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 March 31, 2007
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 (I.R.S. 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
--------------
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 April
27, 2007, was 11,886,613.
TABLE OF CONTENTS
Form 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2007 and December 31, 2006 1
Consolidated Statements of Operations for the three months
ended March 31, 2007 and 2006 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2007 and 2006 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
SIGNATURES 19
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
(unaudited)
MARCH 31, DECEMBER 31,
2007 2006
--------------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 5,528 4,219
Current installments of notes receivable 155 161
Receivables:
Trade 99,500 100,559
Refundable income taxes 2,363 4,898
Other 2,266 2,298
--------------------------
104,129 107,755
--------------------------
Inventories 11,354 10,819
Work-in-process on medical interiors and products contracts 2,951 2,026
Assets held for sale 7,087 9,560
Costs and estimated earnings in excess of billings on
uncompleted contracts 4,112 2,982
Deferred income taxes (note 5) 446 421
Prepaid expenses and other 2,601 1,918
--------------------------
Total current assets 138,363 139,861
--------------------------
Property and equipment:
Land 251 251
Flight and ground support equipment 160,407 155,478
Buildings and other equipment 14,152 13,868
--------------------------
174,810 169,597
Less accumulated depreciation and amortization (77,118) (74,022)
--------------------------
Net property and equipment 97,692 95,575
--------------------------
Goodwill 6,485 6,485
Notes and other receivables, less current installments 164 198
Other assets, net of accumulated amortization of $4,002 and $3,710
at March 31, 2007 and December 31, 2006, respectively 9,417 8,038
--------------------------
Total assets $ 252,121 250,157
==========================
(Continued)
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(Amounts in thousands, except share and per share amounts)
(unaudited)
MARCH 31, DECEMBER 31,
2007 2006
------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable $ 7,087 9,560
Current installments of long-term debt 9,757 8,749
Current installments of obligations under capital leases 1,069 1,214
Accounts payable 9,181 8,532
Deferred revenue 2,305 2,329
Billings in excess of costs and estimated earnings on
uncompleted contracts 552 329
Accrued wages and compensated absences 9,165 6,894
Due to third party payers 3,031 2,709
Other accrued liabilities 7,268 7,513
------------------------
Total current liabilities 49,415 47,829
Long-term debt, less current installments 57,627 60,566
Obligations under capital leases, less current installments 1,480 1,780
Deferred income taxes (note 5) 20,636 21,062
Other liabilities 10,466 11,606
------------------------
Total liabilities 139,624 142,843
------------------------
Stockholders' equity (notes 2, 3 and 5):
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000 shares;
issued 11,886,613 and 11,874,613 shares at March 31, 2007
and December 31, 2006, respectively 713 712
Additional paid-in capital 71,029 70,106
Retained earnings 40,755 36,496
------------------------
Total stockholders' equity 112,497 107,314
------------------------
Total liabilities and stockholders' equity $ 252,121 250,157
========================
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 MARCH 31,
-----------------------------
2007 2006
-----------------------------
Revenue:
Flight revenue, net $ 79,161 71,424
Sales of medical interiors and products 2,297 1,605
-----------------------------
81,458 73,029
-----------------------------
Operating expenses:
Flight centers 35,550 31,349
Aircraft operations 15,244 17,210
Aircraft rental 5,807 5,004
Cost of medical interiors and products sold 1,740 905
Depreciation and amortization 3,411 3,171
Loss on disposition of assets, net 152 85
General and administrative 12,151 9,827
-----------------------------
74,055 67,551
-----------------------------
Operating income 7,403 5,478
Other income (expense):
Interest expense (1,422) (1,356)
Other, net 455 346
-----------------------------
Income before income taxes 6,436 4,468
Income tax expense (2,738) (1,888)
-----------------------------
Net income $ 3,698 2,580
=============================
Basic income per common share (note 4) $ .31 .22
=============================
Diluted income per common share (note 4) $ .30 .21
=============================
Weighted average number of common shares outstanding - basic 11,876,835 11,635,327
=============================
Weighted average number of common shares outstanding - diluted 12,362,198 12,278,738
=============================
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2007 2006
-----------------------------
Cash flows from operating activities:
Net income $ 3,698 2,580
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 3,411 3,171
Deferred income tax expense (benefit) 110 (151)
Stock-based compensation 753 78
Tax benefit from exercise of stock options (68) (833)
Loss on retirement of equipment, net 152 85
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets (683) (98)
Decrease (increase) in receivables 3,694 (5,357)
Increase in inventories (535) (318)
Increase in work-in-process on medical interiors and costs in excess of
billings (2,055) (769)
Increase in accounts payable, other accrued liabilities, and other
liabilities 1,857 3,545
Increase (decrease) in deferred revenue and billings in excess of costs 199 (715)
-----------------------------
Net cash provided by operating activities 10,533 1,218
-----------------------------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (5,389) (3,669)
Increase in notes receivable and other assets, net (1,590) (199)
-----------------------------
Net cash used by investing activities (6,979) (3,868)
-----------------------------
(Continued)
4
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Amounts in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2007 2006
-----------------------------
Cash flows from financing activities:
Net borrowings (payments) under line of credit $ (1,313) 4,119
Payments for debt issue costs (40) (18)
Proceeds from long-term debt 1,573 --
Payments of long-term debt (2,191) (3,291)
Payments of capital lease obligations (445) (161)
Tax benefit from exercise of stock options 68 833
Proceeds from issuance of common stock, net 103 1,001
-----------------------------
Net cash provided (used) by financing activities (2,245) 2,483
-----------------------------
Increase (decrease) in cash and cash equivalents 1,309 (167)
Cash and cash equivalents at beginning of period 4,219 3,218
-----------------------------
Cash and cash equivalents at end of period $ 5,528 3,051
=============================
Interest paid in cash during the period $ 1,441 1,227
=============================
Income taxes paid in cash during the period $ 25 102
=============================
Non-cash investing and financing activities:
In the quarter ended March 31, 2007, the Company settled notes payable of $8,053
in exchange for the aircraft securing the debt. The Company also entered into
notes payable of $5,580 to finance the purchase of aircraft which are held for
sale as of March 31, 2007.
As described in note 5, effective January 1, 2007, the Company implemented FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes,
resulting in an increase of $561 in deferred tax assets and in the January 1,
2007, balance of retained earnings.
In the quarter ended March 31, 2006, the Company settled notes payable of $4,778
in exchange for the aircraft securing the debt. The Company also entered into
notes payable of $3,733 to finance the purchase of aircraft which were held for
sale as of March 31, 2006.
In the quarter ended March 31, 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.
See accompanying notes to consolidated financial statements.
5
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO 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, 2006.
Effective December 31, 2006, the Company changed its method of accounting
for revenue and estimated uncompensated care. The Company now presents
revenue exclusive of estimated uncompensated care within the consolidated
statement of operations. Previously the Company recorded revenue at full
established rates and recorded a provision for estimated amounts not
expected to be realized as an operating expense. All prior period financial
statements included in this report have been adjusted to reflect the new
method of accounting.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. The Company
considers its critical accounting policies involving more significant
judgments and estimates to be those related to revenue recognition,
deferred income taxes, and depreciation and residual values. Actual results
could differ from those estimates.
(2) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the three months ended March 31,
2007, consisted of the following (amounts in thousands except share
amounts):
Shares
Outstanding Amount
---------------------
Balances at January 1, 2007 11,874,613 $107,314
Adoption of FIN 48 -- 561
Issuance of common shares for options exercised 12,000 103
Tax benefit from exercise of stock options -- 68
Stock-based compensation -- 753
Net income -- 3,698
---------------------
Balances at March 31, 2007 11,886,613 $112,497
=====================
(3) STOCK-BASED COMPENSATION
------------------------
The Company recognized $753,000 and $78,000 in stock-based compensation
expense during the quarters ended March 31, 2007 and March 31, 2006,
respectively. During the first quarter of 2007, options to purchase 194,500
shares were granted at a weighted fair value of $9.37. No options were
granted during the first quarter of 2006. The aggregate intrinsic value of
12,000 and 131,023 options exercised during the quarters ended March 31,
2007 and 2006, was approximately $194,000 and $2,352,000, respectively.
6
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) INCOMEPER 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
outstanding and dilutive potential common shares during the period.
The reconciliation of basic to diluted weighted average common shares
outstanding is as follows for the quarters ended March 31:
2007 2006
---------- ----------
Weighted average number of common shares outstanding - basic 11,876,835 11,635,327
Dilutive effect of:
Common stock options 405,671 551,741
Common stock warrants 79,692 91,670
----------------------
Weighted average number of common shares outstanding - diluted 12,362,198 12,278,738
======================
Common stock options totaling 249,500 were not included in the diluted
shares outstanding for the quarter ended March 31, 2007, because their
effect would have been anti-dilutive.
(5) INCOME TAXES
------------
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken
in a tax return. As a result of adopting FIN 48, the Company recognized an
increase of $561,000 in deferred tax assets, which was accounted for as an
increase to the January 1, 2007, balance of retained earnings. At the
adoption date of January 1, 2007 and at March 31, 2007, the Company had no
gross unrecognized tax benefits. It is the Company's practice to recognize
interest and penalties related to income tax matters in income tax expense.
At March 31, 2007, the Company had no balance accrued for interest and
penalties related to income tax. The Company does not believe that it is
reasonably possible that its estimates of unrecognized tax benefits will
change significantly in the next twelve months.
The Company and its subsidiaries are subject to U.S. federal income
tax as well as income tax of multiple state jurisdictions and are open to
federal and state tax audits until the applicable statutes of limitations
expire. The Company is no longer subject to U.S. federal tax examinations
by tax authorities for tax years before 2003. The Internal Revenue Service
recently concluded its examination of the Company's consolidated income tax
return for the year ended June 30, 2004, and proposed no changes to the
reported tax. The Company is no longer subject to state tax examinations by
tax authorities for tax years before 2002. The Company is currently not
under examination by any federal or state taxing authority.
(6) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In February 2007, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (Statement 159), which provides an option to report
selected financial assets and liabilities at fair value and establishes
presentation and disclosure requirements. Statement 159 permits an election
to measure eligible items at fair value on an instrument-by-instrument
basis and then report unrealized gains and losses for those items in
earnings. Statement 159 is effective for fiscal years beginning after
November 15, 2007. The Company does not expect implementation of Statement
159 to have a material effect on its financial position or results of
operations.
7
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) BUSINESS SEGMENT INFORMATION
----------------------------
Summarized financial information for the Company's operating segments
is shown in the following table (amounts in thousands). Amounts in the
"Corporate Activities" column represent corporate headquarters expenses,
corporate income tax expense, and results of insignificant operations. The
Company does not allocate assets between 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
eighteen 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 MARCH 31: CBM HBM Division Activities Eliminations Consolidated
-------------------------------------------------------------------------------------------------------
2007
External revenue $ 53,399 25,772 2,287 -- -- 81,458
Intersegment revenue -- 473 3,594 -- (4,067) --
-------------------------------------------------------------------------
Total revenue 53,399 26,245 5,881 -- (4,067) 81,458
-------------------------------------------------------------------------
Operating expenses (43,395) (22,401) (4,509) (3,410) 3,071 (70,644)
Depreciation & amortization (1,814) (1,358) (148) (91) -- (3,411)
Interest expense (709) (649) -- (64) -- (1,422)
Other income, net 437 -- -- 18 -- 455
Income tax expense -- -- -- (2,738) -- (2,738)
-------------------------------------------------------------------------
Segment net income (loss) $ 7,918 1,837 1,224 (6,285) (996) 3,698
=========================================================================
Total assets $129,472 N/A N/A 124,813 (2,164) 252,151
=========================================================================
2006
External revenue $ 45,506 25,954 1,569 -- -- 73,029
Intersegment revenue -- -- 3,244 -- (3,244) --
-------------------------------------------------------------------------
Total revenue 45,506 25,954 4,813 -- (3,244) 73,029
-------------------------------------------------------------------------
Operating expenses (36,623) (24,172) (3,493) (2,544) 2,452 (64,380)
Depreciation & amortization (1,652) (1,338) (107) (74) -- (3,171)
Interest expense (728) (599) -- (29) -- (1,356)
Other income, net 293 -- -- 53 -- 346
Income tax expense -- -- -- (1,888) -- (1,888)
-------------------------------------------------------------------------
Segment net income (loss) $ 6,796 (155) 1,213 (4,482) (792) 2,580
=========================================================================
Total assets $ 95,511 N/A N/A 135,096 (2,164) 228,443
=========================================================================
8
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;
continuation and/or renewal of HBM contracts; acquisition of new and profitable
Products Division contracts; flight volume and collection rates for CBM
operations; 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 quarter of 2007 the CBM Division generated 66% of
our total revenue, increasing from 62% in the first quarter of 2006.
- - 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 65% of total contract
revenue) and hourly flight fees (approximately 35% of total contract
revenue) billed to hospital customers. In the first quarter of 2007 the HBM
Division generated 32% of our total revenue, decreasing from 36% in 2006.
- - Products Division - designs, manufactures, and installs aircraft medical
interiors and other aerospace and medical transport products for domestic
and international customers. In the first quarter of 2007 the Products
Division generated 2% of our total revenue, unchanged from 2006.
See Note 7 to the consolidated financial statements included in Item 1 of this
report for operating results by segment.
We believe that the following factors have the greatest impact on our results of
operations and financial condition:
- - FLIGHT VOLUME. Fluctuations in flight volume have a greater impact on CBM
operations than HBM operations because almost all of CBM revenue is derived
from flight fees, as compared to approximately 35% of HBM revenue. By
contrast, 81% of our costs primarily associated with flight operations
(including salaries, aircraft ownership costs, hull insurance, and general
and administrative expenses) incurred during the first quarter of 2007 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 8,300 for the first quarter of 2007
compared to approximately 7,600 for the first quarter of 2006. Patient
transports for CBM bases open longer than one year (Same-Base Transports)
were approximately 7,200 in the first quarter of 2007, compared to 7,500 in
the first quarter of 2006. Cancellations due to unfavorable weather
conditions for CBM bases open longer than one year were 45, or 2.4%, higher
in the first quarter of 2007, compared to the first quarter of 2006.
9
- - REIMBURSEMENT PER TRANSPORT. We respond to calls for air medical transports
without pre-screening the creditworthiness of the patient and are subject
to collection risk on services provided to insured and uninsured patients.
Medicare and Medicaid also receive contractual discounts from our standard
charges for flight services. Flight revenue is recorded net of provisions
for contractual discounts and estimated uncompensated care. Both provisions
are estimated during the period the related services are performed based on
historical collection experience and any known trends or changes in
reimbursement rate schedules and payer mix. The provisions are adjusted as
required based on actual collections in subsequent periods. Net
reimbursement per 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 have increased
average prices for our CBM operations a total of 13% since the first
quarter of 2006, contributing to an increase of 7.9% in net reimbursement
per transport in the first quarter of 2007 compared to the first quarter of
2006. Provisions for contractual discounts and estimated uncompensated care
for CBM operations are as follows:
For quarters ended March 31,
2007 2006
----------------------------
Gross billings 100% 100%
Provision for contractual discounts 33% 30%
Provision for uncompensated care 18% 18%
The increase in the total percentage of uncollectible accounts is primarily
attributable to price increases. 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. Although
we have not yet experienced increased limitations in the amount reimbursed
by insurance companies, continued price increases may cause insurance
companies to limit coverage for air medical transport to amounts less than
our standard rates.
- AIRCRAFT MAINTENANCE. 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 (OEM's) tend to be higher for aircraft which are no
longer in production. Five models of aircraft within our fleet,
representing 35% 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 21 new aircraft and have the option to purchase fifteen
additional aircraft through the end of 2007. We plan to replace
discontinued models and other older aircraft with the new aircraft expected
to be delivered under these options, 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
decreased 17.1% from the first quarter of 2006 to the first quarter of
2007, while total flight volume for CBM and HBM operations decreased less
than 1% over the same period. During the first quarter of 2007, we incurred
costs on fewer significant maintenance events related to older models of
aircraft than during the first quarter of 2006. Maintenance costs per hour
on newer aircraft has remained relatively constant on an annual basis.
Maintenance costs per hour on older models of aircraft, however, may vary
more widely on a quarterly basis depending on component overhaul and
replacement and aircraft refurbishment cycles.
10
- - 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. 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 also serves 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. Other employee groups may also elect to be
represented by unions in the future.
RESULTS OF OPERATIONS
We reported net income of $3,698,000 for the three months ended March 31, 2007,
compared to $2,580,000 for the three months ended March 31, 2006. Net flight
revenue increased 10.8% in the first quarter of 2007 compared to 2006, primarily
because of the addition of new base locations and an increase of 7.9% in net
reimbursement per transport for CBM operations. Aircraft operating expenses also
decreased 11.4%, mainly due to a decrease in maintenance cost on older models of
aircraft.
FLIGHT OPERATIONS - COMMUNITY-BASED MODEL AND HOSPITAL-BASED MODEL
NET FLIGHT REVENUE increased $7,737,000, or 10.8%, from $71,424,000 to
$79,161,000 for the three months ended March 31, 2007, compared to 2006. Flight
revenue is generated by both CBM and HBM operations and is recorded net of
provisions for contractual discounts and uncompensated care.
- - CBM - Net flight revenue increased $7,893,000, or 17.3%, to $53,390,000 in
the three months ended March 31, 2007, compared to 2006, for the following
reasons:
- Average price increases totaling approximately 13% for all CBM
operations since the first quarter of 2006, including 7% effective
January 1, 2007. Net reimbursement per transport increased
approximately 7.9% in the first quarter of 2007 compared to 2006.
- Incremental net revenue of $6,512,000 generated from the addition
of fourteen new CBM bases either during or subsequent to the first
quarter of 2006.
- Decrease in Same-Base Transports of 3.5% in the first quarter of
2007 compared to 2006. Cancellations due to unfavorable weather
conditions for CBM bases open longer than one year were 2.4% higher in
the first quarter of 2007, compared to the first quarter of 2006.
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- - HBM - Net flight revenue decreased $156,000, or 0.6%, to $25,771,000 for
the quarter ended March 31, 2007, for the following reasons:
- Incremental revenue of $848,000 generated from the addition of
one new contract and the expansion of two contracts subsequent to the
first quarter of 2006.
- Cessation of service under two contracts and the conversion of
one contract to CBM in 2006, resulting in a decrease in revenue of
approximately $1,253,000.
- Annual price increases in the majority of contracts based on
changes in the Consumer Price Index or spare parts prices from
aircraft manufacturers and the renewal of contracts at higher rates.
- Decrease of 5.7% in flight volume for all contracts excluding the
new contract, contract expansions, and closed contracts discussed
above.
FLIGHT CENTER COSTS (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased $4,201,000, or 13.4%, to $35,550,000 for the
quarter ended March 31, 2007, compared to 2006. Changes by business segment are
as follows:
- - CBM - Flight center costs increased $3,405,000, or 17.0%, to $23,420,000
for the following reasons:
- Increase of approximately $3,106,000 for the addition of personnel to
staff new base locations described above.
- Increases in salaries for merit pay raises.
- - HBM - Flight center costs increased $795,000, or 7.0%, to $12,129,000
primarily due to the following:
- Approximately $252,000 for the addition of personnel to staff new
base locations described above.
- Decrease of approximately $425,000 due to the base closures described
above.
- Increases in salaries for merit pay raises.
AIRCRAFT OPERATING EXPENSES decreased $1,966,000, or 11.4%, for the quarter
ended March 31, 2007, in comparison to the quarter ended March 31, 2006.
Aircraft operating expenses consist primarily of fuel, insurance, and
maintenance costs and generally are a function of the size of the fleet, type of
aircraft flown, and number of hours flown. The decrease in costs is due to the
following:
- - Decrease of $2,317,000 in the cost of aircraft maintenance. Annual price
increases in the cost of spare parts and overhauls were offset in part
during the quarter by our ability to use exchange components rather than
new parts in certain instances and by increased life-cycle intervals
approved on certain life-limited components. Since the first quarter of
2006, we have added 35 new helicopters to our fleet and eliminated nine
aircraft which were older models. Maintenance costs per hour on newer
aircraft has remained relatively constant on an annual basis. Maintenance
costs per hour on older models of aircraft, however, may vary more widely
on a quarterly basis depending on component overhaul and replacement and
aircraft refurbishment cycles. During the first quarter of 2007, we
incurred costs on fewer significant maintenance events related to older
models of aircraft than during the first quarter of 2006.
- - Decreases in flight volume for bases open longer than one year for both CBM
and HBM as described above.
- - Increase of approximately 17.6% in the cost of aircraft fuel per hour
flown.
- - Decrease in hull insurance rates effective July 2006.
AIRCRAFT RENTAL EXPENSE increased $803,000, or 16.0%, for the first quarter of
2007 compared to the first quarter of 2006. Incremental rental expense incurred
in the first quarter of 2007 for eighteen leased aircraft added to our fleet
subsequent to March 31, 2006, totaled $1,275,000. The increase for new aircraft
was offset in part during the quarter by refinancing eight aircraft at lower
lease rates.
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MEDICAL INTERIORS AND PRODUCTS
SALES OF MEDICAL INTERIORS AND PRODUCTS increased $692,000, or 43.1%, from
$1,605,000 for the first quarter of 2006 to $2,297,000 for the first quarter of
2007. Significant projects in the first quarter of 2007 included production of
27 litter systems for the U.S. Army's Medical Evacuation Vehicle (MEV) and three
modular, medical interior kits for commercial customers. Revenue by product line
was as follows:
- - $293,000 - multi-mission interiors
- - $577,000 - modular medical interiors
- - $1,427,000 - other aerospace and medical transport products
Significant projects in the first quarter of 2006 included continued production
of eleven Multi-Mission Medevac Systems for the U. S. Army's HH-60L Black Hawk
helicopter and 21 MEV units. We also began production of two modular, medical
interior kits for commercial customers. Revenue by product line was as follows:
- - $1,006,000 - multi-mission interiors
- - $417,000 - modular medical interiors
- - $182,000 - other aerospace and medical transport products
COST OF MEDICAL INTERIORS AND PRODUCTS increased $835,000, or 92.3%, for the
three months ended March 31, 2007, as compared to the previous year, due partly
to the change in sales volume. The average net margin earned on projects during
2007 was 21.1% compared to 41.5% in 2006, primarily due to the change in product
mix.
GENERAL EXPENSES
DEPRECIATION AND AMORTIZATION EXPENSE increased $240,000, or 7.6% for the three
months ended March 31, 2007, compared to 2006, primarily as a result of placing
two aircraft totaling $3,640,000 into service and the purchase of new rotable
equipment and aircraft interiors.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSES increased $2,324,000, or 23.6%, for
the quarter ended March 31, 2007, compared to the quarter ended March 31, 2006.
G&A expenses include executive management, accounting and finance, billing and
collections, information services, human resources, aviation management, pilot
training, dispatch and communications, and program administration. G&A expenses
for the quarter ended March 31, 2007, included stock compensation expense of
$741,000 related to the grant of stock options. We also increased staffing in
our Information Services department to support scheduled systems upgrades and
CBM program administration staffing, particularly in the southeast region, to
manage the growth of operations. G&A expenses were 14.9% of revenue in 2007,
compared to 13.5% in 2006.
INTEREST EXPENSE increased $66,000, or 4.9%, in the first quarter of 2007,
compared to the first quarter of 2006. Regularly scheduled payments of long-term
debt offset increased borrowings against our line of credit. The average balance
outstanding against the line of credit was $15.2 million in the first quarter of
2007 compared to $9.0 million in the first quarter of 2006.
INCOME TAX EXPENSE was $2,738,000 in the first quarter of 2006, compared to
$1,888,000 in the first quarter of 2006, both at an effective tax rate of
approximately 42%.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital position as of March 31, 2007, was $88,948,000, compared to
$92,032,000 at December 31, 2006. Net receivables decreased $3,626,000 primarily
due to a decrease in days' sales outstanding for CBM operations, measured by
comparing net revenue for the annualized previous 3-month period to outstanding
open net accounts receivable, from 133 days at December 31, 2006, to 122 days at
March 31, 2007. In addition, receivables for refundable income taxes were offset
in part by estimated income taxes payable for first quarter operations.
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We had cash and cash equivalents of $5,528,000 at March 31, 2007, compared to
$4,219,000 at December 31, 2006. Cash generated by operations was $10,533,000 in
the first quarter of 2007, compared to $1,218,000 in the first quarter of 2006.
Net receivable balances decreased $3,626,000 in the first quarter of 2007
compared to increasing $5,357,000 in the first quarter of 2006, for the reasons
described above. Balances for accounts payable and other liabilities increased
$1,857,000 in 2007, compared to $3,545,000 in 2006; balances at March 31, 2006,
included an accrual of $1,654,000 for incremental salaries and benefits related
to the implementation of the CBA with our pilots.
Cash used by investing activities totaled $6,979,000 in 2007 compared to
$3,868,000 in 2006. Equipment acquisitions in the first quarter of 2007 included
a $1.5 million aircraft, as well as medical interior and avionics installations
and information systems hardware and software. We also paid approximately
$756,000 in deposits for future aircraft purchases and $510,000 related to the
purchase of certain business assets from another air medical service provider in
Florida. Equipment acquisitions in the first quarter of 2006 consisted primarily
of a $1.4 million aircraft, as well as medical interior and avionics
installations and information systems hardware and software.
Financing activities used $2,245,000 in 2007 compared to generating $2,483,000
in 2006. The primary use of cash in both 2007 and 2006 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. In March 2007, we originated a note payable of $1,573,000 with
interest at 6.99% to finance the purchase of an aircraft which was previously
leased under an operating lease agreement. The note is payable through March
2017.
OUTLOOK FOR 2007
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 2007, we acquired certain business assets from another
air medical service provider in Florida, resulting in the addition of two new
base locations, and opened two other new bases in the southeast region and one
in the northeast region. During the second quarter of 2007, we purchased certain
business assets of another provider in South Carolina, resulting in the addition
of two new base locations. We also expect to open three other new CBM bases
during the second quarter. CBM flight volume at all other locations during 2007
is expected to be consistent with historical levels, subject to seasonal,
weather-related fluctuations. Effective January 1, 2007, we increased prices for
our CBM operations an average of approximately 7%.
Hospital-Based Model
Fifteen hospital contracts are due for renewal in 2007, two of which have been
renewed for terms ranging from one to three years. A third customer has agreed
to convert to CBM operations during the second quarter of 2007. Also during the
second quarter, we signed two three-year contracts to begin rotor wing
operations in Portland, Oregon, and Tyler, Texas, in late second quarter or
early third quarter. We expect 2007 flight activity for continuing hospital
contracts to remain consistent with historical levels.
Products Division
As of March 31, 2007, 27 MEV units for the U.S. Army and four commercial medical
interiors or interior kits were in process. Deliveries under all contracts in
process are expected to be completed by the third quarter of 2007, and remaining
revenue is estimated at $1.6 million.
The current U.S. Army Aviation Modernization Plan defines a requirement for 180
HH-60M Multi-Mission Medevac units in total over an unspecified number of years
and has funding for 54 units, in addition to the 39 units we have already
completed, to be delivered by 2012. The M Model is the new model of the Black
Hawk helicopter, replacing the HH-60L. There is no assurance that orders for
additional units will be received in future periods. The new contract for 27 MEV
units completes the current U.S. Army requirement for this program.
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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 2007. We also have approximately $27,124,000 in borrowing capacity
available under our revolving credit facility as of March 31, 2007.
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, 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 and is recorded
net of provisions for contractual discounts and estimated uncompensated care.
Both provisions are estimated during the period the related services are
performed based on historical collection experience and any known trends or
changes in reimbursement rate schedules and payer mix. The provisions are
adjusted as required based on actual collections in subsequent periods. We have
from time to time experienced delays in reimbursement from third-party payers.
In addition, third-party payers may disallow, in whole or in part, claims for
reimbursement based on determinations that certain amounts are not reimbursable
under plan coverage, determinations of medical necessity, or the need for
additional information. Laws and regulations governing the Medicare and Medicaid
programs are very complex and subject to interpretation. We also provide
services to patients who have no insurance or other third-party payer coverage.
There can be no guarantee that we will continue to experience the same
collection rates that we have in the past. If actual future collections are more
or less than those projected by management, adjustments to allowances for
contractual discounts and uncompensated care may be required. Based on related
flight revenue for the quarter ended March 31, 2007, a change of 100 basis
points in the percentage of estimated contractual discounts and uncompensated
care would have resulted in a change of approximately $1,094,000 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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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. The
effect on deferred income tax assets and liabilities of a change in statutory
tax rates applicable to the Company is also recognized in income in the period
of the change.
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
product 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 $14,022,000 outstanding against the
line of credit and $24,954,000 in notes payable. Based on the amounts
outstanding at March 31, 2007, the annual impact of a change of 100 basis points
in interest rates would be approximately $390,000. Interest rates on these
instruments approximate current market rates as of March 31, 2007.
Periodically we enter into interest rate risk hedges to minimize exposure to the
effect of an increase in interest rates. As of March 31, 2007, we were party to
one interest rate swap agreement which matures in February 2008. The swap
agreement provides that we will pay a 3.62% fixed interest rate on $804,000 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 March 31, 2007, pursuant to Rule 13a-15(b) under the Exchange Act. Based on
that evaluation, the Certifying Officers have concluded that, as of March 31,
2007, our disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes in our internal control over financial
reporting that occurred during the most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in
our annual report on Form 10-K for the year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
31.1 Chief Executive Officer Certification adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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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: May 10, 2007 By \s\ Aaron D. Todd
--------------------------------------
Aaron D. Todd
Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2007 By \s\ Trent J. Carman
--------------------------------------
Trent J. Carman
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 2007 By \s\ Sharon J. Keck
--------------------------------------
Sharon J. Keck
Chief Accounting Officer
(Principal Accounting Officer)
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