncements that require
or permit fair value measurements but does not require any new fair value
measurements. Statement 157 is effective for years beginning after November
15, 2007. The Company does not expect implementation of Statement 157 to
have a material effect on its financial position or results of operations.
9
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) 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 SEPTEMBER 30: CBM HBM Division Activities Eliminations Consolidated
----------------------------------------------------------------------------------------------------------
2006
External revenue $ 86,702 28,012 1,374 -- -- 116,088
Intersegment revenue -- 382 5,586 -- (5,968) --
-------------------------------------------------------------------------
Total revenue 86,702 28,394 6,960 -- (5,968) 116,088
-------------------------------------------------------------------------
Operating expenses (40,960) (25,963) (5,336) (2,800) 4,900 (70,159)
Depreciation & amortization (1,748) (1,303) (109) (79) -- (3,239)
Bad debt expense (25,001) (567) -- -- -- (25,568)
Interest expense (815) (700) -- (7) -- (1,522)
Other income, net 432 -- -- 20 -- 452
Income tax expense -- -- -- (6,446) -- (6,446)
-------------------------------------------------------------------------
Segment net income (loss) $ 18,610 (139) 1,515 (9,312) (1,068) 9,606
=========================================================================
Total assets $116,380 N/A N/A 150,315 (2,164) 264,531
=========================================================================
2005
External revenue $ 61,831 26,287 2,415 -- -- 90,533
Intersegment revenue -- -- 1,501 -- (1,501) --
-------------------------------------------------------------------------
Total revenue 61,831 26,287 3,916 -- (1,501) 90,533
-------------------------------------------------------------------------
Operating expenses (34,635) (21,089) (2,990) (2,211) 1,143 (59,782)
Depreciation & amortization (1,539) (1,299) (110) (74) -- (3,022)
Bad debt expense (17,534) (300) -- -- -- (17,834)
Interest expense (658) (544) -- (26) -- (1,228)
Other income, net 274 -- -- 87 -- 361
Income tax expense -- -- -- (3,530) -- (3,530)
-------------------------------------------------------------------------
Segment net income (loss) $ 7,739 3,055 816 (5,754) (358) 5,498
=========================================================================
Total assets $ 83,463 N/A N/A 128,774 (2,164) 210,073
=========================================================================
10
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) BUSINESS SEGMENT INFORMATION, CONTINUED
---------------------------------------
Products Corporate Intersegment
FOR NINE MONTHS ENDED SEPTEMBER 30: CBM HBM Division Activities Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
2006
External revenue $ 223,447 83,035 4,277 -- -- 310,759
Intersegment revenue -- 382 11,738 -- (12,120) --
--------------------------------------------------------------------------
Total revenue 223,447 83,417 16,015 -- (12,120) 310,759
--------------------------------------------------------------------------
Operating expenses (117,795) (75,566) (11,819) (6,908) 9,666 (202,422)
Depreciation & amortization (4,996) (4,047) (324) (237) -- (9,604)
Bad debt expense (66,608) (2,125) -- -- -- (68,733)
Interest expense (2,314) (1,976) -- (58) -- (4,348)
Other income, net 1,100 -- -- 92 -- 1,192
Income tax expense -- -- -- (10,845) -- (10,845)
--------------------------------------------------------------------------
Segment net income (loss) $ 32,834 (297) 3,872 (17,956) (2,454) 15,999
==========================================================================
Total assets $ 116,380 N/A N/A 150,315 (2,164) 264,531
==========================================================================
2005
External revenue $ 167,026 73,961 5,739 -- -- 246,726
Intersegment revenue -- -- 5,946 -- (5,946) --
--------------------------------------------------------------------------
Total revenue 167,026 73,961 11,685 -- (5,946) 246,726
--------------------------------------------------------------------------
Operating expenses (101,174) (60,875) (8,842) (6,585) 4,647 (172,829)
Depreciation & amortization (4,483) (3,890) (316) (201) -- (8,890)
Bad debt expense (43,527) (654) -- -- -- (44,181)
Interest expense (2,427) (2,140) -- (79) -- (4,646)
Loss on early extinguishment of debt -- -- -- (3,104) (3,104)
Other income (expense), net 733 -- -- (39) -- 694
Income tax expense -- -- -- (5,416) -- (5,416)
--------------------------------------------------------------------------
Segment net income (loss) $ 16,148 6,402 2,527 (15,424) (1,299) 8,354
==========================================================================
Total assets $ 83,463 N/A N/A 128,774 (2,164) 210,073
==========================================================================
(7) SUBSEQUENT EVENT
----------------
In October 2006, the Company amended its senior revolving credit
facility to increase the maximum revolving advance amount from $35 million
to $45 million. The amendment also increased the limitation on annual
capital expenditures, inclusive of leased assets, from $40 million to $50
million. All other terms and conditions of the credit facility remained
unchanged.
11
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 nine months ended September 30, 2006, the CBM Division
generated 72% of our total revenue, increasing from 68% in the nine months
ended September 30, 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 nine months ended September 30, 2006, the HBM
Division generated 27% of our total revenue, decreasing from 30% in 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 1% of our
total revenue in the nine months ended September 30, 2006, compared to 2%
in 2005.
See Note 6 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 nearly 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 9,200 and 25,700 for the quarter and nine months ended
September 30, 2006, respectively, compared to approximately 8,700 and
24,000 for the quarter and nine months ended September 30, 2005,
respectively. Patient transports for CBM bases open longer than one year
(Same-Base Transports) were approximately 8,200 and 24,000 in the quarter
and nine months ended September 30, 2006, respectively, compared to
approximately 8,500 and 23,400 in the quarter and nine months ended
September 30, 2005, respectively. Cancellations due to unfavorable weather
conditions were 427, or 26.8%, higher in the third quarter of 2006 compared
to the third quarter of 2005. Weather cancellations were unchanged in the
nine months ended September 30, 2006, compared to 2005.
12
- - 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 15.6% in net revenue after bad debt expense
per transport in the nine months ended September 30, 2006, compared to the
nine months ended September 30, 2005. The total provision for expected
uncollectible amounts, including contractual discounts for
Medicare/Medicaid and bad debts, changed from 47.5% and 46.4% of related
flight revenue for the quarter and nine months ended September 30, 2005,
respectively, to 45.0% and 48.6% for the quarter and nine months ended
September 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 operating results 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 36% of the rotor wing fleet, are no longer in production and
are, therefore, susceptible to price increases which outpace general
inflationary trends. In addition, on-condition components are more likely
to require replacement with age. Since January 1, 2006, we have taken
delivery of ten new aircraft and have the option to purchase seventeen
additional aircraft beginning in the fourth quarter of 2006 and continuing
through the end of 2007. New aircraft expected to be delivered under these
options are expected to replace the discontinued models and other older
aircraft, as well as to provide capacity for base expansion. 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 32.5% and 20.6% in the quarter
and nine months ended September 30, 2006, respectively, compared to 2005,
while total flight volume for CBM and HBM operations decreased
approximately 1.2% during the third quarter and increased 3.7% during the
nine months ended September 30, 2006, compared to the prior year. The
number of engine events, including overhauls, increased approximately 10.3%
and 9.8% in the quarter and nine months ended September 30, 2006,
respectively, compared to 2005.
- - AIRCRAFT AVAILABILITY. The recent high rate of growth in the air medical
transportation and other helicopter services industries has generated
strong demand for new models of helicopters. Quality used aircraft are also
in short supply worldwide. We have endeavored to mitigate the shortage of
suitable aircraft primarily through long-term arrangements with a single
aircraft manufacturer which provides us options to purchase up to ten
aircraft each year for the next several years. We also have a purchase
commitment with another aircraft manufacturer for fifteen aircraft, with
deliveries scheduled to begin in 2008, as well as options for an additional
fifteen aircraft in future years.
- - 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. Unionization of our pilot workforce has
also led to higher compensation rates than those paid by some of our
competitors who are not unionized. 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.
13
- - 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 employee's participation. We recorded approximately
$1,983,000 and $5,750,000 in incremental salary and benefit costs during
the quarter and nine months ended September 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 $9,606,000 and $15,999,000 for the three and nine
months ended September 30, 2006, respectively, compared to net income of
$5,498,000 and $8,354,000 for the three and nine months ended September 30,
2005, respectively. Net income for the nine months ended September 30, 2005,
included a pre-tax loss on early extinguishment of debt of $3,104,000 (with a
tax effect of approximately $1,211,000). Operating income was $17,122,000 and
$30,000,000 for the quarter and nine months ended September 30, 2006,
respectively, compared $9,895,000 and $20,826,000 for the quarter and nine
months ended September 30, 2005, respectively. Net reimbursement (revenue after
Medicare/Medicaid discounts and bad debt expense) for CBM operations improved
29.7% and 15.6% for the quarter and nine months ended September 30, 2006,
respectively, compared to the prior year, while Same-Base Transports for both
CBM and HBM bases remained relatively constant. Improvement in net reimbursement
during 2006 was offset in part by increases in 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 $26,423,000, or 30.0%, and $65,226,000, or 27.1%, for
the quarter and nine months ended September 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 $24,886,000, or 40.3%, to $86,693,000 for
the third quarter of 2006 and $56,451,000, or 33.8%, to $223,414,000 for
the nine months ended September 30, 2006, for the following reasons:
- Average price increases totaling approximately 27.5% for all CBM
operations since March 2005, including 6.5% in mid-June 2006.
- Incremental revenue of $10,873,000 and $20,362,000 for the
quarter and nine months ended September 30, 2006, respectively, from
the addition of thirteen new CBM bases either during or subsequent to
the nine months ended September 30, 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, two bases
in the first quarter of 2006, and one in the third quarter of 2006,
resulting in decreases in revenue of approximately $959,000 and
$3,016,000 for the quarter and nine months ended September 30, 2006,
respectively.
- Same Base Transports decreased 3.9% during the third quarter of
2006 compared to the third quarter of 2005, and increased 2.3% for the
nine months ended September 30, 2006, compared to the nine-month
period in 2005. Cancellations due to unfavorable weather conditions
were 427, or 26.8%, higher in the third quarter of 2006 compared to
the third quarter of 2005. Weather cancellations were unchanged in the
nine months ended September 30, 2006, compared to 2005.
- Increase caused by a change in payer mix to a lower percentage of
Medicare/Medicaid transports, resulting in lower contractual discounts
which are offset against flight revenue. Contractual discounts were
22.5% and 26.6% of related flight revenue in the quarter and nine
months ended September 30, 2006, respectively, compared to 26.6% and
27.4% in the quarter and nine months ended September 30, 2005,
respectively. See discussion of total provision for uncollectible
accounts, including contractual discounts and bad debt expense, below
under Bad Debt Expense.
14
- - HBM - Flight revenue increased $1,537,000, or 5.9%, to $27,824,000 for the
third quarter of 2006 and $8,775,000, or 11.9%, to $82,729,000 for the nine
months ended September 30, 2006, for the following reasons:
- Incremental revenue of $702,000 and $3,972,000, for the quarter
and nine months ended September 30, 2006, respectively, from the
addition of two new bases and the expansion of six contracts
subsequent to the first quarter of 2005.
- Discontinuation of service under one contract during the second
quarter of 2006, resulting in decreases in revenue of approximately
$189,000 and $408,000 in the quarter and nine months ended September
30, 2006, respectively.
- Annual price increases in the majority of contracts based on
changes in the Consumer Price Index.
- Decreases of 7.1% and 2.3% in flight volume for the quarter and
nine months ended September 30, 2006, respectively, compared to 2005,
for all contracts excluding the effect of new contracts, contract
expansions, and discontinued contract discussed above.
FLIGHT CENTER COSTS (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased $6,115,000, or 21.6%, and $18,159,000, or
22.5%, for the quarter and nine months ended September 30, 2006, respectively,
compared to 2005. Changes by business segment are as follows:
- - CBM - Flight center costs increased $4,514,000, or 24.7% to $22,754,000 and
$12,134,000, or 23.2%, to $64,333,000 for the quarter and nine months ended
September 30, 2006, for the following reasons:
- Increases of approximately $3,306,000 and $7,173,000 for the
quarter and nine months ended September 30, 2006, respectively, for
the addition of personnel to staff new base locations described above.
- Decreases of approximately $754,000 and $2,399,000 for the
quarter and nine months ended September 30, 2006, respectively, due to
the closure of base locations described above.
- Increases of approximately $1,086,000 and $3,061,000 in pilot
salaries and benefits for the quarter and nine months ended September
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 $1,601,000, or 16.0%, to $11,626,000
and $6,025,000, or 21.3%, to $34,368,000 for the quarter and nine months
ended September 30, 2006, primarily due to the following:
- Increases of approximately $239,000 and $1,131,000 for the
quarter and nine months ended September 30, 2006, for the addition of
personnel to staff new base locations described above.
- Increases of approximately $897,000 and $2,689,000 in pilot
salaries and benefits for the quarter and nine months ended September
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 $4,331,000, or 26.9%, and $9,424,000, or
19.7%, for the quarter and nine months ended September 30, 2006, respectively,
in comparison to the quarter and nine months ended September 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 twenty helicopters for CBM operations and ten for HBM
operations either during or subsequent to the nine months ended September
30, 2005, resulting in increases of approximately $812,000 and $1,651,000
for the quarter and nine months ended September 30, 2006, respectively.
- - Increases of approximately $222,000 and $311,000 in fuel costs for the
quarter and nine months ended September 30, 2006, respectively, as a result
of the addition of new CBM bases, net of the impact of closed CBM bases.
The addition of new HBM bases and expansion of HBM programs did not have a
material impact on fuel costs because HBM customers typically pay for all
fuel consumed in medical flights.
- - Increases of approximately 12.0% and 16.3% in the cost of aircraft fuel per
hour flown for the quarter and nine months ended September 30, 2006,
respectively.
- - Decreases in hull insurance rates effective July 2005 and July 2006.
- - 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 nine months ended September
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.
15
AIRCRAFT RENTAL EXPENSE increased $882,000, or 19.1%, and $2,489,000, or 18.6%,
for the quarter and nine months ended September 30, 2006, respectively, in
comparison to the quarter and nine months ended September 30, 2005. Incremental
rental expense for 22 leased aircraft added to our fleet, either during or
subsequent to the first nine months of 2005, totaled $885,000 and $3,161,000 in
the quarter and nine months ended September 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 $7,734,000, or 43.4%, and $24,552,000, or 55.6%, for
the quarter and nine months ended September 30, 2006, compared to 2005, due in
part to the increase in related flight revenue. Bad debt as a percentage of
related net flight revenue was 28.9% and 30.1% for the quarter and nine months
ended September 30, 2006, respectively, compared to 28.3% and 26.1% for the
quarter and nine months ended September 30, 2005, respectively. The total
provision for expected uncollectible amounts, including contractual discounts
and bad debts, was 45.0% and 48.6% of related flight revenue for the quarter and
nine months ended September 30, 2006, respectively, compared to 47.5% and 46.4%
for the quarter and nine months ended September 30, 2005, respectively. The
decrease in the provision during the third quarter of 2006 was attributable to
changes in payer mix and to adjustments to bad debt reserves during the third
quarter of 2005 for lower than anticipated collections. The increase in reserves
for the nine months ended September 30, 2006, compared to the prior year, was
attributed in 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. The total provision for
expected uncollectible amounts as a percentage of related flight revenue for the
quarters and nine months ended September 30, 2006 and 2005, is consistent with
our historical collection experience, taking into consideration fluctuations in
payer mix and the effect of price increases. 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 $1,041,000, or 43.1%, and
$1,462,000, or 25.5%, for the quarter and nine months ended September 30, 2006,
compared to 2005. Significant projects in 2006 included continuation of
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). The 21 MEV units were completed during the third
quarter of 2006. Five modular, medical interior kits for commercial customers
were completed during the nine months ended September 30, 2006, and six other
kits were still in process as of September 30, 2006. Revenue by product line for
the quarter and nine months ended September 30, 2006, respectively, was as
follows:
- - $237,000 and $1,798,000 - design and manufacture of multi-mission interiors
- - $1,058,000 and $2,086,000 - manufacture and installation of modular medical
interiors
- - $79,000 and $393,000 - design and manufacture of other aerospace products
In the first quarter of 2005, we completed production of eleven HH-60L units and
19 MEV units. In 2005, we also continued production of 13 additional HH60L units
and 21 additional 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 nine months
ended September 30, 2005, respectively, was as follows:
- - $1,235,000 and $2,824,000 - design and manufacture of multi-mission
interiors
- - $546,000 and $1,348,000 - manufacture and installation of modular medical
interiors
- - $634,000 and $1,567,000 - design and manufacture of other aerospace
products
COST OF MEDICAL INTERIORS AND PRODUCTS decreased $952,000, or 58.5%, and
$1,535,000, or 42.4%, for the quarter and nine months ended September 30, 2006,
respectively, compared to the prior year, consistent with the change in sales
volume. The average net margin earned on projects during 2006 was 49.9% for the
third quarter and 41.4% for the nine-month period compared to 30.9% for the
third quarter and 28.4% for the nine-month period in 2005, primarily due to the
change in product mix.
16
GENERAL EXPENSES
DEPRECIATION AND AMORTIZATION EXPENSE increased $217,000, or 7.2%, and $714,000,
or 8.0%, for the quarter and nine months ended September 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.
LITIGATION SETTLEMENT of $1,417,000 recorded during the quarter ended September
30, 2006, represents the net amount received in settlement of a lawsuit we filed
against a company related to the fatal crash of one of our helicopters in
September 2002. The amount recorded is net of attorney fees and is related
primarily to revenue lost in the Nevada CBM program during the period following
the accident.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSES increased $1,195,000, or 13.1%, and
$3,215,000, or 11.9%, for the quarter and nine months ended September 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. Final consolidation of the billing
function into the San Bernardino office is expected to be completed in the
fourth quarter. We also increased staffing in our Information Services
department to support the expanded information technology infrastructure and
scheduled software systems upgrades. In addition, premiums for medical
malpractice insurance and directors and officers liability insurance increased
39.6% and 21.4%, respectively, during the nine months ended September 30, 2006,
compared to the prior year. G&A expenses were 8.8% and 9.7% of revenue for the
quarter and nine months ended September 30, 2006, respectively, compared to
10.1% and 10.9% of revenue for the quarter and nine months ended September 30,
2005, respectively.
INTEREST EXPENSE increased $294,000, or 23.9%, in the quarter ended September
30, 2006, compared to the prior year, and decreased $298,000, or 6.4%, in the
nine months ended September 30, 2006, compared to 2005. The increase for the
third quarter was primarily the result of an increase in the average balance
outstanding against our line of credit from $15.0 million during the third
quarter of 2005 to $20.0 million during the third quarter of 2006. Interest
expense decreased during the nine-month period primarily as a result of
regularly scheduled payments of long-term debt and a decrease in the average
balance outstanding against the line from $16.4 million during the nine months
ended September 30, 2005, to $14.9 million during the nine months ended
September 30, 2006. 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 9.1% during 2006. The remainder of the repayment
was funded by draws against the line of credit.
LOSS ON EARLY EXTINGUISHMENT OF DEBT for the nine months ended September 30,
2005, totaled $3,104,000 and related to the repayment of $23 million in
subordinated debt in May 2005. The Company 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 $6,446,000 and $10,845,000 in the quarter and nine months
ended September 30, 2006, respectively, compared to $3,530,000 and $5,416,000 in
the quarter and nine months ended September 30, 2005, respectively. The
effective tax rate was approximately 40% for 2006, compared to approximately 39%
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 September 30, 2006, was $92,438,000, compared
to $66,839,000 at December 31, 2005. The change in working capital position is
primarily attributable to an increase of $23,904,000 in net receivables
consistent with increased revenue for the CBM and HBM divisions and increased
net reimbursement for CBM operations. These effects were offset in part by a
decrease in 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, from 119 days at December 31, 2005, to
117 days at September 30, 2006.
17
SOURCES AND USES OF CASH
We had cash and cash equivalents of $3,805,000 as of September 30, 2006,
compared to $3,218,000 at December 31, 2005. Cash generated by operations in the
nine months ended September 30, 2006, totaled $2,822,000 compared to $14,181,000
in 2005. Receivable balances, net of bad debt expense, increased $23,904,000 in
2006 compared to $14,823,000 in 2005, reflecting continued growth in CBM and HBM
revenue and an improved net reimbursement rate for CBM operations, as described
above. In addition, during the nine months ended September 30, 2006, we made
payments of $8,577,000 for income taxes, compared to $272,000 in 2005.
Cash used by investing activities totaled $11,525,000 in 2006 compared to
$3,149,000 in 2005. Equipment acquisitions in 2006 consisted primarily of two
used aircraft for a total of approximately $2.1 million 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,
information systems hardware and software, 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.
Financing activities generated $9,290,000 in 2006 compared to using $10,569,000
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 $431,000 in debt issuance costs,
primarily associated with the amendment to our senior revolving 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.
In October 2006, we amended our senior revolving credit facility to increase the
maximum revolving advance amount from $35 million to $45 million. The amendment
also increased the limitation on annual capital expenditures, inclusive of
leased assets, from $40 million to $50 million. All other terms and conditions
of the credit facility remained unchanged.
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
during the fourth quarter 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. During the third quarter of 2006, one of our customers in Minnesota
expanded operations to a satellite location. We expect one other contract to
open a satellite base in 2006 and another in early 2007. Twelve hospital
contracts are due for renewal in 2006, seven of which have been renewed for
terms ranging from one to three years. In October 2006, we discontinued
operations under a contract in Illinois upon its expiration date. We expect 2006
flight activity for continuing hospital contracts to remain consistent with
historical levels.
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Products Division
As of September 30, 2006, eleven HH-60L units for the U.S. Army and six modular
medical interiors for commercial customers were in process. At the end of the
third quarter, we also received a contract for 27 additional MEV units. Final
terms and conditions are under negotiation. Remaining revenue for all contracts
in process is estimated at $2.5 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 in process. The new contract for 27 MEV units completes the
current U.S. Army requirement for this program. There is no assurance that
orders for additional units will be received in future periods.
All Segments
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 had approximately $12,672,000 in borrowing capacity
available under our revolving credit facility as of September 30, 2006. The
maximum revolving advance amount under the line was increased from $35 million
to $45 million in October 2006.
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 nine months ended September 30, 2006, a
change of 100 basis points in the percentage of estimated contractual discounts
would have resulted in a change of approximately $3,103,000 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.
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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 applied to each
account based upon payer classification 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 nine months ended September 30, 2006, a change of 100 basis
points in the percentage of estimated uncollectible accounts would have resulted
in a change of approximately $2,282,000 in bad debt expense.
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 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 $20,912,000 outstanding against the line of
credit and $25,829,000 in notes payable. Based on the amounts outstanding at
September 30, 2006, the annual impact of a change of 100 basis points in
interest rates would be approximately $467,000. Interest rates on these
instruments approximate current market rates as of September 30, 2006.
Periodically we enter into interest rate risk hedges to minimize exposure to the
effect of an increase in interest rates. As of September 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 $829,000 of notional principal and receive a
floating interest rate (LIBOR plus 2.50%) on the same amount of notional
principal from the counterparty.
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ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted to the
Securities and Exchange Commission 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 September 30, 2006, pursuant to Rule 13a-15(b) under the Exchange Act. Based
on that evaluation, the Certifying Officers have concluded that, as of September
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
$1,983,000 and $5,750,000 in incremental salary and benefit costs during
the quarter and nine months ended September 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
The 2006 Annual Meeting of Stockholders was held on August 2, 2006. At
the meeting, Dr. Lowell D. Miller and Messrs. Ralph J. Bernstein and
Paul H. Tate were elected to Class III directorships. Voting results
were as follows:
Total Vote
Total Vote For Withheld From
Each Director Each Director
-------------- -------------
Ralph J. Bernstein 10,005,958 126,355
Lowell D. Miller 10,003,559 128,754
Paul H. Tate 9,729,061 403,252
Following the meeting, George W. Belsey; Samuel H. Gray; David
Kikumoto; Maj. Gen. Carl H. McNair, Jr. (Ret.); Morad Tahbaz; and Aaron D.
Todd continued to serve as directors.
Stockholders approved the 2006 Equity Compensation Plan which had been
adopted by the Board of Directors in May 2006, subject to stockholder
approval. Voting results were as follows:
For Against Abstain/Broker Non-Vote
--------- --------- -----------------------
5,666,281 1,050,958 3,415,074
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ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
10.1 2006 Equity Compensation Plan
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: November 8, 2006 By \s\ Aaron D. Todd
--------------------------------------
Aaron D. Todd
Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 2006 By \s\ Trent J. Carman
--------------------------------------
Trent J. Carman
Chief Financial Officer
(Principal Financial Officer)
Date: November 8, 2006 By \s\ Sharon J. Keck
--------------------------------------
Sharon J. Keck
Chief Accounting Officer
(Principal Accounting Officer)
24