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Item 2.
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Management's Discussion and Analysis of Financial Condition
and Results of Operations
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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; 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; expected receipt
of funds related to the decrease in purchase price of TSCF;
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:
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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. In the first quarter of 2016, the AMS Division generated
87% of our total revenue, compared to 86% in the first quarter of 2015.
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Tourism Division – provides helicopter tours and charter flights, primarily focusing on Grand
Canyon and Hawaiian Island tours. In the first quarter of 2016, the Tourism Division generated 10% of our total revenue, compared
to 12% in the first quarter of 2015.
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United Rotorcraft (UR) Division - designs, manufactures, and installs aircraft medical interiors
and other aerospace and medical transport products for domestic and international customers. In the first quarter of 2016, the
UR Division generated 3% of our total revenue, compared to 2% in the first quarter of 2015.
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See Note 7 to the condensed 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:
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Patient transport volume.
Almost
all of patient transport revenue is derived from flight fees, as compared to approximately 20% of AMS contract revenue. B
y
contrast, 87%
of AMS operating costs
incurred during the quarter
ended March 31, 2016, was mainly fixed in nature.
While flight volume is affected by many factors, including competition
and the effectiveness of marketing and business development initiatives, the greatest single variable has historically been weather
conditions. Adverse weather conditions—such as fog, high winds, or heavy precipitation—hamper our ability to operate
our aircraft safely and, therefore, result in reduced flight volume. Further, prolonged periods of adverse weather conditions may
lead referring agencies to incorrectly assume that our bases are out-of-service for weather even though that is not the case, thereby
leading to decreases in requests and patient transports.
Total patient
transports for
community-based locations
were 16,980 for the first
quarter of 2016 compared to 13,852 for the first quarter of 2015. Patient transports for
community-based locations
open
longer than one year (Same-Base Transports) were 13,965 in the first quarter of 2016, compared to 13,551 in the first quarter of
2015. Cancellations due to unfavorable weather conditions for
community-based locations
open
longer than one year were 454 lower in the first quarter of 2016, compared to the first quarter of 2015. Requests for community-based
services increased 1.7% for bases open greater than one year.
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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. Medicaid
reimbursement rates in many jurisdictions have remained well below the cost of providing air medical transportation.
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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. We believe that the movement from self-pay patients to Medicaid in our
payer mix shown below is attributable to the expansion of Medicaid eligibility under PPACA. 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 0.2% in the first quarter of 2016, compared to 2015, attributed to recent price increases net of deteriorations in payer
mix and collection rate. Payer mix inclusive of TSCF, based on number of transports, was as follows:
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For quarters ended
March 31,
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2016
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2015
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Private insurance carriers
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26.2
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%
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27.0
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%
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Government-sponsored insurance plans
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3.7
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%
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3.6
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%
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Medicare
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35.6
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%
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34.8
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%
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Medicaid
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24.5
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%
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23.9
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%
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Self-pay patients
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10.0
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%
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10.7
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%
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Excluding the effect of TSCF,
private insurance carriers represented 26.9% of total transports for the quarter ended March 31, 2016.
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. 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.
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Tourism passenger count.
Tourism revenue is entirely derived from passenger fees, but 74%
of tourism operating costs incurred during the first quarter of 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 decreased to 95,593 in the first quarter of 2016 from 100,196 in the first quarter of 2015.
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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. During
the first quarter of 2015, we entered into an agreement to take delivery of 200 Bell 407GXP helicopters beginning in 2016 over
a ten-year term, subject to an early termination right exercisable by us. Since January 1, 2015, we have taken delivery of 35 new
aircraft, including four Bell 407GXP helicopters, and expect to take delivery of eleven 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 decreased 21.3% from the first quarter of 2015 to the first quarter
of 2016, while total flight hours for AMS operations increased 13.6% over the same period. Excluding TSCF operations, AMS aircraft
maintenance expense decreased 27.3%, compared to an increase of 5.9% in total flights hours for corresponding operations. Aircraft
maintenance expense for the Tourism Division decreased 1.0% in the first quarter of 2016 compared to the first quarter of 2015,
reflecting a 4.7% decrease in total flight hours. The change in maintenance expense reflects normal fluctuations in the timing
of overhaul and replacement cycles for aircraft parts. During the first quarter of 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.
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Competitive pressures from low-cost providers.
We are recognized within the industry for
our standard of service and our use of cabin-class aircraft. Many of our 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.
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Employee recruitment and relations.
The ability to deliver quality services is partially
dependent upon our ability to hire and retain employees who have advanced aviation, nursing, and other technical skills. In addition,
hospital contracts typically contain minimum certification requirements for pilots and mechanics. 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. Other employee groups may also elect to be represented by unions in the future.
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Results
of Operations
We
reported net income of $20,453,000 for the quarter ended March 31, 2016, compared to $12,628,000 for the quarter ended March 31,
2015. Same-Base Transports were 3.1% higher in the first quarter of 2016 compared to the first quarter of 2015, while net reimbursement
per patient transport decreased 0.2%, primarily as a result of recent price increases net of a deterioration in payer mix
and
collection rate
.
Air Medical Services
Patient transport revenue
is recorded
net of provisions for contractual discounts and uncompensated care and increased $36,016,000, or 22.3%, for the quarter ended March
31, 2016, compared to 2015, for the following reasons:
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Net revenue of $15,274,000 from TSCF’s operations during the first quarter of 2016.
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Increase in Same-Base Transports of 414,
or 3.1%, in the first quarter of 2016 compared to 2015. Cancellations due to unfavorable weather conditions for bases open longer
than one year were 454 lower in the first quarter of 2016, compared to the first quarter of 2015. Requests for community-based
services increased 1.7% for bases open greater than one year.
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Decrease of 0.2% in net reimbursement per transport for the first quarter of 2016, compared to
2015, due primarily to recent price increases
net of a deterioration in
payer mix
and collection rate.
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Incremental net revenue of $23,623,000 generated from the addition of 27 new bases, including thirteen
bases resulting from the conversion of hospital contracts, during or subsequent to the first quarter of 2015.
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Closure of nine bases due to insufficient flight volume during or subsequent to the first quarter
of 2015, resulting in a decrease in net revenue of approximately $3,191,000.
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Air medical services contract revenue
decreased $6,995,000, or 17.2%, for the quarter ended March 31, 2016, compared to 2015, for the following reasons:
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Cessation of service under three contracts
and the conversion of three contracts to community-based operations
subsequent
to the first
quarter of 2015, resulting in a decrease in revenue of approximately $8,092,000.
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Incremental revenue of $829,000 generated from the expansion of three contracts to additional bases
of operation during 2015 or 2016.
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Decrease of 0.7% in flight volume for
all contracts, excluding the contract expansions and closed contracts described above.
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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.
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Flight center costs
(consisting
primarily of pilot, mechanic, and medical staff salaries and benefits) increased $12,279,000, or 13.1%, for the quarter ended March
31, 2016, compared to 2015, for the following reasons:
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Flight center costs of $5,393,000 related to TSCF’s operations during the first quarter of
2016.
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Increase of approximately $11,598,000 for the addition of personnel to staff new base locations
described above.
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Decrease of $5,250,000 due to the closure of base locations described above.
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Aircraft operating expenses
decreased
$5,428,000, or 14.5%, for the quarter ended March 31, 2016, in comparison to the quarter ended March 31, 2015. Aircraft operating
expenses consist primarily of fuel, insurance, and maintenance costs for AMS operations and generally are a function of the size
of the fleet, type of aircraft flown, and number of hours flown. The change in costs is due to the following:
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Aircraft operating expenses of $2,152,000 related to TSCF’s fleet during the first quarter
of 2016.
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Decrease of $8,073,000, or 27.3%, in AMS aircraft maintenance expense to $21,552,000, excluding
the effect of the TSCF fleet. Total flight volume for corresponding AMS operations increased 5.9% for the first quarter of 2016
compared to 2015. The change in maintenance expense reflects normal fluctuations in the timing of overhaul and replacement cycles
for aircraft parts. During the first quarter of 2015, we also incurred $2,635,000 to remediate certification documentation issues
related to NVIS installations in certain of our aircraft.
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Decrease of approximately 36.1% in the cost of aircraft fuel per hour flown for AMS operations.
Excluding the effect of the TSCF fleet, total fuel cost decreased by $1,249,000 to a total expense of $3,403,000 for 2016.
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Decrease in hull insurance rates effective July 2015.
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Tourism
Tourism and charter revenue
decreased
$994,000, or 3.5%, for the first quarter of 2016 compared to the first quarter of 2015, reflecting a decrease in tourism passengers
from 100,196 to 95,593.
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 decreased
$767,000, or 3.9%, in the first quarter of 2016 compared to the first quarter of 2015 for the following reasons:
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Decrease in the number of passengers, as described above.
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·
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Decrease of $75,000, or 1.0%, in tourism aircraft maintenance expense to $7,107,000 in the first
quarter of 2016 compared to 2015, reflecting a decrease of 4.7% in total flight hours, as well as normal fluctuations in the timing
of overhaul and replacement cycles for aircraft parts.
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Decrease of 26.5% in the cost of aircraft fuel per hour flown for tourism operations.
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Medical Interiors and Products
Medical interiors and products revenue
increased $2,820,000, or 68.2%, for the first quarter of 2016 compared to the first quarter of 2015. Significant projects during
the first quarter of 2016 included the completion of six multi-mission interiors for the U.S. Army’s HH-60M helicopter and
work under two contracts for a total of 73 interior kits for an older generation of the Black Hawk helicopter. Revenue by product
line was as follows:
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$5,390,000 – governmental entities
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·
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$1,567,000 – commercial customers
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Significant projects during the first quarter
of 2015 included the completion of six multi-mission interiors for the U.S. Army’s HH-60M helicopter and work on two contracts
for commercial customers. Revenue by product line was as follows:
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·
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$3,157,000 – governmental entities
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·
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$980,000 – commercial customers
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Cost of medical interiors and products
increased $2,779,000, or 86.8%, for the first quarter of 2016, as compared to the previous year, due primarily to the increase
in related revenue. 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
Depreciation and amortization
increased
$2,522,000, or 12.6%, for the first quarter of 2016, compared to the first quarter of 2015. Depreciation related to TSCF’s
fixed assets was approximately $469,000 and amortization of TSCF’s intangible assets was $701,000 for the first quarter of
2016. In addition, since March 31, 2015, we have placed 29 aircraft with a total depreciable basis of $88.0 million into service.
These increases were offset, in part, by the buyout of nineteen 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 $3,667,000, or 10.3%, for the first quarter of 2016, compared to the first quarter of 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 $1,586,000 for the first quarter of 2016. We also incurred $755,000
in legal and other TSCF acquisition-related expenses. Since March 31, 2015, we have opened a net of 18 new community-based locations,
contributing to an increase in billing and collections, dispatch, and AMS program administration requirements.
Interest expense
increased $2,815,000,
or 56.5%, for the first quarter of 2016, compared to the first quarter of 2015, primarily due to $220 million of term loans originated
during January 2016 to finance the acquisition of TSCF. In addition, we carried an average balance of $20.3 million against our
line of credit in the first quarter of 2016, compared to no balance in the first quarter of 2015.
Income tax expense
was $13,102,000
in the first quarter of 2016, compared to $8,290,000 in the first quarter of 2015, at effective tax rates of approximately 39.1%
and 39.2%, 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 March
31, 2016, was $337,979,000, compared to $323,821,000 at December 31, 2015. Cash generated by continuing operations was $42,370,000
in the first quarter of 2016, compared to $34,504,000 in the first quarter of 2015, reflecting the results of operations described
above. Receivables decreased $11.8 million during the first quarter of 2016, compared to increasing $475,000 during the first quarter
of 2015. Excluding the effect of TSCF, 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 150
at March 31, 2016, compared to 129 at March 31, 2015. The increase in DSO’s is attributed in part to additional time taken
by private insurers to review claims and related documentation, including proof of medical necessity, prior to processing and to
an increase in the number of accounts subjected to the extended review process by private insurers. We do not expect the claims
processing times for private insurers to improve in the near-term. The increase in patient transport receivables caused by increasing
DSO’s was offset in part by decreases in receivables for AMS contracts, consistent with decreases in related revenue.
Cash used by continuing investing activities
totaled $260,119,000 in the first quarter of 2016 compared to $26,073,000 in the first quarter of 2015. In the first quarter of
2016, we acquired TSCF for $217.2 million (net of cash deposits acquired) and completed the buyout of our minority partners in
Blue Hawaiian Holdings, LLC, for $8.8 million. Equipment acquisitions in the first quarter of 2016 included the purchase of seven
aircraft for approximately $26.2 million and the buyout of three previously leased aircraft for $4.5 million. Equipment acquisitions
in the first quarter of 2015 included the purchase of six aircraft for approximately $19.1 million.
Continuing financing activities provided
$217,026,000 in 2016 compared to $3,254,000 in 2015. In the first quarter of 2016, we utilized $220 million of new term loans under
the senior credit facility to finance the acquisition of TSCF and originated seven notes totaling $28.1 million to finance the
acquisition of new aircraft. We also repurchased 347,522 shares of our common stock on the open market for $13.4 million. During
the first quarter of 2015, we originated seven notes totaling $21.1 million primarily to finance the acquisition of aircraft.
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 expect
to take delivery of a total of twelve aircraft under this agreement in 2016, including four which have already been delivered.
In the event we exercise our right to termination for convenience or are prevented from taking or decline to take delivery of the
aircraft for any other reason, we may forfeit nonrefundable deposits up to $6.3 million. We intend to use the new aircraft for
base expansion opportunities as well as to replace older models of aircraft in the fleet. We plan to either sell the aircraft which
are replaced, use them for spare parts, or redeploy them into the backup fleet.
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
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 quarter ended March 31, 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 $8,550,000 in 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).
In March and April 2016, the FASB issued ASU Nos. 2016-08 and 2016-10, respectively, to clarify guidance on specific provisions
within ASU No. 2014-09.
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.