Item 1. Condensed Consolidated Financial
Statements
Air Methods Corporation
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and
per share amounts)
(unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,417
|
|
|
|
5,808
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Trade, net (notes 1 and 4)
|
|
|
385,747
|
|
|
|
360,542
|
|
Refundable income taxes
|
|
|
26,947
|
|
|
|
2,674
|
|
Other
|
|
|
2,973
|
|
|
|
3,402
|
|
Total receivables
|
|
|
415,667
|
|
|
|
366,618
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
49,490
|
|
|
|
46,377
|
|
Work-in-process on medical interiors and products contracts
|
|
|
4,449
|
|
|
|
4,024
|
|
Assets held for sale
|
|
|
6,054
|
|
|
|
16,369
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
2,223
|
|
|
|
961
|
|
Refundable deposits
|
|
|
5,002
|
|
|
|
7,594
|
|
Prepaid expenses and other (note 6)
|
|
|
10,838
|
|
|
|
9,850
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
501,140
|
|
|
|
457,601
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
251
|
|
|
|
251
|
|
Flight and ground support equipment
|
|
|
958,411
|
|
|
|
835,380
|
|
Aircraft under capital leases
|
|
|
149,814
|
|
|
|
168,725
|
|
Aircraft rotable spare parts
|
|
|
35,591
|
|
|
|
34,688
|
|
Buildings and office equipment
|
|
|
68,180
|
|
|
|
62,503
|
|
|
|
|
1,212,247
|
|
|
|
1,101,547
|
|
Less accumulated depreciation and amortization
|
|
|
(339,455
|
)
|
|
|
(301,891
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
872,792
|
|
|
|
799,656
|
|
|
|
|
|
|
|
|
|
|
Goodwill (note 2)
|
|
|
211,418
|
|
|
|
127,732
|
|
Intangible assets, net of accumulated amortization of $37,625 and $28,093 at September 30, 2016 and December 31, 2015, respectively
|
|
|
193,713
|
|
|
|
129,899
|
|
Other assets
|
|
|
23,858
|
|
|
|
21,062
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,802,921
|
|
|
|
1,535,950
|
|
(Continued)
Air Methods Corporation
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(Amounts in thousands, except share and
per share amounts)
(unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
7,229
|
|
|
|
2,955
|
|
Current installments of long-term debt
|
|
|
55,040
|
|
|
|
37,897
|
|
Current installments of obligations under capital leases
|
|
|
17,923
|
|
|
|
20,407
|
|
Accounts payable
|
|
|
35,704
|
|
|
|
30,912
|
|
Deferred revenue
|
|
|
2,345
|
|
|
|
2,294
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
2,079
|
|
|
|
1,250
|
|
Accrued wages and compensated absences
|
|
|
27,801
|
|
|
|
19,419
|
|
Due to third party payers
|
|
|
13,302
|
|
|
|
12,292
|
|
Other accrued liabilities
|
|
|
20,888
|
|
|
|
21,044
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
182,311
|
|
|
|
148,470
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current installments
|
|
|
803,120
|
|
|
|
567,226
|
|
Obligations under capital leases, less current installments
|
|
|
52,344
|
|
|
|
68,389
|
|
Deferred income taxes (note 1)
|
|
|
204,714
|
|
|
|
166,836
|
|
Other liabilities
|
|
|
9,465
|
|
|
|
12,293
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,251,954
|
|
|
|
963,214
|
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interests
|
|
|
—
|
|
|
|
8,550
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (notes 1 and 3):
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par value. Authorized 15,000,000 shares, none issued
|
|
|
—
|
|
|
|
—
|
|
Common stock, $.06 par value. Authorized 70,500,000 shares; issued 39,604,689 and 39,511,350 shares at September 30, 2016 and December 31, 2015, respectively; outstanding 36,391,523 and 39,003,026 shares at September 30, 2016 and December 31, 2015, respectively
|
|
|
2,355
|
|
|
|
2,353
|
|
Additional paid-in capital
|
|
|
134,777
|
|
|
|
128,767
|
|
Treasury stock at cost, 3,051,220 and 320,988 shares at September 30, 2016, and December 31, 2015, respectively
|
|
|
(109,881
|
)
|
|
|
(13,457
|
)
|
Retained earnings
|
|
|
525,112
|
|
|
|
447,840
|
|
Accumulated other comprehensive loss
|
|
|
(1,396
|
)
|
|
|
(1,317
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
550,967
|
|
|
|
564,186
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,802,921
|
|
|
|
1,535,950
|
|
See accompanying notes to unaudited condensed consolidated financial
statements.
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(Amounts in thousands, except share and
per share amounts)
(unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient transport revenue, net of provision for contractual discounts (note 4)
|
|
$
|
399,347
|
|
|
|
383,641
|
|
|
|
1,146,147
|
|
|
|
983,360
|
|
Provision for uncompensated care (notes 1 and 4)
|
|
|
(169,441
|
)
|
|
|
(160,799
|
)
|
|
|
(503,099
|
)
|
|
|
(421,690
|
)
|
Patient transport revenue, net
|
|
|
229,906
|
|
|
|
222,842
|
|
|
|
643,048
|
|
|
|
561,670
|
|
Air medical services contract revenue
|
|
|
34,563
|
|
|
|
40,329
|
|
|
|
102,382
|
|
|
|
119,743
|
|
Tourism and charter revenue
|
|
|
38,781
|
|
|
|
36,212
|
|
|
|
98,242
|
|
|
|
98,877
|
|
Medical interiors and products revenue
|
|
|
4,536
|
|
|
|
8,379
|
|
|
|
18,899
|
|
|
|
16,966
|
|
Dispatch and billing service revenue
|
|
|
3,226
|
|
|
|
3,580
|
|
|
|
10,411
|
|
|
|
10,739
|
|
|
|
|
311,012
|
|
|
|
311,342
|
|
|
|
872,982
|
|
|
|
807,995
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight centers
|
|
|
117,958
|
|
|
|
100,649
|
|
|
|
333,468
|
|
|
|
293,060
|
|
Air medical aircraft operations
|
|
|
36,512
|
|
|
|
32,876
|
|
|
|
103,196
|
|
|
|
101,445
|
|
Tourism operating expenses
|
|
|
24,700
|
|
|
|
22,519
|
|
|
|
65,930
|
|
|
|
65,462
|
|
Cost of medical interiors and products sold
|
|
|
4,748
|
|
|
|
6,712
|
|
|
|
17,093
|
|
|
|
13,442
|
|
Cost of dispatch and billing services
|
|
|
4,790
|
|
|
|
3,467
|
|
|
|
12,608
|
|
|
|
9,378
|
|
Depreciation and amortization
|
|
|
23,587
|
|
|
|
20,884
|
|
|
|
69,652
|
|
|
|
62,082
|
|
Loss on disposition of assets, net
|
|
|
386
|
|
|
|
2,607
|
|
|
|
564
|
|
|
|
2,876
|
|
General and administrative
|
|
|
41,079
|
|
|
|
39,351
|
|
|
|
120,463
|
|
|
|
108,698
|
|
|
|
|
253,760
|
|
|
|
229,065
|
|
|
|
722,974
|
|
|
|
656,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
57,252
|
|
|
|
82,277
|
|
|
|
150,008
|
|
|
|
151,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(8,146
|
)
|
|
|
(4,893
|
)
|
|
|
(23,854
|
)
|
|
|
(15,041
|
)
|
Other, net
|
|
|
585
|
|
|
|
(266
|
)
|
|
|
1,359
|
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
49,691
|
|
|
|
77,118
|
|
|
|
127,513
|
|
|
|
137,781
|
|
Income tax expense (note 1)
|
|
|
(19,077
|
)
|
|
|
(30,235
|
)
|
|
|
(49,494
|
)
|
|
|
(53,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
30,614
|
|
|
|
46,883
|
|
|
|
78,019
|
|
|
|
83,938
|
|
Loss on discontinued operations, net of income taxes
|
|
|
—
|
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
30,614
|
|
|
|
46,854
|
|
|
|
78,019
|
|
|
|
83,560
|
|
Less net income (loss) attributable to redeemable non-controlling interests
|
|
|
—
|
|
|
|
202
|
|
|
|
(30
|
)
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Air Methods Corporation and subsidiaries
|
|
$
|
30,614
|
|
|
|
46,652
|
|
|
|
78,049
|
|
|
|
82,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(92
|
)
|
|
|
(340
|
)
|
|
|
(79
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
30,522
|
|
|
|
46,312
|
|
|
|
77,970
|
|
|
|
82,076
|
|
(Continued)
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME, Continued
(Amounts in thousands, except share and
per share amounts)
(unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share (notes 1 and 5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.82
|
|
|
|
1.17
|
|
|
|
2.03
|
|
|
|
2.10
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(.01
|
)
|
Net income
|
|
$
|
.82
|
|
|
|
1.17
|
|
|
|
2.03
|
|
|
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.82
|
|
|
|
1.16
|
|
|
|
2.02
|
|
|
|
2.09
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(.01
|
)
|
Net income
|
|
$
|
.82
|
|
|
|
1.16
|
|
|
|
2.02
|
|
|
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic
|
|
|
37,354,787
|
|
|
|
39,293,453
|
|
|
|
38,181,918
|
|
|
|
39,276,062
|
|
Weighted average number of common shares outstanding – diluted
|
|
|
37,413,828
|
|
|
|
39,420,354
|
|
|
|
38,260,743
|
|
|
|
39,408,239
|
|
See accompanying notes to unaudited condensed consolidated financial
statements.
Air Methods Corporation
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Amounts in thousands)
(unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78,019
|
|
|
|
83,560
|
|
Loss from discontinued operations, net of income taxes
|
|
|
—
|
|
|
|
378
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
69,652
|
|
|
|
62,082
|
|
Deferred income tax expense
|
|
|
37,878
|
|
|
|
4,376
|
|
Stock-based compensation
|
|
|
5,129
|
|
|
|
5,733
|
|
Amortization of debt issuance costs
|
|
|
929
|
|
|
|
697
|
|
Loss on disposition of assets, net
|
|
|
564
|
|
|
|
2,876
|
|
Unrealized loss (gain) on derivative instrument
|
|
|
(531
|
)
|
|
|
369
|
|
Loss from equity method investee
|
|
|
395
|
|
|
|
1,193
|
|
Changes in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Decrease in prepaid expenses and other current assets
|
|
|
2,822
|
|
|
|
641
|
|
Increase in receivables
|
|
|
(21,591
|
)
|
|
|
(51,301
|
)
|
Increase in inventories
|
|
|
(1,001
|
)
|
|
|
(797
|
)
|
Increase in costs in excess of billings
|
|
|
(1,262
|
)
|
|
|
(2,188
|
)
|
Increase in accounts payable, other accrued liabilities, and other liabilities
|
|
|
1,420
|
|
|
|
18,770
|
|
Increase (decrease) in deferred revenue and billings in excess of costs
|
|
|
880
|
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities
|
|
|
173,303
|
|
|
|
126,211
|
|
Net cash used by discontinued operating activities
|
|
|
—
|
|
|
|
(100
|
)
|
Net cash provided by operating activities
|
|
|
173,303
|
|
|
|
126,111
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of subsidiaries
|
|
|
(225,519
|
)
|
|
|
—
|
|
Acquisition of property and equipment
|
|
|
(74,025
|
)
|
|
|
(95,494
|
)
|
Acquisition of hospital program
|
|
|
—
|
|
|
|
(43,481
|
)
|
Buy-out of previously leased aircraft
|
|
|
(13,123
|
)
|
|
|
(9,519
|
)
|
Proceeds from disposition and sale of equipment and assets held for sale
|
|
|
6,209
|
|
|
|
3,642
|
|
Increase in other assets
|
|
|
(3,194
|
)
|
|
|
(11,597
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used by continuing investing activities
|
|
|
(309,652
|
)
|
|
|
(156,449
|
)
|
Net cash provided by discontinued investing activities
|
|
|
—
|
|
|
|
25
|
|
Net cash used in investing activities
|
|
|
(309,652
|
)
|
|
|
(156,424
|
)
|
(Continued)
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS, Continued
(Amounts in thousands)
(unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
$
|
803
|
|
|
|
409
|
|
Purchases of common stock
|
|
|
(96,424
|
)
|
|
|
—
|
|
Borrowings under line of credit
|
|
|
95,000
|
|
|
|
50,000
|
|
Payments under line of credit
|
|
|
(80,000
|
)
|
|
|
(50,000
|
)
|
Payments for financing costs
|
|
|
(73
|
)
|
|
|
(4,472
|
)
|
Proceeds from long-term debt
|
|
|
276,000
|
|
|
|
105,525
|
|
Payments of long-term debt
|
|
|
(38,819
|
)
|
|
|
(45,251
|
)
|
Payments of capital lease obligations
|
|
|
(18,529
|
)
|
|
|
(24,100
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing financing activities
|
|
|
137,958
|
|
|
|
32,111
|
|
Net cash provided by discontinued financing activities
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
137,958
|
|
|
|
32,111
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
1,609
|
|
|
|
1,798
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,808
|
|
|
|
13,165
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
7,417
|
|
|
|
14,963
|
|
|
|
|
|
|
|
|
|
|
Interest paid in cash during the period
|
|
$
|
22,930
|
|
|
|
14,366
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid in cash during the period
|
|
$
|
37,247
|
|
|
|
27,950
|
|
Non-cash investing and financing activities:
In the nine months ended September 30, 2016,
the Company settled non-interest-bearing notes payable of $2,955 in exchange for the aircraft securing the debt and entered into
non-interest-bearing notes payable of $7,229 to finance the purchase of aircraft which were held in property and equipment pending
permanent financing as of September 30, 2016.
In the nine months ended September 30, 2015,
the Company entered into non-interest-bearing notes payable of $11,112 to finance the purchase of aircraft which were held in
property and equipment pending permanent financing as of September 30, 2015, and into capital leases of $354 to finance the purchase
of equipment. The Company also settled non-interest-bearing notes payable of $11,442 in exchange for the aircraft securing the
debt.
See accompanying notes to unaudited condensed consolidated financial
statements.
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)
|
(1)
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles
for interim financial information and instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present
fairly the condensed consolidated financial statements for the respective periods. Interim results are not necessarily indicative
of results for a full year. The condensed consolidated financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended December 31, 2015.
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
period. The Company considers its critical accounting policies involving more significant judgments and estimates to be those
related to revenue recognition, deferred income taxes, valuation of long-lived assets, and fair values of assets acquired and
liabilities assumed in business combinations. Actual results could differ from those estimates.
Revision of
Previously Issued Financial Statements
During the third
quarter of 2016, the Company identified errors in the mathematical formula used to calculate its allowances for contractual discounts
and uncompensated care related to patient transport receivables. The errors caused net receivables to be overstated for open accounts
which had been partially collected and understated for open accounts which had been partially discounted. The Company has evaluated
the impact of these errors and concluded it was not material to any previously issued financial statements. The Company has elected
to revise the unaudited condensed consolidated financial statements as of December 31, 2015, and for the nine months ended September
30, 2015, presented in this report and will revise its previously issued financial statements to correct these errors when the
financial statements are presented in future periodic filings.
As of December 31, 2015, the revisions decreased
net trade receivables and total assets by $15.8 million, deferred income taxes by $6.1 million, and retained earnings by $9.7
million. For the nine months ended September 30, 2015, the revisions increased the provision for uncompensated care by $5.2 million
and decreased income tax expense by $2.0 million and net income attributable to the Company and its subsidiaries by $3.2 million.
Basic and diluted earnings per share for the nine months ended September 30, 2015, decreased $0.08. Notes to the unaudited condensed
consolidated financial statements have also been revised consistent with these adjustments, as appropriate.
|
(2)
|
Acquisition of Subsidiaries
|
Tri-State Care Flight, LLC
On January 19, 2016, the Company
acquired
100% of the membership interest of Tri-State Care Flight, LLC (TSCF), for a cash purchase price of $222.5 million plus an initial
estimated working capital adjustment of $11.2 million. TSCF provided air medical transport services in the southwestern United
States under the community-based service delivery model, utilizing a fleet of 22 helicopters and five fixed-wing aircraft. As of
March 31, 2016, the Company recorded a receivable of $811,000 for the decrease to the purchase price related to the change in working
capital, and the amount was received in the second quarter of 2016. The purchase price was financed primarily through additional
term loans and draws against the line of credit under the Company’s senior credit facility.
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
(2)
|
Acquisition of Subsidiaries, continued
|
The Company is in the process of
verifying open aircraft parts repair orders and confirming other liabilities relating to pre-acquisition events. In addition,
the Company is analyzing the payer mix and historical collection data related to patient transport receivables as of the acquisition
date. For these reasons, the allocation of the purchase price is still subject to refinement. The allocation of the purchase price
was as follows (amounts in thousands):
|
|
Initial
|
|
|
|
|
|
Revised
|
|
|
|
Allocation
|
|
|
Adjustments
|
|
|
Allocation
|
|
Assets purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
30,695
|
|
|
|
(3,180
|
)
|
|
|
27,515
|
|
Aircraft
|
|
|
30,501
|
|
|
|
|
|
|
|
30,501
|
|
Goodwill
|
|
|
80,690
|
|
|
|
3,013
|
|
|
|
83,703
|
|
Other intangible assets
|
|
|
74,000
|
|
|
|
|
|
|
|
74,000
|
|
Other assets
|
|
|
26,845
|
|
|
|
3
|
|
|
|
26,848
|
|
Total assets
|
|
|
242,731
|
|
|
|
(164
|
)
|
|
|
242,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(9,864
|
)
|
|
|
164
|
|
|
|
(9,700
|
)
|
Purchase price
|
|
$
|
232,867
|
|
|
|
—
|
|
|
|
232,867
|
|
Net revenue and
income (loss) before income taxes and allocation of corporate administrative expenses generated by TSCF’s operations since
the acquisition date have been included with those of the Company in the consolidated statements of comprehensive income as follows
(amounts in thousands):
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2016
|
|
Net revenue
|
|
$
|
14,000
|
|
|
|
40,429
|
|
Income (loss) before income taxes and corporate administrative expense allocation
|
|
|
(178
|
)
|
|
|
999
|
|
Operating results
shown above for TSCF do not include the effect of patient transports retained at base locations where a TSCF base was consolidated
into a previously existing Company base.
The following
unaudited pro forma information presents combined financial results for the Company and TSCF for the three and nine months ended
September 30, 2015, assuming the acquisition occurred as of January 1, 2015 (amounts in thousands, except per share amounts):
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2015
|
|
|
September 30, 2015
|
|
Revenue
|
|
$
|
331,518
|
|
|
|
871,159
|
|
Net income attributable to Air Methods Corporation and subsidiaries
|
|
$
|
49,872
|
|
|
|
94,365
|
|
Basic income per common share
|
|
$
|
1.25
|
|
|
|
2.38
|
|
Diluted income per common share
|
|
$
|
1.24
|
|
|
|
2.37
|
|
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
(2)
|
Acquisition of Subsidiaries, continued
|
The above unaudited pro forma financial
information is presented for informational purposes only and does not necessarily represent what the Company’s results of
operations would have been had the acquisition occurred on the date assumed, nor is the information indicative of results that
may be expected in future periods. Pro forma adjustments exclude cost savings from synergies that may result from the acquisition.
Blue Hawaiian
Helicopters
In the third quarter of
2015, the Company’s partners exercised their right to require the Company to acquire their 10% ownership interest in Blue
Hawaiian Holdings, LLC. During the first and second quarters of 2016, the Company completed the buyout for $9,173,000.
Changes in stockholders’
equity for the nine months ended September 30, 2016, consisted of the following (amounts in thousands except share amounts):
|
|
Shares
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2016
|
|
|
39,003,026
|
|
|
$
|
564,186
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for options exercised
|
|
|
45,360
|
|
|
|
803
|
|
Stock-based compensation
|
|
|
73,369
|
|
|
|
5,129
|
|
Purchase of common stock
|
|
|
(2,730,232
|
)
|
|
|
(96,424
|
)
|
Forfeiture of unvested restricted shares and related dividends
|
|
|
—
|
|
|
|
14
|
|
Adjustments to redeemable non-controlling interests
|
|
|
—
|
|
|
|
(711
|
)
|
Other comprehensive loss
|
|
|
—
|
|
|
|
(79
|
)
|
Net income attributable to Air Methods Corporation and subsidiaries
|
|
|
—
|
|
|
|
78,049
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2016
|
|
|
36,391,523
|
|
|
$
|
550,967
|
|
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
(4)
|
Patient Transport Revenue Recognition
|
Trade receivables are presented
net of allowances for contractual discounts and uncompensated care. The Company determines its allowances for contractual discounts
and uncompensated care based on estimated payer mix, payer reimbursement schedules, and historical collection experience. The
allowances are reviewed monthly and adjusted periodically based on actual collections. Billings are charged off against the uncompensated
care allowance when it is probable that the receivable will not be recovered. The allowance for contractual discounts is related
primarily to Medicare, Medicaid, and other government-sponsored insurance plan patients. The allowance for uncompensated care
is related primarily to receivables recorded for self-pay patients.
Historically, the Company’s
allowance and provision for contractual discounts were calculated based entirely on Medicare and Medicaid patient transports.
The Company determined that uncollectible amounts related to other government-sponsored insurance plans and to private insurance
carriers with whom the Company has established a contractual relationship should have been categorized as contractual discounts
rather than as uncompensated care in prior periods. Effective in the fourth quarter of 2015, the Company presented these uncollectible
amounts as contractual discounts and corrected the presentation in prior periods. As a result, the Company increased the provision
for contractual discounts and correspondingly decreased the provision for uncompensated care by $19,480,000 and $66,405,000 for
the quarter and nine months ended September 30, 2015, respectively. The Company has also reclassified certain amounts for the
first and second quarters of 2016 from the provision for uncompensated care to the provision for contractual discounts in order
to conform with this presentation.
The Company has not changed its
charitable care policies related to self-pay patients or deductible and copayment balances for insured patients during either
2016 or 2015. The allowance for uncompensated care was 55.3% of receivables from non-contract payers as of September 30, 2016,
compared to 45.0% at December 31, 2015, and 59.9% at September 30, 2015.
The Company recognizes patient transport
revenue at its standard rates for services provided, regardless of expected payer. In the period that services are provided and
based upon historical experience, the Company records a significant provision for uncompensated care related to uninsured patients
who will be unable or unwilling to pay for the services provided and a provision for contractual discounts related to Medicare,
Medicaid, and other transports covered by contracts. Patient transport revenue, net of provision for contractual discounts but
before provision for uncompensated care, by major payer class, was as follows (amounts in thousands):
|
|
For quarter ended
|
|
|
For nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party payers
|
|
$
|
297,386
|
|
|
|
303,155
|
|
|
|
862,329
|
|
|
|
767,120
|
|
Self-pay
|
|
|
101,961
|
|
|
|
80,486
|
|
|
|
283,818
|
|
|
|
216,240
|
|
Total
|
|
$
|
399,347
|
|
|
|
383,641
|
|
|
|
1,146,147
|
|
|
|
983,360
|
|
Air Methods Corporation and Subsidiaries
Notes to Unaudited 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 outstanding during the period and dilutive potential
common shares.
In accordance
with FASB ASC 480-10-S99,
Distinguishing Liabilities from Equity,
and solely for the purpose of calculating earnings per
share, net income was increased by $155,000 and decreased by $711,000 for the quarter and nine months ended September 30, 2016,
respectively, and decreased by $800,000 and $918,000 for the quarter and nine months ended September 30, 2015, respectively, for
adjustments to the value of redeemable non-controlling interests.
The reconciliation
of basic to diluted weighted average common shares outstanding is as follows:
|
|
2016
|
|
|
2015
|
|
For quarter ended September 30:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic
|
|
|
37,354,787
|
|
|
|
39,293,453
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
1,468
|
|
|
|
27,886
|
|
Unvested restricted stock
|
|
|
49,814
|
|
|
|
92,449
|
|
Unvested performance share units
|
|
|
7,759
|
|
|
|
6,566
|
|
Weighted average number of common shares outstanding – diluted
|
|
|
37,413,828
|
|
|
|
39,420,354
|
|
|
|
|
|
|
|
|
|
|
For nine months ended September 30:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic
|
|
|
38,181,918
|
|
|
|
39,276,062
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
4,929
|
|
|
|
35,752
|
|
Unvested restricted stock
|
|
|
69,189
|
|
|
|
95,489
|
|
Unvested performance share units
|
|
|
4,707
|
|
|
|
936
|
|
Weighted average number of common shares outstanding – diluted
|
|
|
38,260,743
|
|
|
|
39,408,239
|
|
Common stock options
totaling 958,567 and performance share units totaling 30,358 were not included in the diluted shares outstanding for the three
and nine months ended September 30, 2016, because their effect would have been anti-dilutive. Common stock options totaling 573,732
and 566,752 were not included in the diluted shares outstanding for the three and nine months ended September 30, 2015, respectively,
and performance share units totaling 68,340 were not included in the diluted shares outstanding for the three and nine months
ended September 30, 2015, because their effect would have been anti-dilutive.
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
(6)
|
Fair Value of Financial Instruments
|
ASC Topic 820, “
Fair Value
Measurements and Disclosures,”
requires disclosures about how fair value is determined for assets and liabilities and
establishes a hierarchy by which these assets and liabilities must be grouped based on the type of inputs used in measuring fair
value as follows:
|
Level 1:
|
quoted prices in active markets for identical assets
or liabilities;
|
|
Level 2:
|
quoted prices in active markets for similar assets and
liabilities and inputs that are observable for the asset or liability; or
|
|
Level 3:
|
unobservable inputs, such as discounted cash flow models
or valuations.
|
The following
methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and
cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable, and accrued liabilities:
The carrying
amounts approximate fair value because of the short maturity of these instruments.
Derivative
instruments:
The Company endeavors to acquire
jet fuel at the lowest possible cost and to reduce volatility in operating expenses through the use of short-term purchased call
options. Financial derivative instruments covering fuel purchases are included in prepaid expenses and other current assets at
fair value. Fair value is determined based on quoted prices in active markets for similar instruments and is classified as Level
2 in the fair value hierarchy. The fair value of all fuel derivative instruments included in prepaid expenses and other current
assets was $770,000 at September 30, 2016, and $0 at December 31, 2015. The Company’s financial derivatives do not qualify
for hedge accounting, and, therefore, realized and non-cash mark to market adjustments are included in air medical aircraft operations
and tourism operating expenses in the Company’s statements of comprehensive income. Operating expenses included a non-cash
mark to market derivative loss of $439,000 and gain of $531,000 for the quarter and nine months ended September 30, 2016, respectively,
compared to losses of $112,000 and $369,000 for the quarter and nine months ended September 30, 2015, respectively. Cash settlements
totaled $343,000 and $439,000 in the quarter and nine months ended September 30, 2016. There were no cash settlements in 2015.
Long-term
debt:
The fair value
of long-term debt is classified as Level 3 in the fair value hierarchy because it is determined based on the present value of
future contractual cash flows discounted at an interest rate that reflects the risks inherent in those cash flows. Based on the
borrowing rates currently available to the Company for loans with similar terms and average maturities and on recent transactions,
the fair value of long-term debt as of September 30, 2016, is estimated to be $874,727,000, compared to a carrying value of $858,160,000.
The fair value of long-term debt as of December 31, 2015, was estimated to be $612,264,000, compared to a carrying value of $605,123,000.
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
(7)
|
Business Segment Information
|
Summarized financial
information for the Company’s operating segments is shown in the following table (amounts in thousands). Amounts in the
“Corporate Activities” column represent corporate headquarters expenses, corporate income tax expense, and results
of insignificant operations. The Company does not allocate assets between operating segments for internal reporting and performance
evaluation purposes. Operating segments and their principal products or services are as follows:
|
·
|
Air
Medical Services (AMS) - provides air medical transportation services to the general
population as an independent service and to hospitals or other institutions under exclusive
operating agreements. Services include aircraft operation and maintenance, medical care,
dispatch and communications, and medical billing and collection.
|
|
·
|
Tourism
– provides helicopter tours and charter flights, primarily focusing on Grand Canyon
and Hawaiian Island tours.
|
|
·
|
United
Rotorcraft (UR) Division - designs, manufactures, and installs aircraft medical interiors
and other aerospace and medical transport products for domestic and international customers.
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Intersegment
|
|
|
|
|
For quarter ended September 30:
|
|
AMS
|
|
|
Tourism
|
|
|
UR
|
|
|
Activities
|
|
|
Eliminations
|
|
|
Consolidated
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
267,699
|
|
|
|
38,781
|
|
|
|
4,532
|
|
|
|
—
|
|
|
|
—
|
|
|
|
311,012
|
|
Intersegment revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
3,173
|
|
|
|
—
|
|
|
|
(3,173
|
)
|
|
|
—
|
|
Total revenue
|
|
|
267,699
|
|
|
|
38,781
|
|
|
|
7,705
|
|
|
|
—
|
|
|
|
(3,173
|
)
|
|
|
311,012
|
|
Operating expenses, excluding depreciation & amortization
|
|
|
(184,740
|
)
|
|
|
(29,155
|
)
|
|
|
(7,676
|
)
|
|
|
(11,272
|
)
|
|
|
2,670
|
|
|
|
(230,173
|
)
|
Depreciation & amortization
|
|
|
(19,808
|
)
|
|
|
(2,317
|
)
|
|
|
(853
|
)
|
|
|
(609
|
)
|
|
|
—
|
|
|
|
(23,587
|
)
|
Interest expense
|
|
|
(6,488
|
)
|
|
|
(1,070
|
)
|
|
|
—
|
|
|
|
(584
|
)
|
|
|
(4
|
)
|
|
|
(8,146
|
)
|
Other income (expense), net
|
|
|
670
|
|
|
|
16
|
|
|
|
—
|
|
|
|
(105
|
)
|
|
|
4
|
|
|
|
585
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,077
|
)
|
|
|
—
|
|
|
|
(19,077
|
)
|
Net income (loss) attributable to Air Methods Corporation and subsidiaries
|
|
$
|
57,333
|
|
|
|
6,255
|
|
|
|
(824
|
)
|
|
|
(31,647
|
)
|
|
|
(503
|
)
|
|
|
30,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
266,751
|
|
|
|
36,212
|
|
|
|
8,379
|
|
|
|
—
|
|
|
|
—
|
|
|
|
311,342
|
|
Intersegment revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
4,803
|
|
|
|
—
|
|
|
|
(4,803
|
)
|
|
|
—
|
|
Total revenue
|
|
|
266,751
|
|
|
|
36,212
|
|
|
|
13,182
|
|
|
|
—
|
|
|
|
(4,803
|
)
|
|
|
311,342
|
|
Operating expenses, excluding depreciation & amortization
|
|
|
(160,200
|
)
|
|
|
(28,303
|
)
|
|
|
(11,127
|
)
|
|
|
(12,757
|
)
|
|
|
4,206
|
|
|
|
(208,181
|
)
|
Depreciation & amortization
|
|
|
(17,412
|
)
|
|
|
(2,002
|
)
|
|
|
(873
|
)
|
|
|
(597
|
)
|
|
|
—
|
|
|
|
(20,884
|
)
|
Interest expense
|
|
|
(3,747
|
)
|
|
|
(783
|
)
|
|
|
—
|
|
|
|
(366
|
)
|
|
|
3
|
|
|
|
(4,893
|
)
|
Other income (expense), net
|
|
|
524
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(787
|
)
|
|
|
(3
|
)
|
|
|
(266
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,235
|
)
|
|
|
—
|
|
|
|
(30,235
|
)
|
Income (loss) from continuing operations
|
|
|
85,916
|
|
|
|
5,124
|
|
|
|
1,182
|
|
|
|
(44,742
|
)
|
|
|
(597
|
)
|
|
|
46,883
|
|
Loss on discontinued operations, net of tax
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(29
|
)
|
Segment net income (loss)
|
|
|
85,887
|
|
|
|
5,124
|
|
|
|
1,182
|
|
|
|
(44,742
|
)
|
|
|
(597
|
)
|
|
|
46,854
|
|
Less net income (loss) attributable to non-controlling interests
|
|
|
(22
|
)
|
|
|
224
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
202
|
|
Net income (loss) attributable to Air Methods Corporation and subsidiaries
|
|
$
|
85,909
|
|
|
|
4,900
|
|
|
|
1,182
|
|
|
|
(44,742
|
)
|
|
|
(597
|
)
|
|
|
46,652
|
|
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
|
(7)
|
Business Segment Information, continued
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Intersegment
|
|
|
|
|
For nine months ended September 30:
|
|
AMS
|
|
|
Tourism
|
|
|
UR
|
|
|
Activities
|
|
|
Eliminations
|
|
|
Consolidated
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
755,853
|
|
|
|
98,242
|
|
|
|
18,887
|
|
|
|
—
|
|
|
|
—
|
|
|
|
872,982
|
|
Intersegment revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
12,249
|
|
|
|
—
|
|
|
|
(12,249
|
)
|
|
|
—
|
|
Total revenue
|
|
|
755,853
|
|
|
|
98,242
|
|
|
|
31,136
|
|
|
|
—
|
|
|
|
(12,249
|
)
|
|
|
872,982
|
|
Operating expenses, excluding depreciation & amortization
|
|
|
(520,255
|
)
|
|
|
(79,470
|
)
|
|
|
(28,257
|
)
|
|
|
(35,718
|
)
|
|
|
10,378
|
|
|
|
(653,322
|
)
|
Depreciation & amortization
|
|
|
(58,373
|
)
|
|
|
(6,898
|
)
|
|
|
(2,598
|
)
|
|
|
(1,783
|
)
|
|
|
—
|
|
|
|
(69,652
|
)
|
Interest expense
|
|
|
(19,090
|
)
|
|
|
(3,185
|
)
|
|
|
—
|
|
|
|
(1,583
|
)
|
|
|
4
|
|
|
|
(23,854
|
)
|
Other income (expense), net
|
|
|
1,606
|
|
|
|
50
|
|
|
|
—
|
|
|
|
(293
|
)
|
|
|
(4
|
)
|
|
|
1,359
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(49,494
|
)
|
|
|
—
|
|
|
|
(49,494
|
)
|
Segment net income (loss)
|
|
|
159,741
|
|
|
|
8,739
|
|
|
|
281
|
|
|
|
(88,871
|
)
|
|
|
(1,871
|
)
|
|
|
78,019
|
|
Less net loss attributable to non-controlling interests
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30
|
)
|
Net income (loss) attributable to Air Methods Corporation and subsidiaries
|
|
$
|
159,771
|
|
|
|
8,739
|
|
|
|
281
|
|
|
|
(88,871
|
)
|
|
|
(1,871
|
)
|
|
|
78,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
692,152
|
|
|
|
98,877
|
|
|
|
16,962
|
|
|
|
4
|
|
|
|
—
|
|
|
|
807,995
|
|
Intersegment revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
17,923
|
|
|
|
—
|
|
|
|
(17,923
|
)
|
|
|
—
|
|
Total revenue
|
|
|
692,152
|
|
|
|
98,877
|
|
|
|
34,885
|
|
|
|
4
|
|
|
|
(17,923
|
)
|
|
|
807,995
|
|
Operating expenses, excluding depreciation & amortization
|
|
|
(466,493
|
)
|
|
|
(80,239
|
)
|
|
|
(30,261
|
)
|
|
|
(33,748
|
)
|
|
|
16,380
|
|
|
|
(594,361
|
)
|
Depreciation & amortization
|
|
|
(52,026
|
)
|
|
|
(5,791
|
)
|
|
|
(2,529
|
)
|
|
|
(1,736
|
)
|
|
|
—
|
|
|
|
(62,082
|
)
|
Interest expense
|
|
|
(11,169
|
)
|
|
|
(2,439
|
)
|
|
|
—
|
|
|
|
(1,440
|
)
|
|
|
7
|
|
|
|
(15,041
|
)
|
Other income (expense), net
|
|
|
2,339
|
|
|
|
3
|
|
|
|
—
|
|
|
|
(1,065
|
)
|
|
|
(7
|
)
|
|
|
1,270
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(53,843
|
)
|
|
|
—
|
|
|
|
(53,843
|
)
|
Income (loss) from continuing operations
|
|
|
164,803
|
|
|
|
10,411
|
|
|
|
2,095
|
|
|
|
(91,828
|
)
|
|
|
(1,543
|
)
|
|
|
83,938
|
|
Loss on discontinued operations, net of tax
|
|
|
(378
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(378
|
)
|
Segment net income (loss)
|
|
|
164,425
|
|
|
|
10,411
|
|
|
|
2,095
|
|
|
|
(91,828
|
)
|
|
|
(1,543
|
)
|
|
|
83,560
|
|
Less net income (loss) attributable to non-controlling interests
|
|
|
(82
|
)
|
|
|
766
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
684
|
|
Net income (loss) attributable to Air Methods Corporation and subsidiaries
|
|
$
|
164,507
|
|
|
|
9,645
|
|
|
|
2,095
|
|
|
|
(91,828
|
)
|
|
|
(1,543
|
)
|
|
|
82,876
|
|
|
(8)
|
New Accounting Pronouncements
|
In August 2016, the FASB issued ASU No.
2016-15,
Classification of Certain Cash Receipts and Cash Payments
, which provides specific guidance for the classification
of eight types of cash receipts or payments on the statement of cash flow. The ASU is effective for periods beginning after December
15, 2017, and must be adopted retrospectively. The Company does not expect implementation to have a material effect on its consolidated
financial statements.
In March 2016, the FASB issued ASU
No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of accounting for
share-based payment transactions, including income tax consequences, forfeitures, and statement of cash flow classification. The
Company elected to adopt the ASU effective January 1, 2016, as permitted, and to recognize forfeitures of equity awards as they
occur. Consequently, the Company recorded a cumulative-effect reduction of $80,000 in retained earnings as of January 1, 2016,
for the change in accounting for forfeitures. In addition, an excess tax benefit of $184,000 for the nine months ended September
30, 2015, has been reclassified from financing activities to operating activities in the accompanying condensed consolidated statements
of cash flows. All other provisions of the ASU have been adopted prospectively, as required.
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial
Statements, continued
(unaudited)
|
(8)
|
New Accounting Pronouncements, continued
|
Effective January 1, 2016, the Company
adopted ASU No. 2015-03,
Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs
, which requires that
debt issuance costs be presented as a deduction from the carrying amount of the related debt liability. Debt issuance costs of
$1,194,000 and $4,379,000 as of December 31, 2015, have been reclassified from other assets to current installments of long-term
debt and long-term debt, respectively, in the accompanying condensed consolidated balance sheets.
In February 2016, the FASB issued
ASU No. 2016-02,
Leases
, which requires lessees to recognize a lease liability and right-of-use asset for all leases, with
the exception of short-term leases. The ASU is effective for periods beginning after December 15, 2018, and must be adopted using
a modified retrospective approach, with a number of optional practical expedients. The Company has not yet determined which, if
any, of the optional practical expedients it may elect to apply nor the effect that the ASU will have on its consolidated financial
statements.
In May 2014, the FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective
date of ASU 2014-09 for public entities to annual periods beginning after December 15, 2017, although early adoption will be permitted
as of the original effective date (i.e., for periods beginning after December 15, 2016). In 2016, the FASB issued ASU Nos. 2016-08,
2016-10, and 2016-12 to clarify guidance on specific provisions within ASU No. 2014-09. ASU No. 2014-09 permits the use of either
the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently
evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures.
|
ITEM 2.
|
Management's Discussion and Analysis of Financial Condition
and Results of Operations
|
The following discussion of the results of
operations and financial condition should be read in conjunction with our condensed consolidated financial statements and notes
thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,”
“expect,” “anticipate,” “plan,” “estimate,” and similar expressions are intended
to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results;
flight volume, collection rates and days’ sales outstanding for patient transports; collection of future price increases
for patient transports; size, structure and growth of our air medical services, aerial tourism, and products markets; continuation
and/or renewal of hospital contracts; acquisition of new and profitable UR Division contracts; impact of the Patient Protection
and Affordable Care Act (PPACA) and other changes in laws and regulations; delivery of new aircraft and disposition of older aircraft;
commitments to purchase new aircraft; and other matters. The actual results that we achieve may differ materially from those discussed
in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in
Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report,
as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements.
Overview
We provide air medical transportation services
throughout the United States and design, manufacture, and install medical aircraft interiors and other aerospace products for
domestic and international customers. We also provide tourism operations in and around the Grand Canyon and Hawaiian Islands.
Our divisions, or business segments, are organized according to the type of service or product provided and consist of the following:
|
·
|
Air Medical Services (AMS) – provides air medical transportation services to the general population
as an independent service (also called community-based services) and to hospitals or other institutions under exclusive operating
agreements (also called hospital-based services). Patient transport revenue consists of flight fees billed directly to patients,
their insurers, or governmental agencies, and cash flow is dependent upon collection from these individuals or entities. Air medical
services contract revenue consists of fixed monthly fees (approximately 80% of total contract revenue) and hourly flight fees (approximately
20% of total contract revenue) billed to hospitals or other institutions. On January 19, 2016, we acquired 100% of the membership
interest of Tri-State Care Flight, LLC (TSCF). In the nine months ended September 30, 2016, the AMS Division generated 87% of our
total revenue, compared to 86% in 2015.
|
|
·
|
Tourism
Division – provides helicopter tours and charter flights, primarily focusing on
Grand Canyon and Hawaiian Island tours. In the nine months ended September 30, 2016,
the Tourism Division generated 11% of our total revenue, compared to 12% in 2015.
|
|
·
|
United
Rotorcraft (UR) Division – designs, manufactures, and installs aircraft medical
interiors and other aerospace and medical transport products for domestic and international
customers. The UR Division generated 2% of our total revenue in the nine months ended
September 30, 2016 and 2015.
|
See Note 7 to the consolidated financial statements
included in Item 1 of this report for operating results by segment.
We believe that the following factors have
the greatest impact on our results of operations and financial condition:
|
·
|
Patient
transport volume.
Almost all patient transport revenue and approximately 20% of AMS contract revenue are
derived from flight fees. By contrast, 86% of AMS operating costs incurred during the
nine months ended September 30, 2016, is mainly fixed in nature. While flight volume
is affected by many factors, including competition and the effectiveness of marketing
and business development initiatives, the greatest single variable in quarterly comparatives
has historically been weather conditions. Adverse weather conditions—such as fog,
high winds, high heat, or heavy precipitation—hamper our ability to operate our
aircraft safely and, therefore, result in reduced flight volume. Total patient transports
for community-based locations were 18,478 and 54,143 for the quarter and nine months
ended September 30, 2016, respectively, compared to 17,330 and 47,287 for the quarter
and nine months ended September 30, 2015, respectively. Patient transports for community-based
locations open longer than one year (Same-Base Transports) were 15,352 and 44,785 in
the quarter and nine months ended September 30, 2016, respectively, compared to 16,764
and 45,712 in the quarter and nine months ended September 30, 2015, respectively. Cancellations
due to unfavorable weather conditions for community-based locations open longer than
one year were 395 higher and 702 lower in the quarter and nine months ended September
30, 2016, respectively, compared to 2015. Requests for community-based services decreased
by 4.6% and 1.5% for the quarter and nine months ended September 30, 2016, respectively,
for bases open longer than one year. Weak hospital census, particularly in rural markets,
adversely impacts inter-facility transports. Extreme weather conditions may also cause
a reduction in flight demand as well as in the number of completed flights.
|
|
·
|
Reimbursement per transport.
We respond to calls
for air medical transports without pre-screening third-party payer coverage or creditworthiness of the patient and are subject
to collection risk for services provided to insured and uninsured patients. Medicare and Medicaid also receive contractual discounts
from our standard charges for flight services. Patient transport revenue is recorded net of provisions for contractual discounts
and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on
historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions
are adjusted as required based on actual collections in subsequent periods. Net reimbursement per patient transport is primarily
a function of collection rate, 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. Medicare and Medicaid reimbursement rates have remained well below the cost of providing
air medical transportation.
|
Private insurers may also take
additional time to review claims and related documentation, including proof of medical necessity, and increase the frequency of
such reviews, thus elongating the collection cycle. The collection rate and cycle may also both be impacted if private insurers
pay patients directly rather than remitting payment to the Company.
One of the primary goals of PPACA
was to decrease the number of uninsured Americans. Although we have experienced a movement from self-pay patients to Medicaid
in our payer mix in prior periods, to date we have not experienced an increase in the percentage of transports covered by private
insurance as a result of PPACA.
Net reimbursement per transport decreased 3.3% in the quarter ended September 30, 2016, compared to 2015,
attributed to deteriorations in payer mix and collection rate, net of recent price increases. Net reimbursement per transport for
the nine months ended September 30, 2016, was relatively unchanged from the prior year. Payer mix inclusive of TSCF, based on number
of transports, was as follows:
|
|
For quarters ended
|
|
|
For nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Private insurance carriers
|
|
|
26.7
|
%
|
|
|
27.8
|
%
|
|
|
26.2
|
%
|
|
|
27.0
|
%
|
Government-sponsored insurance plans
|
|
|
3.6
|
%
|
|
|
3.6
|
%
|
|
|
3.6
|
%
|
|
|
3.8
|
%
|
Medicare
|
|
|
34.3
|
%
|
|
|
33.9
|
%
|
|
|
35.6
|
%
|
|
|
34.8
|
%
|
Medicaid
|
|
|
24.7
|
%
|
|
|
24.6
|
%
|
|
|
24.6
|
%
|
|
|
24.4
|
%
|
Self-pay patients
|
|
|
10.7
|
%
|
|
|
10.1
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
Excluding the effect of TSCF, private
insurance carriers represented 27.2% and 26.8% of total transports for the quarter and nine months ended September 30, 2016, respectively.
Although price increases generally
increase net reimbursement per transport from insurance payers, the amount per transport collectible from self-pay patients, Medicare,
and Medicaid does not increase proportionately with price increases. Therefore, depending upon overall payer mix, price increases
will usually result in an increase in the percentage of uncollectible accounts. Certain insurance companies have also not increased
their reimbursement rates proportionately with recent price increases to the same extent they did with previous price increases.
Continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our historical
collection rates.
|
·
|
Tourism
passenger count.
Tourism revenue is entirely derived from passenger fees, but 76%
of tourism operating costs incurred during the nine months ended September 30, 2016,
was mainly fixed in nature. Passenger count is impacted by many variables, including
weather, competition, and tour prices. Because international travelers account for a
significant number of tourism customers, flight volume may also be impacted by worldwide
economic conditions and international currency exchange rates. Total tourism passenger
count was 137,595 and 347,803 in the quarter and nine months ended September 30, 2016,
respectively, compared to 134,157 and 361,306 in the quarter and nine months ended September
30, 2015, respectively.
|
|
·
|
Aircraft
maintenance.
AMS and Tourism operations are directly affected by fluctuations in
aircraft maintenance costs. Proper operation of the aircraft by flight crews and standardized
maintenance practices can help to contain maintenance costs. Increases in spare parts
prices from original equipment manufacturers tend to be higher for aircraft which are
no longer in production. In addition, on-condition components are more likely to require
replacement with age. Since January 1, 2015, we have taken delivery of 42 new aircraft
and expect to take delivery of two additional new aircraft through the end of 2016. We
have replaced discontinued models and other older aircraft with the new aircraft, as
well as provided capacity for base expansion. Replacement models of aircraft typically
have higher ownership costs than the models targeted for replacement but lower maintenance
costs. Total AMS aircraft maintenance expense increased 9.1% and 0.3% in the quarter
and nine months ended September 30, 2016, respectively, compared to 2015, while total
flight hours for AMS operations increased 3.3% and 8.7% for the quarter and nine months
ended September 30, 2016, respectively, compared to 2015. Excluding TSCF operations,
AMS aircraft maintenance expense increased 1.7% and decreased 5.5%, for the quarter and
nine months ended September 30, 2016, respectively, compared to 2015. Total flight hours
for corresponding operations decreased 2.8% and increased 2.1% for the quarter and nine
months ended September 30, 2016, respectively, compared to 2015. Aircraft maintenance
expense for the Tourism Division increased 6.0% and decreased 3.9% in the quarter and
nine months ended September 30, 2016, respectively, compared to 2015, reflecting increases
of 8.6% and 0.4% in total flight hours for the quarter and nine months ended September
30, 2016, respectively. The change in maintenance expense reflects normal fluctuations
in the timing of overhaul and replacement cycles for aircraft parts. During the nine
months ended September 30, 2015, we also incurred $2.6 million to remediate certification
documentation issues related to Night Vision Imaging Systems (NVIS) installations in
certain of our aircraft.
|
|
·
|
Competitive pressures from low-cost providers.
We
are recognized within the industry for our higher standard of service and our use of cabin-class aircraft. Many of our competitors
utilize aircraft with lower ownership and operating costs and do not require a similar level of experience for aviation and medical
personnel. Reimbursement rates established by Medicare, Medicaid, and most insurance providers are not contingent upon the type
of aircraft used or the experience of personnel. However, we believe that higher quality standards help to differentiate our service
from competitors and, therefore, lead to higher utilization.
|
|
·
|
Employee
recruitment and relations.
The ability to deliver quality service is partially dependent
upon our ability to hire and retain employees who have advanced aviation, nursing, and
other technical skills. In addition, hospital contracts typically contain minimum certification
requirements for pilots and mechanics. Employees who meet these standards are in great
demand and are likely to remain a limited resource in the foreseeable future. Our AMS
pilots are represented by a collective bargaining unit and are covered under a collective
bargaining agreement which is effective through December 31, 2016. Negotiations have
begun on a new CBA but no agreement has yet been reached. Other employee groups may also
elect to be represented by unions in the future.
|
Results
of Operations
We reported net income of $30,614,000
and $78,049,000 for the quarter and nine months ended September 30, 2016, respectively, compared to $46,652,000 and $82,876,000
for the quarter and nine months ended September 30, 2015, respectively. Same-Base Transports decreased 8.4% and 2.0% in the quarter
and nine months ended September 30, 2016, compared to 2015, while net reimbursement per patient transport decreased 3.3% in the
quarter ended September 30, 2016, compared to 2015, primarily as a result of deteriorations in payer mix and collection rate net
of recent price increases. Net reimbursement per patient transport for the nine months ended September 30, 2016, was relatively
unchanged compared to 2015.
Air Medical Services
Patient transport revenue
is recorded
net of provisions for contractual discounts and uncompensated care and increased $7,064,000, or 3.2%, and $81,378,000, or 14.5%,
for the quarter and nine months ended September 30, 2016, respectively, compared to 2015, for the following reasons:
|
·
|
Net
revenue of $13,993,000 and $40,429,000 from TSCF’s operations during the quarter
and nine months ended September 30, 2016.
|
|
·
|
Decreases of 1,412, or 8.4%, and 927, or 2.0%, in Same-Base Transports for the quarter and nine months ended
September 30, 2016, respectively, compared to 2015. Cancellations due to unfavorable weather conditions for bases open longer than
one year were 395 higher and 702 lower in the quarter and nine months ended September 30, 2016, respectively, compared to 2015.
Requests for community-based services decreased 4.6% and 1.5% for the quarter and nine months ended September 30, 2016, respectively,
for bases open greater than one year. Weak hospital census, particularly in rural markets, adversely impacts inter-facility transports.
Extreme weather conditions may also cause a reduction in flight demand as well as in the number of completed flights.
|
|
·
|
Decrease of 3.3% in net reimbursement per transport
for
the quarter ended September 30, 2016, compared to 2015, due primarily to deteriorations in payer mix and collection rate net of
recent price increases. For the nine months ended September 30, 2016, net reimbursement per transport was relatively unchanged
compared to 2015.
|
|
·
|
Incremental net revenue of $24,414,000 and $71,235,000
for the quarter and nine months ended September 30, 2016, respectively, generated from the addition of 38 new bases, including
sixteen bases resulting from the conversion of AMS contract customers to community-based operations, during 2016 or 2015.
|
|
·
|
Closure of eleven bases during 2016 or 2015, related to
insufficient flight volume and to plans to improve per base utilization, resulting in decreases in net revenue of approximately
$5,524,000 and $13,456,000 during the quarter and nine months ended September 30, 2016, respectively.
|
Air medical services contract revenue
decreased $5,766,000, or 14.3%, and $17,361,000, or 14.5%, for the quarter and nine months ended September 30, 2016, for the following
reasons:
|
·
|
Cessation
of service under three contracts
and the conversion of five contracts to community-based
operations
during 2016 or
2015, resulting in decreases in net revenue of approximately $6,460,000 and $20,780,000
for the quarter and nine months ended September 30, 2016, respectively.
|
|
·
|
Incremental
net revenue of $1,034,000 and $2,751,000 for the quarter and nine months ended September
30, 2016, generated from expansion of five contracts to additional bases of operation
during 2016 or 2015.
|
|
·
|
Decreases
of 4.0% and 2.1% in flight volume for the quarter and nine months ended September 30,
2016, respectively, for all contracts excluding contract expansions and closed contracts
described above.
|
|
·
|
Annual
price increases in the majority of contracts based on stipulated contractual increases
or changes in the Consumer Price Index or spare parts prices from aircraft manufacturers.
|
Flight center costs
(consisting primarily
of pilot, mechanic, and medical staff salaries and benefits) increased $17,309,000, or 17.2%, and $40,408,000, or 13.8%, for the
quarter and nine months ended September 30, 2016, respectively, compared to 2015, for the following reasons:
|
·
|
Flight
center costs of $6,817,000 and $19,155,000 related to TSCF’s operations for the
quarter and nine months ended September 30, 2016.
|
|
·
|
Increases
of approximately $11,215,000 and $33,129,000 for the quarter and nine months ended September
30, 2016, respectively, for the addition of personnel to staff new base locations described
above.
|
|
·
|
Decreases
of approximately $4,733,000 and $15,390,000 for the quarter and nine months ended September
30, 2016, respectively, due to the closure of base locations described above.
|
Air medical aircraft operating expenses
increased $3,636,000, or 11.1%, and $1,751,000, or 1.7%, for the quarter and nine months ended September 30, 2016, respectively,
compared to 2015. Aircraft operating expenses consist of fuel, insurance, and maintenance costs and generally are a function of
the size of the fleet, the type of aircraft flown, and the number of hours flown. The change in costs is due to the following:
|
·
|
Aircraft
operating expenses of $2,606,000 and $6,401,000 related to TSCF’s fleet during
the quarter and nine months ended September 30, 2016.
|
|
·
|
Increase
in AMS aircraft maintenance expense of $411,000, or 1.7%, to $25,125,000 for the third
quarter of 2016 and decrease of $4,368,000, or 5.5%, to $74,539,000 for the nine months
ended September 30, 2016, compared to the prior year, excluding the effect of the TSCF
fleet. Total flight volume for corresponding AMS operations decreased 2.8% and increased
2.1% for the quarter and nine months ended September 30, 2016, respectively, compared
to prior year. The change in maintenance expense reflects normal fluctuations in the
timing of overhaul and replacement cycles for aircraft parts. During the nine months
ended September 30, 2015, we also incurred $2,635,000 to remediate certification documentation
issues related to NVIS installations in certain of our aircraft.
|
|
·
|
Decreases
of approximately 2.1% and 16.3% in the cost of aircraft fuel per hour flown for AMS operations
for the quarter and nine months ended September 30, 2016, respectively, excluding the
effect of the TSCF fleet. Total AMS fuel costs, excluding the TSCF fleet, increased $38,000
to $5,882,000 and decreased $1,290,000 to $14,009,000 for the quarter and nine months
ended September 30, 2016, respectively, compared to 2015. Fuel costs also included a
non-cash mark to market derivative loss of $293,000 and gain of $470,000 for the quarter
and nine months ended September 30, 2016, respectively, compared to losses of $112,000
and $369,000 for the quarter and nine months ended September 30, 2015, respectively.
|
|
·
|
Decrease
in hull insurance rates effective July 2015. Effective with our policy renewal on July
1, 2016, our hull insurance rates increased but remain below the rates we paid for the
2014-2015 policy year.
|
Tourism
Tourism and charter revenue
increased
$2,569,000, or 7.1%, and decreased $635,000, or 0.6%, for the quarter and nine months ended September 30, 2016, respectively,
compared to 2015. During the quarter and nine months ended September 30, 2016, respectively, we transported 137,595 and 347,803
passengers on tourism flights, compared to 134,157 and 361,306 in the quarter and nine months ended September 30, 2015, respectively.
Tourism operating expenses
consist
primarily of pilot and mechanic salaries and benefits; aircraft maintenance, fuel, and insurance; landing fees; commissions; and
cost of tour amenities and typically vary with passenger count, flight volume, and number and type of aircraft. Expenses increased
$2,181,000, or 9.7%, and $468,000, or 0.7%, for the quarter and nine months ended September 30, 2016, respectively, compared to
2015, for the following reasons:
|
·
|
Fluctuation
in passenger volume, as described above.
|
|
·
|
Increase
of $416,000, or 6.0%, to $7,378,000 and decrease of $871,000, or 3.9%, to $21,361,000
in tourism aircraft maintenance expense for the quarter and nine months ended September
30, 2016, respectively, reflecting increases of 8.6% and 0.4% in total flight hours for
the quarter and nine months ended September 30, 2016, respectively, as well as normal
fluctuations in the timing of overhaul and replacement cycles for aircraft parts.
|
|
·
|
Increase
of 1.6% and decrease of 18.2% in the cost of aircraft fuel per hour flown for tourism
operations for the quarter and nine months ended September 30, 2016, respectively
|
United Rotorcraft Division
Medical interiors and products revenue
decreased $3,843,000, or 45.9%, and increased $1,933,000, or 11.4%, for the quarter and nine months ended September 30, 2016,
respectively, compared to 2015. Significant projects during 2016 included the completion of seventeen multi-mission interiors
for the U.S. Army’s HH-60M helicopter, work under two contracts for a total of 73 interior kits for an older generation
of the Black Hawk helicopter, and six aircraft interiors for commercial customers. Revenue by product line for the quarter and
nine months ended September 30, 2016, was as follows:
|
·
|
$3,258,000
and $13,900,000 – governmental entities
|
|
·
|
$1,278,000
and $4,999,000 – commercial customers
|
Significant projects during 2015 included
the completion of eighteen multi-mission interiors for the U.S. Army’s HH-60M helicopter and 26 interiors for an older generation
of the U.S. Army’s Black Hawk helicopter, as well as work on six aircraft interiors for commercial customers. Revenue by
product line for the quarter and nine months ended September 30, 2015, was as follows:
|
·
|
$5,677,000
and $11,287,000 – governmental entities
|
|
·
|
$2,702,000
and $5,679,000 – commercial customers
|
Cost of medical interiors and products
decreased $1,964,000, or 29.3%, and increased $3,651,000, or 27.2%, for the quarter and nine months ended September 30, 2016,
respectively, as compared to the prior year, due primarily to the changes in sales volume. In addition, costs in 2016 included
development and design work on aircraft interior configurations for commercial customers, leading to higher engineering and certification
costs and to lower profit margins. Cost of medical interiors and products also includes certain fixed costs, such as administrative
salaries and facilities rent, which do not vary with volume of sales and which are absorbed by both projects for external customers
and interdivisional projects.
General Expenses
Depreciation and amortization
increased
$2,703,000, or 12.9%, and $7,570,000, or 12.2%, for the quarter and nine months ended September 30, 2016, compared to 2015. Depreciation
and amortization expense related to TSCF’s assets was $1,839,000 and $4,773,000 for the quarter and nine months ended September
30, 2016, respectively. In addition, since March 31, 2015, we have placed 43 aircraft with a total basis of $143.7 million into
service. These increases were offset, in part, by the buyout of 26 aircraft which were previously leased under capital lease obligations
since March 31, 2015. Aircraft under capital leases are amortized over the terms of the underlying leases with no assigned salvage
value. Aircraft which are owned directly are depreciated over a 25-year life, based on the year of manufacture, with a 25% salvage
value. As a result, the buyout of aircraft from capital lease obligations results in a decrease in depreciation expense.
General and administrative (G&A) expenses
increased $1,728,000, or 4.4%, and $11,765,000, or 10.8%, for the quarter and nine months ended September 30, 2016, respectively,
compared to 2015. G&A expenses include executive management, legal, accounting and finance, billing and collections, information
services, human resources, aviation management, pilot training, dispatch and communications, AMS program administration, and tourism
customer service and reservations. G&A expenses directly attributable to TSCF operations totaled $1,700,000 and $5,485,000
for the quarter and nine months ended September 30, 2016. Since March 31, 2015, we have opened a net of 26 new community-based
locations, not including TSCF bases, contributing to an increase in billing and collections, dispatch, and AMS program administration
requirements. We also have increased billing and collections staffing in order to address the backlog of claims and thus reduce
days’ sales outstanding. These increases were partially offset by decreases of $3,703,000 and $4,270,000 in equity and incentive
compensation accruals related to our financial performance during the quarter and nine months ended September 30, 2016, respectively,
compared to 2015.
Interest expense
increased
$3,253,000, or 66.5%, and $8,813,000, or 58.6%, for the quarter and nine months ended September 30, 2016, compared to 2015, primarily
due to $220 million of term loans originated during January 2016 to finance the acquisition of TSCF. Weighted average interest
rates on all term loans under our senior credit facility were 2.46% and 2.44% for the quarter and nine months ended September 30,
2016, respectively, and 2.08% and 1.99% for the quarter and nine months ended September 30, 2015, respectively. In addition, we
carried average balances of $10.0 million and $9.0 million against our line of credit in the quarter and nine months ended September
30, 2016, compared to $7.0 million in the nine months ended September 30, 2015. We did not carry a balance against our line during
the third quarter of 2015.
Income tax expense
was $19,077,000
and $49,494,000, at effective tax rates of 38.4%, and 38.8%, for the quarter and nine months ended September 30, 2016, respectively,
compared to $30,235,000 and $53,843,000, at effective tax rates of 39.2%, and 39.1%, for the quarter and nine months ended September
30, 2015, respectively. The rates in 2016 were affected by apportionment factor adjustments and scheduled changes in state income
tax rates which decreased our expected blended state rate; applying the new rate to deferred tax assets and liabilities resulted
in an income tax benefit of $383,000 for the quarter and nine months ended September 30, 2016. Excluding the effect of this change,
the effective tax rate was 39.2% and 39.1% for the quarter and nine months ended September 30, 2016, respectively. Changes in
our effective tax rate are affected by the apportionment of revenue and income before taxes for the various jurisdictions in which
we operate and by changing tax laws and regulations in those jurisdictions.
Liquidity
and Capital Resources
Our working capital position as
of September 30, 2016, was $318.8 million, compared to $309.1 million at December 31, 2015. Cash generated by continuing
operations was $173.3 million in 2016, compared to $126.2 million in 2015, reflecting the results of operations described
above. Excluding the effect of receivables acquired in the TSCF purchase, net trade receivables decreased $1.2 million during
2016, compared to increasing $60.5 million in 2015. Days’ sales outstanding (DSO’s) related to patient
transports, measured by comparing net patient transport revenue for the annualized previous six-month period to outstanding
open net accounts receivable, were 134 at September 30, 2016, compared to 126 at September 30, 2015, and 148 at June 30,
2016. The increase in DSO’s over prior year is attributed in part to additional time taken by private insurers to
review claims and related documentation, including proof of medical necessity, prior to claim adjudication and an
increase in the number of claims subjected to the extended review process by private insurers. To address changes in payer
practices, we have significantly increased billing and collections staffing and initiated process improvements designed to
improve efficiency and effectiveness of the billing cycle.
Cash used by continuing
investing activities totaled $309.7 million in 2016 compared to $156.4 million in 2015. In 2016 we acquired TSCF for $216.3
million (net of cash deposits acquired) and completed the buyout of our minority partners in Blue Hawaiian Holdings, LLC, for
$9.2 million. Equipment acquisitions in 2016 included the purchase of sixteen aircraft for $56.5 million and the buyout of
ten previously leased aircraft for $13.1 million. We sold ten aircraft for $6.1 million. Equipment acquisitions in 2015
included the purchase of 23 aircraft for approximately $86.1 million and the buyout of eight previously leased aircraft for
$9.5 million. During 2015 we also acquired three aircraft, medical equipment, and certain other intangible assets for $43.5
million from a hospital customer in connection with converting the program to community-based operations. We sold seven
aircraft for $3.5 million.
Continuing financing activities
generated $138.0 million in 2016 compared to $32.1 million in 2015. In 2016 we utilized $220 million of new term loans under
the senior credit facility to finance the acquisition of TSCF and originated fourteen notes totaling $56.0 million to finance
the acquisition of new aircraft. We also repurchased 2.7 million shares of our common stock on the open market for $96.4
million. During 2015, we originated 28 notes primarily to finance the acquisition of aircraft and capital lease buyouts.
In the first quarter of 2015, we
entered into an agreement to purchase 200 Bell 407GXP helicopters totaling $882.6 million over a ten-year term beginning in 2016.
We have taken delivery of ten aircraft under this agreement in 2016 and expect to take delivery of two more in the fourth quarter.
During the third quarter of 2016, in accordance with our right to termination for convenience, we gave notice to Bell Helicopter
Textron, Inc., of our intent to cancel or reduce future orders and are in the process of negotiating modifications to the terms
of the purchase agreement, including the total number of aircraft to be delivered under the agreement and application of related
deposits of $6.3 million.
Critical
Accounting Policies
Our unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
On an on-going basis, management evaluates
our estimates and judgments, including those related to revenue recognition, deferred income taxes, and valuation of long-lived
assets and goodwill. Management bases its estimates and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Revenue relating to tourism and charter flights
is recognized upon completion of the services. Fixed contract revenue under our operating agreements with hospitals is recognized
monthly over the terms of the agreements. Revenue relating to patient transports is recognized upon completion of the services
and is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during
the period related services are performed based on historical collection experience and any known trends or changes in reimbursement
rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. We have
from time to time experienced delays in reimbursement from third-party payers. In addition, third-party payers may disallow, in
whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage,
determinations of medical necessity, or the need for additional information. Laws and regulations governing Medicare and Medicaid
programs are very complex and subject to interpretation. We also provide services to patients who have no insurance or other third-party
payer coverage. There can be no guarantee that we will continue to experience the same collection rates that we have in the past.
If actual future collections are more or less than those projected by management, adjustments to allowances for contractual discounts
and uncompensated care may be required. Based on related patient transport revenue for the nine months ended September 30, 2016,
a change of 100 basis points in the percentage of estimated contractual discounts and uncompensated care would have resulted in
a change of approximately $27.1 million in net patient transport revenue.
Revenue related to fixed fee medical interior
and products contracts is recorded as costs are incurred using the percentage of completion method of accounting. We estimate
the percentage of completion based on costs incurred to date as a percentage of an estimate of the total costs to complete the
project. Losses on contracts in process are recognized when determined. If total costs to complete a project are greater or less
than estimated, the gross margin on the project may be greater or less than originally recorded under the percentage of completion
method.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects
to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition
guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of
ASU 2014-09 for public entities to annual periods beginning after December 15, 2017, although early adoption will be permitted
as of the original effective date (i.e., for periods beginning after December 15, 2016). The ASU permits the use of either the
retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating
the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.
Deferred Income Taxes
In preparation of the consolidated financial
statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating
actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as
depreciable assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are
included in the consolidated balance sheets. We then assess the likelihood that deferred tax assets will be recoverable from future
taxable income in the respective federal or state jurisdiction as appropriate and record a valuation allowance for those amounts
we believe are not likely to be realized. We consider estimated future taxable income, tax planning strategies, and the expected
timing of reversals of existing temporary differences in assessing the need for a valuation allowance against deferred tax assets.
Establishing or increasing a valuation allowance in a period increases income tax expense. In the event we were to determine that
we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance
would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize
our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance would increase
income in the period such determination was made. The effect on deferred income tax assets and liabilities of a change in statutory
tax rates applicable to the Company is also recognized in income in the period of the change. We evaluate the recognition and
measurement of uncertain tax positions based on the facts and circumstances surrounding the tax position and applicable tax law
and other tax pronouncements. Changes in our estimates of uncertain tax positions would be recognized as an adjustment to income
tax expense in the period of the change.
Long-lived Assets Valuation
In accounting for long-lived assets, we make
estimates about the expected useful lives, projected residual values and the potential for impairment. Estimates of useful lives
and residual values of aircraft are based upon actual industry experience with the same or similar aircraft types and anticipated
utilization of the aircraft. Changing market prices of new and used aircraft, government regulations and changes in our maintenance
program or operations could result in changes to these estimates. Long-lived assets are evaluated for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived
assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the
asset. Our cash flow estimates are based on historical results adjusted for estimated current industry trends, the economy, and
operating conditions.
Goodwill Valuation
We evaluate goodwill annually in accordance
with ASU No. 2011-08,
Testing for Goodwill Impairment
, which allows an entity to first assess qualitative factors to determine
whether it is necessary to perform the two-step quantitative goodwill impairment test. Factors considered include overall economic
conditions within our markets, access to capital, changes in the cost of operations, the financial performance of the Company,
and change in our stock price during the year. Based upon our qualitative assessment of factors impacting the value of goodwill
as of December 31, 2015, we determined that it was not likely that the fair value of any reporting unit was less than its carrying
amount and that a quantitative assessment of goodwill was not necessary. Changes in these factors or a sustained decline in general
economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment
loss in a future period.