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)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,619
|
|
|
|
5,808
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Trade, net (note 4)
|
|
|
414,470
|
|
|
|
376,300
|
|
Refundable income taxes
|
|
|
8,217
|
|
|
|
2,674
|
|
Other
|
|
|
2,358
|
|
|
|
3,402
|
|
Total receivables
|
|
|
425,045
|
|
|
|
382,376
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
48,790
|
|
|
|
46,377
|
|
Work-in-process on medical interiors and products
contracts
|
|
|
3,776
|
|
|
|
4,024
|
|
Assets held for sale
|
|
|
7,179
|
|
|
|
16,369
|
|
Costs and estimated earnings in excess of billings
on uncompleted contracts
|
|
|
2,136
|
|
|
|
961
|
|
Refundable deposits
|
|
|
649
|
|
|
|
7,594
|
|
Prepaid expenses and other (note
6)
|
|
|
10,619
|
|
|
|
9,850
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
504,813
|
|
|
|
473,359
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
251
|
|
|
|
251
|
|
Flight and ground support equipment
|
|
|
933,292
|
|
|
|
835,380
|
|
Aircraft under capital leases
|
|
|
153,481
|
|
|
|
168,725
|
|
Aircraft rotable spare parts
|
|
|
35,598
|
|
|
|
34,688
|
|
Buildings and office equipment
|
|
|
67,311
|
|
|
|
62,503
|
|
|
|
|
1,189,933
|
|
|
|
1,101,547
|
|
Less accumulated depreciation
and amortization
|
|
|
(322,983
|
)
|
|
|
(301,891
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
866,950
|
|
|
|
799,656
|
|
|
|
|
|
|
|
|
|
|
Goodwill (note 2)
|
|
|
210,147
|
|
|
|
127,732
|
|
Intangible assets, net of accumulated amortization
of $33,776 and $28,093 at June 30, 2016 and December 31, 2015, respectively
|
|
|
197,530
|
|
|
|
129,899
|
|
Other assets
|
|
|
28,212
|
|
|
|
21,062
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,807,652
|
|
|
|
1,551,708
|
|
(Continued)
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(Amounts in thousands, except share and
per share amounts)
(unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
—
|
|
|
|
2,955
|
|
Current installments of long-term debt
|
|
|
51,772
|
|
|
|
37,897
|
|
Current installments of obligations under capital
leases
|
|
|
18,415
|
|
|
|
20,407
|
|
Accounts payable
|
|
|
29,988
|
|
|
|
30,912
|
|
Deferred revenue
|
|
|
4,279
|
|
|
|
2,294
|
|
Billings in excess of costs and estimated earnings
on uncompleted contracts
|
|
|
1,627
|
|
|
|
1,250
|
|
Accrued wages and compensated absences
|
|
|
33,425
|
|
|
|
19,419
|
|
Due to third party payers
|
|
|
12,759
|
|
|
|
12,292
|
|
Other accrued liabilities
|
|
|
13,375
|
|
|
|
21,044
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
165,640
|
|
|
|
148,470
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current installments
|
|
|
808,254
|
|
|
|
567,226
|
|
Obligations under capital leases, less current installments
|
|
|
57,143
|
|
|
|
68,389
|
|
Deferred income taxes
|
|
|
179,908
|
|
|
|
172,905
|
|
Other liabilities
|
|
|
10,440
|
|
|
|
12,293
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,221,385
|
|
|
|
969,283
|
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interests
|
|
|
155
|
|
|
|
8,550
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (note 3):
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par value. Authorized
15,000,000 shares, none issued
|
|
|
—
|
|
|
|
—
|
|
Common stock, $.06 par value. Authorized 70,500,000
shares; issued 39,610,138 and 39,511,350 shares at June 30, 2016 and December 31, 2015, respectively; outstanding 38,072,190
and 39,003,026 shares at June 30, 2016 and December 31, 2015, respectively
|
|
|
2,355
|
|
|
|
2,353
|
|
Additional paid-in capital
|
|
|
132,788
|
|
|
|
128,767
|
|
Treasury stock at cost, 1,356,720 and 320,988 shares
at June 30, 2016, and December 31, 2015, respectively
|
|
|
(51,745
|
)
|
|
|
(13,457
|
)
|
Retained earnings
|
|
|
504,018
|
|
|
|
457,529
|
|
Accumulated other comprehensive
loss
|
|
|
(1,304
|
)
|
|
|
(1,317
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
586,112
|
|
|
|
573,875
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’
equity
|
|
$
|
1,807,652
|
|
|
|
1,551,708
|
|
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
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient transport revenue, net of provision
for contractual discounts (note 4)
|
|
$
|
412,172
|
|
|
|
334,380
|
|
|
|
791,001
|
|
|
|
599,719
|
|
Provision for uncompensated care
(note 4)
|
|
|
(196,862
|
)
|
|
|
(152,120
|
)
|
|
|
(377,859
|
)
|
|
|
(255,643
|
)
|
Patient transport revenue, net
|
|
|
215,310
|
|
|
|
182,260
|
|
|
|
413,142
|
|
|
|
344,076
|
|
Air medical services contract revenue
|
|
|
34,175
|
|
|
|
38,775
|
|
|
|
67,819
|
|
|
|
79,414
|
|
Tourism and charter revenue
|
|
|
32,234
|
|
|
|
34,444
|
|
|
|
59,461
|
|
|
|
62,665
|
|
Medical interiors and products revenue
|
|
|
7,406
|
|
|
|
4,450
|
|
|
|
14,363
|
|
|
|
8,587
|
|
Transfer center, dispatch, and
billing service revenue
|
|
|
3,447
|
|
|
|
3,673
|
|
|
|
7,185
|
|
|
|
7,159
|
|
|
|
|
292,572
|
|
|
|
263,602
|
|
|
|
561,970
|
|
|
|
501,901
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight centers
|
|
|
109,439
|
|
|
|
98,619
|
|
|
|
215,510
|
|
|
|
192,411
|
|
Aircraft operations (note 6)
|
|
|
34,772
|
|
|
|
31,229
|
|
|
|
66,684
|
|
|
|
68,569
|
|
Tourism operating expenses
|
|
|
22,146
|
|
|
|
23,092
|
|
|
|
41,230
|
|
|
|
42,943
|
|
Cost of medical interiors and products sold
|
|
|
6,365
|
|
|
|
3,529
|
|
|
|
12,345
|
|
|
|
6,730
|
|
Cost of transfer center, dispatch, and billing services
|
|
|
4,111
|
|
|
|
3,090
|
|
|
|
7,818
|
|
|
|
5,911
|
|
Depreciation and amortization
|
|
|
23,499
|
|
|
|
21,154
|
|
|
|
46,065
|
|
|
|
41,198
|
|
Loss on disposition of assets, net
|
|
|
508
|
|
|
|
531
|
|
|
|
178
|
|
|
|
269
|
|
General and administrative
|
|
|
39,992
|
|
|
|
33,622
|
|
|
|
79,384
|
|
|
|
69,347
|
|
|
|
|
240,832
|
|
|
|
214,866
|
|
|
|
469,214
|
|
|
|
427,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
51,740
|
|
|
|
48,736
|
|
|
|
92,756
|
|
|
|
74,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,908
|
)
|
|
|
(5,163
|
)
|
|
|
(15,708
|
)
|
|
|
(10,148
|
)
|
Other, net
|
|
|
464
|
|
|
|
1,172
|
|
|
|
774
|
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
44,296
|
|
|
|
44,745
|
|
|
|
77,822
|
|
|
|
65,911
|
|
Income tax expense
|
|
|
(17,315
|
)
|
|
|
(17,339
|
)
|
|
|
(30,417
|
)
|
|
|
(25,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
26,981
|
|
|
|
27,406
|
|
|
|
47,405
|
|
|
|
40,282
|
|
Loss on discontinued operations,
net of income taxes (note 2)
|
|
|
—
|
|
|
|
(340
|
)
|
|
|
—
|
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
26,981
|
|
|
|
27,066
|
|
|
|
47,405
|
|
|
|
39,933
|
|
Less net income (loss) attributable
to redeemable non-controlling interests
|
|
|
(1
|
)
|
|
|
243
|
|
|
|
(30
|
)
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Air
Methods Corporation and subsidiaries
|
|
$
|
26,982
|
|
|
|
26,823
|
|
|
|
47,435
|
|
|
|
39,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
(57
|
)
|
|
|
(85
|
)
|
|
|
13
|
|
|
|
(460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
26,925
|
|
|
|
26,738
|
|
|
|
47,448
|
|
|
|
38,991
|
|
(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
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share (note 5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.70
|
|
|
$
|
.69
|
|
|
|
1.21
|
|
|
|
1.01
|
|
Discontinued operations
|
|
|
—
|
|
|
|
(.01
|
)
|
|
|
—
|
|
|
|
(.01
|
)
|
Net income
|
|
$
|
.70
|
|
|
$
|
.68
|
|
|
|
1.21
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.70
|
|
|
$
|
.69
|
|
|
|
1.20
|
|
|
|
1.01
|
|
Discontinued operations
|
|
|
—
|
|
|
|
(.01
|
)
|
|
|
—
|
|
|
|
(.01
|
)
|
Net income
|
|
$
|
.70
|
|
|
$
|
.68
|
|
|
|
1.20
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
– basic
|
|
|
38,396,241
|
|
|
|
39,272,325
|
|
|
|
38,600,029
|
|
|
|
39,267,222
|
|
Weighted average number of common shares outstanding
– diluted
|
|
|
38,461,238
|
|
|
|
39,405,889
|
|
|
|
38,664,976
|
|
|
|
39,400,193
|
|
See accompanying notes to unaudited condensed consolidated financial
statements.
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Amounts in thousands)
(unaudited)
|
|
Six Months Ended June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
47,405
|
|
|
|
39,933
|
|
Loss from discontinued operations, net of income taxes
|
|
|
—
|
|
|
|
349
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
46,065
|
|
|
|
41,198
|
|
Deferred income tax expense
|
|
|
7,003
|
|
|
|
2,491
|
|
Stock-based compensation
|
|
|
3,140
|
|
|
|
3,604
|
|
Loss on disposition of assets, net
|
|
|
178
|
|
|
|
269
|
|
Unrealized loss (gain) on derivative instrument
|
|
|
(970
|
)
|
|
|
256
|
|
Loss from equity method investee
|
|
|
264
|
|
|
|
353
|
|
Changes in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Decrease in prepaid expenses and other current assets
|
|
|
7,833
|
|
|
|
502
|
|
Increase in receivables
|
|
|
(13,941
|
)
|
|
|
(1,605
|
)
|
Decrease in inventories
|
|
|
372
|
|
|
|
1,192
|
|
Increase in costs in excess of billings
|
|
|
(1,175
|
)
|
|
|
(946
|
)
|
Increase (decrease) in accounts payable, other accrued liabilities, and other
liabilities
|
|
|
(6,197
|
)
|
|
|
19,492
|
|
Increase in deferred revenue and billings in excess
of costs
|
|
|
2,362
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities
|
|
|
92,339
|
|
|
|
108,386
|
|
Net cash used by discontinued operating activities
|
|
|
—
|
|
|
|
(47
|
)
|
Net cash provided by operating activities
|
|
|
92,339
|
|
|
|
108,339
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of subsidiaries, net of cash acquired
|
|
|
(225,519
|
)
|
|
|
—
|
|
Acquisition of property and equipment
|
|
|
(57,675
|
)
|
|
|
(48,355
|
)
|
Acquisition of hospital program
|
|
|
—
|
|
|
|
(43,481
|
)
|
Buy-out of previously leased aircraft
|
|
|
(10,529
|
)
|
|
|
(7,569
|
)
|
Proceeds from disposition and sale of equipment and assets held for sale
|
|
|
5,189
|
|
|
|
2,664
|
|
Increase in other assets
|
|
|
(6,542
|
)
|
|
|
(10,741
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used by continuing investing activities
|
|
|
(295,076
|
)
|
|
|
(107,482
|
)
|
Net cash provided by discontinued investing activities
|
|
|
—
|
|
|
|
25
|
|
Net cash used in investing activities
|
|
|
(295,076
|
)
|
|
|
(107,457
|
)
|
(Continued)
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS, Continued
(Amounts in thousands)
(unaudited)
|
|
Six Months Ended June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
$
|
803
|
|
|
|
408
|
|
Purchases of common stock
|
|
|
(38,288
|
)
|
|
|
—
|
|
Borrowings under line of credit
|
|
|
48,000
|
|
|
|
35,000
|
|
Payments under line of credit
|
|
|
(40,000
|
)
|
|
|
(35,000
|
)
|
Payments for financing costs
|
|
|
(68
|
)
|
|
|
(54
|
)
|
Proceeds from long-term debt
|
|
|
271,792
|
|
|
|
55,321
|
|
Payments of long-term debt
|
|
|
(25,453
|
)
|
|
|
(24,021
|
)
|
Payments of capital lease obligations
|
|
|
(13,238
|
)
|
|
|
(16,840
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing financing activities
|
|
|
203,548
|
|
|
|
14,814
|
|
Net cash provided (used) by discontinued financing activities
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
203,548
|
|
|
|
14,814
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
811
|
|
|
|
15,696
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,808
|
|
|
|
13,165
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,619
|
|
|
|
28,861
|
|
|
|
|
|
|
|
|
|
|
Interest paid in cash during the period
|
|
$
|
15,068
|
|
|
|
9,799
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid in cash during the period
|
|
$
|
29,652
|
|
|
|
3,129
|
|
Non-cash investing and financing activities:
In the six months ended June 30, 2016, the
Company settled non-interest-bearing notes payable of $2,955 in exchange for the aircraft securing the debt.
In the six months ended June 30, 2015, the
Company entered into non-interest-bearing notes payable of $16,314 to finance the purchase of aircraft which were held in property
and equipment pending permanent financing as of June 30, 2015, and into capital leases of $278 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)
|
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.
|
|
(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. The purchase price was subject to adjustment based on final
working capital, as defined in the purchase agreement, as of the closing date. 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.
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. The acquisition is expected to further strengthen the Company’s position as a leader in air
medical transport services in the United States and to result in certain operating efficiencies.
The Company is in the process of
reviewing airworthiness and other documentation for TSCF’s aircraft spare parts inventory, verifying open repair orders
with aircraft parts vendors, 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. Fair
value and estimated useful lives of identifiable intangible assets are based on preliminary estimates and are subject to review
and finalization by the Company’s management.
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
(2)
|
Acquisition of Subsidiaries, continued
|
For the reasons described in the
foregoing paragraph, the allocation of the purchase price is still subject to refinement. The initial allocation of the purchase
price was as follows (amounts in thousands):
|
|
Allocation at
March 31, 2016
|
|
|
Adjustments
|
|
|
Revised
Allocation
|
|
Assets purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
30,695
|
|
|
|
(1,909
|
)
|
|
|
28,786
|
|
Aircraft
|
|
|
30,501
|
|
|
|
|
|
|
|
30,501
|
|
Goodwill
|
|
|
80,690
|
|
|
|
1,742
|
|
|
|
82,432
|
|
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
June 30, 2016
|
|
|
Six months ended
June 30, 2016
|
|
Net revenue
|
|
$
|
11,162
|
|
|
|
26,436
|
|
Income (loss) before income taxes and corporate administrative
expense allocation
|
|
|
(3,214
|
)
|
|
|
1,177
|
|
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 six months ended
June 30, 2015, assuming the acquisition occurred as of January 1, 2015 (amounts in thousands, except per share amounts):
|
|
Three months ended
June 30, 2015
|
|
|
Six months ended
June 30, 2015
|
|
Revenue
|
|
$
|
284,789
|
|
|
|
544,889
|
|
Net income attributable to Air
Methods Corporation and subsidiaries
|
|
$
|
30,670
|
|
|
|
47,684
|
|
Basic income per common share
|
|
$
|
.78
|
|
|
|
1.21
|
|
Diluted income per common share
|
|
$
|
.78
|
|
|
|
1.21
|
|
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.
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
|
Changes in stockholders’ equity
for the six months ended June 30, 2016, consisted of the following (amounts in thousands
except share amounts):
|
|
|
Shares
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
|
|
|
|
|
|
Balances at January 1, 2016
|
|
|
39,003,026
|
|
|
$
|
573,875
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares for options exercised
|
|
|
45,360
|
|
|
|
803
|
|
Stock-based compensation
|
|
|
59,536
|
|
|
|
3,140
|
|
Purchase of treasury shares
|
|
|
(1,035,732
|
)
|
|
|
(38,288
|
)
|
Adjustments to redeemable non-controlling interests
|
|
|
—
|
|
|
|
(866
|
)
|
Other comprehensive income
|
|
|
—
|
|
|
|
13
|
|
Net income attributable to Air
Methods Corporation and subsidiaries
|
|
|
—
|
|
|
|
47,435
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2016
|
|
|
38,072,190
|
|
|
$
|
586,112
|
|
|
(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 $21,227,000 and $46,924,000 for
the quarter and six months ended June 30, 2015.
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 49.8% of receivables from non-contract payers as of June 30, 2016, compared
to 42.0% at December 31, 2015, and 51.7% at June 30, 2015.
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
(4)
|
Patient Transport Revenue Recognition,
continued
|
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 June 30,
|
|
|
For six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party payers
|
|
$
|
318,190
|
|
|
|
266,116
|
|
|
|
609,145
|
|
|
|
463,965
|
|
Self-pay
|
|
|
93,982
|
|
|
|
68,264
|
|
|
|
181,856
|
|
|
|
135,754
|
|
Total
|
|
$
|
412,172
|
|
|
|
334,380
|
|
|
|
791,001
|
|
|
|
599,719
|
|
|
|
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 decreased by $866,000 for the six months ended June
30, 2016, respectively, and by $51,000 and $118,000 for the quarter and six months ended
June 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 June 30:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic
|
|
|
38,396,241
|
|
|
|
39,272,325
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
1,996
|
|
|
|
35,491
|
|
Unvested restricted stock
|
|
|
61,054
|
|
|
|
98,073
|
|
Unvested performance share units
|
|
|
1,947
|
|
|
|
—
|
|
Weighted average number of common shares outstanding – diluted
|
|
|
38,461,238
|
|
|
|
39,405,889
|
|
|
|
|
|
|
|
|
|
|
For six months ended June 30:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic
|
|
|
38,600,029
|
|
|
|
39,267,222
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
7,284
|
|
|
|
39,226
|
|
Unvested restricted stock
|
|
|
57,243
|
|
|
|
93,745
|
|
Unvested performance share units
|
|
|
420
|
|
|
|
—
|
|
Weighted average number of common shares outstanding – diluted
|
|
|
38,664,976
|
|
|
|
39,400,193
|
|
|
|
Common stock options totaling 957,000
were not included in the diluted shares outstanding for the quarter and six months ended
June 30, 2016, because their effect would have been anti-dilutive. Common stock options
totaling 584,832 and 574,832 were not included in the diluted shares outstanding for
the quarter and six months ended June 30, 2015, respectively, 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 $1,552,000 at June 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 aircraft operations expense
in the Company’s statements of comprehensive income. Aircraft operations expense included non-cash mark to market derivative
gains of $821,000 and $970,000 for the quarter and six months ended June 30, 2016, respectively, compared to non-cash mark to
market losses of $108,000 and $256,000 for the quarter and six months ended June 30, 2015, respectively. Cash settlements totaled
$97,000 in the quarter and six months ended June 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 June 30, 2016, is estimated to be $879,418,000,
compared to carrying value of $860,026,000. The fair value of long-term debt as of December
31, 2015, was estimated to be $612,264,000, compared to 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 all 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.
|
For quarter ended June 30:
|
|
AMS
|
|
|
Tourism
|
|
|
UR
|
|
|
Corporate
Activities
|
|
|
Intersegment
Eliminations
|
|
|
Consolidated
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
252,939
|
|
|
|
32,215
|
|
|
|
7,418
|
|
|
|
—
|
|
|
|
—
|
|
|
|
292,572
|
|
Intersegment revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
3,705
|
|
|
|
—
|
|
|
|
(3,705
|
)
|
|
|
—
|
|
Total revenue
|
|
|
252,939
|
|
|
|
32,215
|
|
|
|
11,123
|
|
|
|
—
|
|
|
|
(3,705
|
)
|
|
|
292,572
|
|
Operating expenses, excluding depreciation & amortization
|
|
|
(171,805
|
)
|
|
|
(26,894
|
)
|
|
|
(9,639
|
)
|
|
|
(12,080
|
)
|
|
|
3,085
|
|
|
|
(217,333
|
)
|
Depreciation & amortization
|
|
|
(19,741
|
)
|
|
|
(2,315
|
)
|
|
|
(848
|
)
|
|
|
(595
|
)
|
|
|
—
|
|
|
|
(23,499
|
)
|
Interest expense
|
|
|
(6,460
|
)
|
|
|
(1,046
|
)
|
|
|
—
|
|
|
|
(406
|
)
|
|
|
4
|
|
|
|
(7,908
|
)
|
Other income, net
|
|
|
421
|
|
|
|
17
|
|
|
|
—
|
|
|
|
30
|
|
|
|
(4
|
)
|
|
|
464
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,315
|
)
|
|
|
—
|
|
|
|
(17,315
|
)
|
Segment net income (loss)
|
|
|
55,354
|
|
|
|
1,977
|
|
|
|
636
|
|
|
|
(30,366
|
)
|
|
|
(620
|
)
|
|
|
26,981
|
|
Less net loss attributable to
non-controlling interests
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Net income (loss) attributable
to Air Methods Corporation and subsidiaries
|
|
$
|
55,355
|
|
|
|
1,977
|
|
|
|
636
|
|
|
|
(30,366
|
)
|
|
|
(620
|
)
|
|
|
26,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
224,708
|
|
|
|
34,444
|
|
|
|
4,449
|
|
|
|
1
|
|
|
|
—
|
|
|
|
263,602
|
|
Intersegment revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
4,753
|
|
|
|
—
|
|
|
|
(4,753
|
)
|
|
|
—
|
|
Total revenue
|
|
|
224,708
|
|
|
|
34,444
|
|
|
|
9,202
|
|
|
|
1
|
|
|
|
(4,753
|
)
|
|
|
263,602
|
|
Operating expenses, excluding depreciation & amortization
|
|
|
(152,269
|
)
|
|
|
(27,421
|
)
|
|
|
(8,418
|
)
|
|
|
(10,177
|
)
|
|
|
4,573
|
|
|
|
(193,712
|
)
|
Depreciation & amortization
|
|
|
(17,682
|
)
|
|
|
(1,962
|
)
|
|
|
(907
|
)
|
|
|
(603
|
)
|
|
|
—
|
|
|
|
(21,154
|
)
|
Interest expense
|
|
|
(3,750
|
)
|
|
|
(874
|
)
|
|
|
—
|
|
|
|
(541
|
)
|
|
|
2
|
|
|
|
(5,163
|
)
|
Other income, net
|
|
|
1,254
|
|
|
|
2
|
|
|
|
—
|
|
|
|
(82
|
)
|
|
|
(2
|
)
|
|
|
1,172
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,339
|
)
|
|
|
—
|
|
|
|
(17,339
|
)
|
Income (loss) from continuing operations
|
|
|
52,261
|
|
|
|
4,189
|
|
|
|
(123
|
)
|
|
|
(28,741
|
)
|
|
|
(180
|
)
|
|
|
27,406
|
|
Loss on discontinued operations,
net of tax
|
|
|
(340
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(340
|
)
|
Segment net income (loss)
|
|
|
51,921
|
|
|
|
4,189
|
|
|
|
(123
|
)
|
|
|
(28,741
|
)
|
|
|
(180
|
)
|
|
|
27,066
|
|
Less net income (loss) attributable
to non-controlling interests
|
|
|
(22
|
)
|
|
|
265
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
243
|
|
Net income (loss) attributable
to Air Methods Corporation and subsidiaries
|
|
$
|
51,943
|
|
|
|
3,924
|
|
|
|
(123
|
)
|
|
|
(28,741
|
)
|
|
|
(180
|
)
|
|
|
26,823
|
|
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
(7)
|
Business Segment Information, continued
|
For six months ended June 30:
|
|
AMS
|
|
|
Tourism
|
|
|
UR
|
|
|
Corporate
Activities
|
|
|
Intersegment
Eliminations
|
|
|
Consolidated
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
488,154
|
|
|
|
59,461
|
|
|
|
14,355
|
|
|
|
—
|
|
|
|
—
|
|
|
|
561,970
|
|
Intersegment revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
9,076
|
|
|
|
—
|
|
|
|
(9,076
|
)
|
|
|
—
|
|
Total revenue
|
|
|
488,154
|
|
|
|
59,461
|
|
|
|
23,431
|
|
|
|
—
|
|
|
|
(9,076
|
)
|
|
|
561,970
|
|
Operating expenses, excluding depreciation & amortization
|
|
|
(335,515
|
)
|
|
|
(50,315
|
)
|
|
|
(20,581
|
)
|
|
|
(24,446
|
)
|
|
|
7,708
|
|
|
|
(423,149
|
)
|
Depreciation & amortization
|
|
|
(38,565
|
)
|
|
|
(4,581
|
)
|
|
|
(1,745
|
)
|
|
|
(1,174
|
)
|
|
|
—
|
|
|
|
(46,065
|
)
|
Interest expense
|
|
|
(12,602
|
)
|
|
|
(2,115
|
)
|
|
|
—
|
|
|
|
(999
|
)
|
|
|
8
|
|
|
|
(15,708
|
)
|
Other income, net
|
|
|
936
|
|
|
|
34
|
|
|
|
—
|
|
|
|
(188
|
)
|
|
|
(8
|
)
|
|
|
774
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,417
|
)
|
|
|
—
|
|
|
|
(30,417
|
)
|
Segment net income (loss)
|
|
|
102,408
|
|
|
|
2,484
|
|
|
|
1,105
|
|
|
|
(57,224
|
)
|
|
|
(1,368
|
)
|
|
|
47,405
|
|
Less net loss attributable to
non-controlling interests
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30
|
)
|
Net income (loss) attributable
to Air Methods Corporation and subsidiaries
|
|
$
|
102,438
|
|
|
|
2,484
|
|
|
|
1,105
|
|
|
|
(57,224
|
)
|
|
|
(1,368
|
)
|
|
|
47,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
430,649
|
|
|
|
62,665
|
|
|
|
8,583
|
|
|
|
4
|
|
|
|
—
|
|
|
|
501,901
|
|
Intersegment revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
13,120
|
|
|
|
—
|
|
|
|
(13,120
|
)
|
|
|
—
|
|
Total revenue
|
|
|
430,649
|
|
|
|
62,665
|
|
|
|
21,703
|
|
|
|
4
|
|
|
|
(13,120
|
)
|
|
|
501,901
|
|
Operating expenses, excluding depreciation & amortization
|
|
|
(306,293
|
)
|
|
|
(51,936
|
)
|
|
|
(19,134
|
)
|
|
|
(20,991
|
)
|
|
|
12,174
|
|
|
|
(386,180
|
)
|
Depreciation & amortization
|
|
|
(34,614
|
)
|
|
|
(3,789
|
)
|
|
|
(1,656
|
)
|
|
|
(1,139
|
)
|
|
|
—
|
|
|
|
(41,198
|
)
|
Interest expense
|
|
|
(7,422
|
)
|
|
|
(1,656
|
)
|
|
|
—
|
|
|
|
(1,074
|
)
|
|
|
4
|
|
|
|
(10,148
|
)
|
Other income, net
|
|
|
1,815
|
|
|
|
3
|
|
|
|
—
|
|
|
|
(278
|
)
|
|
|
(4
|
)
|
|
|
1,536
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,629
|
)
|
|
|
—
|
|
|
|
(25,629
|
)
|
Income (loss) from continuing operations
|
|
|
84,135
|
|
|
|
5,287
|
|
|
|
913
|
|
|
|
(49,107
|
)
|
|
|
(946
|
)
|
|
|
40,282
|
|
Loss on discontinued operations,
net of tax
|
|
|
(349
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(349
|
)
|
Segment net income (loss)
|
|
|
83,786
|
|
|
|
5,287
|
|
|
|
913
|
|
|
|
(49,107
|
)
|
|
|
(946
|
)
|
|
|
39,933
|
|
Less net income (loss) attributable
to non-controlling interests
|
|
|
(60
|
)
|
|
|
542
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
482
|
|
Net income (loss) attributable
to Air Methods Corporation and subsidiaries
|
|
$
|
83,846
|
|
|
|
4,745
|
|
|
|
913
|
|
|
|
(49,107
|
)
|
|
|
(946
|
)
|
|
|
39,451
|
|
|
(8)
|
New Accounting Pronouncements
|
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 $160,000 for the six months ended June
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.
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.
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements,
continued
(unaudited)
|
(8)
|
New Accounting Pronouncements, continued
|
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.
In the first six months of 2016, the AMS Division generated 87% of our total revenue,
compared to 86% in the first six months of 2015.
|
|
·
|
Tourism
Division – provides helicopter tours and charter flights, primarily focusing on
Grand Canyon and Hawaiian Island tours. In the six months ended June 30, 2016, the Tourism
Division generated 11% of our total revenue, compared to 12% in the first six months
of 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 six months ended June 30, 2016
and 2015.
|
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:
|
·
|
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 first six months of 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, 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 18,662 and 35,665 for the
quarter and six months ended June 30, 2016, respectively, compared to 16,105 and 29,957
for the quarter and six months ended June 30, 2015, respectively.
Patient
transports for
community-based locations
open
longer than one year (Same-Base Transports) were
15,464 and 29,433 in the quarter
and six months ended June 30, 2016, respectively, compared to 15,397 and 28,948 in the
quarter and six months ended June 30, 2015, respectively.
Cancellations
due to unfavorable weather conditions for
community-based locations
open
longer than one year
were 643 and 1,097 lower in the quarter and six months ended
June 30, 2016, respectively, compared to 2015.
Requests
for community-based services decreased 1.0% and increased 0.3% for the quarter and six
months ended June 30, 2016, 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. 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
increased 1.9% and 0.9% in the quarter and six months ended June 30, 2016, compared to 2015, attributed to recent price increases
net of deteriorations in collection rate. Payer mix inclusive of TSCF, based on number of transports, was as follows:
|
|
For quarters ended
June 30,
|
|
|
For six months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Private insurance carriers
|
|
|
25.6
|
%
|
|
|
26.1
|
%
|
|
|
25.9
|
%
|
|
|
26.6
|
%
|
Government-sponsored insurance plans
|
|
|
3.5
|
%
|
|
|
4.1
|
%
|
|
|
3.6
|
%
|
|
|
3.9
|
%
|
Medicare
|
|
|
36.8
|
%
|
|
|
35.9
|
%
|
|
|
36.2
|
%
|
|
|
35.4
|
%
|
Medicaid
|
|
|
24.6
|
%
|
|
|
24.7
|
%
|
|
|
24.6
|
%
|
|
|
24.5
|
%
|
Self-pay patients
|
|
|
9.5
|
%
|
|
|
9.2
|
%
|
|
|
9.7
|
%
|
|
|
9.6
|
%
|
Excluding the effect of TSCF, private
insurance carriers represented 26.3% and 26.6% of total transports for the quarter and six months ended June 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 first six months 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
114,615 and 210,208 in the quarter and six months ended June 30, 2016, respectively,
from 126,953 and 227,149 in the quarter and six months ended June 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 38 new aircraft
and expect to take delivery of six 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 10.4% and decreased 3.7% in the
quarter and six months ended June 30, 2016, respectively, compared to 2015, while total
flight hours for AMS operations increased 11.6% and 11.8% for the quarter and six months
ended June 30, 2016, respectively, compared to 2015. Excluding TSCF operations, AMS aircraft
maintenance expense increased 6.3% and decreased 8.8%, for the quarter and six months
ended June 30, 2016, respectively, compared to 2015. Total flight hours for corresponding
operations increased 3.9% and 4.8% for the quarter and six months ended June 30, 2016,
respectively, compared to 2015. Aircraft maintenance expense for the Tourism Division
decreased 15.0% and 8.4% in the quarter and six months ended June 30, 2016, respectively,
compared to 2015, reflecting decreases of 3.9% and 4.3% in total flight hours for the
quarter and six months ended June 30, 2016, respectively. The change in maintenance expense
reflects normal fluctuations in the timing of overhaul and replacement cycles for aircraft
parts. During the six months ended June 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
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 services is partially dependent
upon our ability to hire and retain employees who have advanced aviation, nursing, and
other technical skills. In addition, hospital contracts typically contain minimum certification
requirements for pilots and mechanics. Employees who meet these standards are in great
demand and are likely to remain a limited resource in the foreseeable future. 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.
|
Results
of Operations
We reported net income of $26,982,000 and
$47,435,000 for the quarter and six months ended June 30, 2016, respectively, compared to $26,823,000 and $39,451,000 for the
quarter and six months ended June 30, 2015, respectively. Same-Base Transports were 0.4% and 1.7% higher in the quarter and six
months ended June 30, 2016, respectively, compared to 2015, while net reimbursement per patient transport increased 1.9% and 0.9%
in the quarter and six months ended June 30, 2016, respectively, compared to 2015, primarily as a result of recent price increases
net of deteriorations in collection rate.
Air Medical Services
Patient transport revenue
is recorded
net of provisions for contractual discounts and uncompensated care and increased $33,050,000, or 18.1%, and $69,066,000, or 20.1%,
for the quarter and six months ended June 30, 2016, compared to 2015, for the following reasons.
|
·
|
Net
revenue of $11,162,000 and $26,436,000 from TSCF’s operations during the quarter
and six months ended June 30, 2016.
|
|
·
|
Increases
of 67, or 0.4%, and 485, or 1.7%, in Same-Base Transports for the quarter and six months
ended June 30, 2016, respectively, compared to 2015. Cancellations due to unfavorable
weather conditions for bases open longer than one year were 643 and 1,097 lower in the
quarter and six months ended June 30, 2016, respectively, compared to 2015. Requests
for community-based services decreased 1.0% and increased 0.3% for the quarter and six
months ended June 30, 2016, respectively, for bases open greater than one year.
|
|
·
|
Increases
of 1.9% and 0.9% in net reimbursement per transport for the quarter and six months ended
June 30, 2016, respectively, compared to 2015, due primarily to recent price increases
net of deteriorations in collection rate. Exclusive of the effect of TSCF, payer mix
remained relatively stable in the quarter and six months ended June 30, 2016, compared
to 2015.
|
|
·
|
Incremental
net revenue of $23,198,000 and $46,821,000 for the quarter and six months ended June
30, 2016, respectively, generated from the addition of 34 new bases, including fifteen
bases resulting from the conversion of AMS contract customers to community-based operations,
during 2016 or 2015.
|
|
·
|
Closure
of ten bases during 2016 or 2015, due to insufficient flight volume, resulting in decreases
in net revenue of approximately $4,478,000 and $7,669,000 during the quarter and six
months ended June 30, 2016, respectively.
|
Air medical services contract revenue
decreased $4,600,000, or 11.9%, and $11,595,000, or 14.6%, for the quarter and six months ended June 30, 2016, compared to 2015,
for the following reasons:
|
·
|
Cessation
of service under three contracts
and the conversion of four contracts to community-based
operations
during 2016 or
2015, resulting in decreases in net revenue of approximately $4,999,000 and $14,320,000
for the quarter and six months ended June 30, 2016, respectively.
|
|
·
|
Incremental
net revenue of $888,000 and $1,717,000 for the quarter and six months ended June 30,
2016, generated from expansion of five contracts to additional bases of operation during
2016 or 2015.
|
|
·
|
Decreases
of 1.2% and 0.9% in flight volume for the quarter and six months ended June 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 $10,820,000, or 11.0%, and $23,099,000, or 12.0%, for the
quarter and six months ended June 30, 2016, respectively, compared to 2015, for the following reasons:
|
·
|
Flight
center costs of $6,945,000 and $12,338,000 related to TSCF’s operations for the
quarter and six months ended June 30, 2016.
|
|
·
|
Increases
of approximately $10,353,000 and $21,913,000 for the quarter and six months ended June
30, 2016, respectively, for the addition of personnel to staff new base locations described
above.
|
|
·
|
Decreases
of approximately $4,636,000 and $10,375,000 for the quarter and six months ended June
30, 2016, respectively, due to the closure of base locations described above.
|
Aircraft operating expenses
increased
$3,543,000, or 11.3%, and decreased $1,885,000, or 2.7%, for the quarter and six months ended June 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 $1,644,000 and $3,795,000 related to TSCF’s fleet during
the quarter and six months ended June 30, 2016.
|
|
·
|
Increase
in AMS aircraft maintenance expense of $1,545,000, or 6.3%, to $26,113,000 for the second
quarter of 2016 and decrease of $4,779,000, or 8.8%, to $49,414,000 for the six months
ended June 30, 2016, compared to the prior year, excluding the effect of the TSCF fleet.
Total flight volume for corresponding AMS operations increased 3.9% and 4.8% for the
quarter and six months ended June 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 six months ended June 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 19.1% and 24.1% in the cost of aircraft fuel per hour flown for AMS
operations for the quarter and six months ended June 30, 2016, respectively, excluding
the effect of the TSCF fleet. Total AMS fuel costs, excluding the TSCF fleet, decreased
$430,000 to $4,373,000 and $1,328,000 to $8,127,000 for the quarter and six months ended
June 30, 2016, respectively, compared to 2015.
|
|
·
|
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
decreased
$2,210,000, or 6.4%, and $3,204,000, or 5.1%, for the quarter and six months ended June 30, 2016, respectively, compared to 2015.
During the quarter and six months ended June 30, 2016, respectively, we transported 114,615 and 210,208 passengers on tourism
flights, compared to 126,953 and 227,149 in the quarter and six months ended June 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 decreased
$946,000, or 4.1%, and $1,713,000, or 4.0%, for the quarter and six months ended June 30, 2016, respectively, compared to 2015,
for the following reasons:
|
·
|
Decrease
in the number of passengers, as described above.
|
|
·
|
Decreases
of $1,212,000, or 15.0%, to $6,876,000 and $1,287,000, or 8.4%, to $13,983,000 in tourism
aircraft maintenance expense for the quarter and six months ended June 30, 2016, respectively,
reflecting decreases of 3.9% and 4.3% in total flight hours for the quarter and six months
ended June 30, 2016, respectively, as well as normal fluctuations in the timing of overhaul
and replacement cycles for aircraft parts.
|
|
·
|
Decreases
of 30.2% and 28.5% in the cost of aircraft fuel per hour flown for tourism operations
for the quarter and six months ended June 30, 2016, respectively.
|
Medical Interiors and Products
Medical interiors and products revenue
increased $2,956,000, or 66.4%, and $5,776,000, or 67.3%, for the quarter and six months ended June 30, 2016, respectively,
compared to 2015. Significant projects during 2016 included the completion of thirteen 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 four aircraft interiors for commercial customers. Revenue by product line for the quarter and six months ended June 30, 2016,
was as follows:
|
·
|
$5,253,000
and $10,643,000 – governmental entities
|
|
·
|
$2,153,000
and $3,720,000 – commercial customers
|
Significant projects during 2015 included
the completion of nine multi-mission interiors for the U.S. Army’s HH-60M helicopter and work on three aircraft interiors
for commercial customers. Revenue by product line for the quarter and six months ended June 30, 2015, was as follows:
|
·
|
$2,454,000
and $5,611,000 – governmental entities
|
|
·
|
$1,996,000
and $2,976,000 – commercial customers
|
Cost of medical interiors and products
increased $2,836,000, or 80.4%, and $5,615,000, or 83.4%, for the quarter and six months ended June 30, 2016, respectively,
as compared to the prior 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 Expenses
Depreciation and amortization
increased
$2,345,000, or 11.1%, and $4,867,000, or 11.8%, for the quarter and six months ended June 30, 2016, compared to 2015. Depreciation
related to TSCF’s fixed assets was $712,000 and $1,181,000 and amortization of TSCF’s intangible assets was $1,052,000
and $1,753,000 for the quarter and six months ended June 30, 2016, respectively. In addition, since March 31, 2015, we have placed
39 aircraft with a total depreciable basis of $130.1 million into service. These increases were offset, in part, by the buyout
of 24 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 $6,370,000, or 18.9%, and $10,037,000, or 14.5%, for the quarter and six months
ended June 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 $2,199,000 and $3,785,000 for the quarter and six months ended June 30, 2016. In addition, since March 31,
2015, we have opened a net of 23 new community-based locations, not including TSCF bases, contributing to an increase in billing
and collections, dispatch, and AMS program administration requirements.
Interest expense
increased $2,745,000,
or 53.2%, and $5,560,000, or 54.8%, for the quarter and six months ended June 30, 2016, compared to 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 $11.7 million against our line of credit in 2016, compared to $9.4 million in 2015.
Income tax expense
was $17,315,000
and $30,417,000 in the quarter and six months ended June 30, 2016, respectively, compared to $17,339,000 and $25,629,000 in the
quarter and six months ended June 30, 2015, respectively. The effective tax rate was approximately 39.1% for the quarter and six
months ended June 30, 2016, compared to 38.8% and 38.9% for the quarter and six months ended June 30, 2015. 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 June 30,
2016, was $339,173,000, compared to $324,889,000 at December 31, 2015. Cash generated by continuing operations was $92,339,000
in 2016, compared to $108,386,000 in 2015, reflecting the results of operations described above. Receivables increased $13.9 million
during 2016, compared to $1.6 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 155 at June 30, 2016, compared to 131 at June 30, 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. In addition, we paid $29.7 million in estimated income
taxes during the six months ended June 30, 2016, compared to $3.1 million in the prior year. We believe the increase year over
year is primarily due to timing and expect estimated income tax payments during the second half of 2016 to be lower than payments
during both the first half of 2016 and the last half of 2015.
Cash used by continuing investing activities
totaled $295,076,000 in 2016 compared to $107,482,000 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 thirteen aircraft for approximately $45.1 million and the buyout of eight previously leased aircraft
for $10.5 million. Equipment acquisitions in the six months ended June 30, 2015, included the purchase of ten aircraft for approximately
$34.5 million and the buyout of seven previously leased aircraft for $7.6 million. During the six months ended June 30, 2015,
we also acquired three aircraft, medical equipment, and certain other intangible assets totaling $43.5 million from a hospital
customer in connection with converting the program to community-based operations.
Continuing financing activities provided $203,548,000
in 2016 compared to $14,814,000 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 thirteen notes totaling $51.8 million to finance the acquisition of new aircraft.
We also repurchased 1,035,732 shares of our common stock on the open market for $38.3 million. During the six months ended June
30, 2015, we originated seventeen notes, 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 seven which have already been delivered.
During 2016 we began discussions with Bell Helicopter Textron, Inc., to modify the terms of the purchase agreement, including
the total number of aircraft to be delivered under the agreement and application of related deposits. 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 six months ended June 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 $17,876,000 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 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.
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
.