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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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 NO. 0-9827
PETROLEUM HELICOPTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
LOUISIANA 72-0395707
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2002 SE EVANGELINE THRUWAY
LAFAYETTE, LOUISIANA 70508
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (337) 235-2452
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
VOTING COMMON STOCK
NON-VOTING COMMON STOCK
(TITLE OF EACH CLASS)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |
The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the registrant as of June 30, 2003 was $166,297,841 based
upon the last sales price of the Common Stock on June 30, 2003, as reported on
the Nasdaq SmallCap Market.
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 17, 2004 was:
Voting Common Stock................. 2,851,866 shares.
Non-Voting Common Stock............. 2,530,511 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Information Statement for the 2004
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Form 10-K.
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PETROLEUM HELICOPTERS, INC.
INDEX - FORM 10-K
PART I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 6
Item 3. Legal Proceedings............................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 8
Item 4.A. Executive Officers of the Registrant......................................................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.......................................................................... 9
Item 6. Selected Financial Data...................................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 10
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk................................... 21
Item 8. Financial Statements and Supplementary Data.................................................. 22
Petroleum Helicopters, Inc. and Consolidated Subsidiaries:
Independent Auditors' Reports.......................................................... 22
Consolidated Balance Sheets
- December 31, 2003 and December 31, 2002........................................... 23
Consolidated Statements of Operations
- Year ended December 31, 2003, Year ended December 31, 2002, and
Year ended December 31, 2001................................................. 24
Consolidated Statements of Shareholders' Equity
- Year ended December 31, 2003, Year ended December 31, 2002, and
Year ended December 31, 2001................................................. 25
Consolidated Statements of Comprehensive Income (Loss)
- Year ended December 31, 2003, Year ended December 31, 2002, and
Year ended December 31, 2001................................................. 25
Consolidated Statements of Cash Flows
- Year ended December 31, 2003, Year ended December 31, 2002, and
Year ended December 31, 2001................................................. 26
Notes to Consolidated Financial Statements............................................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.................................................................... 48
Item 9.A. Controls and Procedures...................................................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 49
Item 11. Executive Compensation....................................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 49
Item 13. Certain Relationships and Related Transactions............................................... 49
Item 14. Principal Accounting Fees and Services....................................................... 49
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 49
Signatures................................................................................... 52
PART I
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in this Form
10-K and other periodic reports filed by Petroleum Helicopters, Inc. (the
"Company" or "PHI") 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", or "projects" and similar expressions are intended to
identify forward-looking statements. It is important to note that
forward-looking statements are based on a number of assumptions about future
events and are subject to various risks, uncertainties, and other factors that
may cause the Company's actual results to differ materially from the views,
beliefs, and estimates expressed or implied in such forward-looking statements.
Although the Company believes that the assumptions reflected in forward-looking
statements are reasonable, no assurance can be given that such assumptions will
prove correct. Factors that could cause the Company's results to differ
materially from the results discussed in such forward-looking statements include
but are not limited to the following: flight variances from expectations,
volatility of oil and gas prices, the substantial capital expenditures and
commitments required to acquire aircraft, environmental risks, weather
conditions, competition, government regulation, unionization, operating hazards,
risks related to international operations, the ability to obtain insurance, and
the ability of the Company to implement its business strategy. For a more
detailed description of risks, see the "Risk Factors" section in Item 1 below.
All forward-looking statements in this document are expressly qualified in their
entirety by the cautionary statements in this paragraph. PHI undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events, or otherwise.
ITEM 1. BUSINESS
GENERAL
PHI, a Louisiana corporation, was incorporated in 1949. Since its inception, the
Company's primary business has been and continues to be the safe and reliable
transportation of personnel and, to a lesser extent, parts and equipment, to,
from, and among offshore platforms for customers engaged in the oil and gas
exploration, development, and production industry, principally in the Gulf of
Mexico. The Company is a leading provider of helicopter transportation services
in the Gulf of Mexico. PHI also provides helicopter services to the oil and gas
industry internationally, and to non-oil and gas customers such as health care
providers and US governmental agencies such as the National Science Foundation.
The Company also provides helicopter maintenance and repair services to certain
customers. At December 31, 2003, the Company owned or operated approximately 225
aircraft domestically and internationally.
DESCRIPTION OF OPERATIONS
PHI operates in four business segments: Domestic Oil and Gas, Air Medical,
International, and Technical Services. For financial information regarding the
Company's operating segments and the geographic areas in which they operate, see
Note 9 of the Notes to Consolidated Financial Statements included elsewhere in
this Form 10-K.
DOMESTIC OIL AND GAS. PHI operates approximately 164 owned, leased, and
customer-owned aircraft related to its Domestic Oil and Gas operations from
several bases or heliports in the Gulf of Mexico region. The operations in the
Gulf of Mexico service customers located in offshore Louisiana, Texas, Alabama,
and Mississippi. Operating revenues from the Domestic Oil and Gas segment
accounted for 68%, 67%, and 68% of consolidated operating revenues during the
years ended December 31, 2003, December 31, 2002, and December 31, 2001,
respectively.
PHI's oil and gas operations derive revenue primarily from the transport of its
customers' workers and equipment to platforms and other offshore locations. Oil
and gas exploration and production companies and other offshore oil service
companies use PHI's services primarily for routine offshore transportation, to
transport personnel during medical and safety emergencies, and to evacuate
personnel during the threat of hurricanes and other adverse weather conditions.
Most of PHI's customers have entered into contracts for transportation services
for a term of one year or longer, although some do hire the Company on an "ad
hoc" or "spot" basis.
Most of the Domestic Oil and Gas aircraft are available for hire by any
customer, but some are dedicated to individual customers. The Company operates
helicopters that have flying ranges of up to 450 miles with a 30-minute fuel
reserve and
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thus are capable of servicing many of the deepwater oil and gas operations that
are from 50 to 250 miles offshore. (See Item 2. -- Properties, for specific
information by aircraft model.)
AIR MEDICAL. The Company, both directly and through its subsidiary, Air Evac
Services, Inc. ("Air Evac"), provides air medical transportation services for
hospitals and medical programs under the independent provider model in 12 states
using approximately 42 aircraft. The aircraft dedicated to this segment are
specially outfitted to accommodate emergency patients and emergency medical
equipment. The Air Medical segment's operating revenues accounted for 17% of
consolidated operating revenues during the years ended December 31, 2003, 2002,
and 2001.
INTERNATIONAL. PHI provides helicopter services in Angola, Antarctica, and the
Democratic Republic of Congo. The Company operates approximately 19 aircraft
internationally. Each aircraft operating internationally is typically dedicated
to one customer. The Company's international customers are mostly oil and gas
customers and US corporations operating internationally. Operating revenues from
the Company's International segment accounted for 8% of consolidated operating
revenues during each of the years ended December 31, 2003, 2002, and 2001.
TECHNICAL SERVICES. PHI performs maintenance and repair services at its
Lafayette facility pursuant to an FAA repair station license, primarily for its
existing customers. The license includes authority to repair airframes,
powerplants, accessories, radios, and instruments and to perform specialized
services. Commencing in late 2001, the Company changed the strategic focus of
Technical Services from providing maintenance and overhaul services to any third
party customer, to only those customers that are currently serviced by the
Company's helicopter operations. The Company implemented this change to allow
the Technical Services segment to focus on the Company's aircraft and
components. The Company will also continue to provide maintenance to certain
military aircraft under an acceptable rate structure.
Operating revenues from the Technical Services segment accounted for 7% of
consolidated operating revenues for the year ended December 31, 2003, and 8% for
each of the years ended December 31, 2002, and 2001.
SEASONAL ASPECTS
Three seasonal related occurrences affect the Company's operations, including
poor weather conditions generally, tropical storm season in the Gulf of Mexico,
and variation in the number of hours of daylight. For a more detailed discussion
of these events, see the "Adverse Weather Conditions" paragraph in the "Risk
Factors" section of this Item 1. The Company's operating results may, and
usually do, vary from quarter to quarter, depending on factors outside of its
control. As a result, full year results are not likely to be a direct multiple
of any particular quarter or combination of quarters.
INVENTORY
For aircraft maintenance and repair related to both PHI-owned helicopters and
those repaired by the Technical Services segment, the Company carries an
inventory of aircraft parts. Many of these inventory items are parts that have
been removed from aircraft, refurbished according to manufacturers' and FAA
specifications, and returned to inventory. The Company uses systematic
procedures to estimate the valuation of these used parts, which includes
consideration of their condition and continuing utility. As a result, the
carrying values of inventory reported in the Company's financial statements are
impacted by these estimates.
CUSTOMERS
The Company's principal customers are major integrated energy companies and
independent exploration and production companies. The Company also serves oil
and gas service companies, hospitals and medical programs under the independent
provider model, government agencies, and other aircraft owners and operators.
The Company's largest customer accounted for 15%, 17%, and 14% of operating
revenues for the years ended December 31, 2003, December 31, 2002, and December
31, 2001, respectively. The Company has entered into contracts with most of its
customers with terms of at least one year, although most include provisions
allowing for earlier termination.
GOVERNMENT REGULATION
PHI is regulated by a number of different federal and state agencies. All of
PHI's flight operations are regulated by the FAA. Aircraft accidents are subject
to the jurisdiction of the National Transportation Safety Board. Standards
relating to the workplace health and safety of PHI's employees are created and
monitored through the federal Occupational Safety and
2
Health Act ("OSHA"). There are a number of statutes and regulations that govern
offshore operations. Also, PHI is subject to various federal and state
environmental statutes that are discussed separately in the "Environmental
Matters" section below.
The FAA has authority to exercise jurisdiction over many aspects of the
Company's business, including personnel, aircraft, and ground facilities. The
Company requires an Air Taxi Certificate, granted by the FAA, to transport
personnel and property in its helicopters. This certificate contains operating
specifications that allow the Company to conduct its present operations, but
this certificate is potentially subject to amendment, suspension, and revocation
in accordance with procedures set forth in the Federal Aviation Act. The Company
is not required to file tariffs showing rates, fares, and other charges with the
FAA. The FAA is responsible for ensuring that PHI complies with all FAA
regulations relating to the operation of its aviation business. It conducts
regular inspections regarding the safety, training and general regulatory
compliance of PHI's US aviation operations. Additionally, the FAA requires the
Company to file reports confirming its continued compliance.
The FAA's regulations, as currently in effect, require that at least 75% of the
Company's voting securities be owned or controlled by citizens of the United
States or one of its possessions, and that the president and at least two-thirds
of the directors of the Company be United States citizens. The Company's
president and all of its directors are United States citizens, and its
organizational documents provide for the automatic reduction in voting power of
each share of voting common stock owned or controlled by a non-United States
citizen if necessary to comply with these regulations.
The Company is subject to OSHA and similar state statutes. The Company has an
extensive health, safety and environmental program. The primary functions of the
safety staff are to develop and improve company policies that meet or exceed the
safety standards set by OSHA, train company personnel, and make inspections of
safety procedures to ensure their compliance with company policies on safety.
Employees are required to attend safety-training meetings at which the
importance of full compliance with safety procedures is emphasized. The Company
believes that it meets or exceeds all OSHA requirements and that its operations
do not expose its employees to unusual health hazards.
The Company is also subject to the Communications Act of 1934 because of its
ownership and operation of a radio communications flight following network
throughout the Gulf of Mexico.
Numerous other federal statutes and rules regulate the offshore operations of
the Company and the Company's customers, pursuant to which the federal
government has the ability to suspend, curtail, or modify certain or all
offshore operations. A suspension or substantial curtailment of offshore oil and
gas operations for any prolonged period would have an immediate and materially
adverse effect on the Company. A substantial modification of current offshore
operations could adversely affect the economics of such operations and result in
reduced demand for helicopter services.
COMPETITION
The Company's business is highly competitive in each of its markets. Many of the
Company's contracts are awarded after competitive bidding. The principal aspects
of competition are safety, price, reliability, availability, and service.
The Company is a leading operator of helicopters in the Gulf of Mexico. There
are two major and several small competitors operating in the Gulf of Mexico.
Certain of the Company's customers and potential customers in the oil industry
operate their own helicopter fleets; however, oil and gas companies
traditionally contract for most specialty services associated with offshore
operations, including helicopter services.
The market in which the Air Medical segment competes is in an independent
provider model and the hospital-based program. Under the independent provider
model, the Company obtains the necessary local approvals to position an aircraft
and personnel in a community and responds on demand to individuals requiring
transport for medical reasons and the Company is paid by either a commercial
insurance company, federal or state agency, or the patient. Under the
hospital-based program, the Company is contracted directly to the hospital and
is paid only by the hospital based on contracted service rates. These contracts
are typically awarded on a bid basis.
The International segment of PHI's business primarily serves customers in the
oil and gas industry. Most of PHI's international contracts are subject to
competitive bidding.
3
The Technical Services segment competes regionally and nationally against
various small and large repair centers in the United States and Canada. Although
there is aggressive pricing in this market segment, the Technical Service
segment prices its services at profitable levels.
EMPLOYEES
As of December 31, 2003, the Company employed a total of 1,684 full-time
employees and 52 part-time employees, including approximately 500 pilots and
1,000 aircraft maintenance and support personnel. At December 31, 2002, the
Company employed 1,632 full-time employees and 57 part-time employees.
There was a reduction in the employee complement in the quarter ended September
2003 of approximately 60 personnel, some of which are under a planned separation
in early 2004. The reduction consisted primarily of support personnel, and
personnel in the Domestic Oil and Gas segment. Subsequent to that employee
reduction, the Company began adding personnel in the Air Medical segment to
support its expansion of services under the independent provider model.
On June 13, 2001, the Company's domestic pilots ratified a three-year collective
bargaining agreement between the Company and the Office & Professional Employees
International Union ("OPEIU"). The agreement was effective retroactively to June
1, 2001 and remains effective through May 31, 2004. The agreement provides for
automatic base pay increases for pilots and strike protection for the Company.
Union membership under the agreement, which falls under the Railway Labor Act,
is voluntary.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment, storage, recycling, and
disposal of toxic and hazardous wastes. Operating and maintaining helicopters
requires that the Company use, store, and dispose of materials that are subject
to federal and state environmental regulation. The Company periodically conducts
environmental site surveys at its facilities, and determines whether there is a
need for environmental remediation based on these surveys.
RISK FACTORS
All phases of the Company's operations are subject to a number of uncertainties,
risks, and other influences. Some important factors that could cause actual
results to differ materially from anticipated results or other expectations
include the following:
DEPENDENCE ON THE OIL AND GAS INDUSTRY. Approximately 76% of the Company's 2003
operating revenue is attributable to helicopter support for oil and gas
companies. The Company's business is dependent primarily on the level of
activity by the oil and gas companies, particularly in the Gulf of Mexico.
Traditionally, the level of activity has fluctuated with the price of oil and
gas, however, in current markets commodity prices are high and activity levels
in the Gulf of Mexico are relatively low attributable to economic concerns. The
Company is also expanding its Air Medical business segment, which when fully
implemented, will constitute a larger percentage of operating revenues.
ADVERSE WEATHER CONDITIONS/SEASONALITY. Three types of weather-related or
seasonal occurrences impact the Company's business: poor weather conditions
generally, tropical storm season in the Gulf of Mexico, and the number of hours
of daylight.
Poor visibility, high winds, and heavy precipitation can affect the operation of
helicopters and result in a reduced number of flight hours. A significant
portion of the Company's operating revenues is dependent on actual flight hours
and a substantial portion of the Company's direct costs is fixed. Thus,
prolonged periods of adverse weather can materially and adversely affect the
Company's operating revenues and net earnings.
In the Gulf of Mexico, the months of December through February have more days of
adverse weather conditions than the other months of the year. Also in the Gulf
of Mexico, June through November is tropical storm season. When a tropical storm
is about to enter or begins developing in the Gulf of Mexico, flight activity
may increase because of evacuations of offshore workers. However, during
tropical storms, the Company is unable to operate in the area of the storm. In
addition, as most of PHI's facilities are located along the Gulf of Mexico
coast, tropical storms may cause substantial damage to its
4
property, including helicopters. Additionally, the Company incurs costs in
evacuating its aircraft and bases during tropical storms.
The fall and winter months have fewer hours of daylight. Consequently, flight
hours are generally lower at these times, which typically results in a reduction
in operating revenues during those months. The Company currently operates 44
helicopters in its oil and gas operations that are equipped to fly pursuant to
instrument flight rules ("IFR"), which enables these aircraft, when manned by
IFR rated pilots and co-pilots, to operate at times when poor visibility and
darkness prevents flights by aircraft that can fly only by visual flight rules
("VFR").
INTERNATIONAL OPERATIONS ARE SUBJECT TO POLITICAL, ECONOMIC AND REGULATORY
UNCERTAINTY. PHI's International operations are subject to a number of risks
inherent in any international operations including, but not limited to; (i)
political, social, and economic instability; (ii) potential seizure or
nationalization of assets; (iii) import-export quotas; and (iv) other forms of
governmental regulation.
The Company's results of operations could be susceptible to adverse events
beyond its control that could occur in any particular country in which it is
conducting operations. PHI's contracts to provide services internationally
generally provide for payment in US dollars. To the extent PHI does make
investments in foreign assets or receives revenues in currencies other than US
dollars, the value of the Company's assets and income could be adversely
affected by fluctuations in the value of local currencies.
Additionally, competitiveness in international market areas may be adversely
affected by regulations, including, but not limited to, regulations requiring;
(i) the awarding of contracts to local contractors, (ii) the employment of local
citizens, and (iii) the establishment of foreign subsidiaries with significant
ownership positions reserved by the foreign government for local citizens.
CONCENTRATION OF CUSTOMERS IN OIL AND GAS INDUSTRY MAY INCREASE THE COMPANY'S
RISK. The majority of PHI's customers are engaged in the oil and gas industry.
This concentration of customers may impact the Company's overall exposure to
credit risk, either positively or negatively, in that customers may be similarly
affected by changes in economic and industry conditions. PHI does not generally
require collateral in support of trade receivables, but does maintain reserves
for potential credit losses, and, generally, actual losses have historically
been within expectations.
SIGNIFICANT CUSTOMERS. The Company derives a significant amount of its revenue
from a small number of major and independent oil and gas companies. The
Company's loss of one of these significant customers, if not offset by sales to
new or other existing customers, would have a material adverse effect on
business and operations. For more information on customer concentration, see
"Customers" above.
SAFETY AND INSURANCE. The operation of helicopters inherently involves a degree
of risk. Hazards such as aircraft accidents, collisions, fire, and adverse
weather are hazards, which must be managed by providers of helicopter services
and may result in (i) loss of life, (ii) serious injury to employees and third
parties, and (iii) losses of equipment and revenues. The Company's safety record
is favorable in comparison to the record for both United States and
International operators. A favorable safety record is one of the primary factors
a customer reviews in selecting an aviation provider. Significant emphasis is
placed on safety in the Company and it is a very important factor affecting
daily operations.
The Company maintains hull and liability insurance on its aircraft, which
insures the Company against physical loss of, or damage to, its aircraft and
against certain legal liabilities to others. In addition, the Company carries
war risk, expropriation, confiscation, and nationalization insurance for its
aircraft involved in international operations. In some instances, the Company is
covered by indemnity agreements from its customers in lieu of, or in addition to
its insurance. The Company's aircraft are not insured for loss of use. While the
Company believes it is adequately covered by insurance and indemnification
arrangements, the loss, expropriation or confiscation of, or severe damage to, a
material number of its helicopters could adversely affect revenues and profits.
THE PRINCIPAL STOCKHOLDER HAS SUBSTANTIAL CONTROL. Al A. Gonsoulin, Chairman of
the Board, beneficially owns stock representing approximately 52% of the total
voting power. As a result, he exercises control over the election of PHI's
directors and the outcome of matters requiring a stockholder vote.
THE COMPANY DOES NOT PAY DIVIDENDS. The Company has not paid any dividends on
its common stock since 1999 and does not anticipate that it will pay any
dividends on its common stock in the foreseeable future.
5
LOW TRADING VOLUME. Both the Company's voting (PHEL) and nonvoting (PHELK)
common stock are listed on the Nasdaq SmallCap Market ("Nasdaq"). However,
neither class of shares has substantial trading volume. Because of this
limitation, among others, a shareholder may not be able to sell shares of the
Company at the time, in the amounts, or at the price desired.
AVAILABILITY OF SEC FILINGS AND OTHER INFORMATION. The Company's annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to any of these reports are available free of charge through
Petroleum Helicopters Inc.'s web site: www.phihelico.com. These reports are
available as soon as reasonably practicable after filing with the SEC.
ITEM 2. PROPERTIES
AIRCRAFT
Certain information regarding the Company's owned and leased fleet as of
December 31, 2003 is set forth in the following table:
CRUISE APPR.
NUMBER IN SPEED RANGE
MANUFACTURER TYPE FLEET ENGINE PASSENGERS (MPH) (MILES)(2)
- ------------ ---- --------- ------ ---------- ------- ----------
LIGHT
AIRCRAFT
Bell 206 / 407 109 Turbine 4 - 6 103 - 144 300 - 420
Eurocopter BK-117 / BO-105 23 Twin Turbine 4 - 6 135 255 - 270
Aerospatiale AS350 B2 / B3 18 Turbine 5 140 337 - 385
MD Helicopter MD530 1 Turbine 4 120 300
MEDIUM
AIRCRAFT
Bell 212(1) / 222(1)
230(1) / 412(1) 32 Twin Turbine 8 - 13 115 - 160 300 - 370
Sikorsky S-76(1) A, A++, C+ 17 Twin Turbine 12 150 400
TRANSPORT
AIRCRAFT
Bell 214ST(1) 4 Twin Turbine 18 155 450
MISCELLANEOUS
AIRCRAFT
Kaman K-Max K-1200 1 Turbine 1 100 225
-------
Total Helicopters 205
-------
FIXED WING
Rockwell Aero Commander 2 Turboprop 6 300 - 340 1,200-1,600
Beechcraft King Air 200(1) 1 Turboprop 6 300 1,200
Cessna Conquest 441(1) 3 Turboprop 6 330 1,200
-------
Total Fixed Wing 6
-------
Total Aircraft 211
=======
(1) Equipped to fly under instrument flight rules ("IFR"). All other
types listed can only fly under visual flight rules ("VFR"). See
Item 1. "Business - Risk Factors, Adverse weather
conditions/Seasonality."
(2) Based on maintaining a 30-minute fuel reserve.
Of the 211 aircraft listed, the Company owns 209 and leases 2. Additionally, the
Company operates 14 aircraft that are owned by customers that are not reflected
in the above table. In total the Company owns or operates 225 aircraft.
6
The Company sells aircraft whenever they (i) become obsolescent, (ii) do not fit
into future fleet plans, or (iii) are surplus to the Company's needs.
FACILITIES
The Company's principal facility is located on property leased from The
Lafayette Airport Commission at the Lafayette Regional Airport in Lafayette,
Louisiana. The lease covers approximately 28 acres and two buildings, with an
aggregate of approximately 256,000 square feet, housing the Company's main
operational, executive, and administrative offices and the main repair and
maintenance facility. The lease for this new facility expires in 2021 and
contains three five-year renewal options following the expiration date.
The Company owns its Boothville, Louisiana operating facility. The property has
a 23,000 square foot building, a 7,000 square foot hangar, and landing pads for
35 helicopters.
The Company also leases property for an Executive and Marketing office in
Houston, Texas and 12 additional bases to service the oil and gas industry
throughout the Gulf of Mexico. Those bases that represent a significant
investment by the Company in leasehold improvements or which are particularly
important to the Company's operations are:
FACILITY LEASE EXPIRATION AREA FACILITIES COMMENTS
- ------------------- ------------------- -------- ------------------------ ------------------------
Morgan City June 30, 2008 53 acres Operational and Options to extend to
(Louisiana) maintenance facilities, June 30, 2018
landing pads for 46
helicopters
Intracoastal City December 31, 2006 18 acres Operational and Options to extend to
(Louisiana) maintenance facilities, December 31, 2010
landing pads for 45
helicopters
Houma-Terrebonne August 31, 2004 14 acres Operational and Six renewal options to
Airport (Louisiana) maintenance facilities, extend for one year each
landing pads for 30
helicopters
Galveston (Texas) May 31, 2021 4 acres Operational and Lease period to May 31,
maintenance facilities, 2021 with certain
landing pads for 30 cancellation provisions
helicopters
Fourchon May 31, 2006 8 acres Operational and Facility under three
(Louisiana) maintenance facilities, separate leases, of
landing pads for 10 which two contain
helicopters options to extend thru
2026 and 2028.
The Company's other operations-related facilities in the United States are
located at New Orleans, Cameron, and Lake Charles, Louisiana; at Port O'Connor,
Sabine Pass, and Rockport, Texas; and at Theodore, Alabama.
The Company also operates from offshore platforms that are provided without
charge by the owners of the platforms, although in certain instances the Company
is required to indemnify the owners against loss in connection with the
Company's use thereof.
The Company also leases facilities for its Air Medical operations in Phoenix,
Arizona, and for other Air Medical bases in California, Kentucky, New Mexico,
Texas and Virginia. Other bases for the Company's International and other Air
Medical operations are generally furnished by the customer.
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ITEM 3. LEGAL PROCEEDINGS
The Company is named as a defendant in various legal actions that have arisen in
the ordinary course of its business and have not been finally adjudicated. The
amount, if any, of ultimate liability with respect to such matters cannot be
determined. In the opinion of management, the amount of the ultimate liability
with respect to these actions will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4.A. EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information about the executive officers of PHI is set forth in the
following table and accompanying text:
Name Age Position
---- --- --------
Al A. Gonsoulin 61 Chairman of the Board
Lance F. Bospflug 49 President and Chief Executive Officer
Michael J. McCann 56 Chief Financial Officer, Secretary and Treasurer
Richard A. Rovinelli 55 Chief Administrative Officer and Director of Human Resources
William P. Sorenson 54 Director of Marketing and Planning
Mr. Gonsoulin was elected Chairman of the Board in September 2001. Mr. Gonsoulin
had 35 years of oil and gas service industry experience as a manager, owner, and
investor prior to becoming Chairman of PHI. He is a business graduate of the
University of Louisiana at Lafayette. He founded Sea Mar, Inc. in 1977 and
served as President and CEO of that company until December 2001. In 1998 he sold
Sea Mar to Pool Energy Services, which was subsequently merged into Nabors
Industries, Inc. in 1999.
Mr. Bospflug joined PHI in September 2000 as President and was also named Chief
Executive Officer in August 2001. He previously was President and Chief
Executive Officer of T. L. James and Company from 1999 to 2000. Prior to that,
he was Executive Vice President and Chief Financial Officer. Mr. Bospflug holds
a business degree from Jamestown College in Jamestown, North Dakota and a
Masters of Business Administration from the University of South Dakota in
Vermillion, South Dakota and is a Chartered Financial Analyst.
Mr. McCann has served as Chief Financial Officer ("CFO") and Treasurer since
November 1998. From January 1998 to October 1998, he was the CFO for Global
Industries Ltd. and Chief Administrative Officer ("CAO") from July 1996. Prior
to that, he was CFO for Sub Sea International, Inc. Mr. McCann is a Certified
Public Accountant and holds a Masters of Business Administration from Loyola
University. He served in the U.S. Marine Corps 1969 to 1970, after which he
served in the active Marine reserve until 1975 as Captain.
Mr. Rovinelli joined the Company in February 1999 as Director of Human Resources
and was also named Chief Administrative Officer in December 1999. From January
1996 to February 1999, he was self-employed. Prior to that, he was Manager,
Human Resources for Arco Alaska, Inc., Headquarters Staff Manager, Human
Resource Services, Arco Oil and Gas Company, as well as numerous other positions
within Arco. Mr. Rovinelli holds a Bachelor of Science Degree in Industrial
Psychology from the University of Houston.
Mr. Sorenson became Director of Marketing and Planning in February 2002.
Previously, he was Director of International, Air Medical, and Technical
Services beginning in January 2001, after serving as Director of Corporate
Marketing/New Business since 1999 and as General Manager of Air Medical Services
since November 1995. Mr. Sorenson holds a Bachelor of Science degree in Business
from the University of Wisconsin.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's voting and non-voting common stock trades on The Nasdaq Stock
Market, SmallCap Issuers under the symbols PHEL and PHELK, respectively. The
following table sets forth the range of high and low sales prices per share, as
reported by Nasdaq, for the Company's voting and non-voting common stock for the
fiscal quarters indicated.
VOTING NON-VOTING
-------------------- --------------------
PERIOD HIGH LOW HIGH LOW
------ ------- ------- ------- -------
January 1, 2003 to March 31, 2003 $ 30.13 $ 26.44 $ 29.90 $ 26.30
April 1, 2003 to June 30, 2003 31.96 24.41 30.15 24.35
July 1, 2003 to September 30, 2003 34.50 26.83 33.25 27.01
October 1, 2003 to December 31, 2003 32.58 23.01 30.00 23.75
January 1, 2002 to March 31, 2002 $ 25.75 $ 19.20 $ 26.40 $ 19.48
April 1, 2002 to June 30, 2002 33.70 24.30 30.75 23.89
July 1, 2002 to September 30, 2002 32.99 25.51 30.99 25.35
October 1, 2002 to December 31, 2003 31.10 25.75 30.30 25.25
The Company has not paid dividends since 1999 and does not expect to pay
dividends in the foreseeable future.
In addition, the Notes and a revolving credit facility with a commercial bank
restrict the payment of dividends by the Company. See Item 8. "Financial
Statements and Supplementary Data - Notes to the Consolidated Financial
Statements, Note 3.
As of February 17, 2004, there were approximately 1,009 holders of record of the
Company's voting common stock and 77 holders of record of the Company's
non-voting common stock.
Information regarding the Company's stock based compensation plan is included in
Item 8, Notes to Consolidated Financial Statements Note (5) EMPLOYEE BENEFIT
PLANS - Stock Based Compensation.
On April 23, 2002, the Company issued $200 million in aggregate principal amount
of 9 3/8% Senior Unsecured Notes that mature on May 1, 2009 in an offering made
pursuant to Rule 144A and Regulation S of the Securities Act of 1933. The net
proceeds from the issuance of Senior Notes were approximately $194.2 million
(net of underwriting discounts and other issuance costs). The net proceeds were
used to purchase leased aircraft and aircraft on capital lease ($118.0 million),
reduce outstanding borrowings under a working capital facility ($44.5 million),
and reduce outstanding borrowings under a term debt facility ($16.3 million),
settlement of interest rate Swap agreements ($1.6 million), and the remainder
for general corporate purposes. In May 2002, the Company filed a registration
statement for an offer to exchange these Notes for debt securities with
identical terms.
9
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each of the past six fiscal
periods should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included elsewhere in
this Annual Report. Effective December 31, 1999, the Company changed its fiscal
accounting year-end to December 31 of each year. The table below also presents
comparative information for the twelve months ended December 31, 1999 and the
eight months ended December 31, 1998.
Year Ended Eight Months Ended Year Ended
December 31, December 31, April 30,
--------------------------------------------------- -------------------- ----------
2003 2002 2001 2000 1999(1) 1999 1998(1) 1999
-------- -------- -------- --------- --------- --------- -------- ----------
(Thousands of dollars, except per share data)
Income Statement Data
Operating revenues $269,392 $283,751 $282,437 $ 236,843 $ 227,058 $ 149,077 $173,185 $251,165
Net earnings(loss)(2) 1,139 9,231 11,020 (12,294) (5,019) (2,699) 5,194 2,988
Net earnings(loss) per share
Basic 0.21 1.73 2.12 (2.38) (0.97) (0.52) 1.01 0.58
Diluted 0.21 1.70 2.08 (2.38) (0.97) (0.52) 0.99 0.57
Cash dividends declared per share -- -- -- -- 0.15 0.05 0.10 0.20
Balance Sheet Data(3)
Total assets $377,454 $366,707 $225,645 $ 222,755 $ 223,056 $ 223,056 $238,011 $231,575
Total debt 200,000 200,000 66,616 74,819 77,640 77,640 81,836 80,296
Working capital 70,300 72,751 46,987 41,547 54,699 54,699 52,486 51,030
Shareholders' equity 105,993 104,854 91,872 81,622 93,623 93,623 99,440 96,581
- ----------
(1) Information for the year ended December 31, 1999 and the eight months
ended December 31, 1998 is derived from unaudited financial information
and presented for comparison purposes only.
(2) See Item 8. "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 1 - Summary of Significant
Accounting Policies (Fiscal Year Change)."
(3) As of the end of the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the Company's
Consolidated Financial Statements for the years ended December 31, 2003,
December 31, 2002, and December 31, 2001 and the related Notes to Consolidated
Financial Statements.
OVERVIEW
Operating revenues for 2003 were $269.4 million compared to $283.8 million for
2002, a decrease of $14.4 million. The decrease in operating revenue was due to
a decrease in Technical Services segment revenue ($5.5 million) due to
completion of a contract in the prior year for the upgrade and refurbishment of
two aircraft for a customer, a decrease in flight hour activity in the Domestic
Oil and Gas segment as flight hours were 114,769 in 2003 compared to 136,237 in
2002 that resulted in a net decrease in operating revenues in that segment ($5.6
million). The effect in 2003 of customer rate increases implemented in 2002
offset in part the decrease in flight hours in the Domestic Oil and Gas segment.
There was also a net decrease in Air Medical operating revenues ($2.0 million)
resulting from the termination of certain traditional Air Medical contracts that
were hospital-based offset in part by an increase in the average rate for
patient transports under the independent provider model. Under the independent
provider model, the Company responds to individual patient demands for air
transport services and is paid by either a commercial insurance company, federal
or state agency, or the patient. There was also a decrease in the International
segment operating revenues ($1.2 million) due to a decrease in flight hour
activity.
Flight hours were 141,127 for 2003 compared to 170,462 for 2002, a decrease of
29,335 flight hours. The number of aircraft at December 31, 2003 was 225
compared to 236 at December 31, 2002.
10
Direct operating expense was $230.2 million for 2003 compared to $235.2 million
for 2002, a decrease of $5.0 million. The decrease was due to a decrease in
aircraft parts consumed and in component repairs ($6.5 million), a decrease in
helicopter rent ($5.3 million) due to the purchase of leased aircraft in 2002,
and a decrease in Technical Services' segment costs ($5.7 million) due to
completion in 2002 of a contract in the prior year for the upgrade and
refurbishment of two aircraft for a customer. These decreases were offset in
part by a net increase in employee compensation due to increases in compensation
($3.7 million) and severance charges recorded in 2003 ($1.9 million), an
increase in depreciation expense due to the purchase of leased aircraft in 2002
($3.6 million), and an increase in insurance expense ($3.1 million) due to
additional insurance premiums under the terms of the Company's policy related to
loss experience. Insurance expense will increase through the first quarter of
2004, by approximately $0.5 million per quarter, which will then be subject to
renewal.
Selling, general and administrative expense was $20.0 million for 2003 compared
to $18.2 million for 2002, an increase of $1.8 million. The increase is due to
an increase in selling, general and administrative expense in the Air Medical
segment ($2.5 million), as the Company has expanded operations in the Air
Medical segment. There is further discussion below on this expansion.
Interest expense was $20.0 million for 2003 compared to $17.3 million for 2002.
The increase was due to interest on the Notes issuance described below.
On April 23, 2002, the Company issued $200 million in 9 3/8% Notes due May 1,
2009. The proceeds from the offering were used to retire $62.3 million of
existing bank debt and certain swap arrangements, and to acquire 101 aircraft
for $118.1 million, that the Company previously leased. Also on April 23, 2002,
the Company entered into a new $50 million revolving credit facility with a
commercial bank to be available through July 2004. As of December 31, 2003, the
Company had no borrowings and a $1.4 million letter of credit outstanding under
the revolving credit facility related to the Company's workmen's compensation
policy. It is the Company's intention to renew the revolving credit facility
upon expiration in July 2004.
During 2003, the Company began to expand its Air Medical operations. This
expansion is under the independent provider model whereby the Company responds
to medical facilities requiring intrafacility transfers, or to patients
requiring air medical transport and is paid by either a commercial insurance
company, federal or state agency, or the patient. The number of aircraft in this
segment at December 31, 2003 was 42 compared to 26 at December 31, 2002, an
increase of 16 aircraft. In the fourth quarter of 2003, the Company incurred
operating costs of $1.7 million related to this expansion, while the additional
Air Medical programs generated $0.6 million of revenue. Additional operating
costs will be incurred in the first quarter of 2004 related to these programs.
In addition to operating costs, the Company also incurred capital expenditures
of $15.0 million related to the purchase of additional aircraft and installation
of medical interiors in those aircraft. The Company anticipates these additional
programs being fully operational by mid-2004.
The Company is replacing the software system that controls tracking of aircraft
parts and inventory, purchasing, maintenance, and aircraft records. In addition,
the Company has also installed a system for its medical billing and collection
processes. This was necessitated by the growth in this segment. Management
believes these actions will provide greater efficiency throughout the
organization.
In 2004, the Company will take delivery of two additional medium transport
category aircraft. These aircraft will be dedicated to providing transportation
services to deep water projects in the Gulf of Mexico. The aircraft will be
financed under an operating lease agreement for a ten year term with a
commercial finance company.
11
RESULTS OF OPERATIONS
The following table presents segment operating revenues and segment operating
profit before tax, along with certain non-financial operational statistics, for
the years ended December 31, 2003, 2002 and 2001:
YEAR ENDED
DECEMBER 31,
-------------------------------------------
2003 2002 2001
--------- --------- ---------
(Thousands of dollars)
Segment operating revenues
Domestic Oil and Gas $ 183,849 $ 189,480 $ 190,991
Air Medical 46,674 48,664 47,493
International 21,247 22,474 22,634
Technical Services 17,622 23,133 21,319
--------- --------- ---------
Total operating revenues 269,392 283,751 282,437
--------- --------- ---------
Segment direct expense
Domestic Oil and Gas 163,328 161,711 160,293
Air Medical 32,782 34,223 44,280
International 21,093 20,568 21,453
Technical Services 13,026 18,687 17,512
--------- --------- ---------
Total direct expense 230,229 235,189 243,538
Segment selling, general and administrative expense
Domestic Oil and Gas 1,494 795 1,639
Air Medical 4,480 1,978 1,710
International 214 146 469
Technical Services 12 149 317
--------- --------- ---------
Total selling, general and administrative expenses 6,200 3,068 4,135
--------- --------- ---------
Total direct and selling, general and administrative expense 236,429 238,257 247,673
--------- --------- ---------
Net segment profit
Domestic Oil and Gas 19,027 26,974 29,059
Air Medical 9,412 12,463 1,503
International (60) 1,760 712
Technical Services 4,584 4,297 3,490
--------- --------- ---------
Total 32,963 45,494 34,764
Other, net (1) 2,674 2,261 2,812
Unallocated selling, general and administrative costs (13,783) (15,121) (13,894)
Interest expense (19,952) (17,250) (6,190)
--------- --------- ---------
Earnings before income taxes $ 1,902 $ 15,384 $ 17,492
========= ========= =========
Flight hours
Domestic Oil and Gas 114,769 136,237 148,563
Air Medical 11,542 15,780 22,005
International 14,816 18,292 21,235
Other -- 153 950
--------- --------- ---------
Total 141,127 170,462 192,753
========= ========= =========
Aircraft operated at period end
Domestic Oil and Gas 164 190 177
Air Medical 42 26 41
International 19 20 21
--------- --------- ---------
Total (2) 225 236 239
========= ========= =========
(1) Including gains on disposition of property and equipment, equity in losses
of unconsolidated subsidiaries, and other income.
(2) Includes 14, 13, and 19 aircraft as of December 31, 2003, 2002 and 2001,
respectively that are customer owned or leased by customers.
12
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
COMBINED OPERATIONS
REVENUES - Operating revenues for 2003 were $269.4 million compared to $283.8
million for 2002, a decrease of $14.4 million. The decrease in operating revenue
was due to a decrease in Technical Services segment revenue ($5.5 million) due
to completion of a contract in the prior year for the upgrade and refurbishment
of two aircraft for a customer, a decrease in flight hour activity in the
Domestic Oil and Gas segment as flight hours were 114,769 in 2003 compared to
136,237 in 2002 that resulted in a net decrease in operating revenues in that
segment ($5.6 million). The effect in 2003 of customer rate increases
implemented in 2002 offset in part the decrease in flight hours in the Domestic
Oil and Gas segment. There was also a net decrease in Air Medical operating
revenues ($2.0 million) resulting from the termination of certain traditional
Air Medical contracts that were hospital-based, offset in part by an increase in
the average rate for patient transports under independent provider model. (Under
independent provider model, the Company responds to individual patient demands
for air transport services and is paid by either a commercial insurance company,
federal or state agency, or the patient.) There was also a decrease in the
International segment operating revenues ($1.2 million) due to a decrease in
flight hour activity.
Flight hours were 141,127 for 2003 compared to 170,462 for 2002, a decrease of
29,335 flight hours. The number of aircraft at December 31, 2003 was 225
compared to 236 at December 31, 2002.
OTHER INCOME AND LOSSES - Gain (loss) on equipment dispositions was $2.0 million
for 2003 compared to $0.6 million for 2002, an increase of $1.4 million. This
increase was due to the sale or disposal of aircraft.
Other income was $0.7 million for 2003 compared to $1.7 million for 2002.
Included in 2002 is a gain ($0.7 million) related to the favorable settlement in
2002 of a note receivable from a previous joint venture sold in 2001.
DIRECT EXPENSES - Direct expense was $230.2 million for 2003 compared to $235.2
million for 2002, a decrease of $5.0 million. The decrease was due to a decrease
in aircraft parts usage and in component repairs ($6.5 million), due primarily
to decreased flight activity, a decrease in helicopter rent ($5.3 million) due
to the purchase of leased aircraft in 2002, and a decrease in Technical
Services' segment costs ($5.7 million) due to completion in 2002 of a contract
in the prior year for the upgrade and refurbishment of two aircraft for a
customer. These decreases were offset in part by a net increase in employee
compensation due to increases in compensation rates offset by a decrease in
incentive compensation ($3.7 million), net severance charges recorded in 2003
compared to 2002 ($0.7 million), an increase in depreciation expense due to the
purchase of leased aircraft in 2002 ($3.6 million), an increase in insurance
expense ($3.1 million) due to additional insurance premiums under the terms of
the Company's policy related to loss experience, and an increase in costs at
operational field bases which includes various supplies, base repairs, and other
operating costs, ($1.0 million). Insurance expense will increase through the
first quarter of 2004, by approximately $0.5 million per quarter, which will
then be subject to renewal.
Included in the direct expense cost categories above, is $1.7 million in total
related to implementation of additional Air Medical operations.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expense was $20.0 million for 2003 compared to $18.2 for 2002.
The increase was due to an increase in selling, general and administrative
expense in the Air Medical segment ($2.5 million) as the Company expanded
operations in that segment. This necessitated additional management and
supervisory personnel and other related expenditures.
INTEREST EXPENSE - Interest expense was $20.0 million for 2003 compared to $17.3
million for 2002. The increase was due to interest on the Notes issuance
previously described.
INCOME TAXES - Income tax expense for 2003 was $0.8 million, compared to $6.2
million for 2002. The effective tax-rate was 40% for both years.
EARNINGS - The Company's net earnings for 2003 were $1.1 million, compared to
$9.2 million for 2002. Earnings before tax for 2003 were $1.9 million compared
to $15.4 million in 2002. Earnings per diluted share were $0.21 as compared to
$1.70 per diluted share for 2002. The decline in domestic flight hour activity,
the additional costs associated with the Air Medical expansion, and the increase
in interest cost are the principal reasons for the earnings decline.
13
SEGMENT DISCUSSION
Effective July 1, 2002, the Company no longer allocates interest expense to its
segments when evaluating operating performance. All results prior to July 1,
2002 have been restated to remove interest expense from the segment operating
results.
Domestic Oil and Gas - Domestic Oil and Gas segment revenues were $183.8 million
for 2003, compared to $189.5 million for 2002, a decrease of $5.7 million. This
decrease was due to a decrease in flight hour activity as flight hours declined
to 114,769 in 2003 from 136,237 flight hours in 2002. The effect in 2003 of
customer rate increases implemented in 2002 offset in part the effect of the
decrease in flight hours in the Domestic Oil and Gas segment. The number of
aircraft in the segment at December 31, 2003 was 164 compared to 190 aircraft at
December 31, 2002.
Direct expenses in the Domestic Oil and Gas segment was $163.3 million for the
year ended December 31, 2003 compared to $161.7 million for the year ended
December 31, 2002. Employee compensation cost in the segment increased $3.7
million due to an increase in human resource costs due primarily to increases in
compensation rates for pilots and mechanics and to pilots and mechanics in the
Air Medical segment being reassigned to the Domestic Oil and Gas segment related
to the termination of certain Air Medical contracts as a result of proposed rate
increases by the Company. In the fourth quarter 2003, there were some transfers
of pilots and mechanics in the Domestic Oil and Gas segment back to the Air
Medical segment with the addition of Air Medical operations. There was also a
net increase in severance costs in 2003 compared to 2002 ($0.7 million). In
addition, depreciation expense increased ($5.6 million) due to the purchase of
leased aircraft in 2002, insurance cost increased ($3.4 million) due to
additional premiums under the Company's policies related to loss experience.
These amounts were partially offset by a decrease in aircraft parts usage and
component repairs ($7.0 million), and a decrease in helicopter rent due to the
purchase of the leased aircraft ($4.7 million). Additionally, there was a
decrease due to other items, net ($0.2 million).
Selling, general and administrative expense was $1.5 million for 2003 compared
to $0.8 million for 2002. The increase was due to an increase in operational
field base supplies and also repairs at field bases.
The Domestic Oil and Gas segment operating income decreased ($7.9 million) due
primarily to the decrease in flight hour activity, and the increase in costs.
Air Medical - Air Medical segment revenues were $46.7 million for 2003 compared
to $48.7 million for 2002. The decrease in Air Medical revenues is due to the
termination of certain Air Medical contracts as a result of increases in rates.
The contracts terminated were hospital-based contracts. This decrease was offset
in part by an increase in rates on remaining Air Medical operations. The number
of aircraft in the segment was 42 at December 31, 2003, compared to 26 at
December 31, 2002.
Direct expenses in the Air Medical segment was $32.8 million for December 31,
2003 compared to $34.2 million for December 31, 2002. Direct expense decreased
due to the termination of certain Air Medical contracts that were
hospital-based, that resulted in a decrease in aircraft parts usage ($0.9
million), a decrease in aircraft rent ($0.6 million), and a decrease in
depreciation ($0.2 million). In addition, there was an increase in other items,
net ($0.3 million). Included in direct expense and the above direct expense
changes, is an increase in total of $1.7 million related to additional Air
Medical operations implemented in the fourth quarter 2003.
Selling, general and administrative expense was $4.5 million for 2003 compared
to $2.0 million for 2002. The increase of $2.5 million in selling, general and
administrative expense was due to increased operations related to implementation
of additional community-based Air Medical operations under which the patient or
the patient's insurance carrier is invoiced for services. This increase was
specifically in employee compensation cost due to increased management and
supervisory personnel which are charged to selling, general and administrative
expense. There were also increased costs related to additional office locations.
The Air Medical segment operating income was $9.4 million for December 31, 2003
compared to $12.5 million for December 31, 2002. The decrease was due primarily
to increased direct expense and increased selling, general and administrative
expense related to implementation of additional Air Medical operations.
14
As previously discussed, the Company is expanding in the Air Medical segment
under the independent provider model. Operating costs of $1.7 million were
incurred in the fourth quarter of 2003, and these costs will continue in 2004
until the current expanded programs become fully operational.
International - International segment revenues were $21.2 million for 2003,
compared to $22.5 million for 2002. The decrease in revenue was due to the
decrease in flight hours. Flight hours were 14,816 for 2003 as compared to
18,292 for 2002. The number of aircraft in the segment was 19 at December 31,
2003 and 20 at December 31, 2002.
Direct expenses in the International segment was $21.1 million for the year
ended December 31, 2003 compared to $20.6 million for the year ended December
31, 2002. There was an increase in component repairs during 2003 ($1.4 million),
offset in part by a decrease in depreciation expense ($0.9 million) due to fewer
aircraft in the segment in 2003.
Selling, general and administrative expense was $0.2 million for 2003 compared
to $0.1 million for 2002. The increase was less than $0.1 million and was due
primarily to increased travel to certain locations.
International segment operating loss for 2003 was less than $0.1 million
compared to operating income of $1.8 million in 2002. The decrease in flight
activity and increase in cost accounts for the change in operating income.
Technical Services - Technical Services segment revenues for 2003 were $17.6
million compared to $23.1 million for 2002. The decrease in Technical Services
revenues was related to revenue from a contract for the refurbishment and
upgrade of two aircraft completed in the first half of 2002.
Direct expenses in the Technical Services segment was $13.0 million for December
31, 2003 compared to $18.7 million for December 31, 2002. The decrease in direct
expense ($5.7 million) in the Technical Services segment due to the contract
previously mentioned.
Selling, general and administrative expense was less than $0.1 million for
December 31, 2003, compared to $0.1 million for December 31, 2002.
The Technical Services segment had operating income of $4.6 million for December
31, 2003, compared to $4.3 million for December 31 2002. The increase in
operating income was due to an increase in rates on a continuing contract.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
COMBINED OPERATIONS
REVENUES - Operating revenues for 2002 were $283.8 million compared to $282.4
million for the prior year, an increase of $1.4 million. The increase in
operating revenue was due to an increase of $1.8 million in Technical Services
revenues due to completion of a project for the upgrade and refurbishment of a
customer's aircraft during the year and also due to an increase of $1.2 million
in the Air Medical segment. Although Technical Services revenues increased in
2002, the strategic focus of that segment is limited to maintenance services
primarily for certain military aircraft, flight operations customers, and
original equipment manufacturers. As a result, the Company anticipates that
revenues in this segment will decline in future years. Air Medical segment
revenues increased due to an improvement in rates on retained Air Medical
contracts, offset by a reduction in revenue due to the termination of certain
other Air Medical contracts. Domestic Oil and Gas revenues decreased $1.5
million due to a decrease in activity in the Gulf of Mexico, offset in part by
an increase in rates implemented in 2001.
Flight hours were 170,462 for 2002 compared to 192,753 for 2001, a decrease of
22,291 flight hours (11.6% decrease). The Domestic Oil and Gas segment had a
decrease of 12,326 flight hours due to decreased activity in the Gulf of Mexico,
and the Air Medical segment had a decrease of 6,225 flight hours due to the
termination of certain Air Medical contracts that were the result of increases
in rates to customers unwilling to absorb those increases.
OTHER INCOME AND LOSSES - Gain (loss) on equipment dispositions was $0.6 million
for 2002 compared to $1.4 million for 2001, a decrease of $0.8 million. This
decrease was due to a decrease in the sale of aircraft as compared to the prior
year.
Other income was $1.7 million for 2002 compared to $1.5 million for 2001. The
current year includes a gain related to the favorable settlement of a note
receivable from a previous joint venture sold in the prior year in which the
Company accepted
15
a note receivable for the proceeds ($0.7 million), and the balance of other
income primarily being interest income ($0.9 million). The prior year included a
reimbursement received from the U.S. Department of Transportation under the Air
Safety Stabilization Act ($0.8 million), and interest income ($0.7 million).
DIRECT EXPENSES - Direct operating expense was $235.2 million for 2002 compared
to $243.5 million for 2001, a decrease of $8.3 million. Employee compensation
costs decreased ($2.0 million) due to decreased headcount in 2002 compared to
2001. Additionally, included in employee compensation costs in direct expenses
for 2002 are severance costs ($1.4 million) and a management bonus ($0.3
million). No significant severance costs or bonuses were recorded in 2001.
Helicopter rent decreased ($10.7 million) due to the purchase of leased aircraft
as previously discussed. Aircraft fuel decreased as a result of decreased
activity ($1.8 million), insurance expense decreased due in part to a decrease
in the number of aircraft the Company operates ($1.4 million), and a decrease in
maintenance costs ($0.5 million). Depreciation expense increased ($5.6 million)
due to the purchase of leased aircraft. Technical Services costs increased ($1.0
million) due to costs related to a project for the refurbishment and upgrade of
a customer's aircraft completed in 2002, and there was an increase, net, of
other items ($1.5 million).
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expense was $18.2 million for 2002 compared to $18.0 for 2001.
Selling, general and administrative expense for 2002 includes a severance charge
($0.3 million), and a management bonus ($0.8 million). After deducting the
severance charges and management bonus, selling, general and administrative
expense decreased due to employee compensation costs as a result of a decrease
in headcount, and also due to a decrease in legal costs.
INTEREST EXPENSE - Interest expense was $17.3 million for 2002 compared to $6.2
million for 2001. The increase was due to interest on the Notes issuance
previously described, and $1.9 million of costs incurred in the second quarter
of 2002 related to the retirement of the Company's bank debt and liquidation of
the Company's interest rate Swap agreements, which is a contract to fix interest
rates on the Company's bank debt, which were charged to interest expense.
INCOME TAXES - Income tax expense for 2002 was $6.2 million, compared to $6.5
million for 2001. The effective tax-rate was 40% for 2002, and 37% for 2001. The
increase in the effective tax rate is primarily due to increased state income
taxes and permanent book and tax differences.
EARNINGS - The Company's net earnings for 2002 were $9.2 million, compared to
$11.0 million for 2001. Earnings before tax for 2002 were $15.4 million compared
to $17.5 million in 2001. Earnings per diluted share were $1.70 as compared to
$2.08 per diluted share for 2001. Although there was a decline in flight hour
activity, the principal reason for the earnings decline was the increase in
interest expense, described above.
SEGMENT DISCUSSION
Effective July 1, 2002, the Company no longer allocates interest expense to its
segments when evaluating operating performance. All results prior to July 1,
2002 have been restated to remove interest expense from the segment operating
results.
Domestic Oil and Gas - Domestic Oil and Gas segment revenues were $189.5 million
for 2002, compared to $191.0 million for 2001, a decrease of $1.5 million. There
was a decrease in flight activity due to reduced oil and gas activity in the
Gulf of Mexico, as indicated by a decrease of 12,326 flight hours for the year.
This was offset in part by an increase in rates implemented in 2001. The number
of aircraft in the segment was 190 at December 31, 2002 as compared to 177 at
December 31, 2001. Certain aircraft were acquired during the year and certain
other aircraft models that can be configured to meet customers' deepwater
service requirements were also transferred from the Air Medical segment upon
termination of certain Air Medical contracts.
Direct expenses in the Domestic Oil and Gas segment increased $1.4 million due
to an increase in human resource cost due primarily to certain of the pilot and
mechanic employees in the Air Medical segment being reassigned to the Domestic
Oil and Gas segment ($2.3 million), increased depreciation expense ($5.6
million) due to the purchase of leased aircraft, an increase in maintenance
costs ($0.5 million), and an increase in workers' compensation expense ($0.3
million). These amounts were offset by a decrease in helicopter rent due to the
purchase of the leased aircraft ($7.3 million), a decrease in fuel cost due to
decreased activity ($1.1 million), and a decrease in insurance cost due in part
to a decrease in the number of aircraft the Company operates in total that
benefited the segment ($0.7 million). The Company also reduced its environmental
reserve ($0.3 million), primarily due to costs at one site being less than
anticipated. Additionally, there was
16
an increase due to other items, net ($1.0 million), which consists primarily of
supplies and base operating costs and facility repairs.
Selling, general and administrative expense in the Domestic Oil and Gas segment
was $0.8 million for December 31, 2002 compared to $1.6 million for December 31,
2001.
The Domestic Oil and Gas segment operating income decreased ($2.1 million) due
in part to a decrease in activity and also due in part to the transfer of
certain pilots and mechanics from the Air Medical segment. Operating margin was
14.2% for the year compared to 15.2% in the prior year.
Air Medical - Air Medical segment revenues were $48.7 million for 2002 compared
to $47.5 million for 2001. The increase in Air Medical revenues is due to an
increase in rates substantially offset by a decrease in flight hour activity of
6,225 flight hours due to the termination of certain Air Medical contracts as a
result of increases in rates. The number of aircraft in the segment was 26 in
2002 compared to 41 for 2001.
Direct expenses in the Air Medical segment for 2002 decreased ($10.1 million)
due to a decrease in headcount ($4.1 million), a decrease in helicopter rent
($3.4 million) due to a decrease in the number of aircraft in the segment and to
the purchase of leased aircraft, a decrease in maintenance cost ($1.0 million)
and insurance cost ($0.4 million), both due to fewer aircraft in the segment, a
decrease in fuel costs ($0.7 million), and other items, net, decreased ($0.3
million), which is primarily base operating costs.
Selling, general and administrative expense in the Air Medical segment was $2.0
million for December 31, 2002 compared to $1.7 million for December 31, 2001.
The increase was due primarily to changes in management personnel and severance
costs.
The Air Medical segment operating income increased ($11.0 million) for the year.
Operating margin was 25.6% for 2002 and compares to 3.2% for 2001. The increase
in operating income and operating margin is attributable to an increase in
customer rates on retained Air Medical contracts, and also due to a reduction in
direct expense as a result of reduced aircraft, reduced personnel, and other
related costs caused by the termination of certain Air Medical contracts as
mentioned above. Flight hours for the 2002 were 15,780 compared to 22,005 for
2001.
International - International segment revenues were $22.5 million for 2002,
compared to $22.6 million for 2001. The number of aircraft in the segment was 20
at December 31, 2002 and 21 at December 31, 2001. Flight hours were 18,292 for
2002 as compared to 21,235 for 2001. The decrease in revenue due to a decrease
in activity was offset by an improvement in rates.
Direct expenses in the International segment decreased for the year ($0.9
million) due to a decrease in human resource cost ($0.5 million), a decrease in
insurance cost ($0.3 million), and a decrease, net, of other items ($0.1
million).
Selling, general and administrative expense in the International segment was
$0.1 million for December 31, 2002 compared to $0.5 million for December 31,
2001. The decrease was due primarily to a decrease and change in management
personnel.
International segment operating income increased for 2002 ($1.0 million).
Operating margin of 7.8% for the year compares to 3.1% for the prior year. The
improvement in operating income and operating margin was due to an increase in
customer rates and a decrease in direct expenses.
In October 2002, the Company exited a contract in Taiwan that included one
aircraft.
Technical Services - Technical Services segment revenues for 2002 were $23.1
million compared to $21.3 million for 2001. The increase in Technical Services
revenues was related to revenue from a contract for the refurbishment and
upgrade of two aircraft completed in the first half of 2002. The strategic focus
of the Technical Services segment is discussed below and will result in a
reduction in that segment's revenues in future years.
There was an increase in direct expense ($1.2 million) in the Technical Services
segment due to the contract previously mentioned.
17
Selling, general and administrative expense in the Technical Services segment
was $0.2 million for December 31, 2002 compared to $0.3 million for December 31,
2001.
The Technical Services segment had operating income of $4.3 million for 2002,
compared to $3.5 million for 2001. The operating margin was 18.6% for 2002,
compared to 16.4% in the prior year. The improvement in operating income and
operating margin was due to increases in rates on continuing activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at December 31, 2003 was $19.9 million, compared to
$17.7 million at December 31, 2002. Working capital was $70.3 million at
December 31, 2003, as compared to $72.8 million at December 31, 2002, a decrease
of $2.5 million. At December 31, 2003, the Company recorded in current
liabilities an accrual for severance charges and also an accrual for additional
insurance premiums. These items accounted for the decrease in working capital.
Net cash provided by operating activities was $29.4 million for the twelve
months ended December 31, 2003, compared to $39.5 million for the same period
ended December 31, 2002. The primary reason for the decrease was the decrease in
earnings. As discussed below, capital expenditures were $36.9 million and gross
proceeds of aircraft sales of $7.6 million for the twelve months ended December
31, 2003, compared to capital expenditures of $41.4 million and gross proceeds
of aircraft sales of $3.3 million for the twelve months ended December 31, 2002.
On April 23, 2002, the Company issued Notes of $200 million that carry an
interest rate of 9 3/8% payable semi-annually on May 1 and November 1 of each
year that commenced on November 1, 2002, and mature in May 2009. The Notes
contain certain covenants, including limitations on indebtedness, liens,
dividends, repurchases of capital stock and other payments affecting restricted
subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of
proceeds of asset sales, and mergers and consolidations or sales of assets. As
of December 31, 2003, the Company was in compliance with these covenants.
Proceeds from the Notes, net of $5.8 million of fees and expenses, were used to
retire the Company's $16.3 million term credit facility and $44.5 million
revolving credit facility, and to terminate the related swap agreements for $1.6
million. The Company also purchased 101 aircraft, which were previously leased,
for $118.1 million.
Also, on April 23, 2002, the Company executed a new credit agreement with a
commercial bank for a $50 million revolving credit facility to be available
through July 2004. As of December 31, 2003, the Company had no borrowings and a
$1.4 million letter of credit outstanding under the revolving credit facility.
The credit agreement includes covenants related to working capital, funded debt
to net worth, and consolidated net worth. As of December 31, 2003, the Company
was in compliance with these covenants. It is the Company's intention to renew
the revolving credit facility upon expiration in July 2004.
Capital expenditures totaled $36.9 million for the twelve months ended December
31, 2003 as compared to $41.4 million for the twelve months ended December 31,
2002. Capital expenditures primarily include amounts for the upgrade of
capability and renewals of certain aircraft, and the purchase of aircraft during
the year. As discussed above, in 2002, the Company also purchased $118.1 million
of aircraft it previously leased. At December 31, 2003, the Company had
commitments of $4.5 million for the purchase of aircraft.
The Company believes that cash flow from operations will be sufficient to fund
required working capital needs, interest payments on the Notes and capital
expenditures for the next twelve months.
The table below sets out the contractual obligations of the Company related to
operating lease obligations and the Senior Notes issued in 2002. The operating
leases are not recorded as liabilities on the balance sheet, but payments are
treated as an expense as incurred. Each contractual obligation included in the
table contains various terms, conditions, and covenants which, if violated,
accelerate the payment of that obligation. The Company leases two aircraft
included in the lease obligations below. The operating lease obligations
primarily relate to the Company's facilities in Lafayette, Louisiana.
18
Payment Due by Year
----------------------------------------------------------------------
Beyond
Total 2004 2005 2006 2007 2008 2008
-------- ------ ------ ------ ------ -------- --------
(Thousands of dollars)
Operating lease
obligations $ 22,835 $2,733 $2,407 $2,137 $1,837 $ 1,751 $ 11,970
Long term debt 200,000 -- -- -- -- -- 200,000
-------- ------ ------ ------ ------ -------- --------
$222,835 $2,733 $2,407 $2,137 $1,837 $ 1,751 $211,970
======== ====== ====== ====== ====== ======== ========
The amounts above exclude approximately $19.0 million of required annual
interest payments on the Notes.
On February 13, 2004, the Company terminated an aircraft operating lease
agreement with the sale of the aircraft under that operating lease. The
contractual obligation for that operating lease is included in the above
schedule. The amounts included in the above table as a result of the termination
of that lease are reflected below.
Payment Due by Year
--------------------------------------------------------------------------
Beyond
Total 2004 2005 2006 2007 2008 2008
--------- --------- --------- --------- --------- --------- ---------
(Thousands of dollars)
Operating lease
obligations $ 5,108 $ 724 $ 724 $ 724 $ 724 $ 724 $ 1,488
In addition to the above obligations, the Company intends to execute an
operating lease agreement for a term of ten years upon delivery of two medium
transport category aircraft in 2004, at cost of $2.7 million per year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these consolidated financial
statements require the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to allowances for
doubtful accounts, inventory valuation, long-lived assets and self-insurance
liabilities. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
preparation of its consolidated financial statements.
PHI estimates its allowance for doubtful accounts receivable based on an
evaluation of individual customer financial strength, current market conditions,
and other information. If the Company's evaluation of its significant customers'
and debtors' creditworthiness should change or prove incorrect, then the Company
may have to recognize additional allowances in the period that it identifies the
risk of loss.
PHI maintains inventory to service its own aircraft and the aircraft and
components of customers. Portions of that inventory are used parts that are
often exchanged with parts removed from aircraft or components and reworked to a
useable condition. The Company uses systematic procedures to estimate the
valuation of the used parts, which includes consideration of their condition and
continuing utility. If the Company's valuation of these parts should be
significantly different from amounts ultimately realizable or if it discontinues
using or servicing certain aircraft models, then the Company may have to record
a write-down of its inventory. The Company also records provisions against
inventory for obsolescent and slow-moving parts, relying principally on specific
identification of such inventory. If the Company fails to identify such parts,
additional provisions may be necessary.
19
The Company's principal long-lived assets are aircraft. The Company reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company measures recoverability of assets to be held and used by comparing the
carrying amount of an asset to future undiscounted net cash flows that it
expects the asset to generate. When an asset is determined to be impaired, the
Company recognizes the impairment amount, which is measured by the amount that
the carrying value of the asset exceeds fair value. Similarly, the Company
reports assets that it expects to sell at the lower of the carrying amount or
fair value less costs to sell. Future adverse market conditions or poor
operating results could result in the inability to recover the current carrying
value of the long-lived asset, thereby possibly requiring an impairment charge
in the future.
The Company must make estimates for certain of its liabilities and expenses,
losses, and gains related to self-insured programs, insurance deductibles, and
good-experience premium returns. The Company's group medical insurance program
is largely self-insured, and the Company uses estimates to record its periodic
expenses related to that program. The Company also carries deductibles on its
workers' compensation program and aircraft hull and liability insurance and
estimates periodic expenses related to the retained portion of those risks.
Significant changes in estimates due to poor experience or higher accident rates
could result in additional recorded losses.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements applicable to the Company, see
Note 1 to the Financials Statements.
ENVIRONMENTAL MATTERS
The Company has an aggregate estimated liability of $0.6 million as of December
31, 2003 for environmental remediation costs that are probable and estimable.
The Company has conducted environmental surveys of the Lafayette facility, which
it vacated in 2001, and has determined that contamination exists at that
facility. To date, borings have been installed to determine the type and extent
of contamination. Preliminary results indicate limited soil and groundwater
impacts. Once the extent and type of contamination are fully defined, a risk
evaluation in accordance with the Louisiana Risk Evaluation/Corrective Action
Plan ("RECAP") standard will be submitted and evaluated by Louisiana Department
of Environmental Quality ("LDEQ"). At that point, LDEQ will establish what
cleanup standards must be met at the site. When the process is complete, the
Company will be in a position to develop the appropriate remediation plan and
the resulting cost of remediation. However the Company has not recorded any
estimated liability for remediation of contamination and, based on preliminary
surveys and ongoing monitoring, the Company believes the ultimate remediation
costs for the Lafayette facility will not be material to the Company's
consolidated financial position, results of operations or liquidity.
During 2003, the Company obtained favorable sampling results at certain
locations. As a result of these samples and responses received from regulatory
agencies, the Company determined that the cost of remediation at these locations
would be less than originally anticipated, resulting in a reduction of the
estimated environmental liability of $0.3 million. The Company also received a
"No Further Action" letter on its Morgan City site resulting in a reduction of
the environmental reserve of $0.2 million. During the year, the estimated
environmental liability has also been reduced by payments of $0.4 million.
20
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company was exposed to market risks associated with interest rates and prior
to April 23, 2002, made limited use of derivative financial instruments to
manage that risk. When used, all derivatives for risk management are closely
monitored by the Company's senior management. The Company does not hold
derivatives for trading purposes and it does not use derivatives with leveraged
or complex features. Derivative instruments are transacted either with
creditworthy major financial institutions or over national exchanges.
On April 23, 2002, the Company paid its Terminated Loan Agreement. The
Terminated Loan Agreement had variable interest rates. In conjunction with the
payment of the Terminated Loan Agreement, the Company settled its interest rate
Swap agreements by paying $1.6 million to the counterparties.
Also on April 23, 2002, the Company issued Notes of $200 million that have an
interest rate of 9 3/8% payable semi-annually on May 1 and November 1 of each
year, beginning November 1, 2002, and mature in May 2009. The market value of
the Notes will vary as changes occur to general market interest rates, the
remaining maturity of the Notes, and the Company's credit worthiness. At
December 31, 2003, the market value of the Notes was $212.5 million. A
hypothetical 100 basis-point increase to the Notes' imputed interest rate at
December 31, 2003 would have resulted in a market value decline to approximately
$205.4 million.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
To the Board of Directors and Shareholders of
Petroleum Helicopters, Inc.
We have audited the accompanying consolidated balance sheets of Petroleum
Helicopters, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity,
comprehensive income (loss) and cash flows for each of the three years in the
period ended December 31, 2003. Our audits also included the financial statement
schedule for each of the three years in the period ended December 31, 2003,
listed in the Index at Item 15. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Petroleum Helicopters, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial statement schedule
for each of the three years in the period ended December 31, 2003, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, in 2001 the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivatives Instruments and Hedging Activities," as amended.
/s/ DELOITTE & TOUCHE LLP
New Orleans, Louisiana
March 11, 2004
22
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 19,872 $ 17,674
Accounts receivable - net of allowance:
Trade 41,743 40,234
Other 1,315 579
Inventory 40,405 37,375
Other current assets 6,575 5,753
Refundable income taxes 225 2,236
---------- ----------
Total current assets 110,135 103,851
Other 8,793 10,279
Property and equipment, net 258,526 252,577
---------- ----------
Total Assets $ 377,454 $ 366,707
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 18,837 $ 14,772
Accrued liabilities 15,598 11,893
Accrued vacation payable 3,400 3,931
Income taxes payable -- 504
Notes payable 2,000 --
---------- ----------
Total current liabilities 39,835 31,100
Long-term debt 200,000 200,000
Deferred income taxes 25,597 24,249
Other long-term liabilities 6,029 6,504
Commitments and contingencies (Note 8)
Shareholders' Equity:
Voting common stock - par value of $0.10;
authorized shares of 12,500,000 285 285
Non-voting common stock - par value of $0.10;
authorized shares of 12,500,000 253 253
Additional paid-in capital 15,088 15,062
Retained earnings 90,367 89,254
---------- ----------
Total shareholders' equity 105,993 104,854
---------- ----------
Total Liabilities and Shareholders' Equity $ 377,454 $ 366,707
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
23
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------ ------------
Operating revenues $ 269,392 $ 283,751 $ 282,437
Gain, net on disposition of property
and equipment 1,988 586 1,351
Other 686 1,675 1,461
------------ ------------ ------------
272,066 286,012 285,249
Expenses:
Direct expenses 230,229 235,189 243,538
Selling, general and administrative 19,983 18,189 18,029
Interest expense 19,952 17,250 6,190
------------ ------------ ------------
270,164 270,628 267,757
------------ ------------ ------------
Earnings before income taxes 1,902 15,384 17,492
Income taxes 763 6,153 6,472
------------ ------------ ------------
Net earnings $ 1,139 $ 9,231 $ 11,020
============ ============ ============
Earnings per share:
Basic $ 0.21 $ 1.73 $ 2.12
Diluted $ 0.21 $ 1.70 $ 2.08
Weighted average shares outstanding 5,383 5,334 5,199
Incremental shares 103 104 106
------------ ------------ ------------
Weighted average shares and
equivalents 5,486 5,438 5,305
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
24
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(THOUSANDS OF DOLLARS AND SHARES)
ACCUMULATED
VOTING NON-VOTING OTHER COM-
COMMON STOCK COMMON STOCK ADDITIONAL PREHENSIVE
----------------------- ----------------------- PAID-IN INCOME RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL (LOSS) EARNINGS
--------- --------- --------- --------- ---------- ----------- ---------
Balance at Dec. 31, 2000 2,793 $ 279 2,373 $ 237 $ 12,045 $ -- $ 69,061
Stock options exercised 59 6 1 -- 820 -- --
Stock issued to employees -- -- 31 3 111 -- --
Other -- -- 8 1 351 -- (32)
Cumulative effect of
adopting SFAS No. 133 -- -- -- -- -- 38 --
Unrecognized loss on
interest swaps -- -- -- -- -- (2,068) --
Net Earnings -- -- -- -- -- -- 11,020
--------- --------- --------- --------- --------- --------- ---------
Balance at Dec. 31, 2001 2,852 285 2,413 241 13,327 (2,030) 80,049
Stock options exercised -- -- 113 12 1,735 -- --
Other -- -- -- -- -- -- (26)
Unrecognized gain on
interest swaps -- -- -- -- -- 455 --
Reclassification
adjustments for losses
included in net earnings -- -- -- -- -- 1,575 --
Net earnings -- -- -- -- -- -- 9,231
--------- --------- --------- --------- --------- --------- ---------
Balance at Dec. 31, 2002 2,852 $ 285 2,526 $ 253 $ 15,062 $ -- $ 89,254
Stock options exercised -- -- 5 -- 26 -- --
Other -- -- -- -- -- -- (26)
Net earnings -- -- -- -- -- -- 1,139
--------- --------- --------- --------- --------- --------- ---------
Balance at Dec. 31, 2003 2,852 $ 285 2,531 $ 253 $ 15,088 $ -- $ 90,367
========= ========= ========= ========= ========= ========= =========
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(THOUSANDS OF DOLLARS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------ ------------
Net earnings $ 1,139 $ 9,231 $ 11,020
Other comprehensive income (loss)
Cumulative effect of adopting
SFAS No. 133 -- -- 38
Unrecognized gain (loss) on
interest rate swaps -- 455 (2,068)
Add reclassification adjustments for
losses included in net earnings -- 1,575 --
------------ ------------ ------------
Comprehensive income $ 1,139 $ 11,261 $ 8,990
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
25
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 1,139 $ 9,231 $ 11,020
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 25,209 21,048 15,082
Deferred income taxes (293) 7,325 (385)
Gain on asset dispositions (1,988) (586) (1,351)
Bad debt allowance related to notes
receivable -- (731) 575
Other (323) 1,100 218
Changes in operating assets and liabilities:
Accounts receivable (2,245) 6,928 (4,121)
Inventory (3,030) (2,993) 793
Refundable income taxes 2,011 (2,236) 3,852
Other assets 3,021 3,228 (6,753)
Accounts payable, accrued liabilities and
vacation payable 7,239 (4,671) (1,333)
Income taxes payable (504) (1,924) 2,428
Other long-term liabilities (821) 3,810 (1,345)