ITEM 1.
BUSINESS
General
Air Methods Corporation, a Delaware corporation, (Air Methods or the Company) was established in Colorado in 1982 and now serves as the largest provider of air medical emergency transport services and systems throughout the United States of America. We provide air medical emergency transport services under two service delivery models: Community-Based Services (CBS) and Hospital-Based Services (HBS). Rocky Mountain Holdings, LLC (RMH), FSS Airholdings, LLC. (FSS), Mercy Air Service, Inc. (Mercy Air), and LifeNet, Inc. (LifeNet) all operate as wholly-owned subsidiaries of Air Methods. FSS is the parent company of CJ Systems Aviation Group, Inc. (CJ).
As of December 31, 2010, our CBS Division provided air medical transportation services in 24 states, while our HBS Division provided air medical transportation services to hospitals located in thirty states under operating agreements with original terms generally ranging from one to ten years. Under both CBS and HBS operations, we transport persons requiring intensive medical care from either the scene of an accident or general care hospitals to highly skilled trauma centers or tertiary care centers. Under the CBS delivery model, our employees or contractors provide medical care to patients en route, while under the HBS delivery model, medical care en route is provided by employees or contractors of our customer hospitals. Our Products Division designs, manufactures, and installs aircraft medical interiors and other aerospace or medical transport products. Financial information for each of our operating segments is included in the notes to our consolidated financial statements included in Item 8 of this annual report.
In 2008 we entered the voluntary Safety Management System (SMS) administered by the Federal Aviation Administration (FAA) and in the first quarter of 2011 successfully exited Level 2, the third phase of a five-phase program. SMS follows the International Civil Aviation Organization standard as a quality management approach to controlling risk by providing the organizational framework to support a sound safety culture. It also provides our management with a detailed roadmap for monitoring safety-related processes. With the completion of Level 2, most of the components of SMS are in place; subsequent levels focus on maturing those components and moving from reactive analysis to proactive analysis of flight and aircraft systems data. As part of the SMS initiative in 2010, we established a Maintenance Safety Action Program (MSAP) to complement the Aviation Safety Action Program (ASAP) and Line Operations Safety Audit (LOSA) programs established in 2009. Each of these facilitates greater communications from our field operations and earlier identification of areas of concern to enable us to devote resources and attention to issues on a proactive basis.
Over the past several years, we have been in the process of equipping our fleet with Night Vision Goggles (NVG), Terrain Avoidance Warning Systems (TAWS), satellite tracking equipment, satellite weather information equipment, and wire strike kits. In 2010 we invested $6.5 million in equipment and training costs related to this initiative for aircraft already in our fleet, in addition to the $7.9 million we invested in 2009. In 2010, we also took delivery of ten new aircraft which were retrofitted with this equipment.
Community-Based Services
Services provided by our CBS Division include medical care, aircraft operation and maintenance, 24-hour communications and dispatch, and medical billing and collections. CBS aircraft are typically based at fire stations, airports, or hospital locations. CBS revenue consists of flight fees billed directly to patients, their insurers, or governmental agencies. Due to weather conditions and other factors, the number of flights is generally higher during the summer months than during the remainder of the year, causing revenue generated from operations to fluctuate accordingly.
The division operates 138 helicopters and three fixed wing aircraft under both Instrument Flight Rules (IFR) and Visual Flight Rules (VFR) in 24 states. Although the division does not generally contract directly with specific hospitals, it typically has long-standing relationships with several leading healthcare institutions in the metropolitan areas in which it operates.
In 2010 the CBS Division opened nine new bases, including five resulting from the conversion of four HBS customers to CBS operations, and closed two due to insufficient flight volume.
Our aircraft are dispatched in response to requests for transport received by our communications centers from sending or receiving hospitals or local emergency personnel, such as firemen or police officers, at the scene of an accident. Communications and dispatch operations for substantially all CBS locations are conducted from our national center in Omaha, Nebraska, or from the regional center in St. Louis, Missouri. Medical billing and collections are processed primarily from our offices in San Bernardino, California. We also have contracts to provide dispatch, medical billing, and transfer center services to outside third parties.
Competition with the CBS Division comes primarily from three national operators (Air Medical Group Holdings, Inc.; OmniFlight, Inc.; and PHI, Inc.) and from smaller regional carriers and alternative air ambulance providers such as local governmental entities. Some 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, allowing them to operate within markets that generate lower flight volume than our typical CBS location. We believe that our competitive strengths center on the quality of our patient care and customer service, the medical capability of the aircraft we deploy, and our investment in safety equipment and programs for our operations, as well as our ability to tailor the service delivery model to a hospital’s or community’s specific needs. Unlike many operators, we maintain in-house core competencies in hiring, training, and managing medical staff; billing and collection services; dispatch and communication functions; and aviation operations. We believe that choosing not to outsource these services allows us to better ensure the quality of patient care and enhances control over the associated costs.
Hospital-Based Services
Our HBS Division provides hospital clients with medically-equipped helicopters and airplanes which are generally based at hospitals. Our responsibility is to operate and maintain the aircraft in accordance with Federal Aviation Regulations (FAR) Part 135 standards. Hospital clients provide medical personnel and all medical care on board the aircraft. The division operates 173 helicopters and nine fixed wing aircraft in thirty states. Under the typical operating agreement with a hospital, we earn approximately 78% of our revenue from a fixed monthly fee and 22% from an hourly flight fee from the hospital. These fees are earned regardless of when, or if, the hospital is reimbursed for these services by its patients, their insurers, or the federal government. Both monthly and hourly fees are generally subject to annual increases based on changes in the consumer price index, hull and liability insurance premiums, or spare parts prices from aircraft manufacturers. Because the majority of the division's flight revenue is generated from fixed monthly fees, seasonal fluctuations in flight hours do not significantly impact monthly revenue in total. We operate some of our HBS contracts under the service mark AIR LIFE®, which is generally associated within the industry with our standard of service.
In 2010 three of our hospital customers expanded their services areas, resulting in four new bases of operation. Contracts with ten hospital customers were due for renewal in 2010, seven of which were renewed for terms ranging from one to five years. Two other contracts were extended into 2011, pending negotiation of final contract renewal terms, and one contract converted to CBS operations upon expiration in 2010. Cost containment pressures have led an increasing number of healthcare institutions to consider outsourcing their flight programs to community-based models of operation. One customer, representing two base locations, opted to terminate the contract with us as of the end of 2010, prior to the expiration date in the first quarter of 2011.
Competition with the HBS Division comes primarily from four national operators: Air Medical Group Holdings, Inc.; Metro Aviation, Inc.; OmniFlight, Inc.; and PHI, Inc. Operators generally compete on the basis of price, safety record, accident prevention and training, and the medical capability of the aircraft. The ready availability of new and used aircraft has contributed to increased price competition on contract renewals. Price is a significant element of competition because of the continued pressure on many healthcare organizations to contain costs passed on to their consumers. We believe that our competitive strengths center on the quality of our training, maintenance, and customer service; the medical capability of the aircraft we deploy; and our investment in safety equipment and programs for our operations.
Products Division
Our Products Division designs, manufactures, and certifies modular medical interiors, multi-mission interiors, and other aerospace and medical transport products. These interiors and other products range from basic life support to intensive care suites to advanced search and rescue systems. With a full range of engineering, manufacturing and certification capabilities, the division has also designed and integrated aircraft communication, navigation, environmental control, structural, and electrical systems. Manufacturing capabilities include avionics, electrical, composites, machining, welding, sheet metal, and upholstery. The division also offers quality assurance and certification services pursuant to its FAA Organization Designation (ODA) authorization, Parts Manufacturer Approvals (PMA's), and ISO9001:2000 (Quality Systems) certification.
We maintain patents covering several products. These include the Litter Lift System used in the U.S. Army’s HH-60M helicopter and Medical Evacuation Vehicle (MEV), and the Articulating Patient Loading System and Modular Equipment Frame developed as part of the modular interior concept. Raw materials and components used in the manufacture of interiors and other products are widely available from several different vendors.
As of December 31, 2010, projects in process included 26 HH-60M units, 57 interiors for an older generation of the U.S. Army’s Blackhawk helicopter, and approximately 187 MEV litter systems for the U.S. Army’s Stryker vehicle. In the fourth quarter of 2010, we received a contract from the U.S. Army for 24 additional HH-60M units. Deliveries under all contracts in process or received as of December 31, 2010, are expected to be completed by the third quarter of 2012, and remaining revenue is estimated at $23.3 million.
Our competition in the aircraft interior design and manufacturing industry comes primarily from three companies based in the United States and three in Europe. Competition is based mainly on product availability, price, and product features, such as configuration and weight. With our established line of interiors for Bell and Eurocopter aircraft, we believe that we have demonstrated the ability to compete on the basis of each of these factors.
Employees
As of December 31, 2010, we had 2,753 full time and 207 part time employees, comprised of 956 pilots; 531 aviation machinists, airframe and power plant (A&P) engineers, and other manufacturing/maintenance positions; 730 flight nurses and paramedics; and 743 business, dispatch, billing, and administrative personnel. Our pilots are IFR-rated where required by contract, and all have completed an extensive ground school and flight training program at the commencement of their employment with us, as well as local area orientation and annual training provided by us. All of our aircraft mechanics must possess FAA A&P licenses. All flight nurses and paramedics hold the appropriate state and county licenses, as well as Cardiopulmonary Resuscitation, Advanced Cardiac Life Support, and/or Pediatric Advanced Life Support certifications.
In September 2003, our pilots voted to be represented by a collective bargaining unit, and we signed a collective bargaining agreement (CBA) on March 31, 2006. The agreement was effective January 1, 2006, through April 30, 2009. Negotiations on a new CBA commenced in the fourth quarter of 2008 and were referred for mediation during the second quarter of 2009. Under the Railway Labor Act, mediation decisions are non-binding on either party, and the duration of the process may vary depending upon the mediator assigned and the complexity of the issues negotiated. No meetings were held by the mediator during the first and second quarters of 2010, but resumed during the third quarter of 2010. Although negotiations are active, no agreement has yet been reached.
Government Regulation
We are subject to the Federal Aviation Act of 1958, as amended. All of our flight and maintenance operations are regulated and actively supervised by the U.S. Department of Transportation through the FAA. Medical interiors and other aerospace products developed by us are subject to FAA certification. Air Methods holds a Part 135 Air Carrier Certificate and a Part 145 Repair Station Certificate, which covers one master and four satellite locations, from the FAA. A Part 135 certificate requires that the voting interests of the holder of the certificate cannot be more than 25% owned by foreign persons. As of December 31, 2010, we are not aware of any foreign person who holds more than 5% of our outstanding Common Stock.
In 2010 the FAA issued a Notice of Proposed Rule-making (NPRM) for Part 135 air medical operators which, if enacted as presently written, may mandate changes to flight and duty time, flight dispatching procedures to assess flight risk prior to launch, minimum safety equipment requirements, and training requirements. These proposed changes may potentially result in increased response times affecting flight volume and increased cost of operations. The FAA’s process of evaluating comments received from the industry and determining final rules is expected to take 18 to 24 months. In 2010 the FAA also issued an NPRM mandating SMS for all certificated Part 135 and 121 carriers. This proposed regulation is not expected to have a significant adverse impact on our operations, if enacted, because we have already begun implementation of SMS.
We are also subject to laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, Dodd-Frank Wall Street Reform and Consumer Protection Act, Securities and Exchange Commission (SEC) regulations, NASDAQ Market rules, and other federal and state securities laws.
Available Information
Our internet site is www.airmethods.com. We make available free of charge, on or through the website, all annual, quarterly, and current reports, as well as any amendments to these reports, as soon as reasonably practicable after electronically filing these reports with the SEC. This reference to the website does not incorporate by reference the information contained in the website and such information should not be considered a part of this report.
ITEM 1A.
ITEM 1A.
RISK FACTORS
Our actual operating results may differ materially from those described in forward-looking statements as a result of various factors, including but not limited to, those described below.
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Flight volume - Almost all CBS revenue and approximately 22% of HBS revenue is dependent upon flight volume. Approximately 21% of our costs primarily associated with flight operations incurred during the year ended December 31, 2010, also vary with the number of hours flown. Poor visibility, high winds, and heavy precipitation can affect the safe operation of aircraft and therefore result in a reduced number of flight hours due to the inability to fly during these conditions. Prolonged periods of adverse weather conditions could have an adverse impact on our operating results due to missed flights or reduced demand for service. Typically, the months from November through February tend to have lower flight volume due to weather conditions and other factors, resulting in lower CBS operating revenue during these months. Flight volume for CBS operations can also be affected by the distribution of calls among competitors by local government agencies and the entrance of new competitors into a market. Over the past several years, the increase in the number of air medical helicopters operating within the United States has outpaced trends in the demand for service. Transport volume may also be unfavorably impacted by an overall slow-down in economic activity; a decrease in road traffic volume because of unusually high spikes in fuel prices or other factors; cost of the service; loss of confidence in certain markets because of recent, high-profile accidents within the air medical industry; or questions regarding the medical necessity for certain transports.
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Collection rates - We respond to calls for air medical transport without pre-screening the creditworthiness of the patient. The CBS Division invoices patients and their insurers directly for services rendered and recognizes revenue net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. Net reimbursement per transport for CBS operations is primarily a function of price, payer mix, and timely and effective collection efforts. Both the pace of collections and the ultimate collection rate are affected by the overall health of the U.S. economy and the unemployment rate, which impact 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. Although we have not yet experienced a direct impact on Medicaid rates, the pressure on state governments to balance their budgets may lead them to decrease Medicaid benefits offered to their citizens. In addition, the collection rate is impacted by changes in the cost of healthcare and health insurance, as well as economic pressures on employers. As the cost of healthcare increases and businesses explore ways to contain or reduce operating costs, health insurance coverage provided by employers may be reduced or eliminated entirely, resulting in an increase in the uninsured population. The impact of recently enacted healthcare legislation on our operations is still unknown. A shift of 1% of our payer mix from insured accounts to either Medicaid or uninsured accounts would result in a decrease of $5.2 million to $6.0 million in pre-tax operating results. Our ability to collect price increases in our standard charge structure has generally been limited to accounts covered by insurance providers. Although we have not yet experienced significant increased limitations in the amount reimbursed by insurance companies, continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our standard rates. There is no assurance that we will be able to maintain historical collection rates after the implementation of price increases for CBS transports.
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Dependence on third party suppliers - We currently obtain a substantial portion of our helicopter spare parts and components from American Eurocopter Corporation (AEC) and Bell Helicopter, Inc. (Bell) and maintain supply arrangements with other parties for our engine and related dynamic components. As of December 31, 2010, AEC aircraft comprise 83% of our helicopter fleet while Bell aircraft constitute 15%. Increases in spare parts prices tend to be higher for aircraft which are no longer in production. Increases in our monthly and hourly flight fees billed to our HBS customers in a few cases are limited to changes in the consumer price index. As a result, an unusually high increase in the price of parts may not be fully passed on to our HBS customers. The ability to pass on price increases for CBS operations may be limited by reimbursement rates established by Medicare, Medicaid, and insurance providers and by other market considerations. Based upon the manufacturing capabilities and industry contacts of AEC, Bell, and other suppliers, we believe we will not be subject to material interruptions or delays in obtaining aircraft parts and components but do not have an alternative source of supply for AEC, Bell, and certain other aircraft parts. Failure or significant delay by these vendors in providing necessary parts could, in the absence of alternative sources of supply, have a material adverse effect on us.
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Disposition of aircraft - We are dependent upon the secondary used aircraft market to dispose of older models of aircraft as part of our ongoing fleet rejuvenation efforts. In the past two years, the demand for used aircraft has diminished. If we are unable to dispose of our older aircraft, our aircraft carrying costs may increase above requirements for our current operations, or we may accept lower selling prices, resulting in losses on disposition or reduced gains. The types of aircraft targeted for disposition as part of our fleet rejuvenation usually have lower carrying costs than new aircraft. We have also been able to utilize some aircraft for spare parts to support the operation of our existing fleet, rather than seeking to sell the aircraft to a third party.
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Employee unionization - In September 2003, our pilots voted to be represented by a collective bargaining unit, and we signed a CBA on March 31, 2006. The agreement was effective January 1, 2006, through April 30, 2009. Negotiations on a new CBA commenced in the fourth quarter of 2008 and were referred for mediation during the second quarter of 2009. Under the Railway Labor Act, mediation decisions are non-binding on either party, and the duration of the process may vary depending upon the mediator assigned and the complexity of the issues negotiated. No meetings were held by the mediator during the first and second quarters of 2010, but resumed during the third quarter of 2010. Although negotiations are active, no agreement has yet been reached. CBA establishes procedures for training, addressing grievances, discipline and discharge, among other matters, and defines vacation, holiday, sick, health insurance, and other employee benefits. The CBA also establishes wage scales, including adjustments for geographic locations, covering each year of the agreement. There can be no assurance that the CBA will be renewed under terms resembling those of the current agreement. Union personnel have also actively attempted to organize other employee groups in the past and these groups may elect to be represented by unions in the future.
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Competition - Our HBS division faces significant competition from several national and regional air medical transportation providers for contracts with hospitals and other healthcare institutions. In addition to the national and regional providers, our CBS division also faces competition from smaller regional carriers and alternative air ambulance providers such as sheriff departments. In some cases advanced life support and critical care transport ground ambulance providers may also be competing for the same transports. Air medical operators generally compete on the basis of price, safety record, accident prevention and training, and the medical capability of the aircraft. There can be no assurance that we will be able to continue to compete successfully for new or renewing HBS contracts or CBS market share in the future.
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Aviation industry hazards and insurance limitations - Hazards are inherent in the aviation industry and may result in loss of life and property, thereby exposing us to potentially substantial liability claims arising from the operation of aircraft. We may also be sued in connection with medical malpractice claims arising from events occurring during or relating to medical flights. Under most HBS operating agreements, our customers have agreed to indemnify us against liability arising from medical malpractice claims and to maintain insurance covering such liability, but there can be no assurance that a hospital will not challenge the indemnification rights or will have sufficient assets or insurance coverage to fulfill its indemnity obligations. In CBS operations, our personnel perform medical procedures on transported patients, which may expose us to significant direct legal exposure to medical malpractice claims. We maintain general liability aviation insurance, aviation product liability coverage, and medical malpractice insurance, and believe our level of coverage is customary in the industry and adequate to protect against claims. However, there can be no assurance that it will be sufficient to cover potential claims or that present levels of coverage will be available in the future at reasonable cost. A limited number of hull and liability insurance underwriters provide coverage for air medical operators. Insurance underwriters are required by various federal and state regulations to maintain minimum levels of reserves for known and expected claims. However, there can be no assurance that underwriters have established adequate reserves to fund existing and future claims. The number of air medical accidents, as well as the number of insured losses within other helicopter operations and the commercial airline industry, and the impact of general economic conditions on underwriters may result in increases in premiums above the rate of inflation. In addition, loss of any aircraft as a result of accidents could cause adverse publicity and interruption of services to client hospitals, which could adversely affect our operating results and relationships with such hospitals. Approximately 56% of any increases in hull and liability insurance may be passed through to our HBS customers according to contract terms.
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Fuel costs - Fuel accounted for 2.7% of total operating expenses for the year ended December 31, 2010. Both the cost and availability of fuel are influenced by many economic and political factors and events occurring in oil-producing countries throughout the world. The price per barrel of oil has fluctuated significantly over the past several years. We cannot predict the future cost and availability of fuel or the impact of disruptions in oil supplies or refinery production from natural disasters. The unavailability of adequate fuel supplies or higher fuel prices could have an adverse effect on our cost of operations and profitability. Generally, our HBS customers pay for all fuel consumed in medical flights. However, our ability to pass on increased fuel costs for CBS operations may be limited by economic and competitive conditions and by reimbursement rates established by Medicare, Medicaid, and insurance providers. In 2010 and 2009, we entered into financial derivative agreements to protect against increases in the cost of Gulf Coast jet fuel above $2.35 per gallon for wholesale purchases from January 1, 2010, through June 30, 2010; above $2.71 per gallon from July 1, 2010, through December 31, 2010; and above $2.68 per gallon from January 1, 2011, through December 31, 2011. For 2010 our fuel derivatives covered approximately 97% of our fuel consumption. Fuel derivatives in place as of December 31, 2010, cover approximately 90% of our anticipated fuel consumption for 2011.
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Employee recruitment and retention - An important aspect of our operations is the 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. Although attrition rates have been reduced recently as a result of the economic downturn, employees who meet these standards are in great demand and are likely to remain a limited resource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, the ability to maintain and grow the business could be negatively impacted. A limited supply of qualified applicants may also contribute to wage increases which outpace the rate of inflation.
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Restrictive debt covenants - Our senior credit facility contains restrictive financial and operating covenants, including restrictions on our ability to incur additional indebtedness and to engage in various corporate transactions such as mergers, acquisitions, asset sales and the payment of cash dividends. These covenants may restrict future growth through the limitation on acquisitions and may adversely impact our ability to implement our business plan. Failure to comply with the covenants defined in the agreement or to maintain the required financial ratios could result in an event of default and accelerate payment of the principal balances due under the senior credit facility. Given factors beyond our control, such as interruptions in operations from unusual weather patterns or decreases in flight volume due to overall economic conditions not included in current projections, there can be no assurance that we will be able to remain in compliance with financial covenants in the future, or that, in the event of non-compliance, we will be able to obtain waivers from the lenders, or that to obtain such waivers, we will not be required to pay lenders significant cash or equity compensation.
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Governmental regulation - The air medical transportation services and products industry is subject to extensive regulation by governmental agencies, including the FAA, which imposes significant compliance costs on us. In addition, reimbursement rates for air ambulance services established by governmental programs such as Medicare directly affect CBS revenue and indirectly affect HBS revenue from customers. Changes in laws or regulations or in reimbursement rates could have a material adverse impact on our cost of operations or revenue from flight operations. Periodically the FAA issues airworthiness directives covering one or more models of aircraft. Although we believe that our aircraft are currently in compliance with all FAA-issued airworthiness directives, additional airworthiness directives likely will be issued in the future and may result in additional operating costs or make a particular model of aircraft uneconomical to operate. In 2010 the FAA issued an NPRM for Part 135 air medical operators which, if enacted as presently written, may mandate changes to flight and duty time, flight dispatching procedures to assess flight risk prior to launch, minimum safety equipment requirements, and training requirements. These proposed changes may potentially result in increased response times affecting flight volume and increased cost of operations. The FAA’s process of evaluating comments received from the industry and determining final rules is expected to take 18 to 24 months. In 2010 the FAA also issued an NPRM mandating SMS for all certificated Part 135 and 121 carriers. This proposed regulation is not expected to have a significant adverse impact on our operations, if enacted, because we have already begun implementation of SMS.
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Debt and lease obligations - We are obligated under debt facilities providing for up to approximately $147.1 million of indebtedness, of which approximately $97.1 million was outstanding at December 31, 2010, and operating lease obligations which total $358.8 million over the remaining terms of the leases. We have cash on hand of $60.7 million, a portion of which could be used to prepay debt without penalty. If we fail to meet our payment obligations or otherwise default under the agreements governing indebtedness or lease obligations, the lenders under those agreements will have the right to accelerate the indebtedness and exercise other rights and remedies against us. These rights and remedies include the rights to repossess and foreclose upon the assets that serve as collateral, initiate judicial foreclosure against us, petition a court to appoint a receiver for us, and initiate involuntary bankruptcy proceedings against us. If lenders exercise their rights and remedies, our assets may not be sufficient to repay outstanding indebtedness and lease obligations, and there may be no assets remaining after payment of indebtedness and lease obligations to provide a return on common stock.
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Foreign ownership - Federal law requires that United States air carriers be citizens of the United States. For a corporation to qualify as a United States citizen, the president and at least two-thirds of the directors and other managing officers of the corporation must be United States citizens and at least 75% of the voting interest of the corporation must be owned or controlled by United States citizens. If we are unable to satisfy these requirements, operating authority from the Department of Transportation may be revoked. As of December 31, 2010, we are not aware of any foreign person who holds more than 5% of our outstanding Common Stock. Because we are unable to control the transfer of our stock, we are unable to assure that we can remain in compliance with these requirements in the future.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2.
PROPERTIES
Facilities
Our headquarters, which serves all segments of our operation, consists of approximately 113,000 square feet of office and hangar space in metropolitan Denver, Colorado, at Centennial Airport. We own the buildings, subject to an existing ground lease with the airport authority which expires in October 2044. The headquarters buildings are also collateral for a ten-year mortgage which matures in 2018. We also own and lease various properties for depot level maintenance, warehouse, and administration purposes. We believe that these facilities are in good condition and suitable for our present requirements.
Equipment and Parts
As of December 31, 2010, our aircraft fleet consisted of 90 Company-owned aircraft and 177 aircraft leased under operating leases. The table below also includes 56 aircraft owned by HBS customers and operated by us under contracts with them.
We generally pay all insurance, taxes, and maintenance expense for each aircraft in our fleet. Because helicopters are insured at replacement cost which usually exceeds book value, we believe that helicopter accidents covered by hull and liability insurance will generally result in full reimbursement of any damages sustained. In the ordinary course of business, we may from time to time purchase and sell helicopters in order to best meet the specific needs of our operations.
We have experienced no significant difficulties in obtaining required parts for our helicopters. Repair and replacement components are purchased primarily through AEC and Bell, whose aircraft make up the majority of our fleet. Based upon the manufacturing capabilities and industry contacts of AEC and Bell, we believe we will not be subject to material interruptions or delays in obtaining aircraft parts and components. Any termination of production by AEC or Bell would require us to obtain spare parts from other suppliers, which are not currently in place.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ Global Select Market® under the trading symbol "AIRM." The following table shows, for the periods indicated, the high and low closing prices for our common stock. The quotations for the common stock represent prices between dealers and do not reflect adjustments for retail mark-ups, mark-downs or commissions, and may not represent actual transactions.
As of March 4, 2011, there were approximately 180 holders of record of our common stock. We estimate that we have approximately 5,600 beneficial owners of common stock.
We have not paid any cash dividends since inception but may consider the payment of dividends in the future. Our senior credit facility contains a covenant which restricts, but does not prohibit, the payment of dividends.
Stock Performance Graph
The following graph compares our cumulative total stockholder return for the period from December 31, 2005 through December 31, 2010, against the Standard & Poor’s 500 Index (S&P 500) and peer group companies in industries similar to those of the Company. The S&P 500 is a widely used composite index reflecting the returns of 500 publicly traded companies in a variety of industries. The Peer Group consists of all publicly traded companies in SIC Group 4522: “Non-scheduled Air Transport,” including Alliance Network Communications Holdings; Alpine Air Express, Inc.; Avantair, Inc.; Bristow Group, Inc.; Home Energy Savings Corp.; and PHI, Inc. We believe that this Peer Group is our most appropriate peer group for stock comparison purposes due to the limited number of publicly traded companies engaged in air or ground medical transport and because this Peer Group contains a number of companies with capital costs and operating constraints similar to ours. The graph shows the value at the end of each of the last five fiscal years of $100 invested in our common stock or the indices on December 31, 2005, and assumes reinvestment of dividends. Historical stock price performance is not necessarily indicative of future stock price performance.
INDEXED RETURNS
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following tables present selected consolidated financial information of the Company and our subsidiaries which has been derived from our audited consolidated financial statements. This selected financial data should be read in conjunction with our consolidated financial statements and notes thereto appearing in Item 8 of this report. Revenue, expenses, and total assets as of and for the years ended December 31, 2010, 2009, 2008, and 2007, increased in part as a result of the acquisition of CJ in October 2007.
SELECTED FINANCIAL DATA OF THE COMPANY
(Amounts in thousands except share and per share amounts)
SELECTED FINANCIAL DATA OF THE COMPANY
(Amounts in thousands)
SELECTED OPERATING DATA
(1) Includes transports and missions for CJ locations from October 1, 2007 through December 31, 2007, only.
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results; flight volume and collection rates for CBS operations; size, structure and growth of our air medical services and products markets; continuation and/or renewal of HBS contracts; acquisition of new and profitable Products Division contracts; and other matters. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in 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 quarterly reports on Form 10-Q. 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 and medical transport products. 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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Community-Based Services (CBS) - provides air medical transportation services to the general population as an independent service. Revenue consists of flight fees billed directly to patients, their insurers, or governmental agencies, and cash flow is dependent upon collection from these individuals or entities. In 2010 the CBS Division generated 61% of our total revenue, compared to 56% in 2009 and 59% in 2008.
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Hospital-Based Services (HBS) - provides air medical transportation services to hospitals throughout the U.S. under exclusive operating agreements. Revenue consists primarily of fixed monthly fees (approximately 78% of total contract revenue) and hourly flight fees (approximately 22% of total contract revenue) billed to hospital customers. In 2010 the HBS Division generated 35% of our total revenue, compared to 39% in 2009 and 38% in 2008.
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Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers. In 2010 the Products Division generated 4% of our total revenue, compared to 5% in 2009 and 3% in 2008.
See Note 13 to the consolidated financial statements included in Item 8 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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Flight volume. Fluctuations in flight volume have a greater impact on CBS operations than HBS operations because almost all of CBS revenue is derived from flight fees, as compared to approximately 22% of HBS revenue. By contrast, 79% of our costs primarily associated with flight operations (including salaries, aircraft ownership costs, hull insurance, and general and administrative expenses) incurred during the year ended December 31, 2010, are mainly fixed in nature. While flight volume is affected by many factors, including competition and the effectiveness of marketing and business development initiatives, the greatest single variable has historically been weather conditions. Adverse weather conditions-such as fog, high winds, or heavy precipitation-hamper our ability to operate our aircraft safely and, therefore, result in reduced flight volume. Total patient transports for CBS operations were approximately 40,000 for 2010 compared to approximately 39,600 for 2009. Patient transports for CBS bases open longer than one year (Same-Base Transports) were approximately 37,200 in 2010 compared to 38,600 in 2009. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 1,236 lower in 2010 compared to 2009. Requests for community-based services decreased by 2.9% for the year ended December 31, 2010, 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 the 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. Flight revenue is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. Net reimbursement per transport for CBS operations is primarily a function of price, payer mix, and timely and effective collection efforts. Both the pace of collections and the ultimate collection rate are affected by the overall health of the U.S. economy, which impacts the number of indigent patients and funding for state-run programs, such as Medicaid. Medicaid reimbursement rates in many jurisdictions have remained well below the cost of providing air medical transportation. In addition, the collection rate is impacted by changes in the cost of healthcare and health insurance; as the cost of healthcare increases, health insurance coverage provided by employers may be reduced or eliminated entirely, resulting in an increase in the uninsured population. The impact of recently enacted healthcare legislation is still unknown. Net reimbursement per transport increased 15.7% in the year ended December 31, 2010, compared to 2009, attributed to recent price increases. Provisions for contractual discounts and estimated uncompensated care as a percentage of related gross billings for CBS operations were as follows:
Although price increases generally increase the net reimbursement per transport from insurance payers, the amount per transport collectible from private patient payers, Medicare, and Medicaid does not increase proportionately with price increases. Therefore, depending upon overall payer mix, price increases will usually result in an increase in the percentage of uncollectible accounts. The number of transports covered by insurance decreased from 39% of total transports for the year ended December 31, 2009, to 36% of total transports for the year ended December 31, 2010, with most of the decrease moving to Medicare coverage. In 2010, increased collections from insurance payers offset the impact of price increases on the percentage collectible from other payers and the deterioration in payer mix. Although we have not yet experienced significant increased limitations in the amount reimbursed by insurance companies, continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our standard rates.
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Aircraft maintenance. Both CBS and HBS 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. Two models of aircraft within our fleet, representing 22% of the rotor wing fleet, are no longer in production and are, therefore, susceptible to price increases which outpace general inflationary trends. In addition, on-condition components are more likely to require replacement with age. Since January 1, 2009, we have taken delivery of 26 new aircraft and expect to take delivery of a total of 37 additional aircraft during 2011 and 2012. 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 maintenance expense for CBS and HBS operations increased 14.5% from the year ended December 31, 2009, to the year ended December 31, 2010, while total flight volume for CBS and HBS operations decreased 2.4% over the same period. During the year ended December 31, 2010, we incurred costs for 113 major maintenance events, such as engine and transmission overhauls, compared to 66 in the year ended December 31, 2009, primarily because of the timing of overhaul cycles.
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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. The collective bargaining agreement covering our pilots expired on April 30, 2009. Negotiations on a new CBA commenced in the fourth quarter of 2008 and were referred for mediation during the second quarter of 2009. Under the Railway Labor Act, mediation decisions are non-binding on either party, and the duration of the process may vary depending upon the mediator assigned and the complexity of the issues negotiated. No meetings were held by the mediator during the first and second quarters of 2010, but resumed during the third quarter of 2010. Although negotiations are active, no agreement has yet been reached. Other employee groups may also elect to be represented by unions in the future.
Results of Operations
Year ended December 31, 2010 compared to 2009
We reported net income of $44,115,000 for the year ended December 31, 2010, compared to $28,953,000 for the year ended December 31, 2009. Net reimbursement per transport for CBS operations increased 15.7% in 2010 compared to 2009, while Same-Base Transports for CBS operations were 3.5% lower over the same period.
Flight Operations - Community-based Services and Hospital-based Services
Net flight revenue increased $47,549,000, or 9.8%, from $486,303,000 for the year ended December 31, 2009, to $533,852,000 for the year ended December 31, 2010. Flight revenue is generated by both CBS and HBS operations and is recorded net of provisions for contractual discounts and uncompensated care.
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CBS - Net flight revenue increased $49,632,000, or 17.3%, to $337,057,000 for the following reasons:
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Increase of 15.7% in net reimbursement per transport for the year ended December 31, 2010, compared to 2009, due to the benefit of recent price increases net of the deterioration in payer mix described above.
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Decrease of 1,341, or 3.5%, in Same Base Transports in 2010 compared to 2009. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 1,236 lower in 2010 compared to 2009. Requests for community-based services decreased by 2.9% for the year ended December 31, 2010, for bases open greater than one year.
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Incremental net revenue of $24,375,000 generated from the addition of twenty new CBS bases-including eight bases resulting from the conversion of HBS contracts-during either 2010 or 2009 and from new service agreements with another air medical service provider in the Atlanta area effective February 2009.
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Closure of eight bases during either 2010 or 2009 due to insufficient flight volume, resulting in a decrease in net revenue of approximately $5,375,000.
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HBS - Net flight revenue decreased $2,083,000, or 1.0%, to $196,795,000 for the following reasons:
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Cessation of service under six contracts and the conversion of four contracts to CBS operations during either 2010 or 2009, resulting in a decrease in net revenue of approximately $15,146,000.
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Incremental net revenue of $3,048,000 generated from the addition of one new contract during the first quarter of 2009 and the expansion of three other contracts during 2010.
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Annual price increases in the majority of contracts based on changes in the Consumer Price Index or spare parts prices from aircraft manufacturers and the renewal of contracts at higher rates.
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Increase of 1.8% in flight volume for bases open longer than one year.
Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $5,581,000, or 2.7%, to $216,092,000 for the year ended December 31, 2010, compared to 2009. Changes by business segment were as follows:
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CBS - Flight center costs increased $10,635,000, or 8.2%, to $139,612,000 for the following reasons:
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Increase of $10,365,000 for the addition of personnel and facilities to staff new base locations described above.
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Decrease of $2,889,000 due to the closure of base locations described above.
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Increases in salaries for merit pay raises.
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HBS - Flight center costs decreased $5,054,000, or 6.2%, to $76,480,000 primarily due to the following:
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Decrease of approximately $5,775,000 due to the base closures described above.
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Increase of approximately $519,000 for the addition of personnel to staff new base locations described above.
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Increases in salaries for merit pay raises.
Aircraft operating expenses increased $13,294,000, or 13.4%, for the year ended December 31, 2010, in comparison to 2009. 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 increase in costs is due to the following:
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Increase of $10,733,000, or 14.5%, in aircraft maintenance expense to $84,712,000. During the year ended December 31, 2010, we incurred costs for 113 major maintenance events, such as engine and transmission overhauls, compared to 66 in the year ended December 31, 2009, primarily because of the timing of overhaul cycles.
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Increase of approximately 10.4% in the cost of aircraft fuel per hour flown. Fuel costs increased by $1,519,000 to a total expense of $13,301,000 for 2010, compared to 2009.
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Decrease of 2.4% in total flight volume for CBS and HBS operations.
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Increase in hull insurance rates effective July 2009, offset by a decrease in rates effective July 2010.
Aircraft rental expense decreased $2,236,000, or 4.5%, for the year ended December 31, 2010, in comparison to 2009. Incremental rental expense incurred in 2010 for nineteen leased aircraft added to our fleet during either 2009 or 2010 was more than offset by the buy-out or refinancing of 42 aircraft at lower lease rates or through debt financing.
Medical Interiors and Products
Sales of medical interiors and products decreased $1,855,000, or 7.6%, from $24,302,000 for the year ended December 31, 2009, to $22,447,000 for the year ended December 31, 2010. Significant projects in process during 2010 included 32 HH-60M units, 36 interiors for an older generation of the U.S. Army’s Blackhawk helicopter, approximately 187 MEV litter systems, and five medical interior kits for commercial customers. Revenue by product line for the year ended December 31, 2010, was as follows:
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$16,785,000 - governmental entities
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$5,662,000 - commercial customers
Significant projects in process during 2009 included 48 HH-60L units, 81 MEV litter systems, and eight medical interior kits for commercial customers. Revenue by product line for the year ended December 31, 2009, was as follows:
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$16,919,000 - governmental entities
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$7,383,000 - commercial customers
Cost of medical interiors and products decreased $2,274,000, or 12.6%, for the year ended December 31, 2010, as compared to the previous year, due primarily to changes in sales volume.
Other Revenue and General Expenses
Other revenue-consisting of fees earned for dispatch, transfer center, and patient billing services provided to third parties-increased $2,010,000, or 54.4% for the year ended December 31, 2010, compared to 2009. We entered into eight new contracts during either 2010 or 2009.
Depreciation and amortization expense increased $4,733,000, or 23.8%, for the year ended December 31, 2010. Since the first quarter of 2009, we have added 42 aircraft and 38 medical interiors, as well as four new software systems, totaling approximately $95.6 million to our depreciable assets.
Interest expense increased $838,000, or 16.5%, for the year ended December 31, 2010, compared to 2009, primarily because of $47.2 million in long-term notes with a weighted average interest rate of 6.5% entered into subsequent to the first quarter of 2009. Interest on the new notes was offset in part by the fact that we had no balance outstanding against our revolving line of credit during 2010, compared to an average balance of $6.4 million during the year ended December 31, 2009.
Income tax expense was $25,942,000, or 37.0% of income before taxes, in 2010 and $18,151,000, or 38.5% of income before taxes, in 2009. The rate in 2010 was affected by apportionment factor adjustments which reduced our expected blended state rate by approximately $300,000 and adjustments to previously filed state income tax returns which also reduced state income tax expense by approximately $625,000. 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.
Year ended December 31, 2009 compared to 2008
We reported net income of $28,953,000 for the year ended December 31, 2009, compared to $19,269,000 for the year ended December 31, 2008. Net income for 2008 included an income tax benefit of $1,479,000 due to a change in the effective state income tax rate. Net reimbursement per transport for CBS operations increased 6.3% in 2009 compared to 2008, while Same-Base Transports for CBS operations were 5.9% lower over the same period. Aircraft operating expenses decreased 15.3% for 2009 compared to 2008, reflecting lower maintenance and fuel costs.
Flight Operations - Community-based Services and Hospital-based Services
Net flight revenue increased $1,119,000, or 0.2%, from $485,184,000 for the year ended December 31, 2008, to $486,303,000 for the year ended December 31, 2009.
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CBS - Net flight revenue decreased $9,835,000, or 3.3%, to $287,425,000 for the following reasons:
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Net revenue of $7,688,000 earned in 2008 pursuant to a contract to support the Federal Emergency Management Agency (FEMA) in disaster recovery efforts. No such revenue was generated in 2009.
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Decrease of approximately 5.9% in Same Base Transports in 2009 compared to 2008. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 550 higher in 2009 compared to 2008. In the first six months of 2009, Same Base Transports were negatively affected by overall weaker economic conditions in the United States. In the last six months of 2009, the decrease in Same Base Transports can be attributed almost entirely to increased weather cancellations.
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Increase of 12.7% in average gross charge per transport for the year ended December 31, 2009, compared to 2008. Net reimbursement per transport increased approximately 6.3% over the same period.
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Incremental net revenue of $23,055,000 generated from new service agreements with another air medical service provider in the Atlanta area and the addition of fourteen new CBS bases, including two bases resulting from the conversion of an HBS contract, during either 2009 or 2008.
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Closure of seventeen bases during either 2009 or 2008, resulting in a decrease in net revenue of approximately $17,421,000.
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HBS - Net flight revenue increased $10,954,000, or 5.8%, to $198,878,000 for the following reasons:
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Incremental net revenue of $8,098,000 generated from the addition of one new contract and the expansion of nine contracts during either 2009 or 2008.
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Cessation of service under ten contracts during either 2009 or 2008 and the conversion of one contract to CBS operations in the second quarter of 2009, resulting in a decrease in net revenue of approximately $10,239,000.
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Annual price increases in the majority of contracts based on changes in the Consumer Price Index or spare parts prices from aircraft manufacturers and the renewal of contracts at higher rates.
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Decrease of 9.2% in flight volume for all contracts excluding new contracts, contract expansions, and closed contracts discussed above.
Flight center costs increased $805,000, or 0.4%, to $210,511,000 for the year ended December 31, 2009, compared to 2008. Changes by business segment were as follows:
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CBS - Flight center costs decreased $328,000, or 0.3%, to $128,977,000 for the following reasons:
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Increase of $10,272,000 for the addition of personnel and facilities to staff new base locations described above.
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Decrease of $10,081,000 due to the closure of base locations described above.
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Increases in salaries for merit pay raises and in the cost of our medical insurance.
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HBS - Flight center costs increased $1,132,000, or 1.4%, to $81,534,000 primarily due to the following:
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Increase of approximately $2,606,000 for the addition of personnel to staff new base locations and contract described above.
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Decrease of approximately $3,993,000 due to the base closures described above.
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Increases in salaries for merit pay raises and in the cost of our medical insurance.
Aircraft operating expenses decreased $17,988,000, or 15.3%, for the year ended December 31, 2009, in comparison to 2008. The decrease in costs is due to the following:
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Decrease of $13,404,000, or 15.3%, in aircraft maintenance expense to $73,980,000, primarily attributable to our fleet rejuvenation efforts and to our increasing use of single-engine, rather than twin-engine, aircraft. Since the first quarter of 2008, we have placed 58 new helicopters into service (consisting of 34 single-engine aircraft, 23 twins, and 1 fixed wing aircraft) and eliminated 47 aircraft which were older models (consisting of 11 single-engine aircraft, 32 twins, and 4 fixed wing aircraft). In 2009, as part of our fleet planning, we also utilized components from certain retired aircraft instead of purchasing replacement parts from outside vendors.
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Decrease of approximately 33.7% in the cost of aircraft fuel per hour flown. Fuel costs decreased by $6,830,000 to a total expense of $11,782,000 for 2009, compared to 2008.
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Decreases in flight volume for bases open longer than one year for both CBS and HBS as described above.
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Increases in hull insurance rates effective July 2009 and 2008.
Aircraft rental expense increased $2,517,000, or 5.3%, for the year ended December 31, 2009, in comparison to 2008, due primarily to incremental rental expense of $6,354,000 for 35 leased aircraft added to our fleet during either 2008 or 2009. The increase for new aircraft was offset in part by selling or refinancing 27 aircraft at lower lease rates or through debt financing.
Medical Interiors and Products
Sales of medical interiors and products increased $10,684,000, or 78.5%, from $13,618,000 for the year ended December 31, 2008, to $24,302,000 for the year ended December 31, 2009. Significant projects in process during 2009 included 48 HH-60L units, 81 MEV litter systems, and eight medical interior kits for commercial customers. Revenue by product line for the year ended December 31, 2009, was as follows:
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$16,919,000 - governmental entities
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$7,383,000 - commercial customers
Significant projects in 2008 included nine modular medical interior kits for commercial customers, three of which were still in process as of December 31, 2008. As of December 31, 2008, two design contracts for the U.S. Army, 48 HH-60L units, and 366 MEV units were also in process. Revenue by product line for the year ended December 31, 2008, was as follows:
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$7,905,000 - governmental entities
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$5,713,000 - commercial customers
Cost of medical interiors and products increased $8,313,000, or 85.4%, for the year ended December 31, 2009, as compared to the previous year, due primarily to changes in sales volume and sales mix. The average net margin earned on projects during 2009 was 21.8% compared to 17.1% in 2008. Costs in 2008 included development and design work on avionics and other aircraft interior configurations for commercial customers, leading to higher engineering and documentation costs and lower profit margins.
General Expenses
Depreciation and amortization expense increased $2,779,000, or 16.3%, for the year ended December 31, 2009. In 2009 we added seventeen aircraft totaling approximately $37.6 million to our depreciable assets.
General and administrative (G&A) expenses decreased $2,517,000, or 3.7%, for the year ended December 31, 2009, compared to 2008. G&A expenses include executive management, accounting and finance, billing and collections, information services, human resources, aviation management, pilot training, dispatch and communications, and CBS and HBS program administration. The following events contributed to the change in G&A expenses:
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Completion of the consolidation of the Part 135 Air Carrier Certificate for CJ into the Air Methods certificate during the second quarter of 2008. Costs of $1,195,000 were incurred in 2008 related to the consolidation.
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Reorganization of field-based program management during the second quarter of 2009, resulting in the elimination of fifteen positions and the transfer of other personnel into other open positions within the Company.
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Closure of the CJ patient billing office and incorporation of these functions into our existing billing department, resulting in the elimination of sixteen full-time positions as well as additional contract positions. The transition was completed during the second quarter of 2008.
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Consolidation of corporate overhead functions.
Income tax expense was $18,151,000, or 38.5% of income before taxes, in 2009 and $11,209,000, or 36.8% of income before taxes, in 2008. In 2008 the effective rate used to determine state income taxes decreased primarily due to a change in Colorado statute defining the apportionment calculation. Income tax benefit of $1,479,000 was recognized for the year ended December 31, 2008, as a result of applying the new rate to deferred tax assets and liabilities. Excluding the effect of this change, the effective tax rate for 2008 was 41.6%. The decrease from 41.6% to 38.5% in the effective tax rate was primarily attributed to a decrease in certain permanent book-tax differences and to a change in the effective state income tax rate as a result of our withdrawal from certain states and revisions in state tax regulations.
Liquidity and Capital Resources
Cash Requirements
Debt and Other Long-term Obligations
The following table outlines our contractual obligations as of December 31, 2010 (amounts in thousands):
(1)
Interest payments include an estimate of variable-rate interest on notes with principal balances totaling $33,697,000 as of December 31, 2010, using the weighted average rates in effect during 2010. Because we have not carried a balance against our revolving credit facility since May 2009, no estimate of interest on the line of credit is included in the above table.
Balloon payments on long-term debt are due as follows:
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$579,000 in 2011
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$21,755,000 in 2012
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$4,710,000 in 2013
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$10,762,000 in 2014
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$2,755,000 in 2015
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$5,896,000 in 2016
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$392,000 in 2017
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$2,950,000 in 2018
Off-Balance Sheet Arrangements
Aircraft Purchase Commitments
As of December 31, 2009, we had one open purchase commitment totaling approximately $26.2 million for twelve aircraft, ten of which were delivered in 2010 with the remaining two scheduled to be delivered in 2011. In addition to these two aircraft, we also had open purchase commitments as of December 31, 2010, totaling approximately $85.0 million for 35 aircraft scheduled to be delivered in 2011 and 2012. 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. Typically we have financed aircraft acquired under similar commitments through operating lease or debt agreements. If financing arrangements cannot be arranged or we are prevented from taking or decline to take delivery of aircraft under the commitments described above for any other reason, we may forfeit nonrefundable deposits of approximately $4.7 million. The amount of deposit to be forfeited may be mitigated if the aircraft manufacturer is able to remarket the commitment positions. As of December 31, 2010, we have received financing commitments, subject to routine credit approval and aircraft inspection processes, to cover the cost of all aircraft scheduled to be delivered in 2011 and 2012.
Residual Value Guarantees
We have entered into various aircraft operating leases under which we provide residual value guarantees to the lessor. As of December 31, 2010, the undiscounted maximum amount of potential future payments under the guarantees is $5,281,000. Of this amount, $5,040,000 relates to aircraft operating leases which were assumed in the CJ acquisition. No amounts have been accrued for any estimated losses with respect to the guarantees, since it is not probable that the residual value of the aircraft will be less than the amounts stipulated in the guarantee. The assessment of whether it is probable that we will be required to make payments under the terms of the guarantee is based on current market data and our actual and expected loss experience.
Letters of Credit
In January 2005, we entered into a $1,400,000 letter of credit with an insurance underwriter in lieu of increasing cash deposits on our workers compensation insurance policy. In April 2008, we entered into a $100,000 letter of credit with a county government in California as performance security under an exclusive operating agreement. In February 2009, we entered into a $3,000,000 letter of credit with another air medical service provider as performance security under a service agreement. All letters of credit may be renewed annually and reduce the available borrowing capacity under our revolving credit facility.
Sources and Uses of Cash
We had cash and cash equivalents of $60,710,000 and working capital of $164,021,000 at December 31, 2010, compared to cash and cash equivalents of $38,073,000 and working capital of $133,366,000 at December 31, 2009. Cash generated by operations totaled $70,362,000 in 2010 compared to $70,155,000 in 2009. Despite an increase in accounts receivable as a result of increased revenue, cash generated by operations remained consistent due to improved collections for CBS operations. Days’ sales outstanding for CBS operations, measured by comparing net revenue for the annualized previous 3-month period to outstanding open net accounts receivable, decreased from 107 days at December 31, 2009, to 90 days at December 31, 2010.
Cash used for investing activities totaled $40,855,000 in 2010, compared to $36,141,000 in 2009. Equipment acquisitions in 2010 included the purchase of one aircraft and the buyout of 22 previously leased aircraft for a total of approximately $30.5 million, as well as medical interiors and avionics upgrades. We sold eight aircraft for $7.3 million during 2010. Significant equipment acquisitions in 2009 included the purchase of nineteen aircraft for approximately $41.0 million. During 2009 we sold nine aircraft for total proceeds of $6.4 million and received $1.5 million in insurance proceeds for an aircraft damaged in a ground incident.
Financing activities used $6,870,000 in 2010 compared to $9,088,000 in 2009. The primary use of cash in both 2010 and 2009 was regularly scheduled payments of long-term debt and capital lease obligations. In 2010 we used proceeds of $6.2 million from notes payable to finance the purchase of four aircraft. The notes are payable over five-year terms with current weighted average interest rates of 4.8%. In 2009 we used proceeds of $41.0 million from fifteen new long-term debt agreements to purchase ten helicopters and to pay off $18.8 million of short-term notes payable to an aircraft manufacturer for the delivery of five helicopters. We used proceeds from operations to fully pay off the balance against our revolving credit facility during the second quarter of 2009. We have not carried a balance against our line of credit during 2010.
Senior Credit Facility
Our senior credit facility consists of term loans with a balance of $30,365,000 as of December 31, 2010, and a revolving credit facility. As of December 31, 2010, we had no balance outstanding against the $50 million revolving credit facility and available capacity on the facility of $45,500,000. The capacity available on the revolving credit facility is reduced by three outstanding letters of credit totaling $4,500,000.
Borrowings under the credit facility are secured by substantially all of our accounts receivable, inventory, equipment and general intangibles. Indebtedness under the credit facility has a first priority claim to the assets pledged to secure it. The facility matures September 1, 2012, but can be prepaid at any time without penalty. Base Rate loans (as defined) bear interest at the greater of (i) prime or (ii) the federal funds rate plus 0.5%. The interest rate for LIBOR Rate loans (as defined) is generally the LIBOR rate plus 1.5% to 2.5%. As of December 31, 2010, the interest rate on the term loans was 2.56%.
Payment obligations under the credit facility accelerate upon the occurrence of defined events of default, including the following: failure to pay principal or interest or to perform covenants under the credit facility or other indebtedness with outstanding obligations exceeding $1 million; events of insolvency or bankruptcy; failure to timely discharge judgments of $500,000 or more; failure to maintain the first priority status of liens under the credit facility; suspension of material governmental permits; a material adverse effect with respect to the Company; and a change of control in the Company.
The credit facility contains various covenants that limit, among other things, our ability to create liens, declare dividends, make loans and investments, make any material change to the nature of our business, enter into any transaction with affiliates other than on arms' length terms, enter into a merger or consolidation, or sell assets. We are required to maintain certain financial ratios as defined in the credit facility and other notes. As of December 31, 2010, we were in compliance with the covenants of the credit facility.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, management evaluates our estimates and judgments, including those related to revenue recognition, deferred income taxes, and valuation of long-lived assets and goodwill. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Fixed flight fee revenue under our operating agreements with hospitals is recognized monthly over the terms of the agreements. Flight revenue relating to patient transports is recognized upon completion of the services and is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. We have from time to time experienced delays in reimbursement from third-party payers. In addition, third-party payers may disallow, in whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, determinations of medical necessity, or the need for additional information. Laws and regulations governing the Medicare and Medicaid programs are very complex and subject to interpretation. We also provide services to patients who have no insurance or other third-party payer coverage. There can be no guarantee that we will continue to experience the same collection rates that we have in the past. If actual future collections are more or less than those projected by management, adjustments to allowances for contractual discounts and uncompensated care may be required. Based on related flight revenue for the year ended December 31, 2010, a change of 100 basis points in the percentage of estimated contractual discounts and uncompensated care would have resulted in a change of approximately $8,105,000 in flight revenue.
Revenue related to fixed fee medical interior and products contracts is recorded as costs are incurred using the percentage of completion method of accounting. We estimate the percentage of completion based on costs incurred to date as a percentage of an estimate of the total costs to complete the project. Losses on contracts in process are recognized when determined. If total costs to complete a project are greater or less than estimated, the gross margin on the project may be greater or less than originally recorded under the percentage of completion method.
Deferred Income Taxes
In preparation of the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciable assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. We then assess the likelihood that deferred tax assets will be recoverable from future taxable income and record a valuation allowance for those amounts we believe are not likely to be realized. Establishing or increasing a valuation allowance in a period increases income tax expense. We consider estimated future taxable income, tax planning strategies, and the expected timing of reversals of existing temporary differences in assessing the need for a valuation allowance against deferred tax assets. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. The effect on deferred income tax assets and liabilities of a change in statutory tax rates applicable to the Company is also recognized in income in the period of the change.
Long-lived Assets Valuation
In accounting for long-lived assets, we make estimates about the expected useful lives, projected residual values and the potential for impairment. Estimates of useful lives and residual values of aircraft are based upon actual industry experience with the same or similar aircraft types and anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations and changes in our maintenance program or operations could result in changes to these estimates. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. Our cash flow estimates are based on historical results adjusted for estimated current industry trends, the economy, and operating conditions.
Goodwill Valuation
The Company’s goodwill relates to four acquisitions and has been allocated to our community-based and hospital-based services segments. Annually, at December 31, the Company evaluates goodwill for potential impairment using a two-step test at the reporting unit level. The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value. If the book value of a reporting unit exceeds its fair value, we perform the second step of the impairment test to determine the amount of goodwill impairment loss to be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is compared to the book value of the goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.
We determine the fair value of each reporting unit based upon the reporting unit’s historical operating profit and the Company’s current public trading value. Estimated future operating profit for each reporting unit is also taken into consideration when determining the reporting unit’s fair value. Considerable management judgment is necessary to evaluate the impact of economic changes and to estimate future operating profit for the reporting units. Assumptions used in our impairment evaluations, such as forecasted growth rates and patient receivable collection rates, are based on the best available market information and are consistent with our internal forecasts. Changes in these estimates or a continued decline in general economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period.
The estimated fair values of the reporting units have historically exceeded the carrying values of the reporting units. We performed a sensitivity analysis on the Company’s public trading value and on each reporting unit’s historical and estimated future operating profits. In estimating sensitivity, either the Company’s current public trading value or any reporting unit’s operating profit would have to decrease by more than 65% before the carrying value of the reporting unit exceeded its fair value.
New Accounting Standards
In August 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-24, Presentation of Insurance Claims and Related Insurance Recoveries, clarifying that health care entities should not net insurance recoveries against a related claim liability. The ASU is effective for periods beginning after December 15, 2010. The Company does not expect the implementation of ASU No. 2010-24 to have a material effect on its financial position or results of operations.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. All of our sales and related receivables are payable in U.S. dollars. We are subject to interest rate risk on our debt obligations and notes receivable, all of which have fixed interest rates except our line of credit (which has no balance outstanding at December 31, 2010) and $33,697,000 in notes payable. Based on the amounts outstanding at December 31, 2010, the annual impact of a change of 100 basis points in interest rates would be approximately $337,000. Interest rates on these instruments approximate current market rates as of December 31, 2010.
Our cost of operations is also affected by changes in the price and availability of aircraft fuel. Generally, our HBS customers pay for all fuel consumed in medical flights. Based on actual CBS fuel usage for the year ended December 31, 2010, the impact on operating costs of an increase of 10% in the cost of aircraft fuel per hour flown would be approximately $1,200,000 for the year, exclusive of the impact of fuel derivative agreements. Flight volume for CBS operations can vary due to weather conditions and other factors. Therefore, the impact of a change in fuel cost based on 2010 volume is not necessarily indicative of the impact on subsequent years or quarters. We have financial derivative agreements to protect against increases in the cost of Gulf Coast jet fuel above $2.68 per gallon for wholesale purchases from January 1, 2011, through December 31, 2011, covering approximately 90% of our anticipated fuel consumption for 2011.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements attached hereto.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officers (referred to in this report as the Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Management, under the supervision and with the participation of the Certifying Officers, evaluated the effectiveness of disclosure controls and procedures as of December 31, 2010, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of December 31, 2010, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no significant changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010, using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management concluded that we maintained effective internal control over financial reporting as of December 31, 2010.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
KPMG LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2010, and their report is included herein.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from the Company's Proxy Statement to be filed on or prior to April 30, 2011, for the Annual Meeting of Stockholders to be held in June 2011.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the Company's Proxy Statement to be filed on or prior to April 30, 2011, for the Annual Meeting of Stockholders to be held in June 2011.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the Company's Proxy Statement to be filed on or prior to April 30, 2011, for the Annual Meeting of Stockholders to be held in June 2011.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the Company's Proxy Statement to be filed on or prior to April 30, 2011, for the Annual Meeting of Stockholders to be held in June 2011.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the Company's Proxy Statement to be filed on or prior to April 30, 2011, for the Annual Meeting of Stockholders to be held in June 2011.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of the report:
1.
Financial Statements included in Item 8 of this report:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2010 and 2009
Consolidated Statements of Income for the years ended December 31, 2010, 2009, and 2008
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2010, 2009, and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules included in Item 8 of this report:
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2010, 2009, and 2008
All other supporting schedules have been omitted because the information required is included in the financial statements or notes thereto or have been omitted as not applicable or not required.
3.
Exhibits:
Exhibit
Number
Description of Exhibits
3.1
Certificate of Incorporation1
3.2
Amendments to Certificate of Incorporation2
3.3
Amendment to Certificate of Incorporation, effective June 18, 201013
3.4
By-Laws as Amended8
4.1
Specimen Stock Certificate2
10.1
1995 Air Methods Corporation Employee Stock Option Plan4
10.2
Amendment to 1995 Air Methods Corporation Employee Stock Option Plan5
10.3
Amended and Restated 2006 Equity Compensation Plan7
10.4
Amendment to Amended and Restated 2006 Equity Compensation Plan13
10.5
Form of Restricted Stock Grant Agreement10
10.6
Equity Compensation Plan for Nonemployee Directors, adopted March 12, 19933
10.7
Employment Agreement between the Company and Aaron D. Todd, dated July 1, 20036
IV-1
10.8
Employment Agreement between the Company and Company and Michael D. Allen, dated January 4, 20069
10.9
Employment Agreement between the Company and Trent J. Carman, dated April 28, 20036
10.10
Employment Agreement between the Company and Sharon J. Keck, dated January 1, 20036
10.11
Employment Agreement between the Company and Paul Tate, dated February 22, 200814
10.12
Employment Agreement between the Company and Edward Rupert, dated June 14, 201013
10.13
Employment Agreement between the Company and Howard Ragsdale, dated June 17, 201013
10.14
Revolving Credit, Term Loan and Security Agreement, dated as of September 17, 2007, among Air Methods Corporation, Rocky Mountain Holdings, L.L.C., Mercy Air Service, Inc. and LifeNet, Inc., KeyBank National Association, as Administrative Agent for the Lenders, Lead Arranger and Sole Book Runner, and the lending parties thereto11
10.15
Amendment No. 1 to Revolving Credit, Term Loan and Security Agreement dated as of October 1, 2007 among Air Methods Corporation, Rocky Mountain Holdings, L.L.C., Mercy Air Service, Inc., LifeNet, Inc., FSS Airholdings, Inc., and CJ Systems Aviation Group, Inc., as Borrowers, KeyBank National Association, as a Lender, lead arranger, sole book runner and administrative agent, LaSalle Bank National Association, as a Lender and syndication agent, National City Bank, as a Lender and documentation agent, and the other Lenders identified therein.12
10.16
Form of Guaranty Agreement between KeyBank, as Agent for the Lenders and each of (i) Special Jet Services, Inc., (ii) CJ Critical Care Transportation Systems of Kentucky, Inc., (iii) CJ Critical Care Transportation Systems of Florida, Inc., and (iv) CJ Critical Care Transportation Systems, Inc. 12
10.17
Air Methods Corporation Economic Value Added Plan, adopted February 5, 200915
Subsidiaries of Registrant
Consent of KPMG LLP
31.1
Chief Executive Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Chief Financial Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
IV-2
Filed as an exhibit to the Company’s Registration Statement on Form S-1 (Registration No. 33-15007), as declared effective on August 27, 1987, and incorporated herein by reference.
Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, and incorporated herein by reference.
Filed as an exhibit to the Company's Registration Statement on Form S-8 (Registration No. 33-65370), filed with the Commission on July 1, 1993, and incorporated herein by reference.
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by reference.
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, and incorporated herein by reference.
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, and incorporated herein by reference.
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, and incorporated herein by reference.
Filed as an exhibit to the Company’s Current Report on Form 8-K dated June 20, 2006, and incorporated herein by reference.
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, and incorporated herein by reference.
Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, and incorporated herein by reference.
Filed as an exhibit to the Company's Current Report on Form 8-K dated September 17, 2007, and incorporated herein by reference.
Filed as an exhibit to the Company's Current Report on Form 8-K dated October 1, 2007, and incorporated herein by reference.
Filed as an exhibit to the Company's Current Report on Form 8-K dated June 14, 2010, and incorporated herein by reference.
Filed as an exhibit to the Company's Current Report on Form 8-K dated February 21, 2008, and incorporated herein by reference.
Filed as an exhibit to the Company's Current Report on Form 8-K dated February 5, 2009, and incorporated herein by reference.
IV-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AIR METHODS CORPORATION
Date: March 11, 2011
By:
/s/ Aaron D. Todd
Aaron D. Todd
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
/s/ Aaron D. Todd
Chief Executive Officer and Director
March 11, 2011
Aaron D. Todd
/s/ Trent J. Carman
Chief Financial Officer
March 11, 2011
Trent J. Carman
Secretary and Treasurer
/s/ Sharon J. Keck
Chief Accounting Officer
March 11, 2011
Sharon J. Keck
/s/ George W. Belsey
Chairman of the Board
March 11, 2011
George W. Belsey
/s/ Ralph J. Bernstein
Director
March 11, 2011
Ralph J. Bernstein
/s/ Mark D. Carleton
Director
March 11, 2011
Mark D. Carleton
/s/ C. David Kikumoto
Director
March 11, 2011
C. David Kikumoto
/s/ Carl H. McNair, Jr.
Director
March 11, 2011
Carl H. McNair, Jr.
/s/ Lowell D. Miller, Ph.D.
Director
March 11, 2011
Lowell D. Miller, Ph.D.
/s/ David A. Roehr
Director
March 11, 2011
David A. Roehr
/s/ Morad Tahbaz
Director
March 11, 2011
Morad Tahbaz
IV-4
AIR METHODS CORPORATION
AND SUBSIDIARIES
All other supporting schedules are omitted because they are inapplicable, not required, or the information is presented in the consolidated financial statements or notes thereto.
IV-5
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Air Methods Corporation:
We have audited the accompanying consolidated balance sheets of Air Methods Corporation and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we also have audited financial statement Schedule II - Valuation and Qualifying Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Air Methods Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Air Methods Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Denver, Colorado
March 10, 2011
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Air Methods Corporation:
We have audited Air Methods Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Air Methods Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Air Methods Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Air Methods Corporation and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated March 10, 2011, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Denver, Colorado
March 10, 2011
AIR METHODS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2010 and 2009
(Amounts in thousands, except share and per share amounts)
(Continued)
AIR METHODS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(Amounts in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
AIR METHODS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2010, 2009, and 2008
(Amounts in thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
AIR METHODS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2010, 2009, and 2008
(Amounts in thousands, except share amounts)
See accompanying notes to consolidated financial statements.
AIR METHODS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009, and 2008
(Amounts in thousands)
(Continued)
AIR METHODS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(Amounts in thousands)
(Continued)
AIR METHODS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(Amounts in thousands, except share amounts)
Non-cash investing and financing activities:
In the year ended December 31, 2010, the Company settled notes payable of $4,510 in exchange for the aircraft securing the debt and entered into capital leases of $589 to finance the purchase of equipment. The Company also traded a used aircraft for a $2,000 deposit toward the purchase of fifteen new aircraft.
In the year ended December 31, 2009, the Company entered into capital leases of $450 to finance the purchase of equipment and into a note payable of $552 to finance insurance policies. In the year ended December 31, 2009, the Company settled notes payable of $5,061 in exchange for the aircraft securing the debt. The Company also entered into notes payable of $4,510 to finance the purchase of aircraft which were held for sale as of December 31, 2009.
In the year ended December 31, 2008, the Company entered into capital lease obligations of $2,668 to finance the purchase of equipment. In the year ended December 31, 2008, the Company settled notes payable of $24,203 in exchange for the aircraft securing the debt and entered into notes payable of $19,520 to finance the purchase of aircraft which were held for sale as of December 31, 2008. The Company also made adjustments to the preliminary purchase price allocation related to the acquisition of FSS Airholdings, Inc., which decreased goodwill by $16.
See accompanying notes to consolidated financial statements.
AIR METHODS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1)
Summary of Significant Accounting Policies
Basis of Financial Statement Presentation and Business
Air Methods Corporation, a Delaware corporation, and its subsidiaries (Air Methods or the Company) serves as the largest provider of air medical emergency transport services and systems throughout the United States of America. The Company also designs, manufactures, and installs medical aircraft interiors and other aerospace and medical transport products for domestic and international customers. Rocky Mountain Holdings, LLC (RMH), Mercy Air Service, Inc. (Mercy Air), LifeNet, Inc. (LifeNet), and FSS Airholdings, LLC (FSS) operate as wholly-owned subsidiaries of Air Methods. All significant intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company considers its critical accounting policies involving more significant judgments and estimates to be those related to revenue recognition, deferred income taxes, and valuation of long-lived assets and goodwill. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Cash equivalents of $27,828,000 and $10,916,000 at December 31, 2010 and 2009, respectively, consist of short-term money market funds.
Trade Receivables, net
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 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. Billings in excess of actual payment are charged off against the contractual allowance when payment is received. The allowance for uncompensated care is related primarily to receivables recorded for self-pay patients. The allowances for contractual discounts and uncompensated care are as follows at December 31 (amounts in thousands):
AIR METHODS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, continued
Inventories
Inventories are comprised primarily of expendable aircraft parts and manufactured parts for medical aircraft interiors and are recorded at the lower of cost (average cost) or market.
Property and Equipment
Hangars, equipment, and leasehold improvements are recorded at cost. All maintenance and repairs, including scheduled aircraft component overhauls and replacements, are expensed when incurred. Major modifications and costs incurred to place aircraft in service are capitalized. Improvements to helicopters and airplanes leased under operating leases are included in flight and ground support equipment in the accompanying financial statements. Leasehold improvements to hangar and office space are included in buildings and office equipment in the accompanying financial statements. Depreciation is computed using the straight-line method over the shorter of the useful lives of the equipment or the lease term, as follows:
Intangible Assets - Supplemental Type Certificates
The Company capitalizes incremental direct costs related to the application for multiple Supplemental Type Certificates (STC’s). STC’s are issued by the Federal Aviation Administration (FAA) and represent the FAA’s approval and certification of the airworthiness of an aircraft modification, such as a medical interior. A multiple STC allows the modification to be made to more than one aircraft without additional certification. STC costs are amortized using the straight-line method over the estimated useful economic life of the STC, typically five years.
Goodwill
The Company accounts for goodwill under FASB ASC 350, Intangibles - Goodwill and Other. Under ASC 350, goodwill and certain identifiable intangible assets are not amortized, but instead are reviewed for impairment at least annually in accordance with the provisions of the statement. In 2008, the Company recorded net adjustments of $16,000 to decrease goodwill related to the acquisition of FSS and did not recognize any losses related to impairment of existing goodwill in 2010, 2009, and 2008.
AIR METHODS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, continued
Derivative Instruments
The Company accounts for derivative financial instruments under FASB ASC 815, Derivatives and Hedging. ASC 815 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability. The Company is also required to describe the reason and method for using derivative instruments in its operations. Changes in fair value of derivative instruments not designated as hedging instruments are recognized in earnings in the current period. As of December 31, 2010, the Company’s derivative instruments were not designated as hedging instruments. Changes in the fair value of the fuel derivative instruments are reflected in fuel expense, included in aircraft operations expense, in the statement of income.
Long-lived Assets
The Company periodically reviews long-lived assets, including amortizable intangible assets, 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. No impairment related to long-lived assets has been recognized in the accompanying consolidated financial statements.
Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated selling costs. As of December 31, 2010, assets held for sale consisted of three aircraft, which the Company intends to sell within one year. Periodically the Company identifies aircraft to be sold or used for spare parts as part of its long-term plan to phase out certain older models of aircraft and replace them with newer models.
Revenue Recognition
Fixed fee revenue under the Company's operating agreements with hospitals is recognized monthly over the terms of the agreements.
Revenue relating to emergency flights is recognized upon completion of the services and is recorded net of provisions for contractual discounts and estimated uncompensated care. Provisions for contractual discounts and estimated uncompensated care as a percentage of related gross billings are as follows:
The Company has from time to time experienced delays in reimbursement from third-party payers. In addition, third-party payers may disallow, in whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, determinations of medical necessity, or the need for additional information. Laws and regulations governing the Medicare and Medicaid programs are very complex and subject to interpretation. The Company also provides services to patients who have no insurance or other third-party payer coverage. As a result, there is a reasonable possibility that recorded estimates will change materially in the short-term. Retroactive adjustments may change the amounts realized from third-party payers.
AIR METHODS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, continued
Revenue Recognition, continued
The Company has medical interior and products contracts to manufacture and install medical equipment and modify aircraft for third parties. When the total cost to complete a project can be reasonably estimated, revenue is recorded as costs are incurred using the percentage of completion method of accounting. Losses on contracts in process are recognized when determined.
Stock-based Compensation
The Company accounts for its stock-based compensation under FASB ASC 718, Compensation - Stock Compensation. ASC 718 requires recognition over the vesting period in the income statement of the grant-date fair value of stock options and other equity-based compensation issued to employees.
Income Taxes
Deferred tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company evaluates its tax positions in accordance with FASB ASC 740-10-25, Accounting for Uncertainty in Income Taxes. ASC 740-10-25 prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return.
Income Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by all outstanding and potentially dilutive common shares during the period.
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Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, continued
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable, and accrued liabilities:
The carrying amounts approximate fair value because of the short maturity of these instruments.
Long-term debt:
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 December 31, 2010, is estimated to be $99,747,000, compared to carrying value of $95,223,000. The fair value of long-term debt as of December 31, 2009, was estimated to be $103,527,000, compared to a carrying value of $104,503,000.
New Accounting Standards
In August 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-24, Presentation of Insurance Claims and Related Insurance Recoveries, clarifying that health care entities should not net insurance recoveries against a related claim liability. The ASU is effective for periods beginning after December 15, 2010. The Company does not expect the implementation of ASU No. 2010-24 to have a material effect on its financial position or results of operations.
Reclassifications
Certain prior period amounts have been reclassified to conform with the 2010 presentation.
(2)
Costs in Excess of Billings and Billings in Excess of Costs
As of December 31, 2010, the estimated period to complete contracts in process ranges from one to twelve months, and the Company expects to collect all related accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts within one year. The following summarizes contracts in process at December 31 (amounts in thousands):
AIR METHODS CORPORATION
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Notes to Consolidated Financial Statements, Continued
(3)
Derivative Instruments
The Company’s cost of operations is affected by changes in the price and availability of aircraft fuel, which has historically fluctuated widely in price. Fuel costs represented approximately 2.7%, 2.5%, and 4.0% of the Company’s operating expenses for the years ended December 31, 2010, 2009, and 2008, respectively. 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. With the use of purchased call options, the Company cannot be in a liability position at settlement. For 2010 the Company had fuel derivatives in place related to approximately 97% of its fuel consumption. Fuel derivatives in place as of December 31, 2010, cover approximately 90% of the Company’s anticipated fuel consumption for 2011.
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 statement of income. Premiums paid under all agreements are included in prepaid expenses and other current assets on the Company’s balance sheet, and all cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the Company’s statement of cash flows. The Company does not purchase or hold any derivative financial instruments for trading purposes.
In 2010 and 2009, the Company entered into financial derivative agreements to protect against increases in the cost of Gulf Coast jet fuel above $2.35 per gallon for wholesale purchases from January 1, 2010, through June 30, 2010; above $2.71 per gallon from July 1, 2010, through December 31, 2010; and above $2.68 per gallon from January 1, 2011, through December 31, 2011.
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 fair value of all fuel derivative contracts included in prepaid expenses and other current assets was $586,000 and $348,000 at December 31, 2010 and 2009, respectively, and are classified as Level 2 in the fair value hierarchy. Aircraft operations expense for the years ended December 31, 2010, 2009, and 2008, included non-cash mark to market derivative losses of $181,000, $455,000, and $128,000, respectively. There were no cash settlements under the terms of the agreements in 2010, 2009, or 2008.
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Notes to Consolidated Financial Statements, Continued
(4)
Long-term Debt
Long-term debt consists of the following at December 31 (amounts in thousands):
AIR METHODS CORPORATION
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Notes to Consolidated Financial Statements, Continued
(4)
Long-term Debt, continued
The Company’s senior credit facility consists of term loans with a balance of $30,365,000 as of December 31, 2010, and a revolving credit facility. As of December 31, 2010, the Company had no balance outstanding against the $50 million revolving credit facility and available capacity on the facility of $45,500,000. The capacity available on the revolving credit facility is reduced by three outstanding letters of credit totaling $4,500,000.
Borrowings under the credit facility are secured by substantially all of the Company’s accounts receivable, inventory, equipment and general intangibles. Indebtedness under the credit facility has a first priority claim to the assets pledged to secure it. The facility matures September 1, 2012, but can be prepaid at any time without penalty. Base Rate loans (as defined) bear interest at the greater of (i) prime or (ii) the federal funds rate plus 0.5%. The interest rate for LIBOR Rate loans (as defined) is generally the LIBOR rate plus 1.5% to 2.5%. As of December 31, 2010, the interest rate on the term loans was 2.56%.
Payment obligations under the credit facility accelerate upon the occurrence of defined events of default, including the following: failure to pay principal or interest or to perform covenants under the credit facility or other indebtedness with outstanding obligations exceeding $1 million; events of insolvency or bankruptcy; failure to timely discharge judgments of $500,000 or more; failure to maintain the first priority status of liens under the credit facility; suspension of material governmental permits; a material adverse effect with respect to the Company; and a change of control in the Company.
The credit facility contains various covenants that limit, among other things, the Company’s ability to create liens, declare dividends, make loans and investments, make any material change to the nature of its business, enter into any transaction with affiliates other than on arms' length terms, enter into a merger or consolidation, or sell assets. The Company is required to maintain certain financial ratios as defined in the credit facility and other notes. As of December 31, 2010, the Company was in compliance with the covenants of the credit facility.
Aggregate maturities of long-term debt are as follows (amounts in thousands):
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Notes to Consolidated Financial Statements, Continued
(5)
Leases
The Company leases hangar and office space under noncancelable operating leases and leases certain equipment and aircraft under noncancelable operating and capital leases. The majority of aircraft leases contain purchase options, either at the end of the lease term or at a stipulated early buyout date. As of December 31, 2010, future minimum lease payments under capital and operating leases are as follows (amounts in thousands):
Rent expense relating to operating leases totaled $56,933,000, $58,482,000, and $56,441,000, for the years ended December 31, 2010, 2009, and 2008, respectively.
The Company receives certain allowances for the completion of medical interiors within its leased aircraft. Gains associated with these completion allowances are deferred and amortized over the term of the lease and are included in other liabilities in the consolidated balance sheets. As of December 31, 2010 and 2009, unamortized completion allowances included in other liabilities totaled $19,990,000 and $14,742,000, respectively.
At December 31, 2010 and 2009, leased property held under capital leases included in equipment, net of accumulated depreciation, totaled approximately $2,376,000 and $2,829,000, respectively. Amortization of leased property held under capital leases is included in depreciation expense.
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Notes to Consolidated Financial Statements, Continued
(6)
Income per Share
The reconciliation of basic to diluted weighted average common shares outstanding is as follows for the years ended December 31:
Common stock options totaling 124,333, 185,234, and 38,500 were not included in the diluted income per share calculation for the years ended December 31, 2010, 2009, and 2008, respectively, because their effect would have been anti-dilutive.
(7)
Stock-based Compensation
In August 2006, the Company’s shareholders approved the 2006 Equity Compensation Plan (2006 Plan) which provides for the granting of incentive stock options, non-statutory stock options (NSO’s), shares of restricted stock, stock appreciation rights and supplemental bonuses consisting of shares of common stock, cash or a combination thereof to employees, directors, and consultants. In August 2010, the Company’s shareholders approved an amendment to the 2006 Plan, increasing the number of shares of common stock available under the plan from 600,000 to 1,000,000. The 2006 Plan is administered by a committee of the Company’s board of directors which has discretion to set the exercise price and term of any option granted, provided that the term may not exceed ten years. Shares of restricted stock granted under the 2006 Plan in 2008 were valued at the closing market price of the Company’s common stock on the date of grant, vested over a weighted average life of 2.0 years, and were subject to a restriction on the transfer of the shares for one year following the vesting date.
The Company also has a 1995 Stock Option Plan (1995 Plan) which provides for the granting of incentive stock options and nonqualified stock options, stock appreciation rights, and supplemental stock bonuses. Under the 1995 Plan, 3,500,000 shares of common stock are reserved for options. Generally, the options granted under both plans have an exercise price equal to the market value on the date of grant, vest in three equal installments beginning one year from the date of grant, and expire five years from the date of grant.
In February 1993, the Board of Directors adopted the Air Methods Corporation Equity Compensation Plan for Nonemployee Directors which was subsequently approved by the Company's stockholders on March 12, 1993. Under this compensation plan, 150,000 shares of common stock are reserved for issuance to non-employee directors. As of December 31, 2010, no shares have been issued under this plan.
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Notes to Consolidated Financial Statements, Continued
(7)
Stock-based Compensation, continued
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company uses historical option exercise data for similar employee groups, as well as the vesting period and contractual term, to estimate the expected term of options granted; the expected term represents the period of time that options granted are expected to be outstanding. Expected volatility is based on historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. During the year ended December 31, 2010, options to purchase 92,000 shares of stock, with exercise prices ranging from $27.64 to $41.03, were granted at a weighted average fair value of $11.01. The weighted average fair value of options granted during the years ended December 31, 2009 and 2008, was $8.53 and $15.02, respectively. The following weighted average assumptions were used in valuing the grants for the years ended December 31:
The following is a summary of option activity under all stock option plans during the year ended December 31, 2010:
The aggregate intrinsic value of options exercised during the years ended December 31, 2010, 2009, and 2008, was $2,631,000, $6,842,000, and $2,299,000, respectively.
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Notes to Consolidated Financial Statements, Continued
(7)
Stock-based Compensation, continued
The following is a summary of restricted stock activity during the year ended December 31, 2010:
The total fair value of shares vested during 2010, 2009, and 2008 was $293,000, $235,000 and $625,000, respectively.
During the years ended December 31, 2010, 2009, and 2008, the Company recognized $1,512,000, $1,177,000, and $2,206,000 in stock-based compensation expense. No income tax benefit was recognized related to stock compensation expense recorded for Incentive Stock Options. Total unrecognized compensation cost related to unvested stock-based awards as of December 31, 2010, was $991,000 and is expected to be recognized over the remaining weighted average vesting term of approximately one year.
(8)
Related Party Transactions
During the year ended December 31, 2010, the Company paid one of its directors $105,000 to provide consulting services. In addition, the director was issued 5,000 stock options with an exercise price of $41.03 per share and a grant-date fair value totaling $65,000. The options vested immediately and are exercisable over a three-year term.
(9)
Revenue
The Company has operating agreements with various hospitals and hospital systems to provide services and aircraft for initial terms ranging from one to ten years. The agreements provide for revenue from monthly fixed fees and flight fees based upon the utilization of aircraft in providing emergency medical services. The fixed-fee portions of the agreements effective as of December 31, 2010, provide for the following revenue for years ending December 31 (amounts in thousands):
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Notes to Consolidated Financial Statements, Continued
(10)
Income Taxes
Income tax expense consists of the following for the years ended December 31 (amounts in thousands):
The Company’s effective tax rate is affected by the apportionment of revenue and income before taxes to the various jurisdictions in which it operates and by changing tax laws and regulations in those jurisdictions. In 2008 the effective rate used to determine state income taxes decreased primarily due to a change in Colorado statute defining the apportionment calculation. Income tax benefit of $1,479,000 was recognized for the year ended December 31, 2008, as a result of applying the new rate to deferred tax assets and liabilities.
Reconciliation of income taxes on income before income taxes computed at the federal statutory rate of 35% for the years ended December 31 to income taxes as recorded is as follows (amounts in thousands):
For state income tax purposes, at December 31, 2010, the Company has net operating loss carryforwards of approximately $10 million, expiring at various dates through 2028. In addition, as of December 31, 2010, the Company has approximately $1.5 million of net operating loss carryforwards for state income tax purposes relating to pre-acquisition periods for FSS. Utilization of the FSS net operating loss carryforwards, which expire at various dates through 2026, is subject to an annual limitation under the provisions of Section 382 of the Internal Revenue Code.
For the years ended December 31, 2010, 2009, and 2008, the Company recognized excess tax benefits related to stock option plans in the amount of $561,000, $2,029,000, and $506,000, respectively. Such benefits were recorded as a reduction of income taxes payable and an increase in additional paid-in capital.
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Notes to Consolidated Financial Statements, Continued
(10)
Income Taxes, continued
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31 are as follows (amounts in thousands):
Based on management’s assessment of future taxable earnings and tax-planning strategies, realization of net deferred tax assets through future taxable earnings is considered more likely than not.
At December 31, 2010, the Company had no gross unrecognized tax benefits. It is the Company’s practice to recognize interest and penalties related to income tax matters in income tax expense. At December 31, 2010, the Company had no balance accrued for interest and penalties related to income tax. The Company does not believe that it is reasonably possible that its estimates of unrecognized tax benefits will change significantly in the next twelve months.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions and are open to federal and state tax audits until the applicable statutes of limitations expire. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2007. The Company is currently not under examination by any federal or state taxing authority.
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Notes to Consolidated Financial Statements, Continued
(11)
Employee Benefit Plans
The Company has a defined contribution retirement plan whereby eligible employees may contribute 1% to 60% of their gross pay up to the IRS maximum ($16,500 for 2010). Employees age 50 or older may make additional contributions up to the IRS maximum ($22,000 for 2010). Under the plan, the Company’s current discretionary match is equal to 70% of eligible contributions made by each participant during the year, up to the first 8% of the participant’s current gross pay. On February 29, 2008, the defined contribution plan obtained with the acquisition of FSS was terminated, and the assets of the plan were merged into the Company’s defined contribution retirement plan. Company contributions to all plans totaled approximately $6,575,000, $6,474,000, and $6,740,000, for the years ended December 31, 2010, 2009, and 2008, respectively.
(12)
Commitments, Contingencies, and Concentrations
As of December 31, 2009, the Company had one open purchase commitment totaling approximately $26.2 million for twelve aircraft, ten of which were delivered in 2010 with the remaining two scheduled to be delivered in 2011. In addition to these two aircraft, the Company also had open purchase commitments as of December 31, 2010, totaling approximately $85.0 million for 35 aircraft scheduled to be delivered in 2011 and 2012. The Company intends to use the new aircraft for base expansion opportunities as well as to replace older models of aircraft in the fleet. The Company plans to either sell the aircraft which are replaced, use them for spare parts, or redeploy them into the backup fleet. Typically the Company has financed aircraft acquired under similar commitments through operating lease or debt agreements. If financing arrangements cannot be arranged or the Company is prevented from taking or declines to take delivery of aircraft under the commitments described above for any other reason, the Company may forfeit nonrefundable deposits of approximately $4.7 million. The amount of deposit to be forfeited may be mitigated if the aircraft manufacturer is able to remarket the commitment positions. As of December 31, 2010, the Company has received financing commitments, subject to routine credit approval and aircraft inspection processes, to cover the cost of all aircraft scheduled to be delivered in 2011 and 2012.
In January 2005, the Company entered into a $1,400,000 letter of credit with an insurance underwriter in lieu of increasing cash deposits on its workers compensation insurance policy. In April 2008, the Company entered into a $100,000 letter of credit with a county government in California as performance security under an exclusive operating agreement. In February 2009, the Company entered into a $3,000,000 letter of credit with another air medical service provider as performance security under a service agreement. All letters of credit may be renewed annually and reduce the available borrowing capacity under the Company’s revolving credit facility.
The Company has entered into various aircraft operating leases under which it provides residual value guarantees to the lessor. As of December 31, 2010, the undiscounted maximum amount of potential future payments under the guarantees is $5,281,000. Of this amount, $5,040,000 relates to aircraft operating leases which were assumed in the FSS acquisition. No amounts have been accrued for any estimated losses with respect to the guarantees, since it is not probable that the residual value of the aircraft will be less than the amounts stipulated in the guarantee. The assessment of whether it is probable that the Company will be required to make payments under the terms of the guarantee is based on current market data and the Company’s actual and expected loss experience.
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
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Notes to Consolidated Financial Statements, Continued
(12)
Commitments, Contingencies, and Concentrations, continued
As of December 31, 2010, American Eurocopter Corporation (AEC) aircraft comprise 83% of the Company’s helicopter fleet while aircraft made by Bell Helicopter, Inc. (Bell) constitute 15%. The Company obtains a substantial portion of its helicopter spare parts and components from AEC and Bell and maintains supply arrangements with other parties for engine and related dynamic components.
The Company’s pilots, comprising 32% of the total workforce, are represented by a collective bargaining unit. The collective bargaining agreement covering our pilots expired on April 30, 2009. Negotiations on a new CBA commenced in the fourth quarter of 2008 and were referred for mediation during the second quarter of 2009. Under the Railway Labor Act, mediation decisions are non-binding on either party, and the duration of the process may vary depending upon the mediator assigned and the complexity of the issues negotiated. No meetings were held by the mediator during the first and second quarters of 2010, but resumed during the third quarter of 2010. Although negotiations are active, no agreement has yet been reached.
Payer mix for the Company’s Community-Based Services operations, based on number of transports, was as follows for the years ended December 31, 2010 and 2009:
(13)
Business Segment Information
The Company identifies operating segments based on management responsibility and the type of services or products offered. Operating segments and their principal services or products are as follows:
·
Community-Based Services (CBS) - provides air medical transportation services to the general population as an independent service in 24 states. Services include aircraft operation and maintenance, medical care, dispatch and communications, and medical billing and collection.
·
Hospital-Based Services (HBS) - provides air medical transportation services to hospitals in 30 states under exclusive operating agreements. Services include aircraft operation and maintenance.
·
Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers.
The accounting policies of the operating segments are as described in Note 1. The Company evaluates the performance of its segments based on pretax income. Intersegment sales are reflected at cost-related prices.
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 and results of insignificant operations. The Company does not allocate assets between operating segments for internal reporting and performance evaluation purposes.
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Notes to Consolidated Financial Statements, Continued
(13)
Business Segment Information, continued
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Notes to Consolidated Financial Statements, Continued
(14)
Unaudited Quarterly Financial Data
Summarized unaudited quarterly financial data for 2010 and 2009 is as follows (amounts in thousands except per share data):
Income per common share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly income per share does not necessarily equal the total computed for the year.
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Schedule II - Valuation and Qualifying Accounts
(Amounts in thousands)
Notes:
(a)
Amounts excluded from revenue.
(b)
Actual write-offs and charges to allowances.
See accompanying Report of Independent Registered Public Accounting Firm.