XNAS:PHIIK PHI Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: June 30, 2012

or

 

¨ 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)

Registrant’s 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:  x    No:  ¨

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

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

 

Large accelerated filer:   ¨    Accelerated filer:   x
Non-accelerated filer:   ¨  (Do not check if a smaller reporting company)    Smaller reporting company:   ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at July 27, 2012

Voting Common Stock   2,852,616 shares
Non-Voting Common Stock   12,458,992 shares

 

 

 


Table of Contents

PHI, INC.

Index – Form 10-Q

 

Part I – Financial Information   

Item 1.

 

Financial Statements – Unaudited

  
 

Condensed Consolidated Balance Sheets – June 30, 2012 and December 31, 2011

     3   
 

Condensed Consolidated Statements of Operations – Quarter and Six Months ended June  30, 2012 and 2011

     4   
 

Condensed Consolidated Statements of Comprehensive Income – Quarter and Six Months ended June  30, 2012 and 2011

     5   
 

Condensed Consolidated Statements of Shareholders’ Equity – Six Months ended June  30, 2012 and 2011

     6   
 

Condensed Consolidated Statements of Cash Flows – Six Months ended June 30, 2012 and 2011

     7   
 

Notes to Condensed Consolidated Financial Statements

     8   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     39   

Item 4.

 

Controls and Procedures

     39   
Part II – Other Information   

Item 1.

 

Legal Proceedings

     40   

Item 1.A.

 

Risk Factors

     40   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     40   

Item 3.

 

Defaults Upon Senior Securities

     40   

Item 4.

 

Mine Safety Disclosures

     40   

Item 5.

 

Other Information

     40   

Item 6.

 

Exhibits

     40   
 

Signatures

     42   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars)

(Unaudited)

 

     June 30,
2012
    December 31,
2011
 
ASSETS     

Current Assets:

    

Cash

   $ 1,424      $ 5,091   

Short-term investments

     106,860        100,027   

Accounts receivable – net

    

Trade

     126,279        98,338   

Other

     2,774        958   

Inventories of spare parts – net

     61,966        57,243   

Other current assets

     57,174        15,302   

Income taxes receivable

     712        346   
  

 

 

   

 

 

 

Total current assets

     357,189        277,305   

Other

     33,510        27,071   

Property and equipment – net

     672,368        659,756   
  

 

 

   

 

 

 

Total assets

   $ 1,063,067      $ 964,132   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities:

    

Accounts payable

   $ 40,144      $ 17,697   

Accrued liabilities

     75,179        29,051   
  

 

 

   

 

 

 

Total current liabilities

     115,323        46,748   

Long-term debt

     358,038        346,047   

Deferred income taxes

     91,275        85,937   

Other long-term liabilities

     12,807        8,063   
  

 

 

   

 

 

 

Total liabilities

     577,443        486,795   

Commitments and contingencies (Note 3)

    

Shareholders’ Equity:

    

Voting common stock – par value of $0.10: 12,500,000 shares authorized, 2,852,616 issued and outstanding

     285        285   

Non-voting common stock – par value of $0.10: 25,000,000 shares authorized, 12,458,992 issued and outstanding

     1,246        1,246   

Additional paid-in capital

     291,403        291,403   

Accumulated other comprehensive loss

     (38     (93

Retained earnings

     192,728        184,496   
  

 

 

   

 

 

 

Total shareholders’ equity

     485,624        477,337   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,063,067      $ 964,132   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Thousands of dollars and shares, except per share data)

(Unaudited)

 

     Quarter Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Operating revenues, net

   $ 160,554       $ 135,976       $ 298,605       $ 255,616   

Gain on dispositions of assets, net

     679         77         690         223   

Other, principally interest income

     57         93         363         636   
  

 

 

    

 

 

    

 

 

    

 

 

 
     161,290         136,146         299,658         256,475   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses:

           

Direct expenses

     134,092         120,443         252,790         228,649   

Selling, general and administrative expenses

     9,668         7,736         18,508         17,279   

Interest expense

     7,440         6,761         14,640         13,793   
  

 

 

    

 

 

    

 

 

    

 

 

 
     151,200         134,940         285,938         259,721   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) before income taxes

     10,090         1,206         13,720         (3,246

Income tax expense (benefit)

     4,036         483         5,488         (1,298
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings (loss)

   $ 6,054       $ 723       $ 8,232       $ (1,948
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding:

           

Basic

     15,312         15,312         15,312         15,312   

Diluted

     15,550         15,474         15,486         15,312   

Net earnings (loss) per share:

           

Basic

   $ 0.40       $ 0.05       $ 0.54       $ (0.13

Diluted

   $ 0.39       $ 0.05       $ 0.53       $ (0.13

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

Comprehensive income includes net earnings and other comprehensive income items such as revenues, expenses, gains or losses that under generally accepted accounting principles are included in comprehensive income, and therefore impact total shareholders’ equity, but are excluded from net earnings.

The following table summarizes the components of total comprehensive income (net of taxes):

 

     Quarter Ended
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012     2011  

Net earnings (loss)

   $ 6,054      $ 723       $ 8,232      $ (1,948

Unrealized gain on short-term investments

     17        80         67        151   

Changes in pension plan assets and benefit obligations

     (8     1         (12     1   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 6,063      $ 804       $ 8,287      $ (1,796
  

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Thousands of dollars and shares)

(Unaudited)

 

     Voting
Common Stock
     Non-Voting
Common Stock
     Additional
Paid-in
     Accumulated
Other
Comprehensive
    Retained      Total
Share-
Holders’
 
     Shares      Amount      Shares      Amount      Capital      Income (Loss)     Earnings      Equity  

Balance at December 31, 2011

     2,853       $ 285         12,459       $ 1,246       $ 291,403       $ (93   $ 184,496       $ 477,337   

Net earnings

     —           —           —           —           —           —          8,232         8,232   

Unrealized gain on short-term investments

     —           —           —           —           —           67        —           67   

Changes in pension plan assets and benefit obligations

     —           —           —           —           —           (12     —        

 

 

 

(12

 

                      

 

 

 

Total comprehensive income net of income taxes

     —           —           —           —           —           —          —           8,287   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance at June 30, 2012

     2,853       $ 285         12,459       $ 1,246       $ 291,403       $ (38   $ 192,728       $ 485,624   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     Voting
Common Stock
     Non-Voting
Common Stock
    

Additional
Paid-in

    

Accumulated
Other

Comprehensive

   

Retained

    Total
Share-
Holders’
 
     Shares      Amount      Shares      Amount      Capital      Income (Loss)     Earnings     Equity  

Balance at December 31, 2010

     2,853       $ 285         12,459       $ 1,246       $ 291,403       $ (162   $ 179,644      $ 472,416   

Net loss

     —           —           —           —           —           —          (1,948     (1,948

Unrealized gain on short-term investments

     —           —           —           —           —           151        —          151   

Changes in pension plan assets and benefit obligations

     —           —           —           —           —           1        —          1   
                     

 

 

 

Total comprehensive income net of income taxes

     —           —           —           —           —           —          —          (1,796
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

     2,853       $ 285         12,459       $ 1,246       $ 291,403       $ (10   $ 177,696      $ 470,620   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2012     2011  

Operating activities:

    

Net earnings (loss)

   $ 8,232      $ (1,948

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

    

Depreciation

     16,782        15,316   

Deferred income taxes

     5,338        (1,198

Gain on asset dispositions

     (690     (223

Other

     406        615   

Changes in operating assets and liabilities

     (5,186     (6,314
  

 

 

   

 

 

 

Net cash provided by operating activities

     24,882        6,248   
  

 

 

   

 

 

 

Investing activities:

    

Purchase of property and equipment

     (32,407     (44,378

Proceeds from asset dispositions

     8,587        2,000   

Purchase of short-term investments

     (102,436     (153,812

Proceeds from sale of short-term investments

     94,842        212,993   

Deposits on aircraft

     (9,126     (8,920
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (40,540     7,883   
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from line of credit

     66,081        19,065   

Payments on line of credit

     (54,090     (33,950
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     11,991        (14,885
  

 

 

   

 

 

 

Decrease in cash

     (3,667     (754

Cash, beginning of period

     5,091        3,628   
  

 

 

   

 

 

 

Cash, end of period

   $ 1,424      $ 2,874   
  

 

 

   

 

 

 

Supplemental Disclosures Cash Flow Information

    

Cash paid during the period for:

    

Interest

   $ 14,317      $ 15,112   
  

 

 

   

 

 

 

Income taxes

   $ 563      $ 507   
  

 

 

   

 

 

 

Noncash investing activities:

    

Other current liabilities and accrued payables related to purchase of property and equipment

   $ 1,300      $ 46,007   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

The accompanying unaudited condensed consolidated financial statements include the accounts of PHI, Inc. and its subsidiaries (“PHI” or the “Company” or “we” or “our”). In the opinion of management, these condensed consolidated 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 consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and the accompanying notes.

The Company’s financial results, particularly as they relate to the Company’s Oil and Gas operations, are influenced by seasonal fluctuations as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. For this and other reasons, 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 use a combination of factors to identify reportable segments as required by Accounting Standards Codification 280, “Segment Reporting.” 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.

A segment’s operating profit is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has a portion of selling, general and administrative expenses that are charged directly to the segment and a portion that is allocated. Direct charges represent the vast majority of the segment’s selling, general and administrative expenses. Allocated selling, general and administrative expenses are based primarily on total segment direct expenses as a percentage of total direct expenses. Unallocated overhead consists primarily of corporate selling, general and administrative expenses that we do not allocate to the reportable segments.

Oil and Gas Segment. Our Oil and Gas segment, headquartered in Lafayette, Louisiana, provides helicopter services primarily for the major integrated and independent oil and gas production companies transporting personnel and/or equipment to offshore platforms in the Gulf of Mexico. Our customers include Shell Oil Company, BP America Production Company and ConocoPhillips Company, with whom we have worked for 30 or more years, and ExxonMobil Production Co. and ENI Petroleum, with whom we have worked for more than 15 years. We currently operate 164 aircraft in this segment.

Operating revenue from the Oil and Gas segment is derived mainly from 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. Total fuel cost is included in direct expense and reimbursement of a portion of these costs above a contracted per-gallon amount is included in revenue. Our Oil and Gas operations generated approximately 65% and 66% of our total operating revenue for the quarters ended June 30, 2012 and 2011, respectively, and approximately 66% of our total operating revenue for the six months ended June 30, 2012 and 2011.

Air Medical Segment. 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.

 

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Table of Contents

We provide air medical transportation services for hospitals and emergency service agencies in 18 states using approximately 93 aircraft at 67 separate locations. Our Air Medical segment operates 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, and 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. For the quarters ended June 30, 2012 and 2011, approximately 34% and 33% of our total operating revenues were generated by our Air Medical operations, respectively. For the six months ended June 30, 2012 and 2011, approximately 32% 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 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 a historical payment analysis of accounts fully closed, 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 $61.6 million and $40.0 million as of June 30, 2012 and June 30, 2011, respectively. The allowance for uncompensated care was $35.3 million and $34.4 million as of June 30, 2012 and June 30, 2011, respectively.

Provisions for contractual discounts and estimated uncompensated care for Air Medical operations as a percentage of gross billings are as follows:

 

     Revenue  
     Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Gross billings

     100     100     100     100

Provision for contractual discounts

     60     55     59     55

Provision for uncompensated care

     5     9     7     9

Net reimbursement per transport from commercial payors generally increases when a rate increase is implemented. Net reimbursement from certain commercial payors, as well as Medicare and Medicaid, does not increase proportionately with rate increases.

Net revenue attributable to Medicaid, Medicare, Insurance, and Self-Pay as a percentage of net Air Medical revenues are as follows:

 

     Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Medicaid

     16     16     15     15

Medicare

     22     22     24     24

Insurance

     61     61     60     60

Self-Pay

     1     1     1     1

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 generated approximately 18%

 

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and 19% of the segment’s revenues for the quarters ended June 30, 2012 and 2011, respectively, and approximately 19% and 20% of the segment’s revenues for the six months ended June 30, 2012 and 2011, respectively.

Technical Services Segment. The Technical Services segment provides helicopter repair and overhaul services for customer owned aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above cost. We currently operate six aircraft for the National Science Foundation in Antarctica under this segment.

Approximately 1% of our total operating revenues for the quarter ended June 30, 2012 and June 30, 2011 were generated by our Technical Services operations. Approximately 2% of our total operating revenues for the six months ended June, 30, 2012 and June 30, 2011 were generated by our Technical Services operations.

 

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Summarized financial information concerning our reportable operating segments for the quarters and six months ended June 30, 2012 and 2011 is as follows:

 

     Quarter Ended
June  30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (Thousands of dollars)     (Thousands of dollars)  

Segment operating revenues

        

Oil and Gas

   $ 104,421      $ 90,200      $ 197,373      $ 167,681   

Air Medical

     54,399        44,214        96,553        82,596   

Technical Services

     1,734        1,562        4,679        5,340   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     160,554        135,976        298,605        255,616   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment direct expenses (1)

        

Oil and Gas

     89,252        79,779        169,266        149,377   

Air Medical

     42,847        38,793        80,003        75,420   

Technical Services

     1,989        1,871        3,521        3,852   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total direct expenses

     134,088        120,443        252,790        228,649   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment selling, general and administrative expenses

        

Oil and Gas

     911        883        1,808        1,764   

Air Medical

     1,720        856        3,375        1,788   

Technical Services

     —          6        1        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total selling, general and administrative expenses

     2,631        1,745        5,184        3,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total direct and selling, general and administrative expenses

     136,719        122,188        257,974        232,221   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net segment profit (loss)

        

Oil and Gas

     14,258        9,538        26,299        16,539   

Air Medical

     9,832        4,565        13,175        5,388   

Technical Services

     (255     (315     1,157        1,469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     23,835        13,788        40,631        23,396   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other, net (2)

     736        170        1,053        859   

Unallocated selling, general and administrative costs (1)

     (7,041     (5,991     (13,324     (13,708

Interest expense

     (7,440     6,761        (14,640     (13,793
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

   $ 10,090      $ 1,206      $ 13,720      $ (3,246
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included in direct expenses and unallocated selling, general, and administrative costs are the depreciation expense amounts below:

 

     Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2012      2011     2012      2011  

Oil and Gas

   $ 5,738       $ 5,385      $ 11,528       $ 10,325   

Air Medical

     2,354         2,132        4,665         4,259   

Technical Services

     22         (1     45         96   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 8,114       $ 7,516      $ 16,238       $ 14,680   
  

 

 

    

 

 

   

 

 

    

 

 

 

Unallocated SG&A

   $ 266       $ 303      $ 545       $ 636   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(2) Consists of gains on disposition of property and equipment, and other income.

3. Commitments and Contingencies

Commitments – In 2010, we executed a contract to acquire ten new medium aircraft related to a new contract with a major customer. Two of these aircraft were delivered in 2010, three in 2011, and one in the second quarter of 2012. The remaining four are scheduled for delivery in late 2012, with an aggregate acquisition cost of approximately $49.4 million. We traded in two aircraft in exchange for a credit towards these acquisition costs, of which a credit of $8.2 million remained as of June 30, 2012. The credit for the two aircraft traded is recorded in Other Assets (long-term assets).

 

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During the second quarter of 2011, we entered into a contract to acquire six new heavy transport aircraft for an aggregate purchase price of approximately $148.0 million. In 2011, we took delivery of four aircraft and in March 2012 the remaining two aircraft were delivered. All aircraft were funded with operating leases with commercial banks.

In the third quarter of 2011, we entered into a contract to acquire ten light aircraft, of which four have been delivered. There are three aircraft to be delivered in 2012, at a total cost of $7.6 million, and three to be delivered in 2013, at a total cost of $7.6 million.

During the first quarter of 2012, we entered into a contract to acquire two additional new heavy transport aircraft with delivery scheduled for August and September 2012, for a total cost of $50.9 million, which we intend to fund with operating leases.

Also during the first quarter of 2012, we entered into a contract to acquire six more new heavy transport aircraft with a total cost of $160.3 million, with deliveries from April 2013 to September 2013. We intend to also fund these acquisitions with operating leases.

At June 30, 2012, total aircraft deposits included in Other Assets was $29.2 million. At December 31, 2011, total aircraft deposits was $18.0 million. This amount represents deposits for the medium and heavy transport aircraft contracts.

As of June 30, 2012, we had options to purchase aircraft under lease becoming exercisable in 2012 ($45.0 million), 2013 ($38.8 million), 2014 ($114.4 million), 2016 ($35.9 million), and 2017 ($71.4 million). We intend to exercise these options as they become exercisable, subject to market conditions.

In April 2012, our subsidiary PHI Air Medical, L.L.C. entered into a three-year contract with the Saudi Red Crescent Authority (“SRCA”) to provide helicopter emergency medical services in the Kingdom of Saudi Arabia, subject to our receipt of the escrow payment described below. The contract calls for us to place eight medium aircraft in service during 2012. In connection with the contract, we have entered into an aircraft purchase agreement, pursuant to which we would purchase and then sell seven new aircraft to SRCA’s lessor that will lease them to SRCA, after we complete and configure the aircraft for use in emergency medical services. Funds for the purchase of the aircraft have been deposited into an escrow account by the company that will lease the aircraft to SRCA.

Environmental Matters – We have recorded an aggregate estimated probable liability of $0.2 million as of June 30, 2012 for environmental response costs. The Company has conducted environmental surveys of its former Lafayette facility located at the Lafayette Regional Airport, which it vacated in 2001, and has determined that limited soil and groundwater contamination exists at the facility. The Company has installed groundwater monitoring wells at the facility and periodically monitors and reports on the contamination to the Louisiana Department of Environmental Quality (“LDEQ”). The Company previously submitted a Risk Evaluation Corrective Action Plan (RECAP) Standard Site Assessment Report to the LDEQ fully delineating the extent and type of contamination and updated the Report to include additional analytical data in April 2006. LDEQ reviewed the Assessment Report and requested a Corrective Action Plan from the Company. LDEQ approved the Corrective Action Plan (“CAP”) for the remediation of the former PHI Plant I location on August 23, 2010. All Louisiana Department of Natural Resources (“DNR”) approvals were received and the project began on May 16, 2011. Initial work took three weeks. Groundwater sampling that was performed during December, 2011, March, 2012, and June, 2012 is under evaluation to determine the effectiveness of remediation performed to date and whether additional remediation will be necessary. Based upon the May 2003 Site Assessment Report, the April 2006 update, ongoing monitoring, and the August 2010 CAP, the Company believes the ultimate remediation costs for the former Lafayette facility will not be material to its consolidated financial position, results of operations, or cash flows.

 

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Legal Matters – The Company is 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 liability with respect to these actions will not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

Superior Offshore International Inc. v. Bristow Group Inc., ERA Helicopters, LLC, Seacor Holdings Inc., ERA Group Inc., ERA Aviation, Inc., and PHI, Inc., Civil Action No. 1:09-cv-00438 on the docket of the United States District Court for the District of Delaware. This purported class action was filed on June 12, 2009, on behalf of a class defined to include all direct purchasers of offshore helicopter services in the Gulf of Mexico from the defendants at any time from January 1, 2001 through December 31, 2005. The suit alleged that the defendants acted jointly to fix, maintain, or stabilize prices for offshore helicopter services during the above time frame in violation of the federal antitrust laws. The plaintiff sought unspecified treble damages, injunctive relief, costs, and attorneys’ fees. On June 23, 2011, the court granted the defendants’ motion for summary judgment, entered final judgment in favor of the defendants, and dismissed all of the plaintiff’s claims. On July 22, 2011, the plaintiff filed a notice of appeal with the U.S. Court of Appeals, Third Circuit, and on July 27, 2012, that court affirmed the district court’s grant of summary judgment, dismissing the case.

As previously reported, the Company has been involved in Federal Court litigation in the Western District of Louisiana and the Fifth Circuit Court of Appeals with the Office and Professional Employees International Union (“OPEIU”), the union representing the Company’s domestic pilots. This litigation involves claims of bad faith bargaining, compensation of striking pilots both at the time of the strike and upon their return to work under both the Railway Labor Act (“RLA”) and Louisiana state law, and the terms of employment for the Company’s pilots since the strike ended, including non-payment of retention bonuses. After approximately two years of bargaining between the Company and OPEIU for a second collective bargaining agreement, including negotiations mediated by the National Mediation Board, both parties entered a self-help period as defined by the applicable labor law, the RLA. At that time the pilots commenced a strike in September 2006 and immediately prior to that strike the Company implemented its own terms and conditions of employment for the pilots. The strike ended in November 2006 and a court-approved return to work process began in January 2007 for those pilots who had not already returned to work or left the Company’s employment. This process was essentially completed in April 2007. The Company’s pilots continue to work under the terms and conditions of employment determined by the Company since the strike began. By Order dated July 9, 2010, the Court dismissed both the Company’s and OPEIU’s claims that the other had violated the RLA by bargaining in bad faith before exercising self-help. By Order dated July 30, 2010, the Court dismissed all claims that the Company violated the RLA in the manner in which it returned pilots to work following the strike. Also, the Court dismissed all but claims by 47 pilots under Louisiana state law. On August 27, 2010, the OPEIU and the individual pilot plaintiffs filed a notice of appeal with the Fifth Circuit Court of Appeals. Then, by Order entered September 27, 2010, the district court dismissed the Louisiana-law claims of the remaining 47 individual pilots. On October 22, 2010, the unions and the individual pilots filed a second notice of appeal to the Fifth Circuit Court of Appeals, by which they appealed the district court’s dismissal of all their RLA and Louisiana-law wage payment claims against PHI. On November 5, 2010, PHI filed a cross-appeal of the district court’s dismissal of PHI’s bad-faith bargaining claim against the unions. By orders dated September 12, 2011, the Fifth Circuit Court of Appeals affirmed the dismissal of all claims brought against PHI by the OPEIU and the individual pilots, whether under the RLA or Louisiana law. That Court also remanded the Return-to-Work case to the district court for the sole purpose of calculating court

 

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costs payable to PHI. The OPEIU and individual pilots did not seek rehearing of the Fifth Circuit’s judgment or review by the United States Supreme Court. Accordingly, all claims brought against PHI in these consolidated cases have now been conclusively resolved in PHI’s favor. Subsequently, the Court denied PHI’s motion to recover costs from the Unions in the approximate amount of $20,000. Because PHI chose not to appeal that decision, these consolidated cases are now concluded.

On December 31, 2009, the OPEIU filed another case against the Company in the Western District of Louisiana in which the OPEIU asserts that its acceptance in 2009 of the terms and conditions of employment for the Company’s pilots initially implemented by the Company prior to the strike has created a binding collective bargaining agreement and that the Company has inappropriately made unilateral revisions to those terms including failing to pay a retention bonus. The Court administratively stayed this case pending the completion of appellate briefing in the consolidated cases, which briefing concluded on April 15, 2011. The Court further administratively stayed this case pending the appellate court’s decision in the consolidated cases described above, which cases have now been resolved by the September 12, 2011 judgments of the Fifth Circuit Court of Appeals. At the district court’s direction, the parties filed memoranda on January 27, 2012, presenting argument on the question of the extent, if any, to which these claims survive the Fifth Circuit’s resolution of the issues litigated in the consolidated cases, above. PHI argued that these claims do not survive. By Order dated April 26, 2012, the Court invited PHI to file a motion to dismiss the Union’s claims. PHI filed such a motion on May 11, 2012, and we expect a decision on that motion during the month of August 2012. Even if that motion is denied and the case proceeds into discovery, management does not expect the outcome of this litigation to have a material effect on our consolidated financial position, results of operations, or cash flows.

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 leases. Aircraft leases contain purchase options exercisable at certain dates in the lease agreements.

At June 30, 2012, we had approximately $219.2 million in aggregate commitments under operating leases of which approximately $26.5 million is payable through December 31, 2012. The total lease commitments include $200.9 million for aircraft and $18.3 million for facility lease commitments.

As of June 30, 2012, we had options to purchase aircraft under lease becoming exercisable in 2012 ($45.0 million), 2013 ($38.8 million), 2014 ($114.4 million), 2016 ($35.9 million), and 2017 ($71.4 million). We intend to exercise these options as they become exercisable, subject to market conditions.

4. Long-term Debt

As of June 30, 2012, our total long-term indebtedness was $358.0 million, consisting of $300 million of our 8.625% Senior Notes due 2018 (the “8.625% Senior Notes”) and $58.0 million borrowed under our senior secured revolving credit facility.

On March 28, 2012, we amended our senior secured revolving credit facility to increase the maximum borrowing available from $75.0 million to $100.0 million. The facility is due September 1, 2013 and bears interest at the prime rate plus 100 basis points, or one-month LIBOR plus three percent, at our option. The facility contains a borrowing base of 80% of eligible receivables and 50% of the value of parts located in the United States, of PHI, Inc. and our subsidiaries (not to exceed $100.0 million). As of June 30, 2012, pursuant to the borrowing base calculation, the maximum amount available for borrowing under the facility was $100.0 million. We may prepay the revolving credit facility at any time in whole or in part without premium or penalty. The facility contains a sublimit of $20 million for the issuance of stand-by letters of credit, and no letters of credit were outstanding under the facility as of June 30, 2012 or December 31, 2011.

 

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As of June 30, 2012, we had $58.0 million in borrowings under the facility, and as of December 31, 2011 we had $46.0 million in borrowings under the facility. During the quarters ended June 30, 2012 and 2011, the weighted average effective interest rate on amounts borrowed under the facility was 4.25%. We reviewed interest expense for the quarters and six months ended June 30, 2012 and 2011 that could be capitalized for certain projects and any such amounts were immaterial.

All obligations under the revolving credit facility are secured by a perfected first priority security interest in all of our and our subsidiaries’ accounts, including eligible receivables, and inventory located in the United States, including parts, and are guaranteed by certain of our domestic subsidiaries.

The revolving credit facility includes financial covenants related to working capital, funded debt to consolidated net worth, consolidated net worth, and a fixed charge coverage ratio, and other covenants including restrictions on additional debt, liens, and a change of control. Events of default include a change of control, a default in any other material credit agreement, including the 8.625% Senior Notes, and customary events of default. As of June 30, 2012, we were in compliance with all of the covenants under the revolving credit facility.

We maintain a separate letter of credit facility with a financial institution not party to our revolving credit facility that had $5.5 million outstanding at June 30, 2012, to support our workmen’s compensation program. We also have a letter of credit outstanding for $9.2 million supporting performance of our contractual obligation to the Saudi Red Crescent Authority (“SRCA”) described in Note 3.

On September 23, 2010, we issued $300 million 8.625% Senior Notes due 2018. The 8.625% Senior Notes bear interest at an annual fixed rate of 8.625%, payable semi-annually on April 15 and October 15, and are due October 15, 2018. The 8.625% Senior Notes are unconditionally guaranteed on a senior basis by our domestic subsidiaries, and are general, unsecured obligations of ours and the subsidiary guarantors. We have the option to redeem some or all of the notes at any time on or after October 15, 2014 at specified redemption prices, and prior to that time pursuant to certain make-whole provisions.

The 8.625% Senior Notes contain restrictive covenants, including limitations on incurring indebtedness, creating liens, selling assets, and entering into certain transactions with affiliates. The covenants limit our ability to pay cash dividends on common stock, repurchase or redeem common or preferred equity, prepay subordinated debt, and make certain investments. There are no restrictions on dividends from a subsidiary to the parent company, nor any restrictions on contributions from the parent company to a subsidiary. Upon the occurrence of a “Change in Control” (as defined in the indenture governing the notes), each holder of the notes will have the right to require us to purchase that holder’s notes for a cash price equal to 101% of their principal amount. Upon the occurrence of an “Event of Default” (as defined in the indenture), the trustee or the holders of the notes may declare all of the outstanding notes to be due and payable immediately. We were in compliance with the covenants applicable to the notes as of June 30, 2012.

Because our 8.625% Senior Notes bear interest at a fixed rate, changes in market interest rates do not affect our interest payment obligations on the notes. The fair market value of our Senior Notes varies as changes occur to general market interest rates, the remaining maturity of the notes, and our credit worthiness. At June 30, 2012, the fair market value of our 8.625% Senior Notes was $297.8 million, based on quoted market indications.

Mr. Al A. Gonsoulin, our Chairman and CEO, and the Matzke Family Trust, of which Richard Matzke, one of our directors, is trustee, purchased $2.0 million and $1.0 million of the 8.625% Senior Notes, respectively.

Cash paid for interest was $13.4 million for the quarter ended June 30, 2012 and $14.9 million for the quarter ended June 30, 2011.

 

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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 June 30, 2012 and December 31, 2011.

Revenues related to emergency flights generated by the Company’s Air Medical segment are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when the services are provided. The allowance for contractual discounts was $61.6 million and $39.6 million as of June 30, 2012 and December 31, 2011, respectively. The allowance for uncompensated care was $35.3 million and $37.7 million as of June 30, 2012 and December 31, 2011, respectively.

The allowance for contractual discounts and estimated uncompensated care as a percentage of gross accounts receivable are as follows:

 

     June 30,
2012
    December 31,
2011
 

Gross Accounts Receivable

     100     100

Allowance for Contractual Discounts

     44     36

Allowance for Uncompensated Care

     25     34

We have also established valuation reserves related to obsolete and excess inventory. The inventory valuation reserves were $12.5 million and $12.3 million at June 30, 2012 and December 31, 2011, respectively.

6. Employee Compensation

Employee Incentive Compensation – Pursuant to our incentive compensation plans, we did not accrue incentive compensation expense for the quarter and six months ended June 30, 2011, as certain thresholds were not met. For the quarter and six months ended June 30, 2012, we accrued $1.5 million and $1.9 million, respectively.

We also have a Safety Incentive Plan related to Occupational Safety and Health Administration recordable incidents, for which we expensed $0.2 million and $0.4 million for the quarter and six months ended June 30, 2012, respectively. For the quarter and six months ended June 30, 2011, we expensed $0.2 million and $0.3 million, respectively.

On March 2, 2012, the Compensation Committee of the Company’s Board of Directors recommended the PHI, Inc. Long-Term Incentive Plan (the “Long-Term Incentive Plan”) under which equity-based awards may be granted to eligible participants including the Company’s executive officers. The Company’s Board of Directors adopted and the shareholders approved the plan at the Company’s 2012 Annual Meeting of Shareholders held May 4, 2012. An aggregate of 750,000 shares of the Company’s non-voting common stock were approved for issuance under the Long-Term Incentive Plan. Further, subject to shareholder approval of the Long-Term Incentive Plan, which was obtained on May 4, 2012, the Compensation Committee awarded a total of 23,236 time-vest and 145,572 performance-based restricted stock units to employees, of which 99,721 performance-based restricted stock units were awarded to the Company’s executive officers. The time-vest restricted stock units will vest and be payable in non-voting common stock on March 2, 2015 if the recipient continues to be employed on that date. The performance-based restricted stock units will vest and be payable in non-voting common stock after a three-year period, subject to achievement of performance criteria. Vesting of all awards will be accelerated upon termination of employment due to death or disability, or if a change of control of the Company occurs. Total expected expense to be recorded for the year for this award is $0.9 million.

 

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7. Fair Value Measurements

Accounting standards require that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The following table summarizes the valuation of our short-term investments and financial instruments by the above pricing levels as of the valuation dates listed:

 

            June 30, 2012  
     Total      (Level 1)      (Level 2)  
     (Thousands of dollars)  

Short-term investments:

        

Money Market Mutual Funds

   $ 45,507       $ 45,507       $ —     

Commercial Paper

     6,978         —           6,978   

Corporate bonds and notes

     54,375         —           54,375   
  

 

 

    

 

 

    

 

 

 
     106,860         45,507         61,353   

Investments in other assets

     2,768         2,768         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 109,628       $ 48,275       $ 61,353   
  

 

 

    

 

 

    

 

 

 

 

            December 31, 2011  
     Total      (Level 1)      (Level 2)  
     (Thousands of dollars)  

Short-term investments:

        

Money Market Mutual Funds

   $ 47,140       $ 47,140       $ —     

Commercial Paper

     15,678         —           15,678   

Corporate bonds and notes

     37,209         —           37,209   
  

 

 

    

 

 

    

 

 

 
     100,027         47,140         52,887   

Investments in other assets

     2,807         2,807         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 102,834       $ 49,947       $ 52,887   
  

 

 

    

 

 

    

 

 

 

The Company holds its short-term investments in an investment fund consisting of high quality money market instruments of governmental and private issuers, which is classified as short-term investments. Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets. These items are traded with sufficient frequency and volume to provide pricing on an ongoing basis. The fair values of the shares of these funds are based on observable market prices, and therefore, have been categorized in Level 1 in the fair value hierarchy. Level 2 inputs reflect quoted prices for identical assets or liabilities that are not active. These items may not be traded daily; examples include corporate bonds and U.S. government agencies. Assets are valued based on prices derived by independent third parties that use inputs such as benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. Prices are reviewed and can be challenged with the independent parties and/or overridden by the Company, if it is believed such would be more reflective of fair value. Investments included in other assets, which relate to the liability for the Officers’ Deferred Compensation Plan, consist mainly of multiple investment funds that are highly liquid and diversified.

Cash, accounts receivable, accounts payable, accrued liabilities and our revolving credit facility all had fair values approximating their carrying amounts at June 30, 2012 and December 31, 2011. Our determination of the estimated fair value of our senior notes is derived from quoted market indications (Level 1 inputs as defined in the accounting guidance). Our determination of the estimated fair value of our revolving credit facility is derived using Level 2 inputs, including quoted market indications of similar publicly-traded debts.

 

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8. Investments

We classify all of our short-term investments as available-for-sale. We carry these at fair value and report unrealized gains and losses, net of taxes, in other comprehensive income until realized. These gains and losses are reflected as a separate component of shareholders’ equity in our consolidated balance sheets and our consolidated statements of shareholders’ equity. Cost, gains, and losses are determined using the specific identification method.

Investments consisted of the following as of June 30, 2012:

 

     Cost      Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 
     (Thousands of dollars)  

Short-term investments:

  

Money Market Mutual Funds

   $ 45,507       $ —         $ —        $ 45,507   

Commercial Paper

     6,990         —           (12     6,978   

Corporate bonds and notes

     54,373         21         (19     54,375   
  

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     106,870         21         (31     106,860   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investments in other assets

     2,768         —           —          2,768   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 109,638       $ 21       $ (31   $ 109,628   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investments consisted of the following as of December 31, 2011:

 

     Cost      Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 
     (Thousands of dollars)  

Short-term investments:

  

Money Market Mutual Funds

   $ 47,140       $ —         $ —        $ 47,140   

Commercial Paper

     15,690         —           (12     15,678   

Corporate bonds and notes

     37,299         26         (116     37,209   
  

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     100,129         26         (128     100,027   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investments in other assets

     2,807         —           —          2,807   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 102,936       $ 26       $ (128   $ 102,834   
  

 

 

    

 

 

    

 

 

   

 

 

 

The following table presents the cost and fair value of our debt investments based on maturities as of June 30, 2012.

 

     Amortized
Cost
     Fair
Value
 
     (Thousands of dollars)  

Due in one year or less

   $ 60,338       $ 60,327   

Due within two years

     1,024         1,026   
  

 

 

    

 

 

 

Total

   $ 61,362       $ 61,353   
  

 

 

    

 

 

 

 

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The following table presents the cost and fair value of our debt investments based on maturities as of December 31, 2011.

 

     Amortized
Costs
     Fair
Value
 
     (Thousands of dollars)  

Due in one year or less

   $ 49,667       $ 49,569   

Due within two years

     3,322         3,318   
  

 

 

    

 

 

 

Total

   $ 52,989       $ 52,887   
  

 

 

    

 

 

 

The following table presents the average coupon rate percentage and the average days to maturity of our debt investments as of June 30, 2012.

 

     Average
Coupon
Rate (%)
     Average
Days To
Maturity
 

Commercial Paper

     0.247         177   

Corporate bonds and notes

     4.227         173   

The following table presents the average coupon rate percentage and the average days to maturity of our debt investments as of December 31, 2011.

 

     Average
Coupon
Rate (%)
     Average
Days To
Maturity
 

Commercial Paper

     0.191         116   

Corporate bonds and notes

     4.921         228   

 

The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for less than twelve months as of June 30, 2012.

 

     Fair Value      Unrealized
Losses
 
     (Thousands of dollars)  

Commercial Paper

   $ 6,979       $ (12

Corporate bonds and notes

     32,686         (19
  

 

 

    

 

 

 
   $ 39,665       $ (31
  

 

 

    

 

 

 

The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for less than twelve months as of December 31, 2011.

 

     Fair Value      Unrealized
Losses
 
     (Thousands of dollars)  

Commercial Paper

   $ 15,678       $ (12

Corporate bonds and notes

     17,226         (48
  

 

 

    

 

 

 
   $ 32,904       $ (60
  

 

 

    

 

 

 

 

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Table of Contents

 

The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for twelve months or more as of June 30, 2012.

 

     Fair
Value
     Unrealized
Losses
 
     (Thousands of dollars)  

Corporate bonds and notes

   $ 5,125       $ (0.40
  

 

 

    

 

 

 
   $ 5,125       $ (0.40
  

 

 

    

 

 

 

The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for twelve months or more as of December 31, 2011.

 

     Fair
Value
     Unrealized
Losses
 
     (Thousands of dollars)  

Corporate bonds and notes

   $ 5,172       $ (68
  

 

 

    

 

 

 
   $ 5,172       $ (68
  

 

 

    

 

 

 

We consider the decline in market value to be due to market conditions, and we do not plan to sell these investments prior to a recovery of cost. For these reasons, we do not consider any of our investments to be other than temporarily impaired at June 30, 2012 and December 31, 2011. The assessment of whether an investment in a debt security has suffered an other-than-temporary impairment is based on whether the Company has the intent to sell or more likely than not will be required to sell the debt security before recovery of its amortized costs. Further, if the Company does not expect to recover the entire amortized cost basis of the debt security, an other-than-temporary impairment is considered to have occurred and it is measured by the present value of cash flows expected to be collected less the amortized cost basis (credit loss). The Company did not have any other-than-temporary impairments relating to credit losses on debt securities for the quarter and six months ended June 30, 2012.

9. Shareholders’ Equity

We had weighted average common shares (voting and non-voting) outstanding for the quarters ended June 30, 2012 and June 30, 2011 of 15.3 million.

Accumulated other comprehensive loss is included in the shareholder’s equity section of the condensed consolidated balance sheets of the Company. Accumulated other comprehensive loss in the condensed consolidated balance sheets included the following components:

 

     June 30,
2012
    December 31,
2011
 

Unrealized gain (loss) on short-term investments

   $ 6      $ (61

Changes in pension plan assets and benefit obligations

     (44     (32
  

 

 

   

 

 

 
   $ (38   $ (93
  

 

 

   

 

 

 

10. Condensed Consolidating Financial Information

PHI, Inc. issued $300 million 8.625% Senior Notes in September 2010 that are fully and unconditionally guaranteed on a joint and several, senior basis by all of our domestic subsidiaries. All of our domestic subsidiaries are 100% owned.

 

20


Table of Contents

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 eliminating entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenues and expenses. The condensed consolidating financial statements have been prepared on the same basis as the consolidated financial statements of PHI, Inc. The equity method is followed by the parent company within these financial statements.

 

21


Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(Thousands of dollars)

(Unaudited)

 

     June 30, 2012  
     Parent
Company
Only (issuer)
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  
ASSETS          

Current Assets:

         

Cash

   $ 52      $ 1,372       $ —        $ 1,424   

Short-term investments

     106,860        —           —          106,860   

Accounts receivable – net

     75,789        53,264         —          129,053   

Intercompany receivable

     82,071        —           (82,071     —     

Inventories of spare parts – net

     61,821        145         —          61,966   

Other current assets

     18,803        38,371         —          57,174   

Income taxes receivable

     712        —           —          712   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     346,108        93,152         (82,071     357,189   

Investment in subsidiaries and other

     87,904        —           (87,904     —     

Other assets

     30,668        2,842         —          33,510   

Property and equipment – net

     480,883        191,485         —          672,368   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 945,563      $ 287,479       $ (169,975   $ 1,063,067   
  

 

 

   

 

 

    

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY          

Current Liabilities:

         

Accounts payable

   $ 34,121      $ 6,023       $ —        $ 40,144   

Accrued liabilities

     23,350        15,829         —          75,179   

Intercompany payable

     —          82,071         (82,071     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     57,471        139,923         (82,071     115,323   

Long-term debt

     358,038        —           —          358,038   

Deferred income taxes and other long-term liabilities

     44,430        59,653         —          104,082   

Shareholders’ Equity:

         

Common stock and paid-in capital

     292,934        2,674         (2,674     292,934   

Accumulated other comprehensive loss

     (38     —           —          (38

Retained earnings

     192,728        85,230         (85,230     192,728   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     485,624        87,904         (87,904     485,624   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 945,563      $ 287,479       $ (169,975   $ 1,063,067   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

 

22


Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(Thousands of dollars)

 

     December 31, 2011  
     Parent
Company
Only (issuer)
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  
ASSETS          

Current Assets:

         

Cash

   $ 4,313      $ 778       $ —        $ 5,091   

Short-term investments

     100,027        —           —          100,027   

Accounts receivable – net

     91,144        8,152         —          99,296   

Intercompany receivable

     —          97,381         (97,381     —     

Inventories of spare parts – net

     57,243        —           —          57,243   

Other current assets

     14,349        953         —          15,302   

Income taxes receivable

     346        —           —          346   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     267,422        107,264         (97,381     277,305   

Investment in subsidiaries and others

     80,992        —           (80,992     —     

Other assets

     27,050        21         —          27,071   

Property and equipment, net

     651,046        8,710         —          659,756   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,026,510      $ 115,995       $ (178,373   $ 964,132   
  

 

 

   

 

 

    

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY          

Current Liabilities:

         

Accounts payable

   $ 12,693      $ 5,004       $ —        $ 17,697   

Accrued liabilities

     24,018        5,033         —          29,051   

Intercompany payable

     97,381        —           (97,381     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     134,092        10,037         (97,381     46,748   

Long-term debt

     346,047        —           —          346,047   

Deferred income taxes and other long-term liabilities

     69,034        24,966         —          94,000   

Shareholders’ Equity:

         

Common stock and paid-in capital

     292,934        2,674         (2,674     292,934   

Accumulated other comprehensive loss

     (93     —           —          (93

Retained earnings

     184,496        78,318         (78,318     184,496   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     477,337        80,992         (80,992     477,337   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,026,510      $ 115,995       $ (178,373   $ 964,132   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

 

23


Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(Thousands of dollars)

(Unaudited)

 

     For the quarter ended June 30, 2012  
     Parent
Company
Only
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  

Operating revenues, net

   $ 102,270      $ 58,284       $ —        $ 160,554   

Management fees

     2,331        —           (2,331     —     

Gain on dispositions of assets, net

     679        —           —          679   

Other, principally interest income

     57        —           —          57   
  

 

 

   

 

 

    

 

 

   

 

 

 
     105,337        58,284         (2,331     161,290   
  

 

 

   

 

 

    

 

 

   

 

 

 

Expenses:

         

Direct expenses

     88,555        45,537         —          134,092   

Management fees

     —          2,331         (2,331     —     

Selling, general, and administrative expenses

     7,857        1,811           9,668   

Equity in net income of consolidated subsidiaries

     (5,156     —           5,156        —     

Interest expense

     7,428        12         —          7,440   
  

 

 

   

 

 

    

 

 

   

 

 

 
     98,684        49,691         2,825        151,200   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings before income taxes

     6,653        8,593         (5,156     10,090   

Income tax expense

     599        3,437         —          4,036   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net earnings

   $ 6,054      $ 5,156       $ (5,156   $ 6,054   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     For the quarter ended June 30, 2011  
     Parent
Company
Only
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  

Operating revenues, net

   $ 120,033      $ 15,943       $ —        $ 135,976   

Management fees

     637        —           (637     —     

Gain on dispositions of assets, net

     77        —           —          77   

Other, principally interest income

     93        —           —          93   
  

 

 

   

 

 

    

 

 

   

 

 

 
     120,840        15,943         (637     136,146   
  

 

 

   

 

 

    

 

 

   

 

 

 

Expenses:

         

Direct expenses

     108,180        12,263         —          120,443   

Management fees

     —          637         (637     —     

Selling, general, and administrative expenses

     7,479        257         —          7,736   

Equity in net income of consolidated subsidiaries

     (1,670     —           1,670        —     

Interest expense

     6,761        —           —          6,761   
  

 

 

   

 

 

    

 

 

   

 

 

 
     120,750        13,157         1,033        134,940   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings before income taxes

     90        2,786         (1,670     1,206   

Income tax (benefit) expense

     (633     1,116         —          483   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net earnings

   $ 723      $ 1,670       $ (1,670   $ 723   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

 

24


Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(Thousands of dollars)

(Unaudited)

 

     For the six months ended June 30, 2012  
     Parent
Company
Only
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  

Operating revenues, net

   $ 194,368      $ 104,237       $ —        $ 298,605   

Management fees

     4,169        —           (4,169     —     

Gain on dispositions of assets, net

     690        —           —          690   

Other, principally interest income

     363        —           —          363   
  

 

 

   

 

 

    

 

 

   

 

 

 
     199,590        104,237`         (4,169     299,658   
  

 

 

   

 

 

    

 

 

   

 

 

 

Expenses:

         

Direct expenses

     167,815        84,975         —          252,790   

Management fees

     —          4,169         (4,169     —     

Selling, general and administrative Expenses

     14,947        3,561         —          18,508   

Equity in net income of consolidated subsidiaries

     (6,912     —           6,912        —     

Interest expense

     14,628        12         —          14,640   
  

 

 

   

 

 

    

 

 

   

 

 

 
     190,478        92,717         2,743        285,938   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings before income taxes

     9,112        11,520         (6,912     13,720   

Income tax expense

     880        4,608         —          5,488   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net earnings

   $ 8,232      $ 6,912       $ (6,912   $ 8,232   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     For the six months ended June 30, 2011  
     Parent
Company
Only
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  

Operating revenues, net

   $ 224,434      $ 31,182       $ —        $ 255,616   

Management fees

     1,247        —           (1,247     —     

Gain on dispositions of assets, net

     223        —           —          223   

Other, principally interest income

     636        —           —          636   
  

 

 

   

 

 

    

 

 

   

 

 

 
     226,540        31,182         (1,247     256,475   
  

 

 

   

 

 

    

 

 

   

 

 

 

Expenses:

         

Direct expenses

     205,103        23,546         —          228,649   

Management fees

     —          1,247         (1,247     —     

Selling, general and administrative expenses

     16,730        549         —          17,279   

Equity in net income of consolidated subsidiaries

     (3,503     —           3,503        —     

Interest expense

     13,793        —           —          13,793   
  

 

 

   

 

 

    

 

 

   

 

 

 
     232,123        25,342         2,256        259,721   
  

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) earnings before income taxes

     (5,583     5,840         (3,503     (3,246

Income tax (benefit) expense

     (3,635     2,337         —          (1,298
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) earnings

   $ (1,948   $ 3,503       $ (3,503   $ (1,948
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

 

25


Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

 

     For the quarter ended June 30, 2012  
     Parent
Company
Only
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  

Net earnings

   $ 6,054      $ 5,156       $ (5,156   $ 6,054   

Unrealized gain on short-term investments

     17        —           —          17   

Changes in pension plan assets and benefit obligations

     (8     —           —          (8
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 6,063      $ 5,156       $ (5,156     6,063   
  

 

 

   

 

 

    

 

 

   

 

 

 

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

 

     For the quarter ended June 30, 2011  
     Parent
Company
Only
     Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  

Net earnings

   $ 723       $ 1,670       $ (1,670   $ 723   

Unrealized gain on short-term investments

     80         —           —          80   

Changes in pension plan assets and benefit obligations

     1         —           —          1   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 804       $ 1,670       $ (1,670   $ 804   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

 

26


Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

 

     For the six months ended June 30, 2012  
     Parent
Company
Only
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  

Net earnings

   $ 8,232      $ 6,912       $ (6,912   $ 8,232   

Unrealized gain on short-term investments

     67        —           —          67   

Changes in pension plan assets and benefit obligations

     (12     —           —          (12
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 8,287      $ 6,912       $ (6,912     8,287   
  

 

 

   

 

 

    

 

 

   

 

 

 

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

 

     For the six months ended June 30, 2011  
     Parent
Company
Only
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated  

Net (loss) earnings

   $ (1,948   $ 3,503       $ (3,503   $ (1,948

Unrealized gain on short-term investments

     151        —           —          151   

Changes in pension plan assets and benefit obligations

     (1     —           —          (1
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ (1,796   $ 3,503       $ (3,503     (1,796
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

 

27


Table of Contents

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

 

     For the six months ended June 30, 2012  
     Parent
Company
Only
    Guarantor
Subsidiaries  (1)
     Eliminations      Consolidated  

Net cash provided by operating activities

   $ 24,288      $ 594       $ —         $ 24,882   

Investing activities:

          

Purchase of property and equipment

     (32,407     —           —           (32,407

Purchase of short-term investments

     (102,436     —           —           (102,436

Proceeds from asset dispositions

     8,587        —           —           8,587   

Proceeds from sale of short-term Investments

     94,842        —           —           94,842   

Deposits on aircraft

     (9,126     —           —           (9,126
  

 

 

   

 

 

    

 

 

    

 

 

 

Net cash used in investing activities

     (40,540     —           —           (40,540
  

 

 

   

 

 

    

 

 

    

 

 

 

Financing activities:

          

Payments on line of credit, net

     11,991        —           —           11,991   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net cash used in financing activities

     11,991        —           —           11,991   
  

 

 

   

 

 

    

 

 

    

 

 

 

Increase in cash

     (4,261     594         —           (3,667

Cash, beginning of period

     4,313        778         —           5,091   
  

 

 

   

 

 

    

 

 

    

 

 

 

Cash, end of period

   $ 52      $ 1,372       $ —         $ 1,424   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

     For the six months ended June 30, 2011  
     Parent
Company
Only
    Guarantor
Subsidiaries  (1)
     Eliminations      Consolidated  

Net cash provided by operating activities

   $ 6,002      $ 246       $ —         $ 6,248   

Investing activities:

          

Purchase of property and equipment

     (44,378     —           —           (44,378

Purchase of short-term investments

     (153,812     —           —           (153,812

Proceeds from asset dispositions

     2,000        —           —           2,000   

Proceeds from sale of short-term Investments

     212,993        —           —           212,993   

Deposits on aircraft

     (8,920     —           —           (8,920
  

 

 

   

 

 

    

 

 

    

 

 

 

Net cash used in investing activities

     7,883        —           —           7,883   
  

 

 

   

 

 

    

 

 

    

 

 

 

Financing activities:

          

Payments on line of credit, net

     (14,885     —           —           (14,885
  

 

 

   

 

 

    

 

 

    

 

 

 

Net cash used in financing activities

     (14,885     —           —           (14,885
  

 

 

   

 

 

    

 

 

    

 

 

 

(Decrease) increase in cash

     (1,000     246         —           (754

Cash, beginning of period

     2,957        671         —           3,628   
  

 

 

   

 

 

    

 

 

    

 

 

 

Cash, end of period

   $ 1,957      $ 917       $ —         $ 2,874   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

 

28


Table of Contents
Item 2. MANAGEMENT’S 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 consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2011, management’s 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 and other periodic reports filed by PHI, Inc. (“PHI” or the “Company” or “we” or “our”) under the Securities Exchange Act of 1934 and other written or oral statements made by it or on its behalf, are forward-looking statements. When used herein, the words “anticipates”, “expects”, “believes”, “goals”, “intends”, “plans”, “projects” and similar words and 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 the Company’s actual results to differ materially from the expectations, beliefs, and estimates expressed or implied in such forward-looking statements. Although the Company believes 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 the Company’s 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 and the level of exploration and production activity in the Gulf of Mexico, the effect on the demand for our services as a result of the Macondo incident, the effect on our operating costs of volatile fuel prices, the availability of capital required to acquire aircraft, environmental risks, hurricanes and other adverse weather conditions, the activities of our competitors, changes in government regulation, unionization, operating hazards, risks related to operating in foreign countries, the ability to obtain adequate insurance at an acceptable cost and the ability of the Company to develop and implement successful business strategies. For a more detailed description of risks, see the “Risk Factors” section in Item 1.A. of our Form 10-K for the year ended December 31, 2011 and in Part II Item 1.A. of our subsequently filed quarterly reports on Form 10-Q (the “SEC Filings”). All forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph and the Risk Factors section of our SEC Filings. PHI undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

Operating revenues for the three months ended June 30, 2012 were $160.6 million, compared to $136.0 million for the three months ended June 30, 2011, an increase of $24.6 million. Oil and Gas segment operating revenues increased $14.2 million for the quarter ended June 30, 2012, related primarily to increased medium and heavy aircraft flight hours and revenues resulting mainly from the continuing improvement in deepwater drilling activity since the Macondo incident in 2010. Operating revenues in the Air Medical segment increased $10.2 million primarily due to an increase in revenues in the independent provider programs of $8.8 million. This increase was due to increased patient transports, improvement in the payor mix, and also due to rate increases implemented in the prior and current years. Operating revenues related to hospital based contracts increased $1.3 million due to a new contract that began in the third quarter of 2011.

Flight hours for the quarter ended June 30, 2012 were 40,180 compared to 38,734 for the quarter ended June 30, 2011. Oil and Gas segment flight hours increased 836 hours due to increases in medium and heavy aircraft flight hours related to improvements in deepwater drilling activity subsequent to the Macondo incident. Air Medical segment flight hours increased 610 hours for the quarter ended June 30, 2012. Individual patient transports in the Air Medical segment were 4,922 for the quarter ended June 30, 2012, compared to transports of 4,525 for the quarter ended June 30, 2011.

 

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Net Oil and Gas segment profit was $14.3 million for the quarter ended June 30, 2012, compared to $9.5 million for the quarter ended June 30, 2011. The increase of $4.8 million was primarily due to increased revenues of $14.2 million, primarily in medium and heavy aircraft revenue, partially offset by an increase in direct expense of $9.5 million, discussed further in the Segment Discussion below.

Net segment profit for the Air Medical segment was $9.8 million for the quarter ended June 30, 2012, compared to $4.6 million for the quarter ended June 30, 2011. The increase in segment profit in the Air Medical segment was primarily due to increased revenues, as discussed above and in the Segment Discussion below.

Net earnings for the quarter ended June 30, 2012 was $6.1 million, or $0.38 per diluted share, compared to net earnings of $0.7 million for the quarter ended June 30, 2011, or $0.05 per diluted share. Pre-tax earnings were $10.1 million for the quarter ended June 30, 2012, compared to pre-tax earnings of $1.2 million for the same period in 2011.

Year to date operating revenues for June 30, 2012 were $298.6 million, compared to $255.6 million for the six months ended June 30, 2011, an increase of $43.0 million. Oil and Gas operating revenues increased $29.7 million for the six months ended June 30, 2012, related primarily to increased medium and heavy aircraft flight hours and revenues, resulting mainly from the continuing improvement in deepwater drilling activity since the Macondo incident in 2010. Operating revenues in the Air Medical segment increased $14.0 million primarily due to increased revenues in the independent provider programs, primarily due to increased patient transports, improvement in the payor mix, and rate increases implemented in the prior and current years.

Flight hours for the six months ended June 30, 2012 were 74,245 compared to 71,172 for the six months ended June 30, 2011. Oil and Gas segment’s flight hours increased 2,297 hours due to an increase in medium and heavy aircraft flight hours. Air Medical segment flight hours increased 788 hours for the six months ended June 30, 2012. Individual patient transports in the Air Medical segment were 8,968 for the six months ended June 30, 2012, compared to transports of 8,560 for the six months ended June 30, 2011, an increase of 408 transports.

Net Oil and Gas segment profit was $26.3 million for the six months ended June 30, 2012, compared to $16.5 million for the six months ended June 30, 2011. The increase of $9.8 million was primarily due to increased revenues of $29.7, primarily in medium and heavy aircraft revenue, partially offset by an increase in direct expense of $19.9 million, discussed further in the Segment Discussion.

Net segment profit for the Air Medical segment was $13.2 million for the six months ended June 30, 2012, compared to $5.4 million for the six months ended June 30, 2011. The increase in segment profit in the Air Medical segment was primarily due to the increased revenues in the independent provider programs.

Net earnings for the six months ended June 30, 2012 was $8.2 million, or $0.53 per diluted share, compared to net loss of $1.9 million for the six months ended June 30, 2011, or $0.13 per diluted share. Pre-tax earnings were $13.7 million for the six months ended June 30, 2012, compared to pre-tax loss of $3.2 million for the same period in 2011.

Our Oil and Gas segment continues to improve with additional deepwater drilling activity by our customers, with such activity projected to exceed pre-Macondo levels in the next 18 months and require us to provide additional medium and heavy aircraft.

 

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Also, in our Air Medical segment, we have recently commenced the startup of several projects, including the project below, which collectively we believe will have a favorable effect on net segment profit particularly in 2013 and 2014.

In April 2012, our subsidiary PHI Air Medical, L.L.C. entered into a three-year contract with the Saudi Red Crescent Authority (“SRCA”) to provide helicopter emergency medical services in the Kingdom of Saudi Arabia. The contract calls for us to place eight medium aircraft in service during 2012, along with support staff, and to operate and maintain the aircraft for the contract term. In connection with the contract, we have entered into an aircraft purchase agreement, pursuant to which we would purchase and then sell seven new aircraft to the company that will lease them to the SRCA, after we complete and configure the aircraft for use in emergency medical services. Funds for the purchase of the aircraft have been deposited into an escrow account by the company that will lease the aircraft to SRCA. As of August 1, 2012, all seven of the new aircraft have been delivered by the manufacturer to PHI. The contract envisions a transition of the program over time to qualified Saudi personnel, and pursuant to the contract we will provide training services to SRCA’s qualified pilots, technicians, paramedics and communications specialists. The SRCA project is expected to commence flight operations in September 2012, with two aircraft in service at that time.

 

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Operating Statistics

The following tables present certain non-financial operational statistics for the quarters and six months ended June 30, 2012 and 2011:

 

     Quarter Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Flight hours:

           

Oil and Gas

     30,833         29,997         56,547         54,250   

Air Medical (1)

     9,347         8,737         17,148         16,360   

Technical Services

     —           —           550         562   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     40,180         38,734         74,245         71,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Air Medical Transports (2)

     4,922         4,525         8,968         8,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30,  
     2012      2011  

Aircraft operated at period end:

     

Oil and Gas (3)

     164         164   

Air Medical (4)

     93         88   

Technical Services

     6         5   
  

 

 

    

 

 

 

Total (3) (4)

     263         257   
  

 

 

    

 

 

 

 

(1) Flight hours include 2,685 flight hours associated with hospital-based contracts, compared to 2,560 flight hours in the prior year quarter, and 4,798 flight hours year-to-date, compared to 4,686 in the prior year-to-date.
(2) Represents individual patient transports for the period.
(3) Includes nine aircraft as of June 30, 2012 and 2011 that are customer owned.
(4) Includes six aircraft as of June 30, 2012 and seven aircraft as of June 30, 2011 that are customer owned.

Results of Operations

Quarter Ended June 30, 2012 compared with Quarter Ended June 30, 2011

Combined Operations

Revenues – Operating revenues for the three months ended June 30, 2012 were $160.6 million, compared to $136.0 million for the three months ended June 30, 2011, an increase of $24.6 million. Oil and Gas operating revenues increased $14.2 million for the quarter ended June 30, 2012, related primarily to increased medium and heavy aircraft flight hours and revenues. Operating revenues in the Air Medical segment increased $10.2 million primarily due to increased revenues in the independent provider programs due to improvements in the payor mix, rate increases implemented in the prior and current years, and increased patient transports.

Flight hours for the quarter ended June 30, 2012 were 40,180 compared to 38,734 for the quarter ended June 30, 2011. Oil and Gas segment’s flight hours increased 836 hours due to increases in medium and heavy aircraft flight hours. Air Medical segment flight hours increased 610 hours for the quarter ended June 30, 2012, due to increased flight hours in the independent provider programs. Individual patient transports in the Air Medical segment were 4,922 for the quarter ended June 30, 2012, compared to transports of 4,525 for the quarter ended June 30, 2011.

Other Income and Gains – Gains on asset dispositions were $0.7 million for the three months ended June 30, 2012, compared to $0.1 million for the three months ended June 30, 2011.

 

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Direct Expenses – Direct operating expense was $134.1 million for the three months ended June 30, 2012, compared to $120.4 million for the three months ended June 30, 2011, an increase of $13.7 million. Aircraft rent increased ($3.2 million) due to the acquisition of four heavy aircraft in 2011 and two heavy aircraft in 2012 funded with operating leases. We also experienced increases in aircraft warranty costs ($1.7 million), employee compensation expenses ($9.5 million), and component repair costs ($1.6 million). Aircraft parts usage decreased ($2.8 million) due to a decrease in parts usage for light aircraft. Other items increased, net ($0.5 million).

Selling, General, and Administrative Expenses – Selling, general and administrative expenses were $9.7 million for the three months ended June 30, 2012, compared to $7.7 million for the three months ended June 30, 2011. The $2.0 million increase is due to increased legal and audit expenses ($0.5 million), increased employee compensation expenses ($0.9 million), increased contract services ($0.1 million), increased travel costs ($0.1 million), and other items, net ($0.4 million).

Interest Expense – Interest expense was $7.4 million for the three months ended June 30, 2012, compared to $6.8 million for the three months ended June 30, 2011. The increase is due to the increased balance on the revolving credit facility.

Income Taxes – Income tax expense for the three months ended June 30, 2012 was $4.0 million compared to $0.5 million for the three months ended June 30, 2011. The effective tax rate was 40% for the three months ended June 30, 2012, and the three months ended June 30, 2011.

Net Earnings – Net income for the three months ended June 30, 2012 was $6.1 million compared to net income of $0.7 million for the three months ended June 30, 2011. Earnings before income taxes for the three months ended June 30, 2012 was $10.1 million compared to earnings before tax of $1.2 million for the same period in 2011. Earnings per diluted share was $0.38 for the current quarter compared to earnings per diluted share of $0.05 for the prior year quarter. We had 15.3 million weighted average common shares outstanding during the three months ended June 30, 2012 and 2011. The increase in earnings before taxes for the quarter ended June 30, 2012 is primarily due to increased revenues and segment operating profit in the Oil and Gas and Air Medical segments.

Segment Discussion

Oil and Gas – Oil and Gas segment revenues were $104.4 million for the three months ended June 30, 2012, compared to $90.2 million for the three months ended June 30, 2011, an increase of $14.2 million. Flight hours were 30,833 for the current quarter compared to 29,997 for the same quarter in the prior year. The increase in revenue is primarily due to increased medium and heavy aircraft flight hours and revenues, due to an increase in deepwater drilling activity compared to the same period in 2011 when there was no significant deepwater drilling activity due to the Deepwater Horizon incident.

The number of aircraft in the segment was 164 at June 30, 2012 and June 30, 2011. We have sold or disposed of three light and one medium aircraft in the Oil and Gas segment since June 30, 2011. We added eleven new aircraft to the Oil and Gas segment since June 30, 2011, consisting of four light, three medium and four heavy aircraft. Inter-segment aircraft transfers account for the remaining amount.

Direct expense in our Oil and Gas segment was $89.3 million for the three months ended June 30, 2012, compared to $79.8 million for the three months ended June 30, 2011, an increase of $9.5 million. Aircraft rent expense increased ($2.5 million) due to the acquisition of four heavy aircraft in 2011 and two heavy aircraft in 2012, funded with operating leases. Employee compensation expenses increased ($7.5 million) due to compensation rate increases and an increase in the number of employees in the Oil and Gas segment. Aircraft warranty costs increased ($2.2 million) due to increased flight hours. Component repair costs increased ($1.0 million) and aircraft parts usage decreased ($3.2 million). Other items decreased, net ($0.5 million).

 

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Our Oil and Gas segment profit was $14.3 million for the quarter ended June 30, 2012, compared to $9.5 million for the quarter ended June 30, 2011. Operating margins (segment profit divided by operating revenues) were 14% for the three months ended June 30, 2012, compared to 11% for the three months ended June 30, 2011. The increase in segment profit of $4.8 million was primarily due to increased revenues of $14.2 million, partially offset by increased direct expenses of $9.5 million as previously discussed. The Oil and Gas segment revenues are primarily driven by contracted aircraft and flight hours. Costs are primarily fixed, and are driven by the number of aircraft, and a portion is variable which is driven by flight hours.

Air Medical – Air Medical segment revenues were $54.4 million for the three months ended June 30, 2012, compared to $44.2 million for the three months ended June 30, 2011, an increase of $10.2 million. The increase was primarily due to increased revenue of $8.8 million in the independent provider programs related to improved payor mix, rate increases implemented in 2011 and 2012, and increased patient transports. Operating revenues related to hospital based contracts increased $1.3 million due to a new contract that began in the third quarter of 2011. Total patient transports were 4,922 for the three months ended June 30, 2012, compared to 4,525 for the three months ended June 30, 2011.

Flight hours were 9,347 for the three months ended June 30, 2012, compared to 8,737 for the three months ended June 30, 2011. The number of aircraft in the segment was 93 at June 30, 2012 and 88 at June 30, 2011. Since June 30, 2011, we added one medium aircraft related to a hospital contract. We also acquired one fixed wing aircraft, and sold or disposed of two fixed wing and two light aircraft. Inter-segment aircraft transfers account for the remaining amount.

Direct expense in our Air Medical segment was $42.8 million for the three months ended June 30, 2012, compared to $38.8 million for the three months ended June 30, 2011. There was an increase in employee compensation expense ($1.9 million) due to additional employees and rate increases. There was also increases in aircraft rent ($0.7 million) and aircraft depreciation ($0.2 million) due to additional aircraft added to the fleet. Aircraft warranty costs increased ($0.1 million) and component repair costs increased ($0.7 million). Other items increased, net ($0.4 million).

Selling, general and administrative expenses were $1.7 million for the three months ended June 30, 2012, compared to $0.9 million for the three months ended June 30, 2011. The $0.8 million increase is primarily due to increased employee compensation expenses, legal and audit expenses, and contract services costs.

Our Air Medical segment’s profit was $9.8 million for the quarter ended June 30, 2012, compared to $4.6 million for the quarter ended June 30, 2011. Operating margins were 18% for the three months ended June 30, 2012, compared to 10% for the three months ended June 30, 2011. The improvement in segment operating income was primarily due to an increase in transports, increase in rates in 2011 and 2012, closure of unprofitable bases, and cost reductions.

Technical Services – Technical Services revenues were $1.7 million for the three months ended June 30, 2012, compared to $1.6 million for the three months ended June 30, 2011. Direct expenses in our Technical Services segment were $2.0 million for the three months ended June 30, 2012, compared to $1.9 million for the three months ended June 30, 2011. Our Technical Services segment’s operating loss was $0.3 million for the three months ended June 30, 2012 and the three months ended June 30, 2011.

Six Months Ended June 30, 2012 compared with Six Months Ended June 30, 2011

Combined Operations

Revenues – Operating revenues for the six months ended June 30, 2012 were $298.6 million, compared to $255.6 million for the six months ended June 30, 2011, an increase of $43.0 million. Oil and Gas operating revenues increased $29.7 million for the six months ended June 30, 2012, related primarily to

 

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increased medium and heavy aircraft revenue due to increased flight hours due to the continuing improvement in deepwater drilling activity since the Macondo incident in 2010. Operating revenues in the Air Medical segment increased $14.0 million primarily due to increased revenues in the independent provider programs due to increased patient transports, improved payor mix and rate increases.

Flight hours for the six months ended June 30, 2012 were 74,245 compared to 71,172 for the six months ended June 30, 2011. Oil and Gas segment’s flight hours increased 2,297 hours due to an increase in deepwater drilling activity in the Gulf of Mexico. Air Medical segment flight hours increased 788 hours for the six months ended June 30, 2012, primarily due to increased flight hours in the independent provider programs. Transports in the independent provider programs were 8,968 for the six months ended June 30, 2012, compared to 8,560 transports for the six months ended June 30, 2011.

Other Income and Gains – Gain on dispositions of assets was $0.7 million for the six months ended June 30, 2012, compared to a gain of $0.2 million for the six months ended June 30, 2011. These amounts represent gains on sales of aircraft that no longer meet our strategic needs.

Other income was $0.4 million for the six months ended June 30, 2012, compared to $0.6 million for the six months ended June 30, 2011.

Direct Expenses – Direct operating expense was $252.8 million for the six months ended June 30, 2012, compared to $228.7 million for the six months ended June 30, 2011, an increase of $24.1 million. There was an increase in employee compensation expense ($12.9 million) due to additional employees and rate increases as compared to the prior year. We also experienced increases in aircraft rent ($4.5 million) and aircraft depreciation ($1.6 million) due to additional aircraft added to the fleet. Other increases included fuel expense ($2.5 million) due to increased flight hours, particularly in medium and heavy aircraft, aircraft warranty costs ($3.9 million), and component repair costs ($4.4 million). There were decreases in aircraft parts usage ($3.8 million), aircraft insurance ($1.6 million), and other items, net ($0.3 million).

Selling, General, and Administrative Expenses – Selling, general and administrative expenses were $18.5 million for the six months ended June 30, 2012, compared to $17.3 million for the six months ended June 30, 2011. The $1.2 million increase was primarily due to increased employee compensation expense ($1.9 million), partially offset by decreases in legal and accounting fees ($0.5 million), and other items (0.2 million).

Interest Expense – Interest expense was $14.6 million for the six months ended June 30, 2012, compared to $13.8 million for the six months ended June 30, 2011. This increase is due to the increased balance on the revolving credit facility.

Income Taxes – Income tax expense for the six months ended June 30, 2012 was $5.5 million compared to income tax benefit of $1.3 million for the six months ended June 30, 2011. The effective tax rate was 40% for the six months ended June 30, 2012 and 2011.

Net Earnings – Our net earnings for the six months ended June 30, 2012 was $8.2 million compared to net losses of $1.9 million for the six months ended June 30, 2011. Earnings per diluted share was $0.53 for the six months ended June 30, 2012, compared to a net loss per diluted share of $0.13 for the prior year period. We had 15.3 million common shares outstanding during the six months ended June 30, 2012 and 2011. Earnings before taxes for the six months ended June 30, 2012 was $13.7 million, compared to a loss before income taxes of $3.2 million for the same period in 2011. The increase in earnings before income taxes for the six months ended June 30, 2012 compared to the prior year period was primarily due to an increase in Oil and Gas segment earnings of $9.8 million and an increase in Air Medical segment earnings of $7.8 million.

 

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Segment Discussion

Oil and Gas – Oil and Gas segment revenues were $197.4 million for the six months ended June 30, 2012, compared to $167.7 million for the six months ended June 30, 2011, an increase of $29.7 million. Flight hours were 56,547 for the six months ended June 30, 2012, compared to 54,250 for the same period in 2011. The increase in Oil and Gas revenues was related primarily to increased medium and heavy aircraft flight hours and revenue due to increased deepwater drilling activity in the Gulf of Mexico. In 2011 there was no significant deepwater drilling activity following the Macondo incident in 2010.

Direct expense in our Oil and Gas segment was $169.3 million for the six months ended June 30, 2012, compared to $149.4 million for the six months ended June 30, 2011, an increase of $19.9 million. Employee compensation expense increased ($11.4 million) due to an increase in employees and rate increases. Fuel expense increased ($2.5 million) as a result of increased flight hours. Total fuel cost is included in direct expense and reimbursement of a portion of these costs above a contracted per-gallon amount is included in revenue. Aircraft rent expense increased ($3.5 million) and aircraft depreciation increased ($1.2 million) due to additional aircraft added to the fleet. Aircraft warranty costs also increased ($3.8 million), and component repair costs increased ($2.8 million). There were decreases in aircraft parts usage ($4.3 million) and other items, net ($1.0 million).

Selling, general and administrative expenses were $1.8 million for the six months ended June 30, 2012 and June 30, 2011.

Our Oil and Gas net segment profit was $26.3 million for the six months ended June 30, 2012, compared to $16.5 million for the six months ended June 30, 2011. The $9.8 million increase was due to the increase in revenues of $29.7 million, partially offset by the decrease in direct expenses of $19.9 million. Operating margins were 13% for the six months ended June 30, 2012, compared to 10% for the six months ended June 30, 2011. The increase in operating income and margin is primarily due to increased medium and heavy aircraft revenue due to increased deepwater drilling activity in the Gulf of Mexico as discussed above. The Oil and Gas segment revenues are primarily driven by contracted aircraft and flight hours. Costs are primarily fixed and are driven by the number of aircraft, and a portion is variable which is driven by flight hours.

Air Medical – Air Medical segment revenues were $96.6 million for the six months ended June 30, 2012, compared to $82.6 million for the six months ended June 30, 2011, an increase of $14.0 million or 17%. Patient transports were 8,968 for the six months ended June 30, 2012, compared to 8,560 for the six months ended June 30, 2011, an increase of 408 transports. Flight hours were 17,148 for the six months ended June 30, 2012, compared to 16,360 for the six months ended June 30, 2011. This increase was primarily due to the increase in patient transports in the independent provider programs.

Direct expense in our Air Medical segment was $80.0 million for the six months ended June 30, 2012, compared to $75.4 million for the six months ended June 30, 2011. The $4.6 million increase is primarily due to aircraft rent ($1.0 million) and aircraft depreciation ($0.4 million) due to additional aircraft added to the fleet. There were also increases in employee compensation expense ($1.4 million) primarily due to increased employees and compensation rate increases, and component repair costs ($1.6 million). Other items increased, net ($0.1 million).

Selling, general and administrative expenses were $3.4 million for the six months ended June 30, 2012, compared to $1.8 million for the six months ended June 30, 2011. The $1.6 million increase was primarily due to increased employee costs ($0.5 million), increased legal fees ($0.3 million), and increased outside contract services ($0.3 million). Other items increased, net ($0.5 million).

Our Air Medical net segment profit was $13.2 million for the six months ended June 30, 2012, compared to $5.4 million for the six months ended June 30, 2011. Operating margins were 14% and 7% for the six months ended June 30, 2012 and 2011, respectively. The increase in segment operating income was primarily due to an increase in transports, increase in rates in 2011 and 2012, closure of unprofitable bases, and cost reductions.

 

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Technical Services – Technical Services revenues were $4.7 million for the six months ended June 30, 2012, compared to $5.3 million for the six months ended June 30, 2011. Direct expenses in our Technical Services segment were $3.5 million for the six months ended June 30, 2012, compared to $3.9 million for the six months ended June 30, 2011. Our Technical Services segment’s operating income was $1.2 million for the six months ended June 30, 2012, compared to $1.5 million for the six months ended June 30, 2011. Operating margins were 25% for the six months ended June 30, 2012, compared to 28% for the six months ended June 30, 2011.

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. In addition, the Technical Services segment conducts flight operations for the National Science Foundation in Antarctica, which are typically conducted in the first and fourth quarters each year.

Liquidity and Capital Resources

General

Our ongoing liquidity requirements arise primarily from the funding of working capital needs, the purchase or leasing of aircraft, the maintenance and refurbishment of aircraft, improvement 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, senior notes, and the sale of non-voting common stock in 2005 and 2006. To the extent we do not use cash, short-term investments or borrowings to finance our aircraft acquisitions, we can typically enter into operating leases to fund these acquisitions.

On March 28, 2012, we amended our senior secured revolving credit facility, primarily to increase the maximum borrowing capacity from $75.0 million to $100.0 million. The amended facility is described in Note 4 to the financial statements included in this report.

We expect our existing cash and short-term investments, cash flow from operations and borrowings under our revolving credit facility will fund our cash requirements for the next twelve months.

Cash Flow

Our cash position was $1.4 million at June 30, 2012, compared to $5.1 million at December 31, 2011. Short-term investments were $106.9 million at June 30, 2012, and $100.0 million at December 31, 2011. Working capital was $249.5 million at June 30, 2012, compared to $230.6 million at December 31, 2011, an increase of $18.9 million. The increase in working capital is due in part the increase in accounts receivable of $29.8 million, offset by a $22.4 million increase in accounts payable, providing a net increase of $ 7.4 million. The increases in accounts receivable and accounts payable are due to increased revenues and related expenses due to increased flight hour activity. Inventory increased $4.7 million from December 31, 2011, and prepaid expenses increased $5.9 million. These increases are the result of the startup costs of several projects, including our project in Saudi Arabia.

Net cash provided by operating activities was $24.9 million for the six months ended June 30, 2012, compared to $6.2 million for the same period in 2011, an increase of $18.7 million. Net earnings adjusted for non-cash items contributed $30.1 million of cash flow for the six months ended June 30, 2012, compared to $12.6 million for the same period in 2011, an increase of $17.5 million, primarily due to the increase in earnings.

Net cash used in investing activities was $40.5 million for the six months ended June 30, 2012, compared to $7.9 million cash provided by investing activities for the same period in 2011. Purchases and sales of

 

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short-term investments provided a net use of cash of $7.6 million during the six months ended June 30, 2012 compared to net cash provided of $59.2 million in the comparable prior year period. Capital expenditures were $32.4 million for the six months ended June 30, 2012, compared to $44.4 million for the same period in 2011. Capital expenditures for 2012 included $26.9 million for aircraft purchases, upgrades, and refurbishments. Capital expenditures for 2011 included $41.8 million for aircraft purchases, upgrades, and refurbishments. Gross proceeds from asset dispositions were $8.6 million for the six months ended June 30, 2012, compared to $2.0 million for the same period in 2011.

Financing activities for the six months ended June 30, 2012 include only proceeds of and payments on the revolving credit facility. For the six months ended June 30, 2012, we had net cash provided of $12.0 million, compared to net payments of $14.9 for the same period in 2011.

Long Term Debt

As of June 30, 2012, our total long-term debt was $358.0 million, consisting of our $300 million 8.625% Senior Notes due 2018 and $58.0 million outstanding on our revolving credit facility. For a description of our 8.625% Senior Notes and our senior secured revolving credit facility, see Note 4 to our financial statements included in this report.

At June 30, 2012, we had $58.0 million in borrowings under our senior secured revolving credit facility. During the quarter ended June 30, 2012, $68.1 million was the highest loan balance, with a weighted average balance of $58.0 million. During the same period for 2011, $16.2 million was the highest loan balance, with a weighted average balance of $2.4 million.

Contractual Obligations

The table below sets out our contractual obligations as of June 30, 2012 related to our operating lease obligations, aircraft purchase commitments, revolving credit facility, and the 8.625% Senior Notes due 2018. The operating leases are not recorded as liabilities on our balance sheet. Each contractual obligation included in the table contains various terms, conditions, and covenants that, if violated, accelerate the payment of that obligation. We were in compliance with the covenants applicable to these contractual obligations as of June 30, 2012, and expect to remain in compliance through the year ending December 31, 2012. As of June 30, 2012, we leased 24 aircraft included in the lease obligations below.

 

           Payment Due by Year  
                                             Beyond  
     Total     2012     2013      2014      2015      2016      2016  
           (Thousands of dollars)  

Aircraft purchase commitments (1)

   $ 275,720      $ 107,832 (2)    $ 167,888       $ —         $ —         $ —         $ —     

Aircraft lease obligations

     200,945        19,606        39,402         39,402         39,039         31,208         32,288   

Aircraft commitment for SRCA project (1)

     45,175        45,175        —           —           —           —           —     

Other lease obligations

     18,265        2,140        3,267         2,751         2,537         2,102         5,468   

Long-term debt

     358,038        —          58,038         —           —           —           300,000   

Senior notes interest

     162,797        12,938        25,875         25,875         25,875         25,875         46,359   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,060,940      $ 187,691      $ 294,470       $ 68,028       $ 67,451       $ 59,185       $ 384,115   

Aircraft funding by SRCA’s lessor (1)

     (45,175     (45,175     —           —           —           —           —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,015,765      $ 142,516      $ 263,835       $ 68,028       $ 67,451       $ 59,185       $ 384,115   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For information about these aircraft purchase commitments, see Note 3 to the financial statements in this report.
(2) Includes two heavy aircraft which we have obtained financing through leases with commercial banks.

 

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Table of Contents

As of June 30, 2012, we had options to purchase aircraft under lease becoming exercisable in 2012 ($45.0 million), 2013 ($38.8 million), 2014 ($114.4 million), 2016 ($35.9 million), and 2017 ($71.4 million). We intend to exercise these options as they become exercisable, subject to market conditions.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our earnings are subject to changes in short-term interest rates due to the variable interest rate on our revolving credit facility. Based on the $58.0 million in borrowings outstanding at June 30, 2012, a 10% increase (0.425%) in the interest rate would reduce our annual pre-tax earnings approximately $0.2 million.

Our $300 million outstanding 8.625% Senior Notes due 2018 bear interest at a fixed rate of 8.625% and therefore changes in market interest rates do not affect our interest payment obligations on the notes. The fair market value of our 8.625% Senior Notes will vary as changes occur to general market interest rates, the remaining maturity of the notes, and our creditworthiness. At June 30, 2012, the market value of the notes was approximately $297.8 million, based on quoted market indications.

Market risk is the risk of changes in the value of financial instruments, or in future net income or cash flows, in response to changing market conditions. The Company holds financial instruments that are exposed to the following significant market risks: the interest rate risk associated with the Company’s investments in money market funds, U.S. Government Agencies, commercial paper, and corporate bonds and notes. See Note 8 to the financial statements in this report for details regarding our short-term investments.

 

Item 4. CONTROLS AND PROCEDURES

The Company’s 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 our disclosure controls and procedures were effective as of such date to ensure 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, including to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required 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.

 

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Table of Contents

PART II – OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

For information regarding legal proceedings, see “Legal Matters” in Note 3 to our financial statements included in this report, which is incorporated herein by reference. These legal matters were also discussed in our Form 10-K for the year ended December 31, 2011 and in our Form 10-Q for the quarter ended March 31, 2012.

 

Item 1.A. RISK FACTORS

Item 1.A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011 includes a discussion of our risk factors. Except as described below, there have been no significant changes to our risk factors.

We must obtain additional financing in order to fund our aircraft purchase and other obligations.

As of June 30, 2012, we had obligations related to aircraft purchase commitments (excluding SRCA project) totaling approximately $275.7 million due in 2012 and 2013, along with other significant contractual obligations as described in this report. As of June 30, 2012, we had approximately $108.3 million in cash and short-term investments and $42.0 million available under our $100.0 million revolving credit facility. We intend to seek to obtain operating leases and/or additional debt financing to fund these obligations. We have no current commitments or arrangements with respect to such financing, and no assurances can be given that such financing will be available to us on acceptable terms. Our inability to obtain such financing could have a material adverse affect on our business, financial condition and results of operations.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

Item 4. MINE SAFETY DISCLOSURES

None.

 

Item 5. OTHER INFORMATION

None.

 

Item 6. EXHIBITS

 

(a) Exhibits

 

    3.1    (i)    Composite Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to PHI’s Report on Form 10-Q filed on August 7, 2008).
   (ii)    Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3(ii) to PHI’s Report on Form 8-K filed October 13, 2011).
    4.1    Amended and Restated Loan Agreement dated as of March 31, 2008 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 4.1 to PHI’s Report on Form 10-Q filed on May 8, 2008).

 

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    4.2    First Amendment dated as of August 5, 2009 to Amended and Restated Loan Agreement dated as of March 31, 2008 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 4.2 to PHI’s Report on Form 10-Q filed on August 10, 2009).
    4.3    Second Amendment dated September 13, 2010 to Amended and Restated Loan Agreement dated March 31, 2008 by and among PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. and International Helicopter Transport, Inc., and Whitney National Bank (incorporated by reference to Exhibit 4.3 to PHI’s Report on Form 10-Q filed on November 8, 2010).
    4.4    Third Amendment dated September 26, 2011 to Amended and Restated Loan Agreement dated March 31, 2008 by and among PHI, Inc., PHI Air Medical, L.L.C., successor to Air Evac Services, Inc., PHI Tech Services, Inc. and International Helicopter Transport, Inc., and Whitney National Bank (incorporated by reference to Exhibit 4.4 to PHI’s Report on Form 10-Q filed on November 7, 2011).
    4.5    Fourth Amendment dated March 28, 2012 to Amended and Restated Loan Agreement dated March 31, 2008 by and among PHI, Inc., PHI Air Medical, L.L.C., successor to Air Evac Services, Inc., PHI Tech Services, Inc. and International Helicopter Transport, Inc., and Whitney National Bank (incorporated by reference to Exhibit 4.5 to PHI’s Report on Form 10-Q filed on May 9, 2012).
    4.6    Indenture dated as of September 23, 2010 by and among PHI, Inc., the subsidiary guarantors and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to PHI’s Report on Form 8-K filed on September 23, 2010).
    4.7    Form of 8.625% Senior Note due 2018 (incorporated by reference to Exhibit 4.2 to PHI’s Report on Form 8-K filed on September 23, 2010).
  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.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase
101.DEF    XBRL Taxonomy Extension Definition Linkbase
101.LAB    XBRL Taxonomy Extension Label Linkbase
101.PRE    XBRL Taxonomy Extension Presentation Linkbase

 

41


Table of Contents

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.
August 6, 2012     By:  

/s/ Al A. Gonsoulin

    Al A. Gonsoulin
    Chairman and Chief Executive Officer
August 6, 2012     By:  

/s/ Michael J. McCann

    Michael J. McCann
    Chief Financial Officer

 

42

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