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Air Methods 10-Q 2010 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
(Mark One)
OR
Commission file number 0-16079
AIR METHODS CORPORATION
(Exact name of Registrant as Specified in Its Charter)
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 T No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes £ No T
The number of shares of Common Stock, par value $.06, outstanding as of October 22, 2010, was 12,537,621.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
(unaudited)
(Continued)
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(Amounts in thousands, except share and per share amounts)
(unaudited)
See accompanying notes to condensed consolidated financial statements.
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share amounts)
(unaudited)
See accompanying notes to condensed consolidated financial statements.
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
(Continued)
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Amounts in thousands)
(unaudited)
Non-cash investing and financing activities:
In the nine months ended September 30, 2010, the Company settled notes payable of $4,510 in exchange for the aircraft securing the debt and entered into a capital lease of $273 to finance the purchase of equipment. The Company also entered into notes payable of $10,322 to finance the purchase of aircraft which are held for sale as of September 30, 2010.
In the nine months ended September 30, 2009, the Company entered into capital leases of $450 to finance the purchase of equipment and into a note payable of $552 to finance insurance policies. In the nine months ended September 30, 2009, the Company settled notes payable of $8,954 in exchange for the aircraft securing the debt. The Company also entered into notes payable of $16,424 to finance the purchase of aircraft which were held for sale as of September 30, 2009.
See accompanying notes to condensed consolidated financial statements.
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the condensed consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2009.
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, valuation of long-lived assets, and valuation of goodwill. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform with the 2010 presentation.
Changes in stockholders’ equity for the nine months ended September 30, 2010, consisted of the following (amounts in thousands except share amounts):
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)
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:
Common stock options of 43,500 and 108,500 were not included in the diluted income per share calculation for the quarter and nine months ended September 30, 2010, respectively, because their effect would have been anti-dilutive. Common stock options of 38,500 and 222,234 were not included in the diluted income per share calculation for the quarter and nine months ended September 30, 2009, respectively, because their effect would have been anti-dilutive.
In August 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-24, Presentation of Insurance Claims and Related Insurance Recoveries, clarifying that health care entities should not net insurance recoveries against a related claim liability. The ASU is effective for periods beginning after December 15, 2010. The Company does not expect the implementation of ASU No. 2010-24 to have a material effect on its financial position or results of operations.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable, and accrued liabilities:
The carrying amounts approximate fair value because of the short maturity of these instruments.
Long-term debt (amounts in thousands):
Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities and on recent transactions, the fair value of long-term debt as of September 30, 2010, is estimated to be $99,158.
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)
Summarized financial information for the Company’s operating segments is shown in the following table (amounts in thousands). Amounts in the “Corporate Activities” column represent corporate headquarters expenses, corporate income tax expense, and results of insignificant operations. The Company does not allocate assets between operating segments for internal reporting and performance evaluation purposes. Operating segments and their principal products or services are as follows:
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)
The following discussion of the results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results; flight volume and collection rates for CBS operations; size, structure and growth of our air medical services and products markets; continuation and/or renewal of HBS 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations and 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:
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:
Although price increases generally increase the net reimbursement per transport from insurance payers, the amount per transport collectible from private patient payers, Medicare, and Medicaid does not increase proportionately with price increases. Therefore, depending upon overall payer mix, price increases will usually result in an increase in the percentage of uncollectible accounts. The number of transports covered by insurance decreased from 40% of total transports for the quarter ended September 30, 2009, to 36% of total transports for the quarter ended September 30, 2010, with most of the decrease moving to Medicare coverage. Payer mix remained consistent from March 31, 2010, to September 30, 2010. In 2010, increased collections from insurance payers almost entirely offset the impact of price increases on the percentage collectible from other payers and the deterioration in payer mix. Although we have not yet experienced significant 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.
Results of Operations
We reported net income of $18,629,000 and $31,492,000 for the three and nine months ended September 30, 2010, respectively, compared to net income of $12,604,000 and $26,244,000 for the three and nine months ended September 30, 2009, respectively. Net reimbursement per transport for CBS operations increased 16.1% and 13.1% in the quarter and nine months ended September 30, 2010, compared to 2009, while Same-Base Transports for CBS operations were 4.6% and 6.6% lower over the same periods, respectively.
Flight Operations – Community-Based Services and Hospital-Based Services
Net flight revenue> increased $13,397,000, or 10.2%, and $21,808,000, or 5.9%, for the quarter and nine months ended September 30, 2010, respectively, compared to 2009. Flight revenue is generated by both CBS and HBS operations and is recorded net of provisions for contractual discounts and uncompensated care. Changes by business segment were as follows:
Products Division
Significant projects in process during 2009 included 48 HH-60L interiors, 81 litter MEV units, and eight medical interior kits for commercial customers. Revenue by product line for the quarter and nine months ended September 30, 2009, was as follows:
Other Revenue and General Expenses
Other revenue>—consisting of fees earned for dispatch, transfer center, and patient billing services provided to third parties—increased $565,000, or 58.1%, and $1,540,000, or 58.9% for the quarter and nine months ended September 30, 2010, respectively, compared to 2009. We entered into seven new contracts during either 2010 or 2009.
Liquidity and Capital Resources
Our working capital position as of September 30, 2010, was $144,936,000, compared to $133,366,000 at December 31, 2009. Cash generated by operations was $41,909,000 in 2010, compared to $52,105,000 in 2009, reflecting the change in operating results described above. Days’ sales outstanding for CBS operations, measured by comparing net revenue for the annualized previous 3-month period to outstanding open net accounts receivable, decreased from 107 days at December 31, 2009, to 84 days at September 30, 2010. In 2010 we also billed approximately $15.7 million for medical interiors and other products which were completed and shipped; approximately half of the related receivable balances were collected prior to the end of the third quarter.
Cash used by investing activities totaled $29,399,000 in 2010 compared to $32,886,000 in 2009. Equipment acquisitions in 2010 included eighteen aircraft for approximately $21.9 million, as well as medical interiors and avionics upgrades. We sold four aircraft for $5.9 million during the second quarter of 2010. Significant equipment acquisitions in 2009 included the purchase of sixteen aircraft for approximately $36.1 million. During 2009 we sold eight aircraft for total proceeds of $5.9 million and received $1.5 million in insurance proceeds for an aircraft damaged in a ground incident.
Financing activities used $4,986,000 in 2010 compared to $9,185,000 in 2009. The primary use of cash in both 2010 and 2009 was regularly scheduled payments of long-term debt and capital lease obligations. In 2010 we used proceeds of $6.2 million from notes payable to finance the purchase of four aircraft. The notes are payable over five-year terms with current weighted average interest rates of 4.8%. In 2009 we used proceeds of $34.0 million from thirteen new long-term debt agreements to purchase nine helicopters and to pay off $14.5 million of short-term notes payable to an aircraft manufacturer for the delivery of four helicopters. We used proceeds from operations to fully pay off the balance against our revolving credit facility during the second quarter of 2009. We have not carried a balance against our line of credit during 2010.
During the third quarter of 2010, we entered into a purchase commitment totaling approximately $40.2 million for fifteen Bell 407 aircraft. Deliveries are scheduled throughout 2011, beginning in January. Under the terms of the agreement, we will trade in a Bell 430 helicopter to satisfy a portion of the deposit requirements. If financing arrangements cannot be arranged or we are prevented from taking or decline to take delivery of aircraft under the commitment for any other reason, we may forfeit nonrefundable deposits made to date. Deposits are due six months in advance of each individual aircraft delivery.
Divisional Summary of Events
Community-Based Services
In addition to prices increases for our CBS operations during the first three quarters of 2010, we increased our gross charges an average of approximately 3% on October 1. In 2010 we have opened nine new bases, including four resulting from the conversion of HBS contract locations to CBS operations, and closed two bases due to insufficient flight volume. We expect to open three additional bases during the fourth quarter, including one resulting from the conversion of an HBS customer to CBS operations. We also anticipate the closure of at least one base prior to the end of the year.
Hospital-Based Services
Contracts with ten hospital customers are due for renewal in 2010, five of which have been renewed for terms ranging from one to five years. One other contract is expected to convert to CBS operations during the fourth quarter of 2010. During the first quarter of 2010, we ceased operations under one contract, representing three aircraft. We also received notification of the intent of one HBS customer, representing two aircraft, to terminate its contract with us effective in the fourth quarter of 2010. During the third quarter, we opened two satellite locations for one of our current HBS customers, and one of our HBS customers converted to CBS operations. We expect one HBS customer to expand to a satellite location during the fourth quarter.
Products Division
As of September 30, 2010, we were under contract to complete 50 HH60L units, three commercial medical interiors, and approximately 187 MEV units. Deliveries under all contracts in process are expected to be completed by the second quarter of 2012, and remaining revenue is estimated at $22.7 million.
All Segments
There can be no assurance that we will continue to maintain flight volume or current levels of collections on receivables for CBS operations, successfully complete planned expansions of CBS operations, renew operating agreements for our HBS operations, or generate new profitable contracts for the Products Division.
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 valuation of long-lived assets and goodwill. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
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 nine months ended September 30, 2010, a change of 100 basis points in the percentage of estimated contractual discounts and uncompensated care would have resulted in a change of approximately $5,957,000 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.
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.
Long-lived Assets Valuation
In accounting for long-lived assets, we make estimates about the expected useful lives, projected residual values and the potential for impairment. Estimates of useful lives and residual values of aircraft are based upon actual industry experience with the same or similar aircraft types and anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations and changes in our maintenance program or operations could result in changes to these estimates. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. Our cash flow estimates are based on historical results adjusted for estimated current industry trends, the economy, and operating conditions.
Goodwill Valuation
The Company’s goodwill relates to four acquisitions and has been allocated to our community-based and hospital-based services segments. Annually, at December 31, the Company evaluates goodwill for potential impairment using a two-step test at the reporting unit level. The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value. If the book value of a reporting unit exceeds its fair value, we perform the second step of the impairment test to determine the amount of goodwill impairment loss to be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is compared to the book value of the goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.
We determine the fair value of each reporting unit based upon the reporting unit’s historical operating profit and the Company’s current public trading value. Estimated future operating profit for each reporting unit is also taken into consideration when determining the reporting unit’s fair value. Considerable management judgment is necessary to evaluate the impact of economic changes and to estimate future operating profit for the reporting units. Assumptions used in our impairment evaluations, such as forecasted growth rates and patient receivable collection rates, are based on the best available market information and are consistent with our internal forecasts. Changes in these estimates or a continued decline in general economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period.
The estimated fair values of the reporting units have historically exceeded the carrying values of the reporting units. We performed a sensitivity analysis on the Company’s public trading value and on each reporting unit’s historical and estimated future operating profits. Based on the amounts used in the evaluation of goodwill at December 31, 2009, either the Company’s current public trading value or any reporting unit’s operating profit would have to decrease by more than 40% before the carrying value of the reporting unit exceeded its fair value.
There have been no material changes in market risk at September 30, 2010, from that reported in our Annual Report on Form 10-K for the year ended December 31, 2009, except as follows:
In the fourth quarter of 2010, we entered into a fuel derivative agreement for approximately 70% of our projected fuel consumption for the year ending December 31, 2011, to protect us against increases in the cost of Gulf Coast jet fuel above $2.68 per gallon for wholesale purchases. We cannot be in a liability position at settlement under this agreement even if the price of fuel declines, since we paid a premium for this right when the derivative was purchased.
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, 2010, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of September 30, 2010, 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.
PART II: OTHER INFORMATION
Not Applicable
There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2009.
Not Applicable
Not Applicable
Not Applicable
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.
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