Source: Air Methods

Air Methods (NASDAQ:AIRM) shares fell by nearly 20% in October when it cut its third-quarter earnings per share outlook to between $0.83 and $0.87 -- far south of analysts' $1.07 estimates. Fortunately, Air Methods third-quarter results weren't as bad as the company initially thought.

Air Methods third-quarter sales ended up increasing 10% year over year to $277.8 million, good enough to deliver $0.90 per share instead. Since profit still came in below analyst's earlier projections, it's uncertain whether these results will rekindle investor interest. Let's take a closer look.

By the numbers
The company's quarterly results can be lumpy, so it shouldn't be too surprising to see a few lackluster quarters mixed in with some stellar ones. And while the third quarter wasn't as good as some of Air Method's previous quarters, the company still notched growth in important metrics, including patient helicopter transports.

During the third quarter, the number of community based patient transports totaled 15,796, up 7% from a year ago. That growth, however, came thanks to new bases, rather than year-over-year growth at bases in operation for more than a year.

Air Methods operated 186 bases exiting last quarter, versus 173 last year, but the number of people transported from bases that have been in operation for more than a year slipped by 3%, or 370 transports, from a year ago as weather cancellations increased by 60 transports versus last year.

Thanks to higher patient volume, revenue in the company's Air Medical Services business improved 3% to $237.6 million from a year ago, but revenue growth was greatest in the company's tourism segment. Tourism sales jumped 112% to $33.9 million due the company's acquisition of Blue Hawaiian last December.

Dropping to the bottom line
Despite base expansion boosting total patient transports, the company couldn't overcome the impact of weaker per patient payments. The amount of money collected for each patient transfer decreased slightly from $11,988 to $11,972.

That price pressure was driven predominantly by payer mix. In the quarter, a larger than expected number of patient transports were done for patients covered by government programs, which pay less per transport than many insurers. As a result, the percentage of transports for patients covered by private insurers declined from 34.2% last year to 32.6% in the quarter. The company noted that the payer mix within private insurers also skewed toward less profitable contracts, too.

Source: Air Methods and author's calculation

The combination weighed down net income and earnings per share during the quarter, but management thinks that those drags on profit will be offset going forward by a 3% price increase, which went into effect on Oct. 1.

Regardless, higher year-over-year costs from helicopter maintenance, which climbed 1.5%, and fuel, which grew 5.6%, also contributed to the disappointing earnings per share performance.

Looking ahead
The company's price increase should help ease some of the pressure from payer mix, but Air Methods will likely have to continue to innovate on pricing and expenses in the future to offset growing Medicare enrollment (thanks to graying baby boomers) and Medicaid enrollment (thanks to healthcare reform).

But having said that, Air Methods' results over the first nine months of this year are friendlier to shareholders than its third-quarter performance, and that may suggest that the third quarter was an anomaly, rather than the start of a new trend. Sales through the first nine months grew 15% to $759.4 million, leading to net income jumping 50% to $73.4 million.

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