e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
|
|
|
þ |
|
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|
For the quarterly period ended: September 30, 2007
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: 0-9827
PHI, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Louisiana
|
|
72-0395707 |
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
2001 SE Evangeline Thruway |
|
|
Lafayette, Louisiana
|
|
70508 |
(Address of principal executive offices)
|
|
(Zip Code) |
Registrants telephone number, including area code: (337) 235-2452
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: þ No: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer:þ Non-accelerated filer: 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: þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
|
|
|
Class
|
|
Outstanding at November 2, 2007 |
|
|
|
Voting Common Stock
|
|
2,852,616 shares |
Non-Voting Common Stock
|
|
12,423,992 shares |
PHI, INC.
Index Form 10-Q
2
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
647 |
|
|
$ |
820 |
|
Short-term investments |
|
|
86,856 |
|
|
|
153,414 |
|
Accounts receivable net of allowance: |
|
|
|
|
|
|
|
|
Trade |
|
|
101,213 |
|
|
|
87,366 |
|
Other |
|
|
3,674 |
|
|
|
1,928 |
|
Inventories of spare parts and supplies |
|
|
55,094 |
|
|
|
55,596 |
|
Assets held for sale |
|
|
5,647 |
|
|
|
|
|
Other current assets |
|
|
8,901 |
|
|
|
7,930 |
|
Refundable income taxes |
|
|
72 |
|
|
|
635 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
262,104 |
|
|
|
307,689 |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
32,772 |
|
|
|
23,816 |
|
Property and equipment, net |
|
|
428,222 |
|
|
|
369,465 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
723,098 |
|
|
$ |
700,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
25,264 |
|
|
$ |
35,815 |
|
Accrued liabilities |
|
|
12,721 |
|
|
|
8,511 |
|
Accrued interest |
|
|
6,554 |
|
|
|
3,045 |
|
Accrued vacation payable |
|
|
3,787 |
|
|
|
2,583 |
|
Accrued wages and salaries |
|
|
6,494 |
|
|
|
3,636 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
54,820 |
|
|
|
53,590 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
201,750 |
|
|
|
205,500 |
|
Deferred income taxes |
|
|
42,021 |
|
|
|
32,828 |
|
Other long-term liabilities |
|
|
7,933 |
|
|
|
8,927 |
|
Commitments and contingencies (Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
Voting common stock par value of $0.10;
authorized shares of 12,500,000 |
|
|
285 |
|
|
|
285 |
|
Non-voting common stock par value of $0.10;
authorized shares of 12,500,000 |
|
|
1,242 |
|
|
|
1,242 |
|
Additional paid-in capital |
|
|
290,695 |
|
|
|
290,695 |
|
Accumulated other comprehensive income |
|
|
65 |
|
|
|
77 |
|
Retained earnings |
|
|
124,287 |
|
|
|
107,826 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
416,574 |
|
|
|
400,125 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
723,098 |
|
|
$ |
700,970 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Operating revenues |
|
$ |
118,401 |
|
|
$ |
109,315 |
|
|
$ |
333,129 |
|
|
$ |
317,844 |
|
Gain (loss) on disposition of
assets, net |
|
|
6,988 |
|
|
|
621 |
|
|
|
15,596 |
|
|
|
(541 |
) |
Other |
|
|
1,119 |
|
|
|
2,659 |
|
|
|
4,263 |
|
|
|
6,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,508 |
|
|
|
112,595 |
|
|
|
352,988 |
|
|
|
323,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses |
|
|
101,427 |
|
|
|
93,224 |
|
|
|
291,779 |
|
|
|
269,492 |
|
Selling, general and
administrative expenses |
|
|
7,374 |
|
|
|
6,795 |
|
|
|
22,306 |
|
|
|
20,203 |
|
Interest expense |
|
|
3,895 |
|
|
|
4,039 |
|
|
|
12,262 |
|
|
|
13,241 |
|
Loss on debt restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,696 |
|
|
|
104,058 |
|
|
|
326,347 |
|
|
|
315,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
13,812 |
|
|
|
8,537 |
|
|
|
26,641 |
|
|
|
7,653 |
|
Income taxes |
|
|
5,183 |
|
|
|
3,415 |
|
|
|
10,180 |
|
|
|
3,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
8,629 |
|
|
$ |
5,122 |
|
|
$ |
16,461 |
|
|
$ |
4,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
15,288 |
|
|
|
15,288 |
|
|
|
15,288 |
|
|
|
13,447 |
|
Diluted |
|
|
15,306 |
|
|
|
15,306 |
|
|
|
15,307 |
|
|
|
13,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.56 |
|
|
$ |
0.34 |
|
|
$ |
1.08 |
|
|
$ |
0.34 |
|
Diluted |
|
$ |
0.56 |
|
|
$ |
0.33 |
|
|
$ |
1.08 |
|
|
$ |
0.34 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
16,461 |
|
|
$ |
4,592 |
|
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
23,201 |
|
|
|
22,389 |
|
Deferred income taxes |
|
|
9,193 |
|
|
|
2,100 |
|
(Gain) loss on disposition of assets, net |
|
|
(15,596 |
) |
|
|
541 |
|
Loss on debt restructuring |
|
|
|
|
|
|
12,790 |
|
Other |
|
|
665 |
|
|
|
594 |
|
Changes in operating assets and liabilities |
|
|
(17,457 |
) |
|
|
(20,226 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
16,467 |
|
|
|
22,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(97,488 |
) |
|
|
(81,622 |
) |
Purchase of short-term investments |
|
|
(104,337 |
) |
|
|
(157,103 |
) |
Proceeds from sale of short-term investments |
|
|
170,895 |
|
|
|
60,041 |
|
Deposits on aircraft |
|
|
(9,448 |
) |
|
|
(23,000 |
) |
Proceeds from asset dispositions |
|
|
27,488 |
|
|
|
30,797 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(12,890 |
) |
|
|
(170,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds of debt issuance Senior Notes |
|
|
|
|
|
|
200,000 |
|
Premium and costs to retire debt early |
|
|
|
|
|
|
(10,208 |
) |
Repayment of Senior Notes |
|
|
|
|
|
|
(200,000 |
) |
Debt issuance costs |
|
|
|
|
|
|
(4,629 |
) |
Proceeds from line of credit |
|
|
36,450 |
|
|
|
138,700 |
|
Payments on line of credit |
|
|
(40,200 |
) |
|
|
(138,500 |
) |
Proceeds from stock issuance, net |
|
|
|
|
|
|
160,722 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(3,750 |
) |
|
|
146,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(173 |
) |
|
|
(2,022 |
) |
Cash and cash equivalents, beginning of period |
|
|
820 |
|
|
|
3,036 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
647 |
|
|
$ |
1,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures Cash Flow Information |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
8,263 |
|
|
$ |
9,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid, net |
|
$ |
21 |
|
|
$ |
68 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited condensed consolidated financial statements include the accounts of PHI,
Inc. and subsidiaries (PHI or the Company). In the opinion of management, these financial
statements reflect all adjustments, consisting of only normal, recurring adjustments, necessary to
present fairly the financial results for the interim periods presented. These condensed
consolidated financial statements should be read in conjunction with the financial statements
contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and the
accompanying notes and Managements Discussion and Analysis of Financial Condition and Results of
Operations.
The Companys financial results, particularly as they relate to the Companys Oil and Gas
operations, are influenced by seasonal fluctuations as discussed in the Companys Annual Report on
Form 10-K for the year ended December 31, 2006. Therefore, the results of operations for interim
periods are not necessarily indicative of the operating results that may be expected for a full
fiscal year.
2. Segment Information
PHI is primarily a provider of helicopter services, including helicopter maintenance and repair
services. We used a combination of factors to identify reportable segments as required by
Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information (SFAS 131). The overriding determination of our segments is based on
how the chief operating decision-maker of our Company evaluates our results of operations. The
underlying factors include customer bases, types of service, operational management, physical
locations, and underlying economic characteristics of the types of work we perform. We previously
identified four segments for disclosure. The reportable segments were Domestic Oil and Gas, Air
Medical, International, and Technical Services.
During the quarter ended March 31, 2007, we combined our oil and gas customers that were previously
included in our International segment into our Domestic Oil and Gas segment, and eliminated the
term Domestic from that segment. Additionally, the contract work previously included in the
International segment for the National Science Foundation is now included in our Technical Services
segment. We therefore now have three reportable segments: Oil and Gas, Air Medical, and Technical
Services. All prior periods have been recast to conform to the 2007 presentation.
A segments operating income is its operating revenues less its direct expenses and selling,
general, and administrative costs. Each segment has a portion of selling, general and
administrative expense that is charged directly to the segment and a portion that is allocated.
Direct charges represent the vast majority of segment selling, general and administrative expense.
Allocated selling, general and administrative expense is based primarily on total segment costs as
a percentage of total operating costs.
Air Medical operations are headquartered in Phoenix, AZ, where we maintain significant
separate facilities and administrative staff dedicated to this segment. Those costs are charged
directly to the Air Medical segment, resulting in a disproportionate share of selling, general and
administrative costs compared to the Companys other reportable segments. Unallocated overhead
consists primarily of corporate selling, general, and administrative costs that we do not allocate
to the reportable segments.
Oil and Gas Segment. Our Oil and Gas segment provides helicopter services primarily for the major
oil and gas production companies transporting personnel and/or equipment to offshore platforms in
the Gulf of Mexico, Angola and the Democratic Republic of Congo. We currently operate 161 aircraft
in this segment.
6
Operating revenue from the Oil and Gas segment is derived mainly from long-term contracts that
include a fixed monthly rate for a particular model of aircraft, plus a variable rate for flight
time. Operating costs for the Oil and Gas operations are primarily aircraft operations costs,
including costs for pilots and maintenance personnel.
The Oil and Gas segment represented 64% of our total operating revenues for the nine months ended
September 30, 2007, compared to 67% of total operating revenues for the nine months ended September
30, 2006.
Air Medical Segment. Our Air Medical segment provides transport services as an independent
provider of emergency medical services and, to a lesser extent, under contract with certain
hospitals. We operate in 15 states with 72 aircraft that are specially outfitted to accommodate
emergency patients, medical personnel and emergency medical equipment. For the nine months ended
September 30, 2007 and 2006, approximately 34% and 31% of our total operating revenues were
generated by our Air Medical operations.
As an independent provider, we bill for our services on the basis of a flat rate plus a variable
charge per loaded mile, regardless of aircraft model. Revenues are recorded net of contractual
allowances under agreements with the third party payors and estimated uncompensated care when the
services are provided. Contractual allowances and uncompensated care are estimated based on
historical collection experience by payor category. The main payor categories are Medicaid,
Medicare, Insurance, and Self-Pay. Payor mix and changes in reimbursement rates are the factors
most subject to sensitivity and variability in calculating our allowances. We compute an 18 month
historical payment analysis of accounts paid in full, by category. The allowance percentages
calculated are applied to the payor categories, and the necessary adjustments are made to the
revenue allowance. The allowance for contractual discounts was $34.2 million and $30.1 million as
of September 30, 2007 and December 31, 2006, respectively. The allowance for uncompensated care
was $19.8 million and $20.5 million as of September 30, 2007 and December 31, 2006, respectively.
Provisions for contractual discounts and estimated uncompensated care are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
Accounts Receivable |
|
|
Quarter Ended |
|
Nine Months Ended |
|
|
|
September 30, |
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Gross billings |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Provision for contractual discounts |
|
|
46 |
% |
|
|
43 |
% |
|
|
46 |
% |
|
|
43 |
% |
|
|
34 |
% |
|
|
32 |
% |
Provision for uncompensated care |
|
|
12 |
% |
|
|
11 |
% |
|
|
10 |
% |
|
|
10 |
% |
|
|
20 |
% |
|
|
21 |
% |
Amounts attributable to Medicaid, Medicare, Insurance and Self Pay as a percentage of net Air
Medical revenues are as follows:
|
|
|
|
Quarter Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Medicaid |
|
|
10 |
% |
|
|
12 |
% |
|
|
9 |
% |
|
|
12 |
% |
Medicare |
|
|
15 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
14 |
% |
Insurance |
|
|
69 |
% |
|
|
63 |
% |
|
|
67 |
% |
|
|
62 |
% |
Self Pay |
|
|
6 |
% |
|
|
10 |
% |
|
|
9 |
% |
|
|
12 |
% |
We also have a limited number of contracts with hospitals under which we receive a fixed monthly
rate for aircraft availability and an hourly rate for flight time. Those contracts generate
approximately 10% of the segments revenues.
7
Technical Services Segment. The Technical Services segment provides helicopter repair and overhaul
services for flight operations customers that own their aircraft. Costs associated with these
services are primarily labor, and customers are generally billed at a percentage above cost. We
also operate four aircraft for the National Science Foundation in Antarctica under this segment.
Approximately 2% of our total operating revenues for the nine months ended September 30, 2007 and
2006 were generated by our technical services operations.
Summarized financial information concerning our reportable operating segments for the quarter and
nine months ended September 30, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Thousands of dollars) |
|
|
(Thousands of dollars) |
|
Segment operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas |
|
$ |
76,853 |
|
|
$ |
71,416 |
|
|
$ |
213,843 |
|
|
$ |
212,168 |
|
Air Medical |
|
|
39,839 |
|
|
|
35,735 |
|
|
|
113,036 |
|
|
|
100,042 |
|
Technical Services |
|
|
1,709 |
|
|
|
2,164 |
|
|
|
6,250 |
|
|
|
5,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
118,401 |
|
|
|
109,315 |
|
|
|
333,129 |
|
|
|
317,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment direct expenses (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas |
|
|
65,805 |
|
|
|
58,912 |
|
|
|
185,000 |
|
|
|
169,668 |
|
Air Medical |
|
|
34,579 |
|
|
|
32,560 |
|
|
|
102,220 |
|
|
|
94,938 |
|
Technical Services |
|
|
1,043 |
|
|
|
1,752 |
|
|
|
4,559 |
|
|
|
4,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct expenses |
|
|
101,427 |
|
|
|
93,224 |
|
|
|
291,779 |
|
|
|
269,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas |
|
|
406 |
|
|
|
301 |
|
|
|
1,196 |
|
|
|
950 |
|
Air Medical |
|
|
1,882 |
|
|
|
1,758 |
|
|
|
5,721 |
|
|
|
5,403 |
|
Technical Services |
|
|
12 |
|
|
|
14 |
|
|
|
37 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses |
|
|
2,300 |
|
|
|
2,073 |
|
|
|
6,954 |
|
|
|
6,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct and selling, general and administrative expenses |
|
|
103,727 |
|
|
|
95,297 |
|
|
|
298,733 |
|
|
|
275,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net segment profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas |
|
|
10,642 |
|
|
|
12,203 |
|
|
|
27,647 |
|
|
|
41,550 |
|
Air Medical |
|
|
3,378 |
|
|
|
1,417 |
|
|
|
5,095 |
|
|
|
(299 |
) |
Technical Services |
|
|
654 |
|
|
|
398 |
|
|
|
1,654 |
|
|
|
724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
14,674 |
|
|
|
14,018 |
|
|
|
34,396 |
|
|
|
41,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net (2) |
|
|
8,107 |
|
|
|
3,280 |
|
|
|
19,859 |
|
|
|
5,535 |
|
Unallocated selling, general and administrative costs |
|
|
(5,074 |
) |
|
|
(4,722 |
) |
|
|
(15,352 |
) |
|
|
(13,826 |
) |
Interest expense |
|
|
(3,895 |
) |
|
|
(4,039 |
) |
|
|
(12,262 |
) |
|
|
(13,241 |
) |
Loss on debt restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
$ |
13,812 |
|
|
$ |
8,537 |
|
|
$ |
26,641 |
|
|
$ |
7,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) |
|
Included in direct expense are the depreciation expense amounts below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Oil and Gas |
|
$ |
4,359 |
|
|
$ |
4,509 |
|
|
$ |
13,063 |
|
|
$ |
12,822 |
|
Air Medical |
|
|
1,946 |
|
|
|
2,343 |
|
|
|
6,568 |
|
|
|
6,627 |
|
Technical Services |
|
|
104 |
|
|
|
37 |
|
|
|
489 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,409 |
|
|
$ |
6,889 |
|
|
$ |
20,120 |
|
|
$ |
19,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated SG&A |
|
$ |
1,011 |
|
|
$ |
1,047 |
|
|
$ |
3,081 |
|
|
$ |
2,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2) |
|
Including gains (losses) on disposition of assets and other income. |
8
3. Commitments and Contingencies
Environmental Matters We have an aggregate estimated liability of $0.2 million as of September
30, 2007 and December 31, 2006 for environmental remediation costs that are probable and estimable.
We have conducted environmental surveys of our former Lafayette Facility, which we vacated in
2001, and have determined that limited soil and groundwater contamination exists at the facility.
We have installed groundwater monitoring wells at the facility and periodically monitor and report
on the contamination. In May 2003, we submitted a Louisiana Risk Evaluation/Corrective Action Plan
(RECAP) standard Site Assessment Report to the Louisiana Department of Environmental Quality
(LDEQ) fully delineating the extent and type of contamination. The Site Assessment Report was
updated in April, 2006 to include recent analytical data. We are currently preparing a report
evaluating all available data against the LDEQ RECAP Management Option 1 Standard. Once that is
complete, LDEQ will establish what cleanup standards must be met at the site. When the process is
complete, we will be in a position to develop an appropriate remediation plan and determine the
resulting cost of remediation. We have not recorded any estimated liability for remediation and
contamination and, based upon the May, 2003 Site Assessment Report and ongoing monitoring, we
believe the ultimate remediation costs for the former Lafayette facility will not be material to
our consolidated financial position, results of operations, or liquidity.
Legal Matters We have been named as a defendant in various legal actions that have arisen in the
ordinary course of business and have not been finally adjudicated. In the opinion of management,
the amount of the ultimate liability with respect to these actions will not have a material adverse
effect on our consolidated financial condition, results of operations, or liquidity.
On June 15, 2005, we received a subpoena from the United States Department of Justice relating to a
grand jury investigation of potential antitrust violations among providers of helicopter
transportation services in the Gulf of Mexico. We are cooperating fully with the investigation and
believe we have provided all documents and other information required by the subpoena. We have not
received any further communications from the Department of Justice since shortly after providing
the requested information. At this stage, it is not possible to assess the outcome of this
investigation, although based on the information available to us to date, management does not
expect the outcome of the investigation to have a material adverse effect on our financial
condition, results of operations, or liquidity.
Long-term Debt On April 12, 2006, we issued $200 million of 7.125% Senior Notes due 2013. Net
proceeds of $196.0 million were used to repurchase $184.8 million of our existing 9 3/8% Senior
Notes, which were tendered by April 12, 2006, at a total cost of $201.6 million including an early
call premium and accrued interest. We redeemed the remaining $15.2 million of 9 3/8% Senior Notes
on May 1, 2006, at a redemption price of 104.688% of the face amount plus accrued interest. As a
result of the refinancing of the 9 3/8% Senior Notes, we recorded a pretax charge of $12.8 million
($7.7 million, net of tax) in the quarter ended June 30, 2006, which consisted of a $9.8
million early call premium, $2.6 million of unamortized issuance costs, and $0.4 million in related
expenses of the tender for the outstanding notes.
The 7.125% Senior Notes mature April 15, 2013, and interest is payable semi-annually on April 15
and October 15. The notes contain restrictive covenants, including limitations on indebtedness,
liens, dividends, repurchases of capital stock and other payments affecting restricted
subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset
sales, and mergers and consolidations and sales of assets. We were in compliance with the
covenants applicable to these notes as of September 30, 2007.
We have a $35 million revolving credit facility with a commercial bank, which is scheduled to
expire on September 1, 2009. As of September 30, 2007, we had $1.8 million in borrowings and $4.6
million in letters of credit outstanding under the facility. The facility includes covenants
related to working capital, funded debt to net worth, and consolidated net worth. As of September
30, 2007, we were in compliance with these covenants.
9
Operating Leases We lease certain aircraft, facilities, and equipment used in our operations.
The related lease agreements, which include both non-cancelable and month-to-month terms, generally
provide for fixed monthly rentals, and certain real estate leases also include renewal options. We
generally pay all insurance, taxes, and maintenance expenses associated with these aircraft, and
some leases contain renewal and purchase options.
At September 30, 2007, we had approximately $182.2 million in aggregate commitments under operating
leases of which approximately $5.1 million is payable through December 31, 2007, and a total of
$20.4 million is payable over the twelve months ending September 30, 2008. Of the total lease
commitments, $161.1 million represents commitments for aircraft, and facility lease commitments of
$21.1 million, primarily for our facilities in Lafayette, Louisiana.
Purchase Commitments At September 30, 2007, we had purchase commitments totaling $180.3 million
for aircraft, which we expect to fund from existing cash or short-term investments, or with
operating leases, as required.
Assets Held for Sale Included in assets held for sale are certain aircraft with a net book value
of approximately $5.6 million as of September 30, 2007. Subsequent to September 30, 2007, we
completed the sale of these aircraft. We expect to report a gain from the sale of these aircraft.
These aircraft are not strategic to our fleet plans.
4. Property and Equipment
Effective
July 1, 2007, we changed the estimated residual value of certain aircraft from
40% to 54%. We believe the revised amounts reflect our historical experience and more
appropriately matches costs over the estimated useful lives and salvage values of these assets.
The change in residual values of certain aircraft was based on our experience in sales of
such aircraft and industry data which indicated that these aircraft were retaining on average a
salvage value of at least 54% by model type. The effect of this change for the three and nine
months ended September 30, 2007 was a reduction in depreciation expense of $0.8 million ($0.5
million after tax or $0.03 per diluted share).
5. Valuation Accounts
We have established an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, current market conditions, and other information. The allowance for
doubtful accounts was approximately $0.1 million at September 30, 2007 and December 31, 2006.
We have also established valuation reserves related to obsolete and excess inventory. The
inventory valuation reserves were $7.7 million and $7.3 million at September 30, 2007 and December
31, 2006, respectively.
6. Employees
Union Related Matters As previously reported, the pilots represented by the OPEIU (the Office and
Professional Employees International Union), commenced a general strike on September 20, 2006,
affecting both the Oil and Gas and Air Medical segments.
On November 10, 2006, the OPEIU notified the Company that it was ending the strike, purportedly
offering an unconditional return to work of the remaining striking pilots. Thereafter, questions
arose over whether the OPEIUs offer was indeed unconditional. As a result, the parties were
unable to agree on a return to work process, and the OPEIU subsequently filed suit seeking
injunctive relief in the United States District Court for the Western District of Louisiana.
10
On January 11, 2007, the court conducted a hearing relating to our handling of the return to work
of the remaining strikers. At the judges request, an agreement was reached on a return to work
process. The court-approved methodology focused on pilot qualifications and currency, safety,
customer requirements, training status and certain other criteria. The return-to-work process was
substantially completed by April 29, 2007. We continue to operate under a pilot compensation
program and other terms and conditions of employment based on the final contract proposals that
were made by the Company and implemented at the end of collective bargaining negotiations on August
28, 2006.
Other issues surrounding PHIs allegations that the OPEIU engaged in bad faith bargaining, as well
as the OPEIUs counterclaims and claims arising from the OPEIUs offer to return to work, remain
outstanding and are expected to be addressed by the same federal court. A trial on these matters
is currently set to start April 21, 2008. It is not possible to predict the outcome of the
remaining claims and counterclaims.
Employee Incentive Compensation In 2002, we implemented an incentive compensation plan for
non-executive and non-represented employees. For calendar year 2007, the represented pilots were
added to this plan as part of the Companys implemented contract proposals. The plan allows us to
pay up to 7% of earnings before tax upon achieving a specified earnings threshold. During 2004, we
implemented an executive/senior management plan for certain corporate and business unit management
employees. Pursuant to these plans, we have accrued an estimated incentive compensation expense of
$0.6 million and $1.0 million for the quarter and nine months ended September 30, 2007,
respectively. We have also accrued $0.1 million and $0.5 million for the Safety Incentive Bonus
for the quarter and nine months ended September 30, 2007, respectively. For the year ended
December 31, 2006, we did not record incentive compensation expense related to the plans because
the earnings threshold was not met.
7. Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting and
disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in
practice associated with certain aspects of the recognition and measurement related to accounting
for income taxes. On January 1, 2007, we adopted the provisions of FIN 48. Based on our
evaluation, we have concluded that there are no significant uncertain tax positions requiring
recognition in our financial statements. Our evaluation was performed for the tax years ended
December 31, 2001 to 2006, the tax years which remained subject to examination by major tax
jurisdictions.
Based on a review and evaluation at September 30, 2007, it was determined that there are no
material tax positions requiring recognition for the current tax year. Our evaluation was
performed for the tax years ended December 31, 2003 to 2006, the tax years which remain subject to
examination by major tax jurisdictions as of September 30, 2007.
In September 2006, FASB issued SFAS No. 157, Fair Value Measurements which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. Earlier application is encouraged provided that the reporting entity has not
yet issued financial statements for that fiscal year including financial statements for an interim
period within that fiscal year. We are assessing SFAS No. 157 and have not determined yet the
impact that the adoption of SFAS No. 157 will have on our results of operations, financial
position, or liquidity.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statements No. 115 (SFAS No. 159). SFAS
No. 159 permits the Company to choose, at specified election dates, to measure eligible items at
fair value (the fair value option). We would report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent reporting period. This
accounting standard is
11
effective as of the beginning of the first fiscal year that begins after November 15, 2007. We are
assessing SFAS No. 159 and have not determined yet the impact that the adoption of SFAS No. 159
will have on our results of operations, financial position, or liquidity.
8. Shareholders Equity
On April 12, 2006, we completed the sale of 4,287,920 non-voting common shares at $35.00 per share
and on May 1, 2006, we completed the sale of the over-allotment of 578,680 shares also at $35.00
per share. Proceeds from the offering were $160.7 million, net of expenses.
We had an average of 15.3 million common shares outstanding for the quarters ended September 30,
2007 and September 30, 2006.
9. Comprehensive Income
The following table summarizes the components of total comprehensive income (net of taxes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Thousands of dollars) |
|
|
(Thousands of dollars) |
|
|
Net earnings |
|
$ |
8,629 |
|
|
$ |
5,122 |
|
|
$ |
16,461 |
|
|
$ |
4,592 |
|
SFAS No. 158 adjustment |
|
|
14 |
|
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
8,643 |
|
|
$ |
5,122 |
|
|
$ |
16,449 |
|
|
$ |
4,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Condensed Consolidating Financial Information
On April 12, 2006, we issued $200 million of 7.125% Senior Notes due 2013 and retired $184.8
million of 9 3/8% Series B Senior Notes due 2009. On May 1, 2006, we redeemed the remaining $15.2
million
9 3/8% Series B Senior Notes.
Our 7.125% Senior Notes are fully and unconditionally guaranteed on a joint and several, senior
basis by all of our Guarantor Subsidiaries.
The following supplemental condensed financial information sets forth, on a consolidated basis, the
balance sheet, statement of operations, and statement of cash flows information for PHI, Inc.
(Parent Company Only) and the Guarantor Subsidiaries. The principal eliminating entries
eliminate investments in subsidiaries, intercompany balances, and intercompany revenues and
expenses.
12
PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
|
Parent |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Only |
|
|
Subsidiaries (1) |
|
|
Eliminations |
|
|
Consolidated |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
217 |
|
|
$ |
430 |
|
|
$ |
|
|
|
$ |
647 |
|
Short-term investments |
|
|
86,856 |
|
|
|
|
|
|
|
|
|
|
|
86,856 |
|
Accounts receivable net of allowance |
|
|
90,511 |
|
|
|
14,376 |
|
|
|
|
|
|
|
104,887 |
|
Inventories of spare parts and supplies |
|
|
55,094 |
|
|
|
|
|
|
|
|
|
|
|
55,094 |
|
Assets held for sale |
|
|
5,647 |
|
|
|
|
|
|
|
|
|
|
|
5,647 |
|
Other current assets |
|
|
8,889 |
|
|
|
12 |
|
|
|
|
|
|
|
8,901 |
|
Refundable income taxes |
|
|
44 |
|
|
|
28 |
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
247,258 |
|
|
|
14,846 |
|
|
|
|
|
|
|
262,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries and other |
|
|
55,604 |
|
|
|
|
|
|
|
(55,604 |
) |
|
|
|
|
Intercompany receivable |
|
|
|
|
|
|
49,027 |
|
|
|
(49,027 |
) |
|
|
|
|
Other assets |
|
|
32,495 |
|
|
|
277 |
|
|
|
|
|
|
|
32,772 |
|
Property and equipment, net |
|
|
415,601 |
|
|
|
12,621 |
|
|
|
|
|
|
|
428,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
750,958 |
|
|
$ |
76,771 |
|
|
$ |
(104,631 |
) |
|
$ |
723,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
48,084 |
|
|
$ |
2,949 |
|
|
$ |
|
|
|
$ |
51,033 |
|
Intercompany payable |
|
|
49,027 |
|
|
|
|
|
|
|
(49,027 |
) |
|
|
|
|
Accrued vacation payable |
|
|
3,499 |
|
|
|
288 |
|
|
|
|
|
|
|
3,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
100,610 |
|
|
|
3,237 |
|
|
|
(49,027 |
) |
|
|
54,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
201,750 |
|
|
|
|
|
|
|
|
|
|
|
201,750 |
|
Deferred income taxes and other long-term
liabilities |
|
|
32,024 |
|
|
|
17,930 |
|
|
|
|
|
|
|
49,954 |
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
292,222 |
|
|
|
4,402 |
|
|
|
(4,402 |
) |
|
|
292,222 |
|
Accumulated other comprehensive
income |
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
65 |
|
Retained earnings |
|
|
124,287 |
|
|
|
51,202 |
|
|
|
(51,202 |
) |
|
|
124,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
416,574 |
|
|
|
55,604 |
|
|
|
(55,604 |
) |
|
|
416,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity |
|
$ |
750,958 |
|
|
$ |
76,771 |
|
|
$ |
(104,631 |
) |
|
$ |
723,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) |
|
Foreign subsidiaries represent minor subsidiaries and are included in the guarantors subsidiaries amounts. |
13
PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
Parent |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Only |
|
|
Subsidiaries (1) |
|
|
Eliminations |
|
|
Consolidated |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
385 |
|
|
$ |
435 |
|
|
$ |
|
|
|
$ |
820 |
|
Short-term investments |
|
|
153,414 |
|
|
|
|
|
|
|
|
|
|
|
153,414 |
|
Accounts receivable net of allowance |
|
|
75,642 |
|
|
|
13,652 |
|
|
|
|
|
|
|
89,294 |
|
Inventories of spare parts and supplies |
|
|
55,596 |
|
|
|
|
|
|
|
|
|
|
|
55,596 |
|
Other current assets |
|
|
7,922 |
|
|
|
8 |
|
|
|
|
|
|
|
7,930 |
|
Refundable income taxes |
|
|
44 |
|
|
|
591 |
|
|
|
|
|
|
|
635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
293,003 |
|
|
|
14,686 |
|
|
|
|
|
|
|
307,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries and other |
|
|
46,226 |
|
|
|
|
|
|
|
(46,226 |
) |
|
|
|
|
Intercompany receivable |
|
|
|
|
|
|
44,085 |
|
|
|
(44,085 |
) |
|
|
|
|
Other assets |
|
|
23,759 |
|
|
|
57 |
|
|
|
|
|
|
|
23,816 |
|
Property and equipment, net |
|
|
361,570 |
|
|
|
7,895 |
|
|
|
|
|
|
|
369,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
724,558 |
|
|
$ |
66,723 |
|
|
$ |
(90,311 |
) |
|
$ |
700,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
46,653 |
|
|
$ |
4,354 |
|
|
$ |
|
|
|
$ |
51,007 |
|
Intercompany payable |
|
|
44,085 |
|
|
|
|
|
|
|
(44,085 |
) |
|
|
|
|
Accrued vacation payable |
|
|
2,295 |
|
|
|
288 |
|
|
|
|
|
|
|
2,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
93,033 |
|
|
|
4,642 |
|
|
|
(44,085 |
) |
|
|
53,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
205,500 |
|
|
|
|
|
|
|
|
|
|
|
205,500 |
|
Deferred income taxes and other long-term
liabilities |
|
|
25,900 |
|
|
|
15,855 |
|
|
|
|
|
|
|
41,755 |
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
292,222 |
|
|
|
4,402 |
|
|
|
(4,402 |
) |
|
|
292,222 |
|
Accumulated other comprehensive
income |
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
77 |
|
Retained earnings |
|
|
107,826 |
|
|
|
41,824 |
|
|
|
(41,824 |
) |
|
|
107,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
400,125 |
|
|
|
46,226 |
|
|
|
(46,226 |
) |
|
|
400,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity |
|
$ |
724,558 |
|
|
$ |
66,723 |
|
|
$ |
(90,311 |
) |
|
$ |
700,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 30, 2007 |
|
|
|
Parent |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Only |
|
|
Subsidiaries (1) |
|
|
Eliminations |
|
|
Consolidated |
|
Operating revenues |
|
$ |
100,311 |
|
|
$ |
18,090 |
|
|
$ |
|
|
|
$ |
118,401 |
|
Management fees |
|
|
723 |
|
|
|
|
|
|
|
(723 |
) |
|
|
|
|
Gain on dispositions of assets, net |
|
|
6,988 |
|
|
|
|
|
|
|
|
|
|
|
6,988 |
|
Other |
|
|
1,119 |
|
|
|
|
|
|
|
|
|
|
|
1,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,141 |
|
|
|
18,090 |
|
|
|
(723 |
) |
|
|
126,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses |
|
|
89,533 |
|
|
|
11,894 |
|
|
|
|
|
|
|
101,427 |
|
Management fees |
|
|
|
|
|
|
723 |
|
|
|
(723 |
) |
|
|
|
|
Selling, general, and administrative |
|
|
6,607 |
|
|
|
767 |
|
|
|
|
|
|
|
7,374 |
|
Equity in net income of consolidated
subsidiaries |
|
|
(3,835 |
) |
|
|
|
|
|
|
3,835 |
|
|
|
|
|
Interest expense |
|
|
3,895 |
|
|
|
|
|
|
|
|
|
|
|
3,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,200 |
|
|
|
13,384 |
|
|
|
3,112 |
|
|
|
112,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
12,941 |
|
|
|
4,706 |
|
|
|
(3,835 |
) |
|
|
13,812 |
|
Income taxes |
|
|
4,312 |
|
|
|
871 |
|
|
|
|
|
|
|
5,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
8,629 |
|
|
$ |
3,835 |
|
|
$ |
(3,835 |
) |
|
$ |
8,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 30, 2006 |
|
|
|
Parent |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Only |
|
|
Subsidiaries (1) |
|
|
Eliminations |
|
|
Consolidated |
|
Operating revenues |
|
$ |
94,968 |
|
|
$ |
14,347 |
|
|
$ |
|
|
|
$ |
109,315 |
|
Management fees |
|
|
574 |
|
|
|
|
|
|
|
(574 |
) |
|
|
|
|
Gain on dispositions of assets, net |
|
|
621 |
|
|
|
|
|
|
|
|
|
|
|
621 |
|
Other |
|
|
2,651 |
|
|
|
8 |
|
|
|
|
|
|
|
2,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,814 |
|
|
|
14,355 |
|
|
|
(574 |
) |
|
|
112,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses |
|
|
82,158 |
|
|
|
11,066 |
|
|
|
|
|
|
|
93,224 |
|
Management fees |
|
|
|
|
|
|
574 |
|
|
|
(574 |
) |
|
|
|
|
Selling, general, and administrative |
|
|
6,042 |
|
|
|
753 |
|
|
|
|
|
|
|
6,795 |
|
Equity in net income of consolidated
subsidiaries |
|
|
(1,564 |
) |
|
|
|
|
|
|
1,564 |
|
|
|
|
|
Interest expense |
|
|
4,039 |
|
|
|
|
|
|
|
|
|
|
|
4,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,675 |
|
|
|
12,393 |
|
|
|
990 |
|
|
|
104,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
8,139 |
|
|
|
1,962 |
|
|
|
(1,564 |
) |
|
|
8,537 |
|
Income taxes |
|
|
3,017 |
|
|
|
398 |
|
|
|
|
|
|
|
3,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
5,122 |
|
|
$ |
1,564 |
|
|
$ |
(1,564 |
) |
|
$ |
5,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) |
|
Foreign subsidiaries represent minor subsidiaries and are included in the guarantors
subsidiaries amounts. |
15
PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007 |
|
|
|
Parent |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Only |
|
|
Subsidiaries (1) |
|
|
Eliminations |
|
|
Consolidated |
|
Operating revenues |
|
$ |
282,892 |
|
|
$ |
50,237 |
|
|
$ |
|
|
|
$ |
333,129 |
|
Management fees |
|
|
2,009 |
|
|
|
|
|
|
|
(2,009 |
) |
|
|
|
|
Gain on dispositions of assets, net |
|
|
15,596 |
|
|
|
|
|
|
|
|
|
|
|
15,596 |
|
Other |
|
|
4,255 |
|
|
|
8 |
|
|
|
|
|
|
|
4,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304,752 |
|
|
|
50,245 |
|
|
|
(2,009 |
) |
|
|
352,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses |
|
|
257,298 |
|
|
|
34,481 |
|
|
|
|
|
|
|
291,779 |
|
Management fees |
|
|
|
|
|
|
2,009 |
|
|
|
(2,009 |
) |
|
|
|
|
Selling, general, and administrative |
|
|
20,060 |
|
|
|
2,246 |
|
|
|
|
|
|
|
22,306 |
|
Equity in net income of consolidated
subsidiaries |
|
|
(9,378 |
) |
|
|
|
|
|
|
9,378 |
|
|
|
|
|
Interest expense |
|
|
12,262 |
|
|
|
|
|
|
|
|
|
|
|
12,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280,242 |
|
|
|
38,736 |
|
|
|
7,369 |
|
|
|
326,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
24,510 |
|
|
|
11,509 |
|
|
|
(9,378 |
) |
|
|
26,641 |
|
Income taxes |
|
|
8,049 |
|
|
|
2,131 |
|
|
|
|
|
|
|
10,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
16,461 |
|
|
$ |
9,378 |
|
|
$ |
(9,378 |
) |
|
$ |
16,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2006 |
|
|
|
Parent |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Only |
|
|
Subsidiaries (1) |
|
|
Eliminations |
|
|
Consolidated |
|
Operating revenues |
|
$ |
276,355 |
|
|
$ |
41,489 |
|
|
$ |
|
|
|
$ |
317,844 |
|
Management fees |
|
|
1,660 |
|
|
|
|
|
|
|
(1,660 |
) |
|
|
|
|
Loss on dispositions of assets, net |
|
|
(541 |
) |
|
|
|
|
|
|
|
|
|
|
(541 |
) |
Other |
|
|
6,061 |
|
|
|
15 |
|
|
|
|
|
|
|
6,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,535 |
|
|
|
41,504 |
|
|
|
(1,660 |
) |
|
|
323,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses |
|
|
239,786 |
|
|
|
29,706 |
|
|
|
|
|
|
|
269,492 |
|
Management fees |
|
|
|
|
|
|
1,660 |
|
|
|
(1,660 |
) |
|
|
|
|
Selling, general, and administrative |
|
|
18,083 |
|
|
|
2,120 |
|
|
|
|
|
|
|
20,203 |
|
Equity in net income of consolidated
subsidiaries |
|
|
(5,755 |
) |
|
|
|
|
|
|
5,755 |
|
|
|
|
|
Interest expense |
|
|
13,241 |
|
|
|
|
|
|
|
|
|
|
|
13,241 |
|
Loss on debt restructuring |
|
|
12,790 |
|
|
|
|
|
|
|
|
|
|
|
12,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278,145 |
|
|
|
33,486 |
|
|
|
4,095 |
|
|
|
315,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
5,390 |
|
|
|
8,018 |
|
|
|
(5,755 |
) |
|
|
7,653 |
|
Income taxes |
|
|
798 |
|
|
|
2,263 |
|
|
|
|
|
|
|
3,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
4,592 |
|
|
$ |
5,755 |
|
|
$ |
(5,755 |
) |
|
$ |
4,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007 |
|
|
|
Parent |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Only |
|
|
Subsidiaries (1) |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash provided by operating activities |
|
$ |
16,469 |
|
|
$ |
(2 |
) |
|
$ |
|
|
|
$ |
16,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(97,485 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(97,488 |
) |
Proceeds from asset dispositions |
|
|
27,488 |
|
|
|
|
|
|
|
|
|
|
|
27,488 |
|
Sale of short-term investments |
|
|
66,558 |
|
|
|
|
|
|
|
|
|
|
|
66,558 |
|
Deposits on aircraft |
|
|
(9,448 |
) |
|
|
|
|
|
|
|
|
|
|
(9,448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
used in investing activities |
|
|
(12,887 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(12,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on line of credit, net |
|
|
(3,750 |
) |
|
|
|
|
|
|
|
|
|
|
(3,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(3,750 |
) |
|
|
|
|
|
|
|
|
|
|
(3,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(168 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
(173 |
) |
Cash and cash equivalents, beginning of
period |
|
|
385 |
|
|
|
435 |
|
|
|
|
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
217 |
|
|
$ |
430 |
|
|
$ |
|
|
|
$ |
647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2006 |
|
|
|
Parent |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Only |
|
|
Subsidiaries (1) |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash provided by operating activities |
|
$ |
22,572 |
|
|
$ |
208 |
|
|
$ |
|
|
|
$ |
22,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(81,428 |
) |
|
|
(194 |
) |
|
|
|
|
|
|
(81,622 |
) |
Proceeds from asset dispositions |
|
|
30,797 |
|
|
|
|
|
|
|
|
|
|
|
30,797 |
|
Purchase of short-term investments |
|
|
(97,062 |
) |
|
|
|
|
|
|
|
|
|
|
(97,062 |
) |
Deposits on aircraft |
|
|
(23,000 |
) |
|
|
|
|
|
|
|
|
|
|
(23,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(170,693 |
) |
|
|
(194 |
) |
|
|
|
|
|
|
(170,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds of debt issuance senior notes |
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
Premium and costs to retire debt early |
|
|
(10,208 |
) |
|
|
|
|
|
|
|
|
|
|
(10,208 |
) |
Repayment of senior notes |
|
|
(200,000 |
) |
|
|
|
|
|
|
|
|
|
|
(200,000 |
) |
Debt issuance costs |
|
|
(4,629 |
) |
|
|
|
|
|
|
|
|
|
|
(4,629 |
) |
Proceeds on line of credit, net |
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
200 |
|
Proceeds from stock issuance, net |
|
|
160,722 |
|
|
|
|
|
|
|
|
|
|
|
160,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
146,085 |
|
|
|
|
|
|
|
|
|
|
|
146,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(2,036 |
) |
|
|
14 |
|
|
|
|
|
|
|
(2,022 |
) |
Cash and cash equivalents, beginning of
period |
|
|
2,577 |
|
|
|
459 |
|
|
|
|
|
|
|
3,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
541 |
|
|
$ |
473 |
|
|
$ |
|
|
|
$ |
1,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) |
|
Foreign subsidiaries represent minor subsidiaries and are included in the guarantors
subsidiaries amounts. |
17
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion and analysis should be read in conjunction with the accompanying unaudited
condensed consolidated financial statements and the notes thereto as well as our audited financial
statements and notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2006 managements discussion and analysis, risk factors and other information
contained therein.
Forward-Looking Statements
All statements other than statements of historical fact contained in this Form 10-Q, other periodic
reports filed by us with the Securities and Exchange Commission, and other written and oral
statements made by us or on our behalf, are forward-looking statements. When used herein, the
words anticipates, expects, believes, goals, intends, plans, or projects and similar
expressions are intended to identify forward-looking statements. Forward-looking statements are
based on a number of assumptions about future events and are subject to significant risks,
uncertainties, and other factors that may cause our actual results to differ materially from the
expectations, beliefs, and estimates expressed or implied in such forward-looking statements.
Although we believe that the assumptions underlying the forward-looking statements are reasonable,
no assurance can be given that such assumptions will prove correct or even approximately correct.
Factors that could cause our results to differ materially from the expectations expressed in such
forward-looking statements include but are not limited to the following: unexpected variances in
flight hours; the effect on demand for our services caused by volatility of oil and gas prices; the
effect on our operating costs of volatile fuel prices; adverse weather conditions; the availability
and cost of capital required to acquire aircraft; environmental risks; the activities of our
competitors; changes in government regulation; results of future collective bargaining negotiations
with the union representing our pilots, or the effects of not reaching any agreement with the
union; continuing litigation with the union arising out of the terminated collective bargaining
negotiations and the pilots strike that ended in late 2006; the effects of any other labor strife;
operating hazards; aircraft accidents and any resulting personal injury, deaths or property damage;
risks related to operating in foreign countries; the ability to obtain adequate insurance at an
acceptable cost, and the effects on our ability to do so of the location of many of our operations
in areas that are vulnerable to hurricanes; and the ability to develop and implement successful
business strategies. All forward-looking statements in this document are expressly qualified in
their entirety by the cautionary statements in this paragraph, the Risk Factors section of this
report, and the Risk Factors section of our Annual Report on Form 10-K for the year ended December
31, 2006. PHI undertakes no obligation to update any forward-looking statements, whether as a
result of new information, future events, or otherwise.
Overview
Operating revenues for the three months ended September 30, 2007 were $118.4 million, compared to
$109.3 million for the three months ended September 30, 2006, an increase of $9.1 million. Oil and
Gas operating revenues increased $5.5 million for the quarter ended September 30, 2007, due to an
increase in medium and heavy aircraft flight hours, and contractual rate increases, offset in part
by a reduction of light aircraft flight hours and aircraft and flight hours in our foreign
operations. Operating revenues in the Air Medical segment increased $4.1 million, due to rate
increases and increased patient transports. Technical Services operating revenues decreased $0.5
million.
The Oil and Gas segment continues to be affected by pilot staffing levels. Substantial progress
has been made since the first quarter 2007 in rebuilding the pilot workforce, and will continue to
be made.
Flight hours for the quarter ended September 30, 2007 were 36,513, compared to 39,534 for the
quarter ended September 30, 2006. The decrease was due to a reduction in flight hours in our
foreign operations, and continuing effects of the strike on our domestic operations through the
third quarter related to pilot
18
staffing levels. Although we have increased our pilot workforce since the termination of the
pilots strike, we still have requirements for additional pilots, particularly in the Oil and Gas
segment, due to the delivery of new aircraft.
Operating revenues for the nine months ended September 30, 2007 were $333.1 million, compared to
$317.8 million for the same period in 2006, an increase of $15.3 million. Operating revenues in
the Air Medical segment increased $13.0 million due to rate increases and increased patient
transports, primarily in the second and third quarters. Oil and Gas operating revenues increased
$1.6 million, due to an increase in medium and heavy aircraft flight hours and contractual rate
increases in our domestic operations, offset in part by a reduction of light aircraft flight hours
and aircraft and flight hours in our foreign operations. There was an increase in Technical
Services revenues of $0.7 million for the nine months ended September 30, 2007.
Flight hours for the nine months ended September 30, 2007 were 106,627, compared to 116,901 for the
nine months ended September 30, 2006. The decrease for the nine months was due to pilot staffing
levels in our domestic oil and gas operations, and a reduction in flight hours in our foreign
operations.
Since September 30, 2006, we have sold or disposed of 25 aircraft, primarily consisting of older
aircraft that were not in our long term growth plan. Since September 30, 2006, we have taken
delivery of 27 aircraft, consisting of three heavy, eight medium, 15 light, and one fixed wing
aircraft.
Since December 31, 2006, we have taken delivery of twelve light, five medium, one heavy, and one
fixed wing aircraft.
At September 30, 2007, we had an order for one additional transport category aircraft at an
approximate cost of $18.6 million for delivery in early 2008. We intend to execute an operating
lease for this aircraft.
At September 30, 2007, we also had orders for 34 medium and light aircraft for service primarily in
the Oil and Gas segment, although certain of these may be assigned to the Air Medical segment as
growth opportunities materialize. The total cost of these aircraft is $161.8 million and delivery
dates are scheduled through the remainder of 2007, 2008, and 2009.
Effective
July 1, 2007, we changed the estimated residual value of certain aircraft from
40% to 54%. We believe the revised amounts reflect our historical experience and more
appropriately matches costs over the estimated useful lives and salvage values of these assets.
The change in residual values of certain aircraft was based on our experience in sales of
such aircraft and industry data which indicated that these aircraft were retaining on average a
salvage value of at least 54% by model type. The effect of this change for the three and nine
months ended September 30, 2007 was a reduction in depreciation expense of $0.8 million ($0.5
million after tax or $0.03 per diluted share).
Direct operating expense was $101.4 million for the three months ended September 30, 2007, compared
to $93.2 million for the three months ended September 30, 2006, an increase of $8.2 million. This
increase was due to increases in employee compensation expense ($2.8 million), due primarily to
compensation increases including incentive and safety compensation accruals; increased aircraft
lease expense ($3.3 million); and increased aircraft warranty costs ($2.4 million) due to
additional aircraft added to the fleet. (See Combined Operations Direct Expenses which discusses
these warranty costs.) Depreciation expense decreased ($0.5 million) due to a $0.8 million
adjustment related to the change in residual value effective July 1, 2007, as discussed above.
Other items increased, net ($0.2 million).
Direct operating expense was $291.8 million for the nine months ended September 30, 2007, compared
to $269.5 million for the nine months ended September 30, 2006, an increase of $22.3 million. The
increase was due to increases in employee expenses ($3.9 million), primarily due to compensation
increases including incentive and safety compensation accruals; contract labor costs ($4.2
million); outside services
19
primarily in the Air Medical segment ($1.8 million); aircraft lease expense ($4.9 million);
aircraft warranty costs ($5.8 million) due to additional aircraft added to the fleet; property
taxes ($1.0 million), and other items, net ($0.3 million). There was also an increase in
depreciation expense ($0.4 million) due to additional aircraft added to the fleet, offset by a $0.8
million adjustment related to the change in residual values effective July 1, 2007, as discussed
above.
Selling, general and administrative expenses were $7.4 million for the three months ended September
30, 2007, compared to $6.8 million for the three months ended September 30, 2006, an increase of
$0.6 million. This increase was related to increased employee compensation expense ($0.2 million);
and outside services ($0.1 million) primarily related to Air Medical segment; and other items, net
($0.3 million).
Selling, general and administrative expenses were $22.3 million for the nine months ended September
30, 2007, compared to $20.2 million for the nine months ended September 30, 2006, an increase of
$2.1 million. This increase was a result of increased legal costs ($0.3 million) related to union
issues; employee compensation costs ($0.5 million) due to overtime costs in the first quarter
related to the strike and also due to compensation increases including incentive and safety
compensation accruals; outside services consisting primarily of consulting fees in the Air Medical
segment ($0.4 million); insurance expense ($0.3 million); and other items, net ($0.6 million).
Operating margins were 10% for the nine months ended September 30, 2007, compared to 13% for the
same period in 2006. This reduction is primarily a result of reduced flight hours related to pilot
staffing levels and increases in certain direct expenses such as pilot overtime and other increased
compensation expenses.
Earnings before tax for the quarter ended September 30, 2007 were $13.8 million, compared to $8.5
million for the same period in the prior year. Earnings for the quarter ended September 30, 2007,
include a gain on disposition of assets of $7.0 million. Earnings before income taxes for the nine
months ended September 30, 2007 were $26.6 million compared to $7.7 million for the nine months
ended September 30, 2006. Earnings for the nine months ended September 30, 2007, include a gain on
disposition of assets of $15.6 million. Earnings for the nine months ended September 30, 2006,
include a loss on debt restructuring of $12.8 million.
As previously reported, the pilots represented by the OPEIU (the Office and Professional Employees
International Union), commenced a general strike on September 20, 2006, affecting both the Oil and
Gas and Air Medical segments. Approximately 236 pilots initially participated in this strike, out
of a total pilot work force of 597.
On November 10, 2006, the OPEIU notified the Company that it was ending the strike, purportedly
offering an unconditional return to work of the remaining striking pilots. Thereafter, questions
arose over whether the OPEIUs offer was indeed unconditional. As a result, the parties were
unable to agree on a return to work process, and the OPEIU subsequently filed suit seeking
injunctive relief in the United States District Court for the Western District of Louisiana.
On January 11, 2007, the court conducted a hearing relating to our handling of the return to work
of the remaining strikers. At the judges request, an agreement was reached on a return to work
process. The court-approved methodology focused on pilot qualifications and currency, safety,
customer requirements, training status and certain other criteria. The return-to-work process was
substantially completed by April 29, 2007. We continue to operate under a pilot compensation
program and other terms and conditions of employment based on the final contract proposals that
were made by the Company and implemented at the end of collective bargaining negotiations on August
28, 2006.
Other issues surrounding PHIs allegations that the OPEIU engaged in bad faith bargaining, as well
as the OPEIUs counterclaims and claims arising from the OPEIUs offer to return to work, remain
outstanding
20
and are expected to be addressed by the same federal court. A trial on these matters is currently
set to start April 21, 2008. It is not possible to predict the outcome of the remaining claims and
counterclaims.
On April 12, 2006, we completed the sale of 4,287,920 non-voting common shares at $35.00 per share
and on May 1, 2006, we completed the sale of another 578,680 shares pursuant to the underwriters
over-allotment option, also at $35.00 per share. Proceeds from the sales were $160.7 million, net
of underwriting fees and expenses. The proceeds are being used to fund the acquisition of aircraft
delivered in 2006 through 2008. Also on April 12, 2006, we issued $200 million of 7.125% Senior
Notes due April 15, 2013 pursuant to Rule 144A and Regulation S under the Securities Act of 1933.
Proceeds were $196.0 million net of underwriting fees and expenses, and were used to retire $184.8
million of our existing 9 3/8% Senior Notes pursuant to a tender offer, at a total cost of $201.6
million including an early call premium and accrued interest. We subsequently redeemed the
remaining $15.2 million of
9 3/8% Senior Notes on May 1, 2006, at a redemption price of 104.688% of the face amount plus
accrued interest. As a result of the early redemption of the 9 3/8% Senior Notes, we recorded a
pretax charge of $12.8 million ($7.7 million, net of tax), which consisted of a $9.8 million early
call premium, $2.6 million of unamortized issuance costs, and $0.4 million in related expenses of
tendering for outstanding notes. On December 8, 2006, we completed an offer to exchange the 7.125%
Senior Notes for registered debt securities with identical terms.
As previously reported, on June 15, 2005, we received a subpoena from the United States Department
of Justice relating to a grand jury investigation of potential antitrust violations among providers
of helicopter transportation services in the Gulf of Mexico. We are cooperating fully with the
investigation and believe we have provided all documents and other information required by the
subpoena. We have not received any further communications from the Department of Justice since
shortly after providing the requested information. At this stage, it is not possible to predict
the outcome of this investigation, although based on the information available to us to date,
management does not expect the outcome of the investigation to have a material adverse effect on
our financial condition, results of operations, or liquidity.
21
Operating Statistics
The following tables present certain non-financial operational statistics for the quarter and nine
months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006(1) |
|
2007 |
|
2006(1) |
Flight hours: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas |
|
|
27,893 |
|
|
|
31,439 |
|
|
|
82,583 |
|
|
|
93,454 |
|
Air Medical |
|
|
8,620 |
|
|
|
7,986 |
|
|
|
23,636 |
|
|
|
22,866 |
|
Technical Services |
|
|
|
|
|
|
109 |
|
|
|
408 |
|
|
|
581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
36,513 |
|
|
|
39,534 |
|
|
|
106,627 |
|
|
|
116,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Medical Transports (2) |
|
|
5,891 |
|
|
|
5,661 |
|
|
|
16,463 |
|
|
|
15,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2007 |
|
2006 |
Aircraft operated at period end: |
|
|
|
|
|
|
|
|
Oil and Gas |
|
|
161 |
|
|
|
162 |
|
Air Medical |
|
|
72 |
|
|
|
69 |
|
Technical Services |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Total (3) |
|
|
237 |
|
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All prior periods have been recast to conform to the 2007 segment presentation. See Note
2, Segment Information, to the Condensed Consolidated Financial Statements for discussion on
change in reportable segments. |
|
(2) |
|
Represents individual patient transports for the period. Flight hours for these
transports are included above. |
|
(3) |
|
Includes 12 aircraft as of September 30, 2007 and 2006 that are customer owned. |
Quarter Ended September 30, 2007 compared with Quarter Ended September 30, 2006
Combined Operations
Revenues Operating revenues for the three months ended September 30, 2007, were $118.4
million, compared to $109.3 million for the three months ended September 30, 2006, an increase of
$9.1 million. Oil and Gas operating revenues increased $5.5 million for the quarter ended
September 30, 2007, due to an increase in medium and heavy aircraft flight hours and contractual
rate increases, offset in part by a reduction of light aircraft flight hours and aircraft and
flight hours in our foreign operations. Operating revenues in the Air Medical segment increased
$4.1 million due to rate increases and increased patient transports. There was a decrease in
Technical Services operating revenues of $0.5 million.
Total flight hours were 36,513 for the three months ended September 30, 2007, compared to 39,534
for the three months ended September 30, 2006. Flight hours in the Oil and Gas segment were 27,893
for the three months ended September 30, 2007, compared to 31,439 for three months ended September
30, 2006, a decrease of 3,546 flight hours.
Other Income and Gains Gain on disposition of assets was $7.0 million for the three
months ended September 30, 2007, compared to a gain of $0.6 million for the three months ended
September 30, 2006. These amounts represent gains and losses on sales of aircraft that no longer
meet our strategic needs.
22
Other income was $1.1 million for the three months ended September 30, 2007, compared to $2.7
million for the three months ended September 30, 2006, and primarily represented interest income on
unspent proceeds from our April 2006 stock offering. A substantial portion of those proceeds have
now been spent on acquiring new aircraft, resulting in the decrease in interest income.
Direct Expenses Direct operating expense was $101.4 million for the three months ended
September 30, 2007, compared to $93.2 million for the three months ended September 30, 2006, an
increase of $8.2 million. This increase was due to increases in employee compensation expense
($2.8 million), due primarily to compensation increases including incentive and safety compensation
accruals; increased aircraft lease expense ($3.3 million); and increased aircraft warranty costs
($2.4 million) due to additional aircraft added to the fleet. All new aircraft come with a
manufacturers warranty that covers defective parts. The increase in our warranty cost is related
to an additional warranty that we purchase from the manufacturer on certain aircraft to cover
replacement or refurbishment of aircraft parts in accordance with manufacturer specifications. We
pay a monthly fee to the manufacturer based on flight hours for the aircraft that are covered under
this warranty. In return, the manufacturer provides replacement parts required for maintaining the
aircraft. There was also an increase in other items, net ($0.2 million). Depreciation expense
decreased ($0.5 million) due to a $0.8 million adjustment related to the change in residual value
effective July 1, 2007, as discussed in the Overview.
Selling, General, and Administrative Expenses Selling, general and administrative
expenses were $7.4 million for the three months ended September 30, 2007, compared to $6.8 million
for the three months ended September 30, 2006, an increase of $0.6 million. This increase was
related to increased employee compensation expense ($0.2 million), and outside services ($0.1
million) primarily related to the Air Medical segment, and other items, net ($0.3 million).
Interest Expense Interest expense was $3.9 million for the three months ended September
30, 2007, compared to $4.0 million for the three months ended September 30, 2006. The decrease was
due to a decrease in borrowings under our revolving line of credit.
Income Taxes Income tax expense for the three months ended September 30, 2007 was $5.2
million compared to $3.4 million for the three months ended September 30, 2006. The effective tax
rate was 38% for the three months ended September 30, 2007, compared to 40% for the three months
ended September 30, 2006.
Earnings Our net income for the three months ended September 30, 2007 was $8.6 million
compared to $5.1 million for the three months ended September 30, 2006. Earnings before income
taxes for the three months ended September 30, 2007, were $13.8 million compared to $8.5 million
for the same period in 2006. Earnings per diluted share were $0.56 for the current quarter
compared to earnings per diluted share of $0.33 for the prior year quarter. We had 15.3 million
common shares outstanding during the three months ended September 30, 2007 and September 30, 2006.
Included in earnings before tax for the quarter ended September 30, 2007, are gains on disposition
of assets of $7.0 million, compared to $0.6 million for the same period in 2006. Earnings in 2007
have been affected by pilot staffing issues, although substantial progress has been made since the
first quarter 2007 in rebuilding the pilot workforce.
Segment Discussion
Oil and Gas Oil and Gas segment revenues were $76.9 million for the three months ended September
30, 2007, compared to $71.4 million for the three months ended September 30, 2006, an increase of
$5.5 million. Flight hours were 27,893 for the current quarter compared to 31,439 for the same
quarter in the prior year. Although overall flight hours decreased, flight hours related to medium
and heavy aircraft increased resulting in increased revenues. There were also certain contractual
rate increases, offset by a decrease in light aircraft flight hours and flight hours and aircraft
in our foreign operations.
23
The number of aircraft in the segment was 161 at September 30, 2007, compared to 162 aircraft at
September 30, 2006. We have sold or disposed of 22 aircraft in the Oil and Gas segment since
September 30, 2006, consisting of 11 light, six medium, and four heavy aircraft. We also
transferred one light aircraft to the Air Medical segment. We have added 21 new aircraft to the
Oil and Gas segment since September 30, 2006, consisting of ten light, eight medium, and three
heavy aircraft. We have a total of 29 aircraft on order for delivery in 2007 and 2008 for the Oil
and Gas segment, although certain of the light aircraft on order will be assigned to the Air
Medical segment as growth opportunities materialize.
Direct expense in our Oil and Gas segment was $65.8 million for the three months ended September
30, 2007, compared to $58.9 million for the three months ended September 30, 2006. The increase of
$6.9 million was primarily due to an increase in aircraft lease expense ($3.2 million), and
aircraft warranty costs ($2.0 million) due to additional aircraft added to the fleet, as previously
discussed in Combined Operations Direct Expenses. There were also increases in employee costs
($1.1 million), and other contract labor costs ($0.9 million) and decreases in other items, net
($0.3 million).
Selling, general and administrative expenses were $0.4 million for the three months ended September
30, 2007, compared to $0.3 million for the three months ended September 30, 2006.
Our Oil and Gas segments operating income was $10.6 million for the three months ended September
30, 2007, compared to $12.2 million for the three months ended September 30, 2006. The decrease
was due to the increase in operating expenses of $7.0 million, offset by the increase in operating
revenues of $5.5 million. As stated in the Overview, the Oil and Gas segment continues to be
affected by pilot staffing levels. Operating margins were 14% for the three months ended September
30, 2007, compared to 17% for the three months ended September 30, 2006, primarily due to pilot
staffing levels resulting in reduced flight hours and lower revenues and increases in certain
direct expenses, such as pilot overtime costs and other contract labor costs.
Air Medical Air Medical segment revenues were $39.8 million for the three months ended September
30, 2007, compared to $35.7 million for the three months ended September 30, 2006, an increase of
$4.1 million. The increase was primarily related to rate increases and an increase in patient
transports, which totaled 5,891 for the three months ended September 30, 2007, compared to 5,661
for the three months ended September 30, 2006.
Flight hours were 8,620 for the three months ended September 30, 2007, compared to 7,986 for the
three months ended September 30, 2006. The number of aircraft in the segment was 72 at September
30, 2007, compared to 69 at September 30, 2006. Since September 30, 2006, we have sold four and
added six light and one fixed wing aircraft in the Air Medical segment.
Direct expenses in our Air Medical segment were $34.6 million for the three months ended September
30, 2007, compared to $32.6 million for the three months ended September 30, 2006. The $2.0
million increase was due to increases in employee costs ($1.2 million) primarily due to employee
compensation increases including incentive and safety compensation accruals, aircraft warranty
costs ($0.4 million) as additional aircraft were added to manufacturers warranty programs, and
outside services ($0.5 million) related to medical director fees and collection expenses, and
decreases in other items, net ($0.1 million).
Selling, general and administrative expenses were $1.9 million for the three months ended September
30, 2007, compared to $1.8 million for the three months ended September 30, 2006. Air Medical
operations are headquartered in Phoenix, Arizona, where we maintain significant separate facilities
and administrative staff dedicated to this segment. Those costs are charged directly to the Air
Medical segment, resulting in higher selling, general and administrative costs as compared to our
other reportable segments.
Our Air Medical segments operating income was $3.4 million for the three months ended September
30, 2007, compared to $1.4 million for the three months ended September 30, 2006, due to increased
rates
24
and patient transports during the period. Operating margins were 8% for the three months ended
September 30, 2007, compared to 4% for the three months ended September 30, 2006. This increase
was primarily due to increased patient transports related to the expansion of new locations in the
segment during the past three years. It takes some time for these programs to grow their revenues
to a level that will cover their costs and produce operating income.
Technical Services Technical Services revenues were $1.7 million for the three months ended
September 30, 2007, compared to $2.2 million for the three months ended September 30, 2006.
Direct expenses in our Technical Services segment were $1.0 million for the three months ended
September 30, 2007, compared to $1.8 million for the three months ended September 30, 2006.
Our Technical Services segments operating income was $0.7 million for the three months ended
September 30, 2007, compared to operating income of $0.4 million for the three months ended
September 30, 2006. Technical Services provides maintenance and repairs performed for our existing
customers that own their aircraft. These services are generally labor intensive with higher
operating margins as compared to other segments.
Nine Months Ended September 30, 2007 compared with Nine Months Ended September 30, 2006
Combined Operations
Revenues Operating revenues for the nine months ended September 30, 2007, were $333.1
million, compared to $317.8 million for the nine months ended September 30, 2006, an increase of
$15.3 million. Operating revenues in the Air Medical segment increased $13.0 million due to rate
increases and increased patient transports, primarily in the second and third quarters. Oil and
Gas operating revenues increased $1.6 million, due to an increase in medium and heavy aircraft
flight hours and contractual rate increases in our domestic operations, offset in part by a
reduction of aircraft and flight hours in our foreign operations, and a reduction in light aircraft
flight hours. There was an increase in Technical Services revenues of $0.7 million for the nine
months ended September 30, 2007, due to an increase in activity.
Total flight hours were 106,627 for the nine months ended September 30, 2007, compared to 116,901
for the nine months ended September 30, 2006. Patient transports were 16,463 for the current nine
months compared to 15,794 for the same period in the prior year.
Other Income and Gains Gain on disposition of assets was $15.6 million for the nine
months ended September 30, 2007, compared to a loss of $0.5 million for the nine months ended
September 30, 2006. The gain was primarily due to the sale of four heavy aircraft and related
parts inventory in the second quarter of 2007. Subsequent to September 30, 2007, we sold three
medium aircraft. We expect to report a gain from the sale of these aircraft.
Other income, which primarily represents interest income on unspent proceeds from our April 2006
stock offering, was $4.3 million for the nine months ended September 30, 2007 as compared to $6.1
million for the nine months ended September 30, 2006. This decrease resulted from a decrease in
short-term investments, as a substantial portion of those proceeds have now been spent on acquiring
new aircraft.
Direct Expenses Direct operating expense was $291.8 million for the nine months ended
September 30, 2007, compared to $269.5 million for nine months ended September 30, 2006, an
increase of $22.3 million. Direct expense increased $15.3 million in the Oil and Gas segment, due
to new aircraft added to the segment, increased employee compensation expense and additional
aircraft lease expense. Direct expense increased $7.3 million in the Air Medical segment, due
primarily to increased flight hours and patient transports and also increases in employee
compensation. There was a decrease in direct expense
25
of $0.3 million in the Technical Services segment. The $22.3 million increase was due to increases
in employee expenses ($3.9 million) primarily due to compensation increases, including incentive
and safety compensation accruals, contract labor costs ($4.2 million), outside services, mainly in
the Air Medical segment ($1.8 million), aircraft lease expense ($4.9 million), aircraft warranty
costs ($5.8 million) due to additional aircraft added to the fleet, property taxes ($1.0 million),
and other items, net ($0.3 million). There was also an increase in depreciation expense ($0.4
million) due to additional aircraft added to the fleet offset by a $0.8 million adjustment related
to the change in residual values effective July 1, 2007, as discussed in the Overview.
Selling, General, and Administrative Expenses Selling, general and administrative
expenses were $22.3 million for the nine months ended September 30, 2007, compared to $20.2 million
for the nine months ended September 30, 2006, an increase of $2.1 million. This increase was a
result of increased legal costs ($0.3 million) related to union issues, employee compensation costs
($0.5 million) due to overtime costs in the first quarter related to the strike and compensation
increases including incentive and safety compensation accruals, outside services consisting
primarily of consulting fees in the air medical segment ($0.4 million), insurance expense ($0.3
million), and other items, net ($0.6 million).
Interest Expense Interest expense was $12.3 million for the nine month period ended
September 30, 2007, compared to $13.2 million for the nine months ended September 30, 2006. The
decrease was due to early redemption of the 9 3/8% Senior Notes, which were refinanced at 7.125% in
April, 2006.
Loss on Debt Restructuring A pretax charge of $12.8 million was recorded in April 2006,
due to the early redemption of the 9 3/8% Senior Notes. This charge consists of $9.8 million early
call premium, $2.6 million of unamortized issuance costs, and $0.4 million in related expenses for
the tender of outstanding notes.
Income Taxes Income tax expense for the nine months ended September 30, 2007 was $10.2
million, an effective rate of 38%, compared to $3.1 million for the nine months ended September 30,
2006, an effective rate of 40%.
Earnings Earnings before tax for the nine months ended September 30, 2007 were $26.6
million, compared to earnings before tax of $7.7 million for the nine months ended September 30,
2006. Net income after tax for the nine months ended September 30, 2007 was $16.4 million,
compared to net income after tax of $4.6 million for the nine months ended September 30, 2006.
Included in the nine months ended September 30, 2006 was a pretax charge of $12.8 million ($7.7
million, net of tax) recorded in April 2006 as a result of the early redemption of our 9 3/8%
Senior notes. Included in earnings before tax for the nine months ended September 30, 2007, are
gains on disposition of assets of $15.6 million, compared to a loss of $0.5 million for the same
period in 2006. Earnings in 2007 have been affected by pilot staffing issues, although substantial
progress has been made since the first quarter 2007.
Segment Discussion
Oil and Gas Oil and Gas segment revenues were $213.8 million for the nine months ended September
30, 2007, compared to $212.2 million for the nine months ended September 30, 2006. Flight hours
were 82,583 for the nine months ended September 30, 2007, compared to 93,454 for the nine months
ended September 30, 2006. Operating revenues increased $1.6 million, due to an increase in medium
and heavy aircraft flight hours and contractual rate increases, offset by a decrease in light
aircraft flight hours and flight hours in our domestic operations due to pilot staffing levels, and
a reduction of aircraft and flight hours in our foreign operations.
Direct expense for the nine months ended September 30, 2007 was $185.0 million compared to $169.7
million for the nine months ended September 30, 2006, an increase of $15.3 million. The
increase was due to increases in employee costs ($4.5 million), primarily due to compensation
increases including
26
incentive and safety compensation accruals, aircraft lease expense ($4.9 million), aircraft
warranty costs ($4.8 million) due to additional aircraft covered under manufacturers warranty
programs, contract labor costs ($4.8 million), and other items, net ($0.6 million). These
increases were offset in part by a decrease in insurance expense ($1.3 million), and aircraft parts
usage ($3.0 million).
Selling, general and administrative expense charged to the Oil and Gas segment was $1.2 million for
the nine months ended September 30, 2007 compared to $1.0 million for the nine months ended
September 30, 2006.
Oil and Gas segment operating income was $27.6 million for the nine months ended September 30,
2007, compared to $41.6 million for the nine months ended September 30, 2006. This decrease is due
to pilot staffing levels, and a decrease in aircraft and flight hours in our foreign operations.
Operating margins were 13% for the nine months ended September 30, 2007, compared to 20% operating
margins for the same period in 2006. The decrease in operating margins was caused by the reduction
in flight hours due to pilot staffing levels and increases in certain direct expenses such as pilot
overtime costs and other compensation expenses.
Air Medical Air Medical segment revenues were $113.0 million for the nine months ended September
30, 2007, compared to $100.0 million for the same period in the prior year. Transports increased
from 15,794 in the nine month period ended September 30, 2006 to 16,463 in the comparable nine
month period in 2007. Flight hours in this segment were 23,636 for the nine months ended September
30, 2007, as compared to 22,866 for the nine months ended September 30, 2006. The number of
aircraft in the segment at September 30, 2007 was 72 compared to 69 at September 30, 2006. The
increase in operating revenue was due to rate increases and increases in patient transports.
Direct expense for the nine months ended September 30, 2007 was $102.2 million compared to $94.9
million for the nine months ended September 30, 2006, an increase of $7.3 million. There was an
increase in employee costs ($4.2 million) primarily due to compensation increases including
incentive and safety compensation accruals. There were also increases in base costs ($1.8
million), which includes fees for outside medical personnel and collection services, aircraft
warranty costs ($1.1 million) due to additional aircraft covered under manufacturers warranty
programs, and other items, net ($0.2 million).
Segment selling, general and administrative expenses were $5.7 million for the nine months ended
September 30, 2007 compared to $5.4 million for the nine months ended September 30, 2006. Air
Medical operations are headquartered in Phoenix, Arizona, where we maintain significant separate
facilities and administrative staff dedicated to this segment. Those costs are charged directly to
the Air Medical segment, resulting in higher selling, general and administrative costs as compared
to our other reportable segments.
Air Medical segment operating income was $5.1 million for the nine months ended September 30, 2007,
compared to $0.3 million operating loss for the nine months ended September 30, 2006. The increase
was due to increased patient transports and increases in rates.
In the Air Medical segment, operating margins increased to 5% in the nine months ended September
30, 2007, compared to a loss in the same period in 2006. This increase is primarily due to the
increase in patient transport volume, related to the expansion of new locations in this segment.
Operating margins were lower in this segment compared to our other segments, as it takes some time
for these programs to grow their revenues to a level that will cover their costs and produce
operating income. Operating margins may also be affected by the mix of payors in any period. In
addition to expected flight operation costs, the Air Medical segment incurs additional costs for
necessary medical personnel.
27
Technical Services The Technical Services segment operating revenues for the nine months ended
September 30, 2007 were $6.3 million, compared to $5.6 million in the comparable period in the
prior year.
Direct expense was $4.5 million for the nine months ended September 30, 2007, compared to $4.9
million for the nine months ended September 30, 2006.
The Technical Services segment had operating income of $1.7 million for the nine months ended
September 30, 2007, compared to $0.7 million for the nine months ended September 30, 2006.
Operating margin in the Technical Services segment were 26% for the nine months ended September 30,
2007, compared to 13% for the same period in 2006. Technical Services includes maintenance and
repairs performed primarily for our existing customers that own their aircraft. These services are
generally labor intensive with higher operating margins as compared to other segments.
Liquidity and Capital Resources
General
Our ongoing liquidity requirements arise primarily from the funding of working capital needs, such
as the acquisition or leasing of aircraft, the maintenance and refurbishment of aircraft,
improvement and expansion of facilities, and acquisition of equipment and inventory. Our principal
sources of liquidity historically have been net cash provided by our operations and borrowings
under our revolving credit facility, as augmented in recent years by the issuance of senior notes
in 2002, which we refinanced in 2006, and the sale of non-voting common stock in 2005 and 2006.
Cash Flow
Our cash position at September 30, 2007 was $0.6 million, compared to $0.8 million at December 31,
2006. Short-term investments at September 30, 2007 were $86.9, compared to short-term investments
of $153.4 million at December 31, 2006. Working capital was $207.3 million at September 30, 2007,
as compared to $254.1 million at December 31, 2006, a decrease of $46.8 million. The decrease in
working capital was a result of a decrease in short-term investments and cash of $66.7 million used
to fund aircraft acquisitions, and accounts payable and other current liabilities of $1.2 million,
offset by an increase in accounts receivable of $15.6 million, and assets held for sale and other
assets of $5.5 million.
Cash flow from operating activities decreased $6.3 million for the nine months ended September 30,
2007, compared to the same period in 2006 due to reduced revenues as a result of pilot staffing
levels in the oil and gas segment. Increases in certain direct expenses included employee
compensation increases, contract labor costs and legal expenses. This resulted in a reduction in
earnings in 2007, compared to 2006, exclusive of the $12.8 million loss on debt restructuring in
2006 and gains/losses on disposition of assets. The changes in operating assets and liabilities of
$17.5 million for the nine months ended September 30, 2007 included increases in accounts
receivable ($15.6 million), accounts payable and other accrued liabilities ($0.2 million) and other
items, net ($2.1 million).
We expect cash flow from operations will increase for the remainder of 2007 since the pilots have
returned to work and certain contract rate increases have been enacted, and will be sufficient to
meet our current and future working capital, capital expenditure and debt obligations. We do not
expect any material changes to future working capital requirements other than continued fleet
expansion, which we intend to fund from existing cash, short-term investments, and/or operating
leases, as required.
Financing Activities
On April 12, 2006, we completed the sale of 4,287,920 non-voting common shares at $35.00 per share
and on May 1, 2006, we completed the sale of another 578,680 shares pursuant to the underwriters
over-
28
allotment option, also at $35.00 per share. Proceeds from the offering were $160.7 million, net of
expenses, and are being used to fund the acquisition of aircraft delivered in 2006 through 2008.
Also on April 12, 2006, we issued $200 million of 7.125% Senior Notes due 2013. Net proceeds of
$196.0 million were used to repurchase $184.8 million of our existing 9 3/8% Senior Notes, which
were tendered by April 12, 2006, at a total cost of $201.6 million including an early call premium
and accrued interest. We redeemed the remaining $15.2 million of 9 3/8% Senior Notes on May 1,
2006, at a redemption price of 104.688% of the face amount plus accrued interest. As a result of
the refinancing of the 9 3/8% Senior Notes, we recorded a pretax charge of $12.8 million ($7.7
million, net of tax) in the quarter ended June 30, 2006, which consisted of a $9.8 million
early call premium, $2.6 million of unamortized issuance costs, and $0.4 million in related
expenses of the tender for the outstanding notes.
The 7.125% Senior Notes mature April 15, 2013, and interest is payable semi-annually on April 15
and October 15. On October 15, 2007, we made a semi-annual interest payment of $7.1 million. The
notes contain restrictive covenants, including limitations on indebtedness, liens, dividends,
repurchases of capital stock and other payments affecting restricted subsidiaries, issuance and
sales of restricted subsidiary stock, dispositions of proceeds of asset sales, and mergers,
consolidations and sales of assets. Estimated annual interest cost of the 7.125% Senior Notes is
$14.3 million, excluding amortization of issuance costs.
Credit Facility
We have a $35 million revolving credit facility with a commercial bank that expires on September 1,
2009. As of September 30, 2007, there were $1.8 million in borrowings and $4.6 million in letters
of credit outstanding under the facility. The facility includes covenants related to working
capital, funded debt to net worth, and consolidated net worth. As of September 30, 2007, we were
in compliance with these covenants.
Contractual Obligations
At September 30, 2007, one additional transport category aircraft was on order and scheduled for
delivery in 2007 at an approximate cost of $18.6 million. We also had orders for 34 additional
aircraft for service primarily in the Oil and Gas segment with a total cost of $161.8 million.
Delivery dates are scheduled throughout 2007, 2008, and 2009.
The table below sets out our contractual obligations related to operating lease obligations, notes
payable and the 7.125% Senior Notes due 2013, issued April 12, 2006, as well as our aircraft
purchase commitments. The operating leases are not recorded as liabilities on our balance sheet,
but payments are treated as an expense as incurred. Each contractual obligation included in the
table contains various terms, conditions, and covenants that, if violated, accelerate the payment
of that obligation. We currently lease 18 aircraft included in the lease obligations below.
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beyond |
|
|
|
Total |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of dollars) |
|
|
|
|
|
|
|
|
|
New aircraft purchase
commitments (1) |
|
$ |
161,751 |
|
|
$ |
57,910 |
|
|
$ |
80,311 |
|
|
$ |
23,530 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New aircraft purchase
commitments (2) |
|
|
18,591 |
|
|
|
|
|
|
|
18,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing aircraft lease
obligations |
|
|
161,103 |
|
|
|
4,261 |
|
|
|
17,043 |
|
|
|
17,044 |
|
|
|
17,645 |
|
|
|
18,913 |
|
|
|
86,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other lease
obligations |
|
|
21,099 |
|
|
|
874 |
|
|
|
3,249 |
|
|
|
2,528 |
|
|
|
2,202 |
|
|
|
1,841 |
|
|
|
10,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
201,750 |
|
|
|
|
|
|
|
|
|
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
564,294 |
|
|
$ |
63,045 |
|
|
$ |
119,194 |
|
|
$ |
44,852 |
|
|
$ |
19,847 |
|
|
$ |
20,754 |
|
|
$ |
296,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These commitments are for aircraft that we intend to finance with remaining cash from
the equity offering completed April 2006, with cash from operations, and operating leases. |
|
(2) |
|
These commitments are for aircraft that we intend to finance with an operating lease.
Once the leases are entered into, the lease payments will be spread out over future years. |
Environmental Matters
We have an aggregate estimated liability of $0.2 million as of September 30, 2007 and December 31,
2006 for environmental remediation costs that are probable and estimable. We have conducted
environmental surveys of our former Lafayette Facility, which we vacated in 2001, and have
determined that limited soil and groundwater contamination exists at the facility. We have
installed groundwater monitoring wells at the facility and periodically monitor and report on the
contamination. In May 2003, we submitted a Louisiana Risk Evaluation/Corrective Action Plan
(RECAP) standard Site Assessment Report to the Louisiana Department of Environmental Quality
(LDEQ) fully delineating the extent and type of contamination. The Site Assessment Report was
updated in April, 2006 to include recent analytical data. We are currently preparing a report
evaluating all available data against the LDEQ RECAP Management Option 1 Standard. Once that is
complete, LDEQ will establish what cleanup standards must be met at the site. When the process is
complete, we will be in a position to develop an appropriate remediation plan and determine the
resulting cost of remediation. We have not recorded any estimated liability for remediation and
contamination and, based upon the May, 2003 Site Assessment Report and ongoing monitoring, we
believe the ultimate remediation costs for the former Lafayette facility will not be material to
our consolidated financial position, results of operation or liquidity.
New Accounting Pronouncements
For a discussion of applicable new accounting pronouncements, see Note 7 to the Condensed
Consolidated Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market value of our 7.125% Senior Notes will vary as changes occur to general market interest
rates, the remaining maturity of the notes, and our credit worthiness. At September 30, 2007, the
market value of the notes was approximately $192.0 million.
30
Item 4. CONTROLS AND PROCEDURES
The Companys management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by
this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that the design and operation of our disclosure controls and procedures were
effective as of such date to provide assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission, and that such information is accumulated and
communicated to management as appropriate to allow timely decisions regarding disclosure.
There have been no changes in our internal control over financial reporting that occurred during
our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
31
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We have been named as a defendant in various legal actions that have arisen in the ordinary course
of our business and have not been finally adjudicated. In the opinion of management, the amount of
the ultimate liability with respect to these actions will not have a material adverse effect on our
consolidated financial condition, results of operations or liquidity.
As previously reported, on June 15, 2005, we received a subpoena from the United States Department
of Justice relating to a grand jury investigation of potential antitrust violations among providers
of helicopter transportation services in the Gulf of Mexico. We are cooperating fully with the
investigation and believe we have provided all documents and other information required by the
subpoena. We have not received any further communications from the Department of Justice since
shortly after providing the requested information. At this stage, it is not possible to predict
the outcome of this investigation, although based on the information available to us to date,
management does not expect the outcome of the investigation to have a material adverse effect on
our financial condition, results of operations, or liquidity.
Item 1. A. RISK FACTORS
All phases of our operations are subject to significant uncertainties, risks, and other influences.
Important factors that could cause our actual results to differ materially from anticipated
results or other expectations include the following:
RISKS INHERENT IN OUR BUSINESS
Our operations are affected by adverse weather conditions and seasonal factors.
We are subject to three types of weather-related or seasonal factors:
Ø |
|
the tropical storm and hurricane season in the Gulf of Mexico; |
|
Ø |
|
poor weather conditions that often prevail during winter and can develop in any season; and; |
|
Ø |
|
reduced daylight hours during the winter months. |
Poor visibility, high winds and heavy precipitation can affect the operation of helicopters and
significantly reduce our flight hours. A significant portion of our operating revenue is dependent
on actual flight hours and a substantial portion of our direct costs is fixed. Thus, prolonged
periods of adverse weather can materially and adversely affect our operating revenues and net
earnings.
In the Gulf of Mexico, the months of December, January and February have more days of adverse
weather conditions than the other months of the year. Also, June through November is tropical
storm and hurricane season in the Gulf of Mexico, with August and September typically being the
most active months. During tropical storms, we are unable to operate in the area of the storm and
can incur significant expense in moving our aircraft to safer locations. In addition, as most of
our facilities are located along the Gulf of Mexico coast, tropical storms and hurricanes may cause
substantial damage to our property, including helicopters that we are unable to relocate.
Because the fall and winter months have fewer hours of daylight, our flight hours are generally
lower at those times, which typically results in a reduction in operating revenues during those
months. Currently, only 44 of the 155 helicopters used in our oil and gas operations are equipped
to fly under instrument flight rules, or IFR, which enables these aircraft, when manned by
IFR-rated pilots and co-pilots, to operate when poor visibility or darkness prevents flight by
aircraft that can fly only under visual flight rules, or VFR. Not all of our pilots are IFR rated.
32
We may not be able to obtain acceptable customer contracts covering some of our new helicopters,
and there will be a delay between the time that a helicopter is delivered to us and the time that
it can begin generating revenues.
We are substantially expanding our fleet of helicopters. Many of our new oil and gas helicopters
may not be covered by customer contracts when they are placed into service, and we cannot assure
you as to when we will be able to utilize these new helicopters or on what terms. In addition,
with respect to those helicopters that will be covered by customer contracts when they are placed
into service, our contract terms generally are too short to recover our cost of purchasing the
helicopter at current rates. Thus, we are subject to the risk that we will be unable to recoup our
investment in the helicopters.
Once a new helicopter is delivered to us, we generally spend between two and five months installing
mission-specific and/or customer-specific equipment before we place it into service. As a result,
there can be a significant delay between the delivery date for a new helicopter and the time that
it is able to generate revenues for us.
There is also a possibility that our customers may request new helicopters in lieu of our existing
helicopters, which could adversely affect the utilization of our existing fleet.
Our contracts generally can be terminated or downsized by our customers without penalty.
Most of our fixed-term contracts contain provisions permitting early termination by the customer,
sometimes with as little as 30 days notice for any reason and generally without penalty. In
addition, many of our contracts permit our customers to decrease the number of aircraft under
contract with a corresponding decrease in the fixed monthly payments without penalty. As a result,
you should not place undue reliance on our customer contracts or the terms of those contracts.
Increased governmental regulations could increase our costs or reduce our ability to operate
successfully.
Our operations are regulated by a number of federal and state agencies. All of our flight
operations are regulated by the Federal Aviation Administration, or FAA. Aircraft accidents are
subject to the jurisdiction of the National Transportation Safety Board. Standards relating to the
workplace health and safety are monitored by the federal Occupational Safety and Health
Administration, or OSHA. We are also subject to various federal and state environmental statutes.
The FAA has jurisdiction over many aspects of our business, including personnel, aircraft and
ground facilities. We are required to have an Air Taxi Certificate, granted by the FAA, to
transport personnel and property in our helicopters. This certificate contains operating
specifications that allow us to conduct our present operations, but it is potentially subject to
amendment, suspension or revocation in accordance with procedures set forth in the Federal Aviation
Act. The FAA is responsible for ensuring that we comply with all FAA regulations relating to the
operation of our aviation business, and conducts regular inspections regarding the safety, training
and general regulatory compliance of our U.S. aviation operations. Additionally, the FAA requires
us to file reports confirming our continued compliance.
FAA regulations require that at least 75% of our voting securities be owned or controlled by
citizens of the U.S. or one of its possessions, and that our president and at least two-thirds of
our directors be U.S. citizens. Our Chief Executive Officer and all of our directors are U.S.
citizens, and our organizational documents provide for the automatic reduction in voting power of
each share of voting common stock owned or controlled by a non-U.S. citizen if necessary to comply
with these regulations.
33
We are subject to significant regulatory oversight by OSHA and similar state agencies. We are also
subject to the Communications Act of 1934 because of our ownership and operation of a radio
communications flight-following network throughout the Gulf of Mexico.
Numerous other federal statutes and rules regulate our offshore operations and those of our
customers, pursuant to which the federal government has the ability to suspend, curtail or modify
certain or all offshore operations. A suspension or substantial curtailment of offshore oil and
gas operations for any prolonged period would have an immediate and material adverse effect on us.
A substantial modification of current offshore operations could adversely affect the economics of
such operations and result in reduced demand for our services.
The helicopter services business is highly competitive.
All segments of our business are highly competitive. Many of our contracts are awarded after
competitive bidding, and the competition for those contracts generally is intense. The principal
aspects of competition are safety, price, reliability, availability and service.
We have two major competitors and several small competitors operating in the Gulf of Mexico, and
most of our customers and potential customers could operate their own helicopter fleets if they
chose to do so. At least one of our primary competitors is in the process of significantly
expanding its fleet.
Our Air Medical segment competes for business primarily under the independent provider model and,
to a lesser extent, under the hospital-based model. Under the independent provider model, we have
no contracts and no fixed revenue stream, but must compete for transport referrals on a daily basis
with other independent operators in the area. Under the hospital-based model, we contract directly
with the hospital to provide their transportation services, with the contracts typically awarded on
a competitive bid basis. Under both models, we compete against national and regional companies,
and there is usually more than one competitor in each local market. In addition, we compete
against hospitals that operate their own helicopters and, in some cases, against ground ambulances
as well.
The failure to maintain our safety record would seriously harm our ability to attract new customers
and maintain our existing customers.
A favorable safety record is one of the primary factors a customer reviews in selecting an aviation
provider. If we fail to maintain our safety and reliability record, our ability to attract new
customers and maintain our current customers will be materially adversely affected.
Helicopter operations involve risks that may not be covered by our insurance or may increase the
cost of our insurance.
The operation of helicopters inherently involves a high degree of risk. Hazards such as aircraft
accidents, collisions, fire and adverse weather are hazards that must be managed by providers of
helicopter services and may result in loss of life, serious injury to employees and third parties,
and losses of equipment and revenues.
We maintain hull and liability insurance on our aircraft, which insures us against physical loss
of, or damage to, our aircraft and against certain legal liabilities to others. In addition, we
carry war risk, expropriation, confiscation and nationalization insurance for our aircraft involved
in international operations. In some instances, we are covered by indemnity agreements from our
customers in lieu of, or in addition to, our insurance. Our aircraft are not insured for loss of
use.
While we believe that our insurance and indemnification arrangements provide reasonable protection
for most foreseeable losses, they do not cover all potential losses and are subject to deductibles,
retentions, coverage limits and coverage exceptions such that severe casualty losses, or the
expropriation or
34
confiscation of significant assets could materially and adversely affect our financial condition or
results of operations. The occurrence of an event that is not fully covered by insurance could
have a material adverse impact on our financial condition and results of operations.
Our air medical operations, which we are expanding, expose us to numerous special risks, including
collection risks, high start-up costs and potential medical malpractice claims.
We recently have expanded our air medical business. These operations are highly competitive and
expose us to a number of risks that we do not encounter in our oil and gas operations. For
instance, the fees for our air medical services generally are paid by individual patients,
insurance companies, or government agencies such as Medicare and Medicaid. As a result, our
profitability in this business depends not only on our ability to generate an acceptable volume of
patient transports, but also on our ability to collect our transport fees. We are not permitted to
refuse service to patients based on their inability to pay.
As a result of our recent expansion, even if we are able to generate an acceptable volume of
patient transports, we cannot assure you that our new markets will be profitable for us. We
generally incurred significant startup costs and lower utilization rates when we entered new air
medical markets, which impacted our profitability. Finally, we employ paramedics, nurses and other
medical professionals for these operations, which can give rise to medical malpractice claims
against us, which, if not fully covered by our medical malpractice insurance, could materially
adversely affect our financial condition and results of operations.
Our international operations are subject to political, economic and regulatory uncertainty.
Our international operations, which represented approximately 6% of our total operating revenues
for the year ended December 31, 2006, are subject to a number of risks inherent in operating in
lesser developed countries, including:
Ø |
|
political, social and economic instability; |
|
Ø |
|
terrorism, kidnapping and extortion; |
|
Ø |
|
potential seizure or nationalization of assets; |
|
Ø |
|
import-export quotas; and |
|
Ø |
|
currency fluctuations or devaluation. |
Additionally, our competitiveness in international markets may be adversely affected by government
regulation, including regulations requiring:
Ø |
|
the awarding of contracts to local contractors; |
|
Ø |
|
the employment of local citizens; and |
|
Ø |
|
the establishment of foreign subsidiaries with significant
ownership positions reserved by the foreign government for local
ownership. |
Our failure to attract and retain qualified personnel could adversely affect us.
Our ability to attract and retain qualified pilots, mechanics, nurses, paramedics and other highly
trained personnel will be an important factor in determining our future success. Many of our
customers require pilots of aircraft that service them to have inordinately high levels of flight
experience. The market for these experienced and highly trained personnel is extremely
competitive. Accordingly, we cannot assure you that we will be successful in our efforts to
attract and retain such persons. Some of our pilots and mechanics, and those of our competitors,
are members of the U.S. military reserves and could be called to
35
active duty. If significant numbers of such persons are called to active duty, it would reduce the
supply of such workers, possibly curtailing our operations and likely increasing our labor costs.
RISKS SPECIFIC TO OUR COMPANY
We are highly dependent on the offshore oil and gas industry.
Approximately 60% of our 2006 operating revenue was attributable to helicopter support for domestic
offshore oil and gas exploration and production companies. Our business is highly dependent on the
level of activity by the oil and gas companies, particularly in the Gulf of Mexico. The level of
activity by our customers operating in the Gulf of Mexico depends on factors that we cannot
control, such as:
Ø |
|
the supply of, and demand for, oil and natural gas and market
expectations regarding supply and demand; |
|
Ø |
|
weather-related or other natural causes; |
|
Ø |
|
actions of OPEC, and Middle Eastern and other oil producing
countries, to control prices or change production levels; |
|
Ø |
|
general economic conditions in the United States and worldwide; |
|
Ø |
|
war, civil unrest or terrorist activities; |
|
Ø |
|
governmental regulation; and |
|
Ø |
|
the price and availability of alternative fuels. |
Any substantial or extended decline in the prices of oil and natural gas could depress the level of
helicopter activity in support of exploration and production activity, and thus have a material
adverse effect on our business, results of operations and financial condition.
Additionally, the Gulf of Mexico is generally considered to be a mature area for oil and gas
exploration, which may result in a continuing decrease in activity over time. This could
materially adversely affect our business, results of operations and financial condition. In
addition, the concentrated nature of our operations subjects us to the risk that a regional event
could cause a significant interruption in our operations or otherwise have a material affect on our
profitability.
Moreover, companies in the oil and gas exploration and production industry continually seek to
implement cost-savings measures. As part of these measures, oil and gas companies have attempted
to improve operating efficiencies with respect to helicopter support services. For example,
certain oil and gas companies have pooled helicopter services among operators, reduced staffing
levels by using technology to permit unmanned production installations and decreased the frequency
of transportation of employees offshore by increasing the lengths of shifts offshore. The
continued implementation of such measures could reduce demand for helicopter services and have a
material adverse effect on our business, results of operations and our financial condition.
Our pilot workforce represented by Office and Professional Employees International Union conducted
a general strike beginning on September 20, 2006.
On September 20, 2006, approximately 236 pilots commenced a strike. On November 10, the OPEIU made
a purported unconditional offer for the strikers to return to work and an end to strike
activities. On January 11, 2007, the United States District Court for the Western District of
Louisiana agreed to PHIs return to work criteria and process for the remaining strikers, and the
processing of those pilots was substantially completed by the end of April. Pilots are currently
working under the terms and conditions of employment set forth in the final contract proposals made
by the Company and implemented at the end of collective bargaining negotiations on August 28, 2006.
36
Other issues surrounding PHIs allegations that the OPEIU engaged in bad faith bargaining, as well
as the OPEIUs counterclaims and claims arising out of the OPEIUs purported unconditional offer
to return to work remain outstanding and are expected to be addressed by the same Federal Court. A
trial on these matters is currently set to start April 21, 2008. It is not possible to predict the
outcome of the remaining claims and counterclaims
We depend on a small number of large oil and gas industry customers for a significant portion of
our revenues, and our credit exposure within this industry is significant.
We derive a significant amount of our revenue from a small number of major and independent oil and
gas companies. For the year ended December 31, 2006, 17% of our revenues were attributable to our
largest customer. The loss of one of our significant customers, if not offset by revenues from new
or other existing customers, would have a material adverse effect on our business and operations.
In addition, this concentration of customers may impact our overall credit risk in that these
entities may be similarly affected by changes in economic and other conditions.
Our Chairman of the Board and Chief Executive Officer is also our principal stockholder and has
voting control of the Company.
Al A. Gonsoulin, our Chairman of the Board and Chief Executive Officer, beneficially owns stock
representing approximately 52% of our total voting power. As a result, he exercises control over
the election of all of our directors and the outcome of most matters requiring a stockholder vote.
This ownership also may delay or prevent a change in our management or a change in control of us,
even if such changes would benefit our other stockholders and were supported by a majority of our
stockholders.
Our substantial indebtedness could adversely affect our financial condition and impair our ability
to operate our business.
We are a highly leveraged company and, as a result, have significant debt service obligations. As
of September 30, 2007, our total indebtedness was $201.8 million, including $200 million of our
7.125% Senior Notes due 2013. On April 12, 2006, we completed the sale of 4,287,920 non-voting
common shares, and then on May 1, 2006 we completed the sale of the over-allotment of shares of
578,680 non-voting common shares. These transactions resulted in an increase in shareholder equity
of $160.7 million, net of expenses. We also issued $200 million of 7.125% Senior Notes due April
15, 2013. Proceeds of the Notes were used to retire our existing $200 million 9 3/8% Senior Notes
due May 1, 2009. As a result of these transactions, our debt to equity ratio at December 31, 2006
was 0.51 to 1.00, as compared to 0.85 to 1.00 at December 31, 2005.
At September 30, 2007, we had $1.8 million in borrowings and $4.6 million in letters of credit
outstanding under our revolving line of credit. As of September 30, 2007, availability for
borrowings under our revolving credit facility was $28.6 million.
Our substantial indebtedness could have significant negative consequences to us that you should
consider. For example, it could:
Ø |
|
require us to dedicate a substantial portion of our cash flow from
operations to pay principal of, and interest on, our indebtedness,
thereby reducing the availability of our cash flow to fund working
capital, capital expenditures or other general corporate purposes,
or to carry out other aspects of our business plan; |
|
Ø |
|
increase our vulnerability to general adverse economic and
industry conditions and limit our ability to withstand competitive
pressures; |
37
Ø |
|
limit our flexibility in planning for, or reacting to, changes in
our business and future business opportunities; |
|
Ø |
|
place us at a competitive disadvantage compared to our competitors
that have less debt; and limit our ability to obtain additional
financing to fund future working capital, capital expenditures and
other aspects of our business plan; |
|
Ø |
|
limit our ability to obtain additional financing for working
capital, capital expenditures and other aspects of our business
plan. |
Our ability to meet our debt obligations and other expenses will depend on our future performance,
which will be affected by financial, business, economic, regulatory and other factors, many of
which we are unable to control. When our 7.125% Senior Notes come due in 2013, we will likely need
to enter into new financing arrangements at that time to repay those notes. We may be unable to
obtain that financing on favorable terms, which could adversely affect our business, financial
condition and results of operations. For more information on our indebtedness, please see the
financial statements included elsewhere herein.
The DOJ investigation could result in criminal proceedings and the imposition of fines and
penalties.
On June 15, 2005, we received a subpoena from the United States Department of Justice relating to a
grand jury investigation of potential antitrust violations among providers of helicopter
transportation services in the Gulf of Mexico. We are cooperating fully with the investigation and
believe we have provided all documents and other information required by the subpoena. We will
respond to any DOJ request for further information, and will continue to cooperate with the
investigation.
We cannot predict the ultimate outcome of the DOJ investigation. The outcome of the DOJ
investigation and any related legal proceedings could include civil injunctive or criminal
proceedings, the imposition of fines and other penalties, remedies and/or sanctions, referral to
other governmental agencies and/or the payment of damages in civil litigation, any of which could
have a material adverse effect on our business, financial condition and results of operations.
Additionally, the cost of defending such an action or actions against us could be significant.
Our stock has a low trading volume.
Our common stock is listed for trading on The NASDAQ Global Market under the symbol PHIIK for
our non-voting common stock and PHII for our voting common stock. Both classes of common stock
have low trading volume. As a result, a stockholder may not be able to sell shares of our common
stock at the time, in the amounts, or at the price desired.
We do not pay dividends.
We have not paid any dividends on our common stock since 1999 and do not anticipate that we will
pay dividends on our common stock in the foreseeable future. In addition, our ability to pay
dividends is restricted by the indenture governing our 7.125% Senior Notes due 2013 and our bank
credit facility.
Provisions in our articles of incorporation and by-laws and Louisiana law make it more difficult to
effect a change in control, which could discourage a takeover of our company and adversely affect
the price of our common stock.
Although an attempted takeover of our company is unlikely by virtue of the ownership by our chief
executive officer of more than 50% of the total voting power of our capital stock, there are also
provisions in our articles of incorporation and by-laws that may make it more difficult for a third
party to acquire
38
control, even if a change in control would result in the purchase of your shares at a premium to
the market price or would otherwise be beneficial to you. For example, our articles of
incorporation authorize our board of directors to issue preferred stock without stockholder
approval. If our board of directors elects to issue preferred stock, it could be more difficult
for, or discourage, a third party to acquire us.
In addition, provisions of our by-laws, such as giving the board the exclusive right to fill all
board vacancies, could make it more difficult for a third party to acquire control of us. In
addition to the provisions contained in our articles of incorporation and by-laws, the Louisiana
Business Corporation Law (LBCL), includes certain provisions applicable to Louisiana
corporations, such as us, which may be deemed to have an anti-takeover effect. Such provisions
give stockholders the right to receive the fair value of their shares of stock following a control
transaction from a controlling person or group and set forth requirements relating to certain
business combinations. Our descriptions of these provisions are only abbreviated summaries of
detailed and complex statutes. For a complete understanding of the statutes, you should read them
in their entirety.
The LBCLs control share acquisition statute provides that any person who acquires control
shares will be able to vote such shares only if the right to vote is approved by the affirmative
vote of at least a majority of both (i) all the votes entitled to be cast by stockholders and (ii)
all the votes entitled to be cast by stockholders excluding interested shares. The control
share acquisition statute permits the articles of incorporation or bylaws of a company to exclude
from the statutes application acquisitions occurring after the adoption of the exclusion. Our
by-laws do contain such an exclusion; however, our board of directors or stockholders, by an
amendment to our by-laws, could reverse this exclusion.
Future sales of our shares could depress the market price of our non-voting common stock.
The market price of our non-voting common stock could decline as a result of issuances and sales by
us of additional shares of non-voting or voting common stock pursuant to our existing shelf
registration statement or otherwise. The market price of our non-voting common stock could also
decline as the result of the perception that these sales could occur. These sales, or the
possibility that these sales may occur, also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
39
Item 6. EXHIBITS
|
3.1 |
|
(i) |
|
Amended and Restated Articles of Incorporation of the Company (incorporated
by reference to Exhibit No. 3.1(i) to PHIs Report on Form 10-Q for the quarterly
period ended June 30, 2006). |
|
|
|
|
(ii) |
|
Amended and Restated By-laws of the Company (as amended through
May 1, 2002) (incorporated by reference to Exhibit 3.1(iii) to PHIs Report on
Form 10-K for the year ended December 31, 2006). |
|
4.1 |
|
Loan Agreement dated as of April 23, 2002 by and among Petroleum Helicopters,
Inc., Acadian Composites, LLC, Air Evac Services, Inc., Evangeline Airmotive Inc., and
International Helicopter Transport, Inc. and Whitney National Bank (incorporated by
reference to Exhibit 10.3 to PHIs Report on Form 10-Q for the quarterly period ended
June 30, 2002; File No. 0-9827). |
|
|
4.2 |
|
1st Amendment to Loan Agreement dated as of April 23, 2002 by and
among Petroleum Helicopters, Inc. Acadian Composites, LLC, Air Evac Services, Inc.,
Evangeline Airmotive Inc., and International Helicopter Transport, Inc. and Whitney
National Bank (incorporated by reference to Exhibit 10.4 to PHIs Report on Form 10-Q
for the quarterly period ended June 30, 2004). |
|
|
4.3 |
|
First Supplemental Indenture dated April 12, 2006, among PHI, Inc., the
Subsidiary Guarantors named therein and The Bank of New York, as Trustee (incorporated
by reference to Exhibit 10.1 to PHIs Report on Form 8-K filed on April 13, 2006). |
|
|
4.4 |
|
Indenture dated April 12, 2006 among PHI, Inc., the Subsidiary Guarantors named
therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.2
to PHIs Report on Form 8-K filed on April 13, 2006). |
|
|
4.5 |
|
Third Amendment to Loan Agreement dated April 12, 2006 by and among PHI, Inc.,
Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.),
and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by
reference to Exhibit 10.4 to PHIs Report on Form 8-K filed on April 13, 2006). |
|
|
4.6 |
|
Registration Rights Agreement dated April 12, 2006 (incorporated by reference
to Exhibit 10.3 to PHIs Report on Form 8-K filed on April 13, 2006). |
|
|
4.7 |
|
Second Amendment to Loan Agreement dated September 30, 2005 by and among
Petroleum Helicopters, Inc., Air Evac Services, Inc., Evangeline Airmotive, Inc., and International Helicopter Transport, Inc. and Whitney
National Bank. |
|
|
4.8 |
|
Fourth Amendment to Loan Agreement dated September 30, 2006 by and among PHI,
Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive,
Inc.), and International Helicopter Transport, Inc. and Whitney National Bank. |
|
|
4.9 |
|
Fifth Amendment to Loan Agreement dated August 1, 2007 by and among PHI, Inc.,
Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.),
and International Helicopter Transport, Inc. and Whitney National Bank. |
40
|
31.1 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al
A. Gonsoulin, Chairman and Chief Executive Officer. |
|
|
31.2 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by
Michael J. McCann, Chief Financial Officer. |
|
|
32.1 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al
A. Gonsoulin, Chairman and Chief Executive Officer. |
|
|
32.2 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
Michael J. McCann, Chief Financial Officer. |
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.
|
|
|
|
|
|
PHI, Inc.
|
|
November 8, 2007 |
By: |
/s/ Al A. Gonsoulin
|
|
|
Al A. Gonsoulin |
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
November 8, 2007 |
By: |
/s/ Michael J. McCann
|
|
|
Michael J. McCann |
|
|
Chief Financial Officer |
|
|
41
EXHIBIT INDEX
|
3.1 |
|
(i) |
|
Amended and Restated Articles of Incorporation of the Company (incorporated
by reference to Exhibit No. 3.1(i) to PHIs Report on Form 10-Q for the quarterly
period ended June 30, 2006). |
|
|
|
|
(ii) |
|
Amended and Restated By-laws of the Company (as amended through
May 1, 2002) (incorporated by reference to Exhibit 3.1(iii) to PHIs Report on
Form 10-K for the year ended December 31, 2006). |
|
4.1 |
|
Loan Agreement dated as of April 23, 2002 by and among Petroleum Helicopters,
Inc., Acadian Composites, LLC, Air Evac Services, Inc., Evangeline Airmotive Inc., and
International Helicopter Transport, Inc. and Whitney National Bank (incorporated by
reference to Exhibit 10.3 to PHIs Report on Form 10-Q for the quarterly period ended
June 30, 2002; File No. 0-9827). |
|
|
4.2 |
|
1st Amendment to Loan Agreement dated as of April 23, 2002 by and
among Petroleum Helicopters, Inc. Acadian Composites, LLC, Air Evac Services, Inc.,
Evangeline Airmotive Inc., and International Helicopter Transport, Inc. and Whitney
National Bank (incorporated by reference to Exhibit 10.4 to PHIs Report on Form 10-Q
for the quarterly period ended June 30, 2004). |
|
|
4.3 |
|
First Supplemental Indenture dated April 12, 2006, among PHI, Inc., the
Subsidiary Guarantors named therein and The Bank of New York, as Trustee (incorporated
by reference to Exhibit 10.1 to PHIs Report on Form 8-K filed on April 13, 2006). |
|
|
4.4 |
|
Indenture dated April 12, 2006 among PHI, Inc., the Subsidiary Guarantors named
therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.2
to PHIs Report on Form 8-K filed on April 13, 2006). |
|
|
4.5 |
|
Third Amendment to Loan Agreement dated April 12, 2006 by and among PHI, Inc.,
Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.),
and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by
reference to Exhibit 10.4 to PHIs Report on Form 8-K filed on April 13, 2006). |
|
|
4.6 |
|
Registration Rights Agreement dated April 12, 2006 (incorporated by reference
to Exhibit 10.3 to PHIs Report on Form 8-K filed on April 13, 2006). |
|
|
4.7 |
|
Second Amendment to Loan Agreement dated September 30, 2005 by and among
Petroleum Helicopters, Inc., Air Evac Services, Inc., Evangeline Airmotive, Inc., and International Helicopter Transport, Inc. and Whitney
National Bank. |
|
|
4.8 |
|
Fourth Amendment to Loan Agreement dated September 30, 2006 by and among PHI,
Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive,
Inc.), and International Helicopter Transport, Inc. and Whitney National Bank. |
|
|
4.9 |
|
Fifth Amendment to Loan Agreement dated August 1, 2007 by and among PHI, Inc.,
Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.),
and International Helicopter Transport, Inc. and Whitney National Bank. |
|
31.1 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al
A. Gonsoulin, Chairman and Chief Executive Officer. |
|
|
31.2 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by
Michael J. McCann, Chief Financial Officer. |
|
|
32.1 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al
A. Gonsoulin, Chairman and Chief Executive Officer. |
|
|
32.2 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
Michael J. McCann, Chief Financial Officer. |