AIR METHODS CORP - FORM 10-Q

Attached files

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EX-31.1 - EXHIBIT 31.1 - AIR METHODS CORP	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - AIR METHODS CORP	ex31-2.htm
EX-32 - EXHIBIT 32 - AIR METHODS CORP	ex32.htm
EXCEL - IDEA: XBRL DOCUMENT - AIR METHODS CORP	Financial_Report.xls

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended	June 30, 2014

OR


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from		to


Commission file number 0-16079

	AIR METHODS CORPORATION
(Exact name of Registrant as Specified in Its Charter)


	Delaware		84-0915893
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)


	7301 South Peoria, Englewood, Colorado		80112
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code (303) 792-7400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated Filer x	Accelerated Filer o
Non-accelerated Filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x

The number of shares of Common Stock outstanding as of August 1, 2014, was 39,151,441.

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets – June 30, 2014 and December 31, 2013	1

		Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013	3

		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013	4

		Notes to Unaudited Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19

	Item 4.	Controls and Procedures	19

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	20

	Item 1A.	Risk Factors	20

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

	Item 3.	Defaults upon Senior Securities	20

	Item 4.	Mine Safety Disclosures	20

	Item 5.	Other Information	20

	Item 6.	Exhibits	20

SIGNATURES			21

PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

(unaudited)

	June 30,			December 31,
	2014			2013
Assets

Current assets:
Cash and cash equivalents	$	2,917			9,862
Receivables:
Trade, net (note 4)		279,525			237,856
Refundable income taxes		--			11,863
Other		4,458			953
Total receivables		283,983			250,672

Inventories		46,395			47,804
Work-in-process on medical interiors and products contracts		4,560			5,313
Assets held for sale		7,665			5,103
Costs and estimated earnings in excess of billings on uncompleted contracts		1,513			2,888
Refundable deposits		8,134			8,459
Prepaid expenses and other (note 6)		11,097			10,449

Total current assets		366,264			340,550

Property and equipment:
Land		251			251
Flight and ground support equipment		646,979			584,059
Aircraft under capital leases		212,461			246,752
Aircraft rotable spare parts		42,829			41,391
Buildings and office equipment		55,702			51,601
		958,222			924,054
Less accumulated depreciation and amortization		(258,269	)		(259,212	)

Net property and equipment		699,953			664,842

Goodwill (note 2)		128,737			128,121
Intangible assets, net of accumulated amortization of $16,185 and $13,397 at June 30, 2014 and December 31, 2013, respectively		86,663			88,215
Other assets		29,485			30,813

Total assets	$	1,311,102			1,252,541

(Continued)

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS, Continued

(Amounts in thousands, except share and per share amounts)

(unaudited)

	June 30,			December 31,
	2014			2013
Liabilities and Stockholders’ Equity

Current liabilities:
Notes payable	$	5,738			2,616
Current installments of long-term debt		44,174			39,415
Current installments of obligations under capital leases		25,537			29,116
Accounts payable		19,380			20,431
Deferred revenue		3,221			3,463
Billings in excess of costs and estimated earnings on uncompleted contracts		1,076			2,232
Accrued wages and compensated absences		27,794			24,346
Due to third party payers		6,561			7,789
Deferred income taxes		16,820			13,748
Other accrued liabilities		26,102			19,162

Total current liabilities		176,403			162,318

Long-term debt, less current installments		488,905			477,038
Obligations under capital leases, less current installments		113,682			131,249
Deferred income taxes		92,312			86,131
Other liabilities		20,602			19,733

Total liabilities		891,904			876,469

Redeemable non-controlling interests		8,496			8,113

Stockholders’ equity (note 3):
Preferred stock, $1 par value. Authorized 15,000,000 shares, none issued		--			--
Common stock, $.06 par value. Authorized 70,500,000 shares; issued 39,374,249 and 39,301,407 shares at June 30, 2014 and December 31, 2013, respectively; outstanding 39,151,441 and 39,064,437 shares at June 30, 2014 and December 31, 2013, respectively		2,345			2,343
Additional paid-in capital		115,890			112,890
Retained earnings		292,793			253,098
Accumulated other comprehensive loss		(326	)		(372	)

Total stockholders’ equity		410,702			367,959

Total liabilities and stockholders’ equity	$	1,311,102			1,252,541

See accompanying notes to unaudited condensed consolidated financial statements.

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenue:
Patient transport revenue, net of provision for contractual discounts (note 4)	$	298,046			258,898			548,642			452,722
Provision for uncompensated care (note 4)		(126,673	)		(109,955	)		(233,340	)		(195,947	)
Patient transport revenue, net		171,373			148,943			315,302			256,775
Air medical services contract revenue		45,790			54,535			90,551			108,993
Tourism and charter revenue		31,430			15,992			55,768			26,383
Medical interiors and products revenue		7,404			4,976			15,224			9,410
Dispatch and billing service revenue		2,474			1,759			4,762			3,873
		258,471			226,205			481,607			405,434
Operating expenses:
Flight centers		87,365			84,291			175,771			169,443
Aircraft operations		32,715			40,490			65,739			77,953
Tourism operating expenses		19,476			12,160			35,476			20,001
Cost of medical interiors and products sold		6,538			4,411			13,217			8,956
Cost of dispatch and billing services		2,395			1,700			4,924			3,000
Depreciation and amortization		20,273			19,887			40,789			40,009
Loss (gain) on disposition of assets, net		806			(233	)		1,213			208
General and administrative		36,131			27,067			67,789			54,290
		205,699			189,773			404,918			373,860

Operating income		52,772			36,432			76,689			31,574

Other income (expense):
Interest expense		(5,569	)		(5,177	)		(11,098	)		(9,979	)
Other, net		292			328			266			615

Income before income taxes		47,495			31,583			65,857			22,210
Income tax expense		(18,571	)		(12,434	)		(25,881	)		(8,750	)
Net income		28,924			19,149			39,976			13,460

Less net income attributable to redeemable non-controlling interests		134			--			297			--
Net income attributable to Air Methods Corporation and subsidiaries	$	28,790			19,149			39,679			13,460

Other comprehensive income, net of income taxes:
Foreign currency translation adjustments		111			--			46			--
Comprehensive income	$	28,901			19,149			39,725			13,460

Basic income per common share (note 5)	$	.73			.49			1.01			.35

Diluted income per common share (note 5)	$	.73			.49			1.01			.34

Weighted average number of common shares outstanding – basic		39,151,012			38,882,681			39,135,292			38,857,034

Weighted average number of common shares outstanding – diluted		39,318,480			39,136,155			39,314,872			39,140,492

See accompanying notes to unaudited condensed consolidated financial statements.

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

	Six Months Ended June 30,
	2014			2013

Cash flows from operating activities:
Net income	$	39,976			13,460
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		40,789			40,009
Deferred income tax expense		9,253			6,775
Stock-based compensation		1,513			2,053
Tax benefit from exercise of stock options		(1,010	)		(527	)
Loss on disposition of assets, net		1,213			208
Unrealized loss on derivative instrument		64			140
Loss from equity method investee		603			--
Changes in assets and liabilities, net of effects of acquisitions:
Increase in prepaid expenses and other current assets		(387	)		(9,826	)
Decrease (increase) in receivables		(32,687	)		8,335
Decrease (increase) in inventories		2,162			(4,132	)
Decrease (increase) in costs in excess of billings		1,375			(708	)
Increase (decrease) in accounts payable, other accrued liabilities, and other liabilities		11,929			(2,748	)
Decrease in deferred revenue and billings in excess of costs		(1,398	)		(2,298	)
Net cash provided by operating activities		73,395			50,741

Cash flows from investing activities:
Acquisition of subsidiaries (note 2)		(3,182	)		--
Acquisition of property and equipment		(65,909	)		(17,310	)
Buy-out of previously leased aircraft		(17,296	)		(36,568	)
Proceeds from disposition and sale of equipment and assets held for sale		9,156			10,964
Decrease (increase) in other assets		447			(2,303	)
Net cash used in investing activities		(76,784	)		(45,217	)

(Continued)

Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(Amounts in thousands)

(unaudited)

	Six Months Ended June 30,
	2014			2013

Cash flows from financing activities:
Proceeds from issuance of common stock, net	$	479			576
Tax benefit from exercise of stock options		1,010			527
Borrowings under line of credit		23,000			44,370
Payments under line of credit		(22,000	)		(73,527	)
Payments for financing costs		(75	)		(168	)
Proceeds from long-term debt		34,429			90,400
Payments of long-term debt and notes payable		(18,803	)		(11,770	)
Payments of capital lease obligations		(21,694	)		(54,003	)
Proceeds from non-controlling interests		98			--
Net cash used in financing activities		(3,556	)		(3,595	)

Increase (decrease) in cash and cash equivalents		(6,945	)		1,929

Cash and cash equivalents at beginning of period		9,862			3,818

Cash and cash equivalents at end of period	$	2,917			5,747

Interest paid in cash during the period	$	10,695			9,509
Income taxes paid in cash during the period	$	268			2,239

Non-cash investing and financing activities:

In the six months ended June 30, 2014, the Company entered into notes payable of $5,738 to finance the purchase of aircraft which were held in property and equipment pending permanent lease financing as of June 30, 2014, and into capital leases of $548 to finance the purchase of equipment. The Company also settled notes payable of $2,616 in exchange for the aircraft securing the debt.

In the six months ended June 30, 2013, the Company entered into notes payable of $2,616 to finance the purchase of aircraft which were held in property and equipment pending permanent lease financing as of June 30, 2013, and into capital leases of $2,707 to finance the purchase of aircraft. The Company also settled notes payable of $3,570 in exchange for the aircraft securing the debt.

See accompanying notes to unaudited condensed consolidated financial statements.

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(unaudited)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the condensed consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2013.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company considers its critical accounting policies involving more significant judgments and estimates to be those related to revenue recognition, deferred income taxes, valuation of long-lived assets, and fair values of assets acquired and liabilities assumed in business combinations. Actual results could differ from those estimates.

(2) Acquisition of Subsidiaries

On December 13, 2013, via a newly formed subsidiary, Blue Hawaiian Holdings, LLC, the Company acquired 100% of the membership interests of Helicopter Consultants of Maui, LLC (doing business as Blue Hawaiian Helicopters) and certain of its affiliates (collectively, BHH) for a cash purchase price of $66.8 million, subject to final determination of working capital, as defined in the merger agreement, as of the closing date. At December 31, 2013, the Company had recorded a liability of $2,282,000 for the estimated increase to the purchase price for the change in working capital. The liability was revised to $3,182,000 during the first quarter of 2014 and paid during the second quarter. No further amounts are due to the sellers. The former owners of BHH hold a 10% ownership interest in Blue Hawaiian Holdings, LLC, which the Company can redeem at any time for a price based on BHH’s current operating results. Between June 13 and December 13, 2015, the former owners of BHH can require the Company to redeem their 10% ownership interest for a price based on the same formula. The purchase price was financed primarily through borrowings under the Company’s Amended and Restated Revolving Credit, Term Loan and Security Agreement with a commercial bank group.

The allocation of the purchase price was as follows (amounts in thousands):

	Allocation at December 31, 2013			Adjustments		Revised Allocation

Aircraft	$	33,440			--		33,440
Amortizable intangible assets		24,525			--		24,525
Goodwill		5,985			590		6,575
Other equipment and leasehold improvements		5,183			--		5,183
Working capital accounts, net		5,964			310		6,274
Total net assets	$	75,097			900		75,997
Redeemable non-controlling interest		(6,065	)		--		(6,065	)
Purchase price	$	69,032			900		69,932

The Company is still evaluating the aircraft spare parts inventory and verifying open repair orders with aircraft parts vendors and other liabilities relating to pre-acquisition events. Therefore, the allocation of the purchase price is still subject to adjustment.

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(3) Stockholders’ Equity

Changes in stockholders’ equity for the six months ended June 30, 2014, consisted of the following (amounts in thousands except share amounts):

	Shares
	Outstanding		Amount

Balances at January 1, 2014		39,064,437	$	367,959

Issuance of common shares for options exercised		41,343		479
Stock-based compensation		45,661		1,513
Tax benefit from exercise of stock options		--		1,010
Forfeiture of unvested restricted shares and related dividends		--		4
Adjustments to redeemable non-controlling interests		--		12
Other comprehensive income		--		46
Net income		--		39,679

Balances at June 30, 2014		39,151,441	$	410,702

(4) Patient Transport Revenue Recognition

Trade receivables are presented net of allowances for contractual discounts and uncompensated care. The Company determines its allowances for contractual discounts and uncompensated care based on estimated payer mix, payer reimbursement schedules, and historical collection experience. The allowances are reviewed monthly and adjusted periodically based on actual collections. Billings are charged off against the uncompensated care allowance when it is probable that the receivable will not be recovered. The allowance for contractual discounts is related primarily to Medicare and Medicaid patients. The allowance for uncompensated care is related primarily to receivables recorded for self-pay patients.

The Company has not changed its discount policies related to self-pay patients or deductible and copayment balances for insured patients during either 2014 or 2013. The allowance for uncompensated care was 39.4% of receivables from non-governmental payers as of June 30, 2014, compared to 39.2% at December 31, 2013, and 44.9% at June 30, 2013. Receivables from private insurance providers accounted for 67% of receivables from non-governmental payers as of June 30, 2014, compared to 60% as of December 31, 2013 and June 30, 2013. The remainder of receivables from non-governmental payers are attributable to self-pay patients.

The Company recognizes patient transport revenue at its standard rates for services provided, regardless of expected payer. In the period that services are provided and based upon historical experience, the Company records a significant provision for uncompensated care related to uninsured patients who will be unable or unwilling to pay for the services provided and a provision for contractual discounts related to Medicare and Medicaid transports. Air medical services contract revenue consists of monthly fees and hourly flight fees billed to hospitals or other institutions under exclusive operating agreements. These fees are earned regardless of when, or if, the institution is reimbursed for these services by its patients, their insurers, or the federal government. As a result, the Company does not maintain an allowance or provision for uncompensated care for air medical services contract revenue and related receivables.

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(4) Patient Transport Revenue Recognition, continued

Patient transport revenue, net of provision for contractual discounts but before provision for uncompensated care, by major payer class, was as follows (amounts in thousands):

	For quarter ended June 30,				For six months ended June 30,
	2014		2013		2014		2013

Third-party payers	$	233,787		196,163		412,720		339,003
Self-pay		64,259		62,735		135,922		113,719
Total	$	298,046		258,898		548,642		452,722

(5) 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 common shares outstanding during the period and dilutive potential common shares.

In accordance with FASB ASC 480-10-S99, Distinguishing Liabilities from Equity, and solely for the purpose of calculating earnings per share, net income was decreased by $38,000 and increased by $12,000 for the quarter and six months ended June 30, 2014, respectively, for an adjustment to the value of redeemable non-controlling interests.

The reconciliation of basic to diluted weighted average common shares outstanding is as follows:

	2014		2013
For quarter ended June 30:
Weighted average number of common shares outstanding – basic		39,151,012		38,882,681
Dilutive effect of:
Common stock options		100,970		208,773
Unvested restricted stock		66,498		44,701
Weighted average number of common shares outstanding – diluted		39,318,480		39,136,155

For six months ended June 30:
Weighted average number of common shares outstanding – basic		39,135,292		38,857,034
Dilutive effect of:
Common stock options		113,711		236,134
Unvested restricted stock		65,869		47,324
Weighted average number of common shares outstanding – diluted		39,314,872		39,140,492

Common stock options totaling 47,500 were not included in the diluted shares outstanding for the quarter and six months ended June 30, 2014, because their effect would have been anti-dilutive. Common stock options totaling 45,000 were not included in the diluted shares outstanding for the quarter ended June 30, 2013, because their effect would have been anti-dilutive.

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(6)	Fair Value of Financial Instruments

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosures about how fair value is determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be grouped based on the type of inputs used in measuring fair value as follows:

	Level 1:	quoted prices in active markets for identical assets or liabilities;
	Level 2:	quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
	Level 3:	unobservable inputs, such as discounted cash flow models or valuations.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable, and accrued liabilities:

The carrying amounts approximate fair value because of the short maturity of these instruments.

Derivative instruments:

The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through the use of short-term purchased call options. Financial derivative instruments covering fuel purchases are included in prepaid expenses and other current assets at fair value. Fair value is determined based on quoted prices in active markets for similar instruments and is classified as Level 2 in the fair value hierarchy. The fair value of all fuel derivative instruments included in prepaid expenses and other current assets was $6,000 at June 30, 2014 and $0 at December 31, 2013. 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. Aircraft operations expense included non-cash mark to market derivative losses of $11,000 and $64,000 for the quarter and six months ended June 30, 2014, respectively, compared to non-cash mark to market losses of $23,000 and $140,000 for the quarter and six months ended June 30, 2013, respectively. There were no cash settlements under the terms of the agreements in 2014 or 2013.

Long-term debt:

The fair value of long-term debt is classified as Level 3 in the fair value hierarchy because it is determined based on the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent in those cash flows. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities and on recent transactions, the fair value of long-term debt as of June 30, 2014, is estimated to be $528,161,000, compared to carrying value of $533,079,000. The fair value of long-term debt as of December 31, 2013, was estimated to be $513,436,000, compared to a carrying value of $516,453,000.

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(7)	New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The ASU requires that performance targets in these situations be accounted for as performance conditions and should not be reflected in the calculation of the grant-date fair value of the award. The ASU also specifies requirements for recognition of associated compensation cost. The ASU is effective for periods beginning after December 15, 2014, with earlier adoption permitted. The Company expects to adopt ASU 2014-12 prospectively and does not expect the implementation to have a material effect on its financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The ASU is effective for the Company for periods beginning after December 15, 2016, and early adoption is not permitted. The ASU permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

(8)	Business Segment Information

Summarized financial information for the Company’s operating segments is shown in the following table (amounts in thousands). Amounts in the “Corporate Activities” column represent corporate headquarters expenses, corporate income tax expense, and results of insignificant operations. The Company does not allocate assets between all operating segments for internal reporting and performance evaluation purposes. Operating segments and their principal products or services are as follows:

●

Air Medical Services (AMS) - provides air medical transportation services to the general population as an independent service and to hospitals or other institutions under exclusive operating agreements. Services include aircraft operation and maintenance, medical care, dispatch and communications, and medical billing and collection.

●

Tourism – provides helicopter tours and charter flights, primarily focusing on Grand Canyon and Hawaiian Island tours.

●

United Rotorcraft (UR) Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers.

Air Methods Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements, continued

(unaudited)

(8) Business Segment Information, continued

For quarter ended June 30:	AMS			Tourism			UR			Corporate Activities			Intersegment Eliminations			Consolidated
2014
External revenue	$	219,611			31,430			7,430			--			--			258,471
Intersegment revenue		--			--			3,991			--			(3,991	)		--
Total revenue		219,611			31,430			11,421			--			(3,991	)		258,471
Operating expenses, excluding depreciation & amortization		(144,416	)		(24,184	)		(10,457	)		(9,995	)		3,626			(185,426	)
Depreciation & amortization		(17,502	)		(1,656	)		(597	)		(518	)		--			(20,273	)
Interest expense		(4,061	)		(731	)		--			(777	)		--			(5,569	)
Other income, net		426			3			--			(137	)		--			292
Income tax expense		--			--			--			(18,571	)		--			(18,571	)
Segment net income (loss)		54,058			4,862			367			(29,998	)		(365	)		28,924
Less net income (loss) attributable to non-controlling interests		(38	)		172			--			--			--			134
Net income (loss) attributable to Air Methods Corporation and subsidiaries	$	54,096			4,690			367			(29,998	)		(365	)		28,790

2013
External revenue	$	205,241			15,992			4,910			62			--			226,205
Intersegment revenue		--			--			2,530			--			(2,530	)		--
Total revenue		205,241			15,992			7,440			62			(2,530	)		226,205
Operating expenses, excluding depreciation & amortization		(143,613	)		(13,932	)		(6,912	)		(7,878	)		2,449			(169,886	)
Depreciation & amortization		(18,325	)		(729	)		(433	)		(400	)		--			(19,887	)
Interest expense		(4,198	)		(273	)		--			(706	)		--			(5,177	)
Other income, net		289			--			--			39			--			328
Income tax expense		--			--			--			(12,434	)		--			(12,434	)
Segment net income (loss)	$	39,394			1,058			95			(21,317	)		(81	)		19,149

For six months ended June 30:
2014
External revenue	$	410,589		55,768		15,250		--		--		481,607
Intersegment revenue		--		--		7,058		--		(7,058	)	--
Total revenue		410,589		55,768		22,308		--		(7,058	)	481,607
Operating expenses, excluding depreciation & amortization		(286,663	)	(44,195	)	(19,967	)	(19,506	)	6,202		(364,129	)
Depreciation & amortization		(35,414	)	(3,220	)	(1,135	)	(1,020	)	--		(40,789	)
Interest expense		(8,257	)	(1,353	)	--		(1,488	)	--		(11,098	)
Other income, net		813		3		--		(550	)	--		266
Income tax expense		--		--		--		(25,881	)	--		(25,881	)
Segment net income (loss)		81,068		7,003		1,206		(48,445	)	(856	)	39,976
Less net income (loss) attributable to non-controlling interests		(86	)	383		--		--		--		297
Net income (loss) attributable to Air Methods Corporation and subsidiaries	$	81,154		6,620		1,206		(48,445	)	(856	)	39,679

2013
External revenue	$	369,647		26,383		9,331		73		--		405,434
Intersegment revenue		--		--		4,301		--		(4,301	)	--
Total revenue		369,647		26,383		13,632		73		(4,301	)	405,434

Operating expenses, excluding depreciation & amortization		(284,674	)	(23,419	)	(13,210	)	(16,580	)	4,032		(333,851	)
Depreciation & amortization		(37,034	)	(1,318	)	(858	)	(799	)	--		(40,009	)
Interest expense		(8,204	)	(493	)	--		(1,282	)	--		(9,979	)
Other income, net		543		--		--		72		--		615
Income tax expense		--		--		--		(8,750	)	--		(8,750	)
Segment net income (loss)	$	40,278		1,153		(436	)	(27,266	)	(269	)	13,460

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” “may,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning the integration of Blue Hawaiian Helicopters (BHH); our possible or assumed future results; flight volume and collection rates for patient transports; size, structure and growth of our air medical services, aerial tourism, and products markets; continuation and/or renewal of hospital contracts; acquisition of new and profitable UR Division contracts; impact of the Patient Protection and Affordable Care Act (PPACA) and other changes in laws and regulations; and other matters. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report, as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements.

Overview

We provide air medical transportation services throughout the United States and design, manufacture, and install medical aircraft interiors and other aerospace products for domestic and international customers. We also provide tourism operations in and around the Grand Canyon and Hawaiian Islands. Our divisions, or business segments, are organized according to the type of service or product provided and consist of the following:

●

Air Medical Services (AMS) - provides air medical transportation services to the general population as an independent service (also called community-based services) and to hospitals or other institutions under exclusive operating agreements (also called hospital-based services). Patient transport revenue consists of flight fees billed directly to patients, their insurers, or governmental agencies, and cash flow is dependent upon collection from these individuals or entities. Air medical services contract revenue consists of fixed monthly fees (approximately 80% of total contract revenue) and hourly flight fees (approximately 20% of total contract revenue) billed to hospitals or other institutions. In the first six months of 2014, the AMS Division generated 85% of our total revenue, compared to 91% in the first six months of 2013.

●

Tourism Division – provides helicopter tours and charter flights, primarily focusing on Grand Canyon and Hawaiian Island tours. The division was started with the acquisition of Sundance Helicopters, Inc. (Sundance) in December 2012. In the six months ended June 30, 2014, the Tourism Division generated 12% of our total revenue, compared to 7% in 2013.

●

United Rotorcraft (UR) Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers. The UR Division generated 3% of our total revenue in the six months ended June 30, 2014, compared to 2% in 2013.

See Note 8 to the condensed consolidated financial statements included in Item 1 of this report for operating results by segment.

We believe that the following factors have the greatest impact on our results of operations and financial condition:

●

Flight volume. Almost all patient transport and tourism revenue and approximately 20% of AMS contract revenue are derived from flight fees. By contrast, 84% of AMS operating costs incurred during the first six months of 2014 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 in quarterly comparatives has historically been weather conditions. Adverse weather conditions—such as fog, high winds, or heavy precipitation—hamper our ability to operate our aircraft safely and, therefore, result in reduced flight volume. Total patient transports for community-based locations were approximately 15,000 and 27,900 for the quarter and six months ended June 30, 2014, respectively, compared to approximately 14,000 and 26,000 for the quarter and six months ended June 30, 2013, respectively. Patient transports for community-based locations open longer than one year (Same-Base Transports) were approximately 13,500 and 25,400 in the quarter and six months ended June 30, 2014, respectively, compared to approximately 13,200 and 24,400 in the quarter and six months ended June 30, 2013, respectively. Cancellations due to unfavorable weather conditions for community-based locations open longer than one year were 333 and 777 lower in the quarter and six months ended June 30, 2014, respectively, compared to 2013. Requests for community-based services increased by 3.5% for the quarter and six months ended June 30, 2014, for bases open greater than one year.

●

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. Patient transport revenue is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. Net reimbursement per patient transport is primarily a function of 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. PPACA is intended to decrease the number of uninsured Americans and reduce health care costs. We believe that the movement from self-pay patients to Medicaid in our payer mix for 2014 compared to 2013 is attributable to the impact of PPACA. Payer mix was as follows:


	For quarters ended June 30,						For six months ended June 30,
	2014			2013			2014			2013
Private insurance carriers		30.5	%		31.9	%		31.2	%		32.2	%
Medicare		34.5	%		34.2	%		34.1	%		33.7	%
Medicaid		24.1	%		20.2	%		22.3	%		20.7	%
Self-pay patients		10.9	%		13.7	%		12.4	%		13.4	%

Net reimbursement per transport increased 6.6% and 12.9% in the quarter and six months ended June 30, 2014, respectively, compared to 2013, attributed primarily to recent price increases. Provisions for contractual discounts and estimated uncompensated care related to patient transport revenue are as follows:


	For quarters ended June 30,						For six months ended June 30,
	2014			2013			2014			2013
Gross billings		100	%		100	%		100	%		100	%
Provision for contractual discounts		51	%		46	%		51	%		47	%
Provision for uncompensated care		21	%		23	%		21	%		23	%

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. 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.

●

Aircraft maintenance. AMS and Tourism operations are directly affected by fluctuations in aircraft maintenance costs. Proper operation of the aircraft by flight crews and standardized maintenance practices can help to contain maintenance costs. Increases in spare parts prices from original equipment manufacturers tend to be higher for aircraft which are no longer in production. Two models of aircraft within our fleet, representing 11% 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, 2013, we have taken delivery of seventeen new aircraft and have commitments to take delivery of 54 additional aircraft through the end of 2017. We have replaced discontinued models and other older aircraft with the new aircraft, as well as provided capacity for base expansion. Replacement models of aircraft typically have higher ownership costs than the models targeted for replacement but lower maintenance costs. Total AMS aircraft maintenance expense decreased 16.9% and 16.5% for the quarter and six months ended June 30, 2014, respectively, compared to 2013. Total flight hours for AMS operations decreased 7.3% and 6.0% for the quarter and six months ended June 30, 2014, respectively, compared to 2013. The change in maintenance expense reflects normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts.

●

Competitive pressures from low-cost providers. We are recognized within the industry for our standard of service and our use of cabin-class aircraft. Many of our competitors utilize aircraft with lower ownership and operating costs and do not require a similar level of experience for aviation and medical personnel. Reimbursement rates established by Medicare, Medicaid, and most insurance providers are not contingent upon the type of aircraft used or the experience of personnel. However, we believe that higher quality standards help to differentiate our service from competitors and, therefore, lead to higher utilization.

●

Employee recruitment and relations. The ability to deliver quality services is partially dependent upon our ability to hire and retain employees who have advanced aviation, nursing, and other technical skills. In addition, hospital contracts typically contain minimum certification requirements for pilots and mechanics. Employees who meet these standards are in great demand and are likely to remain a limited resource in the foreseeable future. Our AMS pilots are represented by a collective bargaining unit and are covered under a collective bargaining agreement (CBA) which expired in December 2013. We have reached a tentative agreement with the pilots’ union on a new CBA, which is subject to ratification by the pilots. We expect the vote on ratification to take place during the third quarter of 2014. Other employee groups may also elect to be represented by unions in the future.

Results of Operations

We reported net income of $28,790,000 and $39,679,000 for the quarter and six months ended June 30, 2014, respectively, compared to $19,149,000 and $13,460,000 for the quarter and six months ended June 30, 2013, respectively. The results for 2014 include the impact of the BHH acquisition which closed in December 2013. Same-Base Transports were 2.5% and 4.0% higher in the quarter and six months ended June 30, 2014, respectively, compared to 2013, while net reimbursement per patient transport increased 6.6% and 12.9% in the quarter and six months ended June 30, 2014, respectively, compared to 2013, primarily as a result of recent price increases.

Air Medical Services

Patient transport revenue is recorded net of provisions for contractual discounts and uncompensated care and increased $22,430,000, or 15.1%, and $58,527,000, or 22.8%, for the quarter and six months ended June 30, 2014, compared to 2013, for the following reasons.

●	Increases of 6.6% and 12.9% in net reimbursement per transport for the quarter and six months ended June 30, 2014, respectively, compared to 2013, due primarily to recent price increases.

●

Increases of 333, or 2.5%, and 974, or 4.0%, in Same-Base Transports for the quarter and six months ended June 30, 2014, respectively, compared to 2013. Cancellations due to unfavorable weather conditions for bases open longer than one year were 333 and 777 lower in the quarter and six months ended June 30, 2014, respectively, compared to 2013. Requests for community-based services increased by 3.5% for the quarter and six months ended June 30, 2014, respectively, for bases open greater than one year.

●

Incremental net revenue of $17,076,000 and $30,056,000 for the quarter and six months ended June 30, 2014, respectively, generated from the addition of 22 new bases, including twelve bases resulting from the conversion of AMS contract customers to community-based operations, during or subsequent to the first six months of 2013.

●	Closure of seventeen bases during or subsequent to the first six months of 2013, due to insufficient flight volume, resulting in decreases in net revenue of approximately $5,781,000 and $9,832,000 during the quarter and six months ended June 30, 2014, respectively.

Air medical services contract revenue decreased $8,745,000, or 16.0%, and $18,442,000, or 16.9%, for the quarter and six months ended June 30, 2014, compared to 2013, for the following reasons:

●

Cessation of service under eleven contracts and the conversion of seven contracts to community-based operations during or subsequent to the first six months of 2013, resulting in decreases in net revenue of approximately $11,949,000 and $23,501,000 for the quarter and six months ended June 30, 2014, respectively.

●	Incremental net revenue of $1,056,000 and $1,508,000 for the quarter and six months ended June 30, 2014, generated from the addition of one new AMS contract and the expansion of two contracts to additional bases of operation subsequent to the first six months of 2013.

●	Increases of 2.8% and 1.9% in flight volume for the quarter and six months ended June 30, 2014, respectively, for all contracts excluding new contracts, contract expansions, and closed contracts described above.

●	Annual price increases in the majority of contracts based on stipulated contractual increases or changes in the Consumer Price Index or spare parts prices from aircraft manufacturers.

Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $3,074,000, or 3.6%, and $6,328,000, or 3.7%, for the quarter and six months ended June 30, 2014, respectively, compared to 2013, for the following reasons:

●	Increases of approximately $7,162,000 and $13,579,000 for the quarter and six months ended June 30, 2014, respectively, for the addition of personnel to staff new base locations described above.

●	Decreases of approximately $9,174,000 and $17,936,000 for the quarter and six months ended June 30, 2014, respectively, due to the closure of base locations described above.

●	Increases in salaries for merit pay raises and in the cost of employee medical insurance.

Aircraft operating expenses decreased $7,775,000, or 19.2%, and $12,214,000, or 15.7%, for the quarter and six months ended June 30, 2014, respectively, compared to 2013. Aircraft operating expenses consist of fuel, insurance, and maintenance costs and generally are a function of the size of the fleet, the type of aircraft flown, and the number of hours flown. The change in costs is due to the following:

●

Decreases in AMS aircraft maintenance expense of $4,717,000, or 16.9%, to $23,148,000 for the second quarter of 2014 and $9,093,000, or 16.5%, to $45,857,000 for the six months ended June 30, 2014, compared to the prior year. Total AMS flight volume decreased 7.3% and 6.0% for the quarter and six months ended June 30, 2014, respectively, compared to prior year. The change in maintenance expense reflects normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts.

●

Decreases of approximately 4.4% and 5.2% in the cost of aircraft fuel per hour flown for AMS operations for the quarter and six months ended June 30, 2014, respectively. Total AMS fuel costs increased $21,000 to $6,659,000 and $10,000 to $12,500,000 for the quarter and six months ended June 30, 2014, respectively, compared to 2013.

●

Credit of $1,066,000 for the quarter and six months ended June 30, 2014, earned based on the amount of hull insurance claims for the policy period ended June 30, 2014. The quarter and six months ended June 30, 2013, included expense of $2,000,000 related to hull and liability insurance retention triggered by hull claims incurred during the second quarter of 2013.

Tourism

Tourism and charter revenue increased $15,438,000, or 96.5%, and $29,385,000, or 111.4%, for the quarter and six months ended June 30, 2014, respectively, compared to 2013. During the quarter and six months ended June 30, 2014, respectively, we transported approximately 113,400 and 200,600 passengers on tourism flights, compared to 62,400 and 102,200 in the quarter and six months ended June 30, 2013, respectively. BHH generated revenue of $14,019,000 and $27,462,000 transporting approximately 49,700 and 96,800 passengers in the quarter and six months ended June 30, 2014, respectively.

Tourism operating expenses consist primarily of pilot and mechanic salaries and benefits; aircraft maintenance, fuel, and insurance; landing fees; commissions; and cost of tour amenities and typically vary with passenger count, flight volume, and number and type of aircraft. Expenses increased $7,316,000, or 60.2%, and $15,475,000, or 77.4%, for the quarter and six months ended June 30, 2014, respectively, primarily related to the acquisition of BHH. BHH operating expenses totaled $8,846,000 and $16,949,000 for the quarter and six months ended June 30, 2014, respectively.

Medical Interiors and Products

Medical interiors and products revenue increased $2,428,000, or 48.8%, and $5,814,000, or 61.8%, for the quarter and six months ended June 30, 2014, respectively, compared to 2013. Significant projects in process during 2014 included work on 24 multi-mission interiors for the U.S. Army’s HH-60M helicopter, 35 interiors for an older generation of the U.S. Army’s Black Hawk helicopter, and twelve aircraft interiors for commercial customers. Revenue by product line for the quarter and six months ended June 30, 2014, was as follows:

●	$4,674,000 and $9,910,000 – governmental entities

●	$2,730,000 and $5,314,000 – commercial customers

Significant projects in process during 2013 included work under two contracts to produce a total of 53 multi-mission interiors for the U.S. Army’s HH-60M helicopter and three aircraft interiors for commercial customers. Revenue by product line for the quarter and six months ended June 30, 2013, was as follows:

●	$3,183,000 and $5,992,000 – governmental entities

●	$1,793,000 and $3,418,000 – commercial customers

Cost of medical interiors and products increased $2,127,000, or 48.2%, and $4,261,000, or 47.6%, for the quarter and six months ended June 30, 2014, respectively, as compared to the prior year, due primarily to the increase in sales volume. Cost of medical interiors and products also includes certain fixed costs, such as administrative salaries and facilities rent, which do not vary with volume of sales and which are absorbed by both projects for external customers and interdivisional projects.

General Expenses

Depreciation and amortization expense increased $386,000, or 1.9%, and $780,000, or 1.9%, for the quarter and six months ended June 30, 2014, compared to 2013. From the fourth quarter of 2013 through the second quarter of 2014, we placed seventeen aircraft with a total depreciable basis of $49 million into service. Depreciation and amortization related to BHH’s assets also totaled $855,000 and $1,684,000 for the quarter and six months ended June 30, 2014, respectively. These increases were offset in part by the buyout of previously leased aircraft. Since March 31, 2013, we have bought out 38 aircraft which were previously leased under capital lease obligations and which had total depreciable basis of $72 million. Aircraft under capital leases are amortized over the terms of the underlying leases with no assigned salvage value. Aircraft which are owned directly are depreciated over a 25-year life, based on the year of manufacture, with a 25% salvage value. As a result, the buyout of aircraft from capital lease obligations resulted in a decrease in depreciation in 2014.

General and administrative (G&A) expenses increased $9,064,000, or 33.5%, and $13,499,000, or 24.9%, for the quarter and six months ended June 30, 2014, respectively, compared to 2013. G&A expenses include executive management, accounting and finance, billing and collections, information services, human resources, aviation management, pilot training, dispatch and communications, AMS program administration, and Tourism customer service and reservations. Total G&A expenses related to BHH operations were $2,242,000 and $4,313,000 for the quarter and six months ended June 30, 2014. Excluding the impact of BHH, G&A expenses increased 25.2% and 16.9% in the quarter and six months ended June 30, 2014, compared to 2013, reflecting branding and marketing initiatives, as well as the addition of senior management positions to enhance the company’s ability to implement its growth strategy. In addition, incentive compensation accruals related to our financial performance increased $3,488,000 and $4,379,000 during the quarter and six months ended June 30, 2014, respectively, compared to 2013.

Interest expense increased $392,000, or 7.6%, and $1,119,000, or 11.2%, for the quarter and six months ended June 30, 2014, compared to 2013, primarily due to an additional $60 million term loan under our senior credit facility originated in December 2013 to finance the purchase of BHH and new term loans totaling $116.9 million with a weighted average interest rate of 4.1% originated subsequent to March 31, 2013, to fund the retirement of capital leases and the purchase of aircraft. The resulting increase in interest expense was offset in part by decreased borrowings against our line of credit, the retirement of $17.7 million in capital lease obligations with a weighted average effective interest rate of 4.7% subsequent to March 31, 2013, and to regularly scheduled payments of long-term debt and capital lease obligations.

Income tax expense was $18,571,000 and $25,881,000 in the quarter and six months ended June 30, 2014, respectively, compared to $12,434,000 and $8,750,000 in the quarter and six months ended June 30, 2013, respectively. The effective tax rate was approximately 39.1% and 39.3% for the quarter and six months ended June 30, 2014, respectively, compared to 39.4% for the quarter and six months ended June 30, 2013. Changes in our effective tax rate are affected by the apportionment of revenue and income before taxes for the various jurisdictions in which we operate and by changing tax laws and regulations in those jurisdictions.

Liquidity and Capital Resources

Our working capital position as of June 30, 2014, was $189,861,000, compared to $178,232,000 at December 31, 2013. Cash generated by operations was $73,395,000 in 2014, compared to $50,741,000 in 2013, reflecting the results of operations described above. Receivables increased during 2014 by $32.7 million, reflecting the increase in net revenue described above. Days’ sales outstanding (DSO’s) related to patient transports, measured by comparing net patient transport revenue for the annualized previous six-month period to outstanding open net accounts receivable, were 123 at June 30, 2014, compared to 104 at December 31, 2013, and 115 at June 30, 2013.

The increase in DSO’s at June 30, 2014, is largely attributed to increases in claims processing times by a private insurance company and a governmental insurance provider. Excluding the impact of these two payers, DSO’s at June 30, 2014, would have been 114. The increases in processing times are expected to be temporary and are not expected to decrease the ultimate collection rate from either payer.

Cash used by investing activities totaled $76,784,000 in 2014 compared to $45,217,000 in 2013. Equipment acquisitions in 2014 included the buy-out of thirteen previously leased aircraft for approximately $17.3 million and the purchase of fifteen aircraft for approximately $44.6 million. We also sold twelve aircraft for $9.1 million. In 2013 we bought out 34 previously leased aircraft for $36.6 million and sold five aircraft for $9.8 million. Equipment acquisitions in 2013 also included the purchase of three aircraft for $6.2 million.

Financing activities used $3,556,000 in 2014 compared to $3,595,000 in 2013. The primary uses of cash in both 2014 and 2013 were regularly scheduled payments of long-term debt and capital lease obligations and capital lease buyouts. During 2014, we originated eleven notes primarily to finance the acquisition of aircraft. During 2013, we originated 33 notes secured by aircraft to finance lease buyouts, retire variable rate debt, and finance the acquisition of two aircraft.

We currently intend to exercise early lease buyout options on up to five additional aircraft totaling approximately $10.2 million prior to the end of 2014. We expect to finance the buyouts with aircraft financiers under long-term notes and with internally generated cash flow or availability under the line of credit.

Critical Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an on-going basis, management evaluates our estimates and judgments, including those related to revenue recognition, deferred income taxes, and valuation of long-lived assets and goodwill. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Revenue relating to tourism and charter flights is recognized upon completion of the services. Fixed contract revenue under our operating agreements with hospitals is recognized monthly over the terms of the agreements. Revenue relating to patient transports is recognized upon completion of the services and is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. We have from time to time experienced delays in reimbursement from third-party payers. In addition, third-party payers may disallow, in whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, determinations of medical necessity, or the need for additional information. Laws and regulations governing Medicare and Medicaid programs are very complex and subject to interpretation. We also provide services to patients who have no insurance or other third-party payer coverage. There can be no guarantee that we will continue to experience the same collection rates that we have in the past. If actual future collections are more or less than those projected by management, adjustments to allowances for contractual discounts and uncompensated care may be required. Based on related patient transport revenue for six months ended June 30, 2014, a change of 100 basis points in the percentage of estimated contractual discounts or uncompensated care would have resulted in a change of approximately $11,263,000 in patient transport revenue.

Revenue related to fixed fee medical interior and products contracts is recorded as costs are incurred using the percentage of completion method of accounting. We estimate the percentage of completion based on costs incurred to date as a percentage of an estimate of the total costs to complete the project. Losses on contracts in process are recognized when determined. If total costs to complete a project are greater or less than estimated, the gross margin on the project may be greater or less than originally recorded under the percentage of completion method.

Deferred Income Taxes

In preparation of the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciable assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. We then assess the likelihood that deferred tax assets will be recoverable from future taxable income in the respective federal or state jurisdiction as appropriate and record a valuation allowance for those amounts we believe are not likely to be realized. We consider estimated future taxable income, tax planning strategies, and the expected timing of reversals of existing temporary differences in assessing the need for a valuation allowance against deferred tax assets. Establishing or increasing a valuation allowance in a period increases income tax expense. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. The effect on deferred income tax assets and liabilities of a change in statutory tax rates applicable to the Company is also recognized in income in the period of the change. We evaluate the recognition and measurement of uncertain tax positions based on the facts and circumstances surrounding the tax position and applicable tax law and other tax pronouncements. Changes in our estimates of uncertain tax positions would be recognized as an adjustment to income tax expense in the period of the change.

Long-lived Assets Valuation

In accounting for long-lived assets, we make estimates about the expected useful lives, projected residual values and the potential for impairment. Estimates of useful lives and residual values of aircraft are based upon actual industry experience with the same or similar aircraft types and anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations and changes in our maintenance program or operations could result in changes to these estimates. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. Our cash flow estimates are based on historical results adjusted for estimated current industry trends, the economy, and operating conditions.

Goodwill Valuation

The Company’s goodwill relates to prior acquisitions and has been allocated to our reporting units. We evaluate goodwill annually in accordance with ASU No. 2011-08, Testing for Goodwill Impairment, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Factors considered include overall economic conditions within our markets, access to capital, changes in the cost of operations, our financial performance, and change in our stock price during the year. Based upon our qualitative assessment of factors impacting the value of goodwill as of December 31, 2013, we determined that it was not likely that the fair value of any reporting unit was less than its carrying amount and that a quantitative assessment of goodwill was not necessary. Changes in these factors or a sustained decline in general economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risk at June 30, 2014, from that reported in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 4. 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 Securities and Exchange Commission (the Commission) under the Securities Exchange Act of 1934, as amended (the Exchange Act), 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 June 30, 2014, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of June 30, 2014, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

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

32	Certification adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AIR METHODS CORPORATION


Date: August 8, 2014	By	/s/ Aaron D. Todd
		Aaron D. Todd
		Chief Executive Officer



Date: August 8, 2014	By	/s/ Trent J. Carman
		Trent J. Carman
		Chief Financial Officer



Date: August 8, 2014	By	/s/ Sharon J. Keck
		Sharon J. Keck
		Chief Accounting Officer

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