Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - PHI INCphii-ex322x093017.htm
EX-32.1 - EXHIBIT 32.1 - PHI INCphii-ex321x093017.htm
EX-31.2 - EXHIBIT 31.2 - PHI INCphii-ex312x093017.htm
EX-31.1 - EXHIBIT 31.1 - PHI INCphii-ex311x093017.htm
EX-10.2 - EXHIBIT 10.2 - PHI INCexhibit102-phicommitmentle.htm
EX-2.1 - EXHIBIT 2.1 - PHI INCexhibit21-arrangementagree.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________________________________________________________ 
 FORM 10-Q
___________________________________________________________ 
 
 ☒    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017
or
☐    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
              For the transition period from                      to                     
Commission file number: 0-9827 
PHI, Inc.
(Exact name of registrant as specified in its charter)
Louisiana
72-0395707
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2001 SE Evangeline Thruway
 
Lafayette, Louisiana
70508
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (337) 235-2452
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                 Yes:  ☒    No:  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes:  ☒    No:  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer: 
 
Accelerated filer:  ☒
Smaller reporting company:
 
 
 
 
 
Non-accelerated filer:
 
☐  (Do not check if a smaller reporting company)
Emerging Growth Company: 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).                                                      Yes:  ☐    No:  ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 31, 2017
Voting Common Stock
 
2,905,757 shares
Non-Voting Common Stock
 
12,893,895 shares



PHI, INC.
Index – Form 10-Q

Item 1.
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2


PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share data)
(Unaudited)
 
 
September 30,
2017
 
December 31, 2016
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash
 
$
2,991

 
$
2,596

Short-term investments
 
204,036

 
289,806

Accounts receivable – net
 
 
 
 
Trade
 
140,434

 
128,662

Other
 
12,303

 
9,603

Inventories of spare parts – net
 
79,245

 
70,402

Prepaid expenses
 
12,006

 
9,259

Deferred income taxes
 
10,798

 
10,798

Income taxes receivable
 
509

 
540

Total current assets
 
462,322

 
521,666

Property and equipment – net
 
910,327

 
903,977

Restricted cash and investments
 
12,396

 
13,038

Other assets
 
9,032

 
9,759

Total assets
 
$
1,394,077

 
$
1,448,440

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current Liabilities:
 
 
 
 
Accounts payable
 
$
30,607

 
$
28,704

Accrued and other current liabilities
 
33,703

 
28,346

Total current liabilities
 
64,310

 
57,050

Long-term debt:
 
 
 
 
Revolving credit facility
 
100,000

 
134,000

Senior Notes issued March 17, 2014, net of debt issuance costs of $1,818 and $2,753, respectively
 
498,182

 
497,247

Deferred income taxes
 
141,420

 
151,713

Other long-term liabilities
 
8,104

 
8,652

Commitments and contingencies (Note 9)
 

 

Shareholders’ Equity:
 
 
 
 
Voting common stock – par value of $0.10; 12,500,000 shares authorized, 2,905,757 shares issued and outstanding
 
291

 
291

Non-voting common stock – par value of $0.10; 37,500,000 shares authorized, 12,893,895 and 12,779,646 issued and outstanding at September 30, 2017 and December 31, 2016, respectively
 
1,289

 
1,278

Additional paid-in capital
 
307,054

 
304,246

Accumulated other comprehensive loss
 
(244
)
 
(478
)
Retained earnings
 
273,671

 
294,441

Total shareholders’ equity
 
582,061

 
599,778

Total liabilities and shareholders’ equity
 
$
1,394,077

 
$
1,448,440


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

3


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars and shares, except per share data)
(Unaudited) 
 
 
Quarter Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
Operating revenues, net
 
$
150,167

 
$
158,093

 
$
431,209

 
$
489,245

Expenses:
 
 
 
 
 

 
 
Direct expenses
 
136,786

 
144,938

 
400,250

 
449,909

Selling, general and administrative expenses
 
11,401

 
13,381

 
38,691

 
36,832

Total operating expenses
 
148,187

 
158,319

 
438,941

 
486,741

Gain (loss) on disposal of assets
 
(4
)
 
85

 
3

 
(3,854
)
Equity in (earnings) loss of unconsolidated affiliates, net
 
(438
)
 
198

 
1,556

 
274

Operating income (loss)
 
2,422

 
(509
)
 
(9,291
)
 
6,084

Interest expense
 
8,027

 
7,719

 
24,305

 
22,792

Other income – net
 
(706
)
 
(462
)
 
(2,474
)
 
(1,571
)
 
 
7,321

 
7,257

 
21,831

 
21,221

Loss before income taxes
 
(4,899
)
 
(7,766
)
 
(31,122
)
 
(15,137
)
Income tax benefit
 
(1,622
)
 
(2,799
)
 
(9,324
)
 
(5,515
)
Net loss
 
$
(3,277
)
 
$
(4,967
)
 
$
(21,798
)
 
$
(9,622
)
Weighted average shares outstanding:
 
 
 
 
 

 
 
Basic
 
15,799

 
15,683

 
15,750

 
15,655

Diluted
 
15,799

 
15,683

 
15,750

 
15,655

Net loss per share:
 
 
 
 
 

 
 
Basic
 
$
(0.21
)
 
$
(0.32
)
 
$
(1.38
)
 
$
(0.61
)
Diluted
 
$
(0.21
)
 
$
(0.32
)
 
$
(1.38
)
 
$
(0.61
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Thousands of dollars)
(Unaudited) 
 
 
Quarter Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
Net (loss) earnings
 
$
(3,277
)
 
$
(4,967
)
 
$
(21,798
)
 
$
(9,622
)
Unrealized gain (loss) on short-term investments
 
41

 
(494
)
 
370

 
523

Changes in pension plan assets and benefit obligations
 
(24
)
 
1

 
(2
)
 
3

Tax effect of the above-listed adjustments
 
(8
)
 
178

 
(134
)
 
(229
)
Total comprehensive (loss) income
 
$
(3,268
)
 
$
(5,282
)
 
$
(21,564
)
 
$
(9,325
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Thousands of dollars and shares)
(Unaudited) 
 
 
Voting
Common Stock
 
Non-Voting
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other Com-prehensive (Loss) Income
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Retained Earnings
 
ShareHolders' Equity
Balance at December 31, 2015
 
2,906

 
$
291

 
12,685

 
$
1,269

 
$
304,884

 
$
(567
)
 
$
321,121

 
$
626,998

Net loss
 

 

 

 

 

 

 
(9,622
)
 
(9,622
)
Unrealized gain on short-term investments
 

 

 

 

 

 
294

 

 
294

Changes in pension plan assets and benefit obligations
 

 

 

 

 

 
2

 

 
2

Amortization of unearned stock-based compensation
 

 

 

 

 
4,334

 

 

 
4,334

Issuance of non-voting common stock (upon vesting of restricted stock units)
 

 

 
128

 
12

 

 

 

 
12

Cancellation of restricted non-voting stock units for tax withholdings on vested shares
 

 

 
(28
)
 
(3
)
 
(528
)
 

 

 
(531
)
Retirement of treasury stock
 

 

 
(8
)
 

 

 

 

 

Balance at September 30, 2016
 
2,906

 
$
291

 
12,777

 
$
1,278

 
$
308,690

 
$
(271
)
 
$
311,499

 
$
621,487

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Voting
Common Stock
 
Non-Voting
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other Com-prehensive (Loss) Income
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Retained Earnings
 
ShareHolders' Equity
Balance at December 31, 2016
 
2,906

 
$
291

 
12,779

 
$
1,278

 
$
304,246

 
$
(478
)
 
$
294,441

 
$
599,778

Net loss
 

 

 

 

 

 

 
(21,798
)
 
(21,798
)
Unrealized gain on short-term investments
 

 

 

 

 

 
235

 

 
235

Changes in pension plan assets and benefit obligations
 

 

 

 

 

 
(1
)
 

 
(1
)
Amortization of unearned stock-based compensation
 

 

 

 

 
3,074

 

 

 
3,074

Issuance of non-voting common stock (upon vesting of restricted stock units)
 

 

 
136

 
13

 
(10
)
 

 

 
3

Cancellation of restricted non-voting stock units for tax withholdings on vested shares
 

 

 
(22
)
 
(2
)
 
(256
)
 

 

 
(258
)
Cumulative effect adjustment of unrecognized tax benefits
 

 

 

 

 

 

 
1,028

 
1,028

Balance at September 30, 2017
 
2,906

 
$
291

 
12,893

 
$
1,289

 
$
307,054

 
$
(244
)
 
$
273,671

 
$
582,061

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

6


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited) 
 
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
Operating activities:
 
 
 
 
Net loss
 
$
(21,798
)
 
$
(9,622
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
50,593

 
53,054

Deferred income taxes
 
(9,416
)
 
(6,775
)
Loss (gain) on asset dispositions
 
3

 
(3,854
)
Equity in loss of unconsolidated affiliate, net
 
1,556

 
274

Inventory valuation reserves
 
(3
)
 
3,766

Changes in operating assets and liabilities
 
(22,803
)
 
(43,991
)
Net cash (used in) provided by operating activities
 
(1,868
)
 
(7,148
)
Investing activities:
 
 
 
 
Purchase of property and equipment
 
(49,227
)
 
(74,950
)
Proceeds from asset dispositions
 
21

 
13,233

Purchase of short-term investments
 
(268,525
)
 
(263,204
)
Proceeds from sale of short-term investments
 
354,250

 
259,322

Payment of deposits on aircraft
 

 
(197
)
Loan to unconsolidated affiliate
 

 
(1,200
)
Net cash provided by (used in) investing activities
 
36,519

 
(66,996
)
Financing activities:
 
 
 
 
Proceeds from line of credit
 
99,150

 
213,900

Payments on line of credit
 
(133,150
)
 
(139,000
)
Repurchase of common stock
 
(256
)
 
(524
)
Net cash (used in) provided by financing activities
 
(34,256
)
 
74,376

Decrease in cash
 
395

 
232

Cash, beginning of period
 
2,596

 
2,407

Cash, end of period
 
$
2,991

 
$
2,639

Supplemental Disclosures Cash Flow Information
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
29,536

 
$
28,258

Income taxes
 
$
1,213

 
$
2,856

Noncash investing activities:
 
 
 
 
Other current liabilities and accrued payables related to purchase of property and equipment
 
$
21

 
$
3,717

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

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include the accounts of PHI, Inc. and its subsidiaries (“PHI” or the “Company” or “we” or “our”). In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly the financial results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Our financial results, particularly as they relate to our Oil and Gas segment, are influenced by seasonal fluctuations as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. For this and other reasons, the results of operations for interim periods are not necessarily indicative of the operating results that may be expected for a full fiscal year.

Recently Adopted Accounting Pronouncements - Effective January 1, 2017, we adopted Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which was issued by the Financial Accounting Standards Board (“FASB”) in March 2016. This new standard requires that excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises be recognized in the income statement. Previously, these amounts were recognized in additional paid-in capital. As a result, during the first quarter of 2017 we recorded a cumulative-effect adjustment of $1.0 million increasing retained earnings and decreasing deferred tax liability on our balance sheet dated September 30, 2017.  Accordingly, we recorded income tax expense of $1.6 million in our consolidated statement of income for the nine months ended September 30, 2017, in recognition of excess tax deficiencies related to equity compensation. Under this new standard, the corresponding cash flows are now reflected in cash provided by operating activities instead of financing activities, as was previously required.  

ASU 2016-09 also allows an employer with a statutory income tax withholding obligation to withhold shares with a fair value up to the amount of tax owed using the maximum statutory tax rate in the employee’s applicable jurisdiction. We have elected to continue to withhold the minimum statutory withholding obligation for outstanding awards. We have also elected to continue to estimate equity award forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
New Accounting Pronouncements - In May 2014, the FASB issued Accounting Standards Update ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. The new standard will be effective for the Company beginning on January 1, 2018. Revenues from our Oil and Gas segment and Air Medical segment hospital contracts are primarily comprised of a fixed monthly fee for a particular model of aircraft, plus a variable component based on flight time. Under the independent provider programs of our Air Medical segment, our revenues are based on a flat rate plus a variable charge per patient-loaded mile, and are recorded net of contractual allowances. We also generate revenue on a cost-plus basis in our Technical Services segment. Based on our initial assessment, we do not expect the adoption of this ASU to have a material impact on our condensed consolidated financial statements.  Remaining implementation matters include establishing new policies, procedures, and controls and quantifying any adoption date adjustments.  We plan to adopt this standard on January 1, 2018 utilizing the modified retrospective method.
In February 2016, the FASB issued ASU 2016-02, Leases, which replaces the existing guidance on leasing transactions in ASC 840 to require recognition of the assets and liabilities for the rights and obligations created by those leases on the balance sheet. We are currently evaluating the effects of this standard, and expect the adoption of this standard will result in a material change to our consolidated assets and liabilities based on our lease portfolio as of September 30, 2017. We plan to adopt this standard beginning January 1, 2019.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The effects of this standard on our financial position, results of operations, and cash flows are not yet known. We plan to adopt this standard beginning January 1, 2018.




8


In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business and requires that an entity apply certain criteria in order to determine when a set of assets and activities qualifies as a business. The adoption of this standard is expected to result in fewer acquisitions of properties qualifying as acquisitions of businesses and, accordingly, acquisition costs for those acquisitions that do not qualify as businesses will be capitalized rather than expensed. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted. The effects of this standard on our financial position, results of operations, and cash flows are not yet known. We plan to adopt this standard beginning January 1, 2018.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the current two-step goodwill impairment test by eliminating the second step of the test. The new standard requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect this ASU to have a material impact on our consolidated financial statements.
2. INVESTMENTS
We classify all of our short-term investments as available-for-sale. We carry these at fair value and report unrealized gains and losses, net of taxes, in Accumulated other comprehensive loss, which is a separate component of shareholders’ equity in our Condensed Consolidated Balance Sheets. These unrealized gains and losses are also reflected in our Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Statements of Shareholders’ Equity. We determine cost, gains, and losses using the specific identification method.
Investments consisted of the following as of September 30, 2017:
 
 
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(Thousands of dollars)
Investments:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
5,278

 
$

 
$

 
$
5,278

Commercial paper
 
9,423

 

 
(10
)
 
9,413

U.S. Government agencies
 
13,505

 

 
(14
)
 
13,491

Corporate bonds and notes
 
188,515

 
3

 
(283
)
 
188,235

Subtotal
 
216,721

 
3

 
(307
)
 
216,417

Deferred compensation plan assets included in other assets
 
2,630

 

 

 
2,630

Total
 
$
219,351

 
$
3

 
$
(307
)
 
$
219,047



Investments consisted of the following as of December 31, 2016:
 
 
Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(Thousands of dollars)
Investments:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
18,118

 
$

 
$

 
$
18,118

Commercial paper
 
27,906

 

 
(39
)
 
27,867

U.S. government agencies
 
13,295

 

 
(32
)
 
13,263

Corporate bonds and notes
 
244,202

 
2

 
(622
)
 
243,582

Subtotal
 
303,521

 
2

 
(693
)
 
302,830

Deferred compensation plan assets included in other assets
 
2,394

 

 

 
2,394

Total
 
$
305,915

 
$
2

 
$
(693
)
 
$
305,224




9


At September 30, 2017 and December 31, 2016, we classified $12.4 million and $13.0 million respectively, of our aggregate investments as long-term investments and recorded them in our Condensed Consolidated Balance Sheets as Restricted cash and investments, as they are securing outstanding letters of credit with maturities beyond one year and a bond relating to foreign operations.
The following table presents the cost and fair value of our debt investments based on maturities as of:
 
 
September 30, 2017
 
December 31, 2016
 
 
Amortized
Costs
 
Fair
Value
 
Amortized
Costs
 
Fair
Value
 
 
(Thousands of dollars)
Due in one year or less
 
$
133,633

 
$
133,481

 
$
184,587

 
$
184,334

Due within two years
 
77,810

 
77,658

 
100,816

 
100,378

Total
 
$
211,443

 
$
211,139

 
$
285,403

 
$
284,712



The following table presents the average coupon rate percentage and the average days to maturity of our debt investments as of:
 
 
September 30, 2017
 
December 31, 2016
 
 
Average
Coupon
Rate (%)
 
Average
Days To
Maturity
 
Average
Coupon
Rate (%)
 
Average
Days To
Maturity
Commercial paper
 
1.236

 
228
 
1.001

 
184
U.S. Government agencies
 
1.213

 
325
 
0.970

 
400
Corporate bonds and notes
 
1.715

 
295
 
1.745

 
318


The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for less than twelve months as of:
 
 
September 30, 2017
 
December 31, 2016
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(Thousands of dollars)
Commercial paper
 
$
9,413

 
$
(10
)
 
$
27,867

 
$
(39
)
U.S. Government agencies
 
9,495

 
(10
)
 
13,263

 
(32
)
Corporate bonds and notes
 
102,767

 
(173
)
 
210,836

 
(602
)
Total
 
$
121,675

 
$
(193
)
 
$
251,966

 
$
(673
)


The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for more than twelve months as of: 
 
 
September 30, 2017
 
December 31, 2016
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(Thousands of dollars)
U.S. Government agencies
 
$
3,996

 
$
(4
)
 
$

 
$

Corporate bonds and notes
 
77,187

 
(110
)
 
24,196

 
(20
)
Total
 
$
81,183

 
$
(114
)
 
$
24,196

 
$
(20
)
From time to time over the periods covered in our financial statements included herein (and as illustrated in the foregoing tables), our investments have experienced net unrealized losses. We consider these declines in market value to be due to customary market fluctuations, and we do not plan to sell these investments prior to maturity. For these reasons, we do not consider any of our investments to be other than temporarily impaired at September 30, 2017 or December 31, 2016. We have also determined that we did not have any other than temporary impairments relating to credit losses on debt securities for the quarter ended September 30, 2017. For additional information regarding our criteria for making these assessments, see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

10


3. REVENUE RECOGNITION AND VALUATION ACCOUNTS
We establish the amount of our allowance for doubtful accounts based upon factors relating to the credit risk of specific customers, current market conditions, and other information. Our allowance for doubtful accounts was approximately $6.1 million and $6.0 million at September 30, 2017, and December 31, 2016, respectively.

Revenues related to flights generated by our Air Medical segment are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when the services are provided. The allowance for contractual discounts was $129.2 million and $111.9 million as of September 30, 2017 and December 31, 2016, respectively. The allowance for uncompensated care was $47.7 million and $46.3 million as of September 30, 2017 and December 31, 2016, respectively.
Included in the allowance for uncompensated care listed above is the value of services to patients who are unable to pay when it is determined that they qualify for charity care. The value of these services was $1.3 million and $2.2 million for the quarters ended September 30, 2017 and 2016, respectively. The value of these services was $5.7 million and $6.9 million for the nine months ended September 30, 2017 and 2016, respectively. The estimated cost of providing charity services was $0.3 million for the quarter ended September 30, 2017 and $0.5 million for the quarter ended September 30, 2016. The estimated cost of providing charity services was $1.3 million and $1.8 million for the nine months ended September 30, 2017 and 2016, respectively. The estimated costs of providing charity services are based on a calculation that applies a ratio of costs to the charges for uncompensated charity care. The ratio of costs to charges is based on our Air Medical segment’s total expenses divided by gross patient service revenue.
The allowance for contractual discounts and estimated uncompensated care (expressed as a percentage of gross segment accounts receivable) as of the dates listed below was as follows: 
 
 
September 30, 2017
 
December 31, 2016
Allowance for Contractual Discounts
 
58
%
 
56
%
Allowance for Uncompensated Care
 
21
%
 
23
%

Under a three-year contract that commenced on September 29, 2012, our Air Medical affiliate provided multiple services to a customer in the Middle East, including helicopter leasing, emergency medical helicopter flight services, aircraft maintenance, provision of spare parts, insurance coverage for the customer-owned aircraft, training services, and base construction. Each of the major services mentioned above qualified as separate units of accounting under the accounting guidance for such arrangements. The selling price for each specific service was determined based upon third-party evidence and estimates. As discussed in greater detail in our Form 10-K for the year ended December 31, 2016 and elsewhere herein, this contract, after being extended one year, lapsed on September 30, 2016.
We have also established valuation reserves related to obsolete and slow-moving spare parts inventory. The inventory valuation reserves were $18.4 million and $17.3 million at September 30, 2017 and December 31, 2016, respectively.
4. FAIR VALUE MEASUREMENTS
Accounting standards require that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.







11


The following table summarizes the valuation of our investments and financial instruments by the above pricing levels as of the valuation dates listed:
 
 
 
 
September 30, 2017
 
 
Total
 
(Level 1)
 
(Level 2)
 
 
(Thousands of dollars)
Investments:
 
 
 
 
 
 
Money market mutual funds
 
$
5,278

 
$
5,278

 
$

Commercial paper
 
9,413

 

 
9,413

U.S. Government agencies
 
13,491

 

 
13,491

Corporate bonds and notes
 
188,235

 

 
188,235

 
 
216,417

 
5,278

 
211,139

Deferred compensation plan assets
 
2,630

 
2,630

 

Total
 
$
219,047

 
$
7,908

 
$
211,139

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Total
 
(Level 1)
 
(Level 2)
 
 
(Thousands of dollars)
Investments:
 
 
 
 
Money market mutual funds
 
$
18,118

 
$
18,118

 
$

Commercial paper
 
27,867

 

 
27,867

U.S. government agencies
 
13,263

 

 
13,263

Corporate bonds and notes
 
243,582

 

 
243,582

 
 
302,830

 
18,118

 
284,712

Deferred compensation plan assets
 
2,394

 
2,394

 

Total
 
$
305,224

 
$
20,512

 
$
284,712


We hold our short-term investments in an investment fund consisting of high quality money market instruments of governmental and private issuers, which is classified as a short-term investment. Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets. These items are traded with sufficient frequency and volume to provide pricing on an ongoing basis. The fair values of the investments in these funds are based on observable market prices, and therefore, have been categorized in Level 1 in the fair value hierarchy. Level 2 inputs reflect quoted prices for identical assets or liabilities that are not actively traded. These items may not be traded daily; examples include commercial paper, corporate bonds and U.S. government agencies debt. There have been no reclassifications of assets between Level 1 and Level 2 investments during the periods covered by the financial statements included in this report. We hold no Level 3 investments. Investments reflected on our balance sheets as Other Assets, which we hold to fund liabilities under our Officers’ Deferred Compensation Plan, consist mainly of multiple investment funds that are highly liquid and diversified.
Cash, accounts receivable, accounts payable and accrued liabilities, and our revolving credit facility debt all had fair values approximating their carrying amounts at September 30, 2017 and December 31, 2016. Our determination of the estimated fair value of our 5.25% Senior Notes due 2019 and our revolving credit facility debt is derived using Level 2 inputs, including quoted market indications of similar publicly-traded debt. The fair value of our 5.25% Senior Notes due 2019, based on quoted market prices, was $489.2 million and $474.4 million at September 30, 2017 and December 31, 2016, respectively.

12


5. LONG-TERM DEBT
The components of long-term debt as of the dates indicated below were as follows: 
 
 
September 30, 2017
 
December 31, 2016
 
 
Principal
 
Unamortized
Debt
Issuance
Debt Cost
 
Principal
 
Unamortized
Debt
Issuance
Debt Cost
 
 
(Thousands of dollars)
Senior Notes issued March 17, 2014, interest only payable semi-annually at 5.25%, maturing March 15, 2019
 
$
500,000

 
$
1,818

 
$
500,000

 
$
2,753

Revolving Credit Facility due October 1, 2018 with a group of commercial banks, interest payable at variable rates
 
100,000

 

 
134,000

 

Total long-term debt
 
$
600,000

 
$
1,818

 
$
634,000

 
$
2,753

Our 5.25% Senior Notes (the “2019 Notes”) will mature on March 15, 2019, are unconditionally guaranteed on a senior basis by each of PHI, Inc.’s wholly-owned domestic subsidiaries, and are the general, unsecured obligations of PHI, Inc. and the guarantors. Interest is payable semi-annually on March 15 and September 15 of each year. PHI has the option to redeem some or all of the 2019 Notes at any time on or after March 15, 2016 at specified redemption prices. The indenture governing the 2019 Notes (the “2019 Indenture”) contains, among other things, certain restrictive covenants, including limitations on incurring indebtedness, creating liens, selling assets and entering into certain transactions with affiliates. The covenants also limit PHI’s ability to, among other things, pay cash dividends on common stock, repurchase or redeem common or preferred equity, prepay subordinated debt and make certain investments. Upon the occurrence of a “Change in Control Repurchase Event” (as defined in the 2019 Indenture), PHI will be required, unless it has previously elected to redeem the 2019 Notes as described above, to make an offer to purchase the 2019 Notes for a cash price equal to 101% of their principal amount.
Revolving Credit Facility – We have an amended and restated revolving credit facility (our “credit facility”) that matures on October 1, 2018. Under this facility, we can borrow up to $150.0 million at floating interest rates based on either the London Interbank Offered Rate plus 225 basis points or the prime rate (each as defined in our credit facility), at our option. Our credit facility includes usual and customary covenants and events of default for credit facilities of its type. Our ability to borrow under the credit facility is conditioned upon our continued compliance with such covenants, including, among others, (i) covenants that restrict our ability to engage in certain asset sales, mergers or other fundamental changes, to incur liens or to engage in certain other transactions or activities and (ii) financial covenants that stipulate that PHI will maintain a consolidated working capital ratio of at least 2 to 1, a net funded debt to consolidated net worth ratio not greater than 1.5 to 1, a fixed charge coverage ratio of at least 1.1 to 1 if our short term investments fall below $150.0 million, and consolidated net worth of at least $450.0 million (with all such terms or amounts as defined in or determined under our credit facility). As of September 30, 2017, we believe we were in compliance with these covenants.
Letter of Credit Facility - We maintain a separate letter of credit facility that had $12.3 million and $13.0 million in letters of credit outstanding at September 30, 2017 and December 31, 2016 respectively. We have letters of credit securing our workers compensation policies, a traditional provider contract, and a bond relating to foreign operations.
We also have outstanding a letter of credit for $7.8 million issued under our $150.0 million credit facility that reduces the amount we can borrow under that facility. The letter of credit was issued to guaranty our performance under an international contract that was awarded in late 2016.
Other - Cash paid to fund interest expense under our outstanding indebtedness was $14.3 million for the quarter ended September 30, 2017 and $13.9 million for the quarter ended September 30, 2016. Cash paid to fund interest expense under our outstanding indebtedness was $29.5 million for the nine months ended September 30, 2017 and $28.3 million for the nine months ended September 30, 2016.
PHI, Inc. has cash management arrangements with certain of its principal subsidiaries, in which substantial portions of the subsidiaries’ cash is regularly advanced to PHI, Inc. Although PHI, Inc. periodically repays these advances to fund the subsidiaries’ cash requirements throughout the year, at any given point in time PHI, Inc. may owe a substantial sum to its subsidiaries under these advances, which, in accordance with generally accepted accounting principles, are eliminated in consolidation and therefore not recognized on our consolidated balance sheets. For additional information, see Note 13.

13


6. EARNINGS PER SHARE
The components of basic and diluted earnings per share for the quarter and nine months ended September 30, 2017 and 2016 are as follows: 
 
 
Quarter Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Thousands of dollars)
Weighted average outstanding shares of common stock, basic
 
15,799

 
15,683

 
15,750

 
15,655

Dilutive effect of unvested restricted stock units
 

 

 

 

Weighted average outstanding shares of common stock, diluted (1)
 
15,799

 
15,683

 
15,750

 
15,655

 
(1)
For the three months ended September 30, 2017 and 2016, 0 and 52,126 unvested restricted stock units were excluded from the weighted average outstanding shares of common stock, diluted, respectively as they were anti-dilutive to earnings per share. For the nine months ended September 30, 2017 and 2016, 0 and 22,221 unvested restricted stock units were excluded from the weighted average outstanding shares of common stock, diluted, respectively as they were anti-dilutive to earnings per share.
7. STOCK-BASED COMPENSATION
We recognize the cost of employee compensation received in the form of equity instruments based on the grant date fair value of those awards. The table below sets forth the total amount of stock-based compensation expense for the nine months and quarter ended September 30, 2017 and 2016
 
 
Quarter Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Thousands of dollars)
Stock-based compensation expense:
 
 
 
 
 
 
Time-based restricted stock units
 
$
582

 
$
631

 
$
1,678

 
$
1,847

Performance-based restricted stock units
 
689

 
823

 
1,396

 
2,502

Total stock-based compensation expense
 
$
1,271

 
$
1,454

 
$
3,074

 
$
4,349

During the quarter and nine months ended September 30, 2017, 26,296 and 472,913 time-based restricted units, respectively, and 4,646 and 371,045 performance-based restricted units were awarded to managerial employees.
During the quarter and nine months ended September 30, 2016, 10,992 and 25,280 time-based restricted units, respectively, and 2,318 and 310,481 performance-based restricted units were awarded to managerial employees, respectively.
8. ASSET DISPOSALS
During the third quarter of 2017, we disposed of one medium aircraft and related parts inventory utilized in the Oil and Gas segment. This aircraft no longer met our strategic needs. During the first two quarters of 2017, we disposed of five medium aircraft and related parts inventory in the Oil & Gas segment. These aircraft no longer met our strategic needs.
During the third quarter of 2016, we sold four light aircraft previously utilized in the Oil and Gas segment. Cash proceeds totaled $2.2 million, resulting in a $0.1 million loss on the sale of these assets. In the first two quarters of 2016 we sold five light and three medium aircraft and related parts inventory utilized in the Oil and Gas segment. Cash proceeds totaled $11.0 million, resulting in a gain on the sale of these assets of $3.9 million. These aircraft no longer met our strategic needs.
9. COMMITMENTS AND CONTINGENCIES
Commitments We currently have no aircraft purchase commitments.
Total aircraft deposits of $0.5 million were included in Other Assets as of September 30, 2017. This amount represents a deposit on a future lease buyout option. In the event we do not exercise the buyout option, the deposit will be applied against lease payments.
As of September 30, 2017, we had options to purchase aircraft under leases, with such purchase options becoming exercisable in 2018 through 2020. The aggregate option purchase prices are $127.0 million in 2018, $129.0 million in 2019, and $22.7 million

14


in 2020. Under current conditions, we believe it is unlikely that we will exercise the 2018 purchase options, unless opportunistic conditions arise.
Environmental Matters – PHI has recorded an estimated liability of $0.15 million as of September 30, 2017 for environmental response costs. Previously, PHI conducted environmental surveys of its former Lafayette Facility located at the Lafayette Regional Airport, which we vacated in 2001, PHI has determined that limited soil and groundwater contamination exist at two parcels of land at the former facility. An Assessment Report for both parcels was submitted in 2003 (and updated in 2006) to the Louisiana Department of Environmental Quality (LDEQ) and the Louisiana Department of Natural Resources (LDNR). Approvals for the Assessment Report were received from the LDEQ and LDNR in 2010 and 2011, respectively. Since that time, PHI has performed groundwater sampling of the required groundwater monitor well installations at both parcels and submitted these sampling reports to the LDEQ. Pursuant to an agreement with the LDEQ, PHI provided groundwater sample results semi-annually to the LDEQ for both parcels from 2005 to 2015. LDEQ approved a reduction in the sampling program from semi-annual to annual groundwater monitoring in 2015. Based on PHI’s working relationship and agreements with the LDEQ, and the results of ongoing former facility parcel monitoring, PHI believes that ultimate remediation costs for the subject parcels will not be material to PHI’s consolidated financial position, operations or cash flows.
Legal Matters – On September 25, 2017, we brought a suit in the U.S. District Court for the Western District of Louisiana against Office & Professional Employees International Union and Office & Professional Employees International Union, Local 108 (Civil Action No. 6:17 cv 01216), which collectively represent our domestic pilot workforce. In this suit, we seek declaratory relief and other remedies under federal law to confirm that we can increase the wages of most of our unionized pilots and provide enhanced benefits of employment without negotiating these proposed changes with the defendants. We are in the early stages of this proceeding.
From time to time, we are involved in various legal actions incidental to our business, including actions relating to employee claims, medical malpractice claims, tax issues, grievance hearings before labor regulatory agencies, and miscellaneous third party tort actions. The outcome of these proceedings is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of our presently pending proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on our financial position, results of operations or cash flows.
Operating Leases We lease certain aircraft, facilities, and equipment used in our operations. The related lease agreements, which include both non-cancelable and month-to-month terms, generally provide for fixed monthly rentals, and certain real estate leases also include renewal options. We generally pay all insurance, taxes, and maintenance expenses associated with these leases. All aircraft leases contain purchase options exercisable by us at certain dates in the lease agreements.
At September 30, 2017, we had approximately $194.9 million in aggregate commitments under operating leases of which approximately $10.7 million is payable through the fourth quarter of 2017. The total lease commitments include $182.0 million for aircraft and $12.9 million for facility lease commitments.
10. SEGMENT INFORMATION
PHI is primarily a provider of helicopter transport services, including helicopter maintenance and repair services. We report our financial results through the three reportable segments further described below.

A segment’s operating profit or loss is its operating revenues less its direct expenses and selling, general and administrative expenses. A portion of our total selling, general and administrative expenses is charged directly to each segment, and a small portion is allocated to that segment. Direct charges represent the vast majority of segment selling, general and administrative expenses. Allocated selling, general and administrative expenses are based primarily on total segment costs as a percentage of total operating costs.
Oil and Gas Segment - Our Oil and Gas segment, headquartered in Lafayette, Louisiana, provides helicopter services primarily for the major integrated and independent oil and gas production companies transporting personnel or equipment to offshore platforms in the Gulf of Mexico. Our customers include Shell Oil Company, BP America Production Company, ExxonMobil Production Company, and ConocoPhillips Company, with whom we have worked for 30 or more years, and ENI Petroleum, with whom we have worked for more than 15 years. At September 30, 2017, we had available for use 126 aircraft in this segment.

Operating revenue from our Oil and Gas segment is derived mainly from contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable payments based on the amount of flight time. A small portion of our Oil and Gas segment revenue is derived from providing services on an "ad-hoc" basis. Operating costs for the Oil and Gas segment are primarily aircraft operation costs, including costs for pilots and maintenance personnel. Total fuel cost is included in direct expense and any reimbursement

15


of a portion of these costs above a contracted amount is included in revenue. We typically operate under fixed-term contracts with our customers, a substantial portion of which are competitively bid.

Our fixed-term contracts have terms of one to seven years (subject to provisions permitting early termination by the customers), with payment in U.S. dollars. For the quarters September 30, 2017 and 2016, respectively, approximately 50% and 49% of our total operating revenues were generated by our Oil and Gas segment, with approximately 89% and 92% of these revenues from fixed-term customer contracts. For the nine months ended September 30, 2017 and 2016, respectively, approximately 51% of our total operating revenues were generated by our Oil and Gas segment, with approximately 90% and 92% of these revenues from fixed-term customer contracts. The remaining 10% and 8% of these revenues were attributable to work in the spot market and ad hoc flights for contracted customers.
Air Medical Segment - The operations of our Air Medical segment are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment.

We provide Air Medical transportation services for hospitals and emergency service agencies throughout the U.S. As of September 30, 2017, our Air Medical segment operated approximately 105 aircraft in 18 states at 72 separate locations.

Our Air Medical segment operates primarily under the independent provider model and, to a lesser extent, under the traditional provider model. Under the independent provider model, we have no fixed revenue stream and compete for transport referrals on a daily basis with other independent operators in the area. Under the traditional provider model, we contract directly with the customer to provide their transportation services, with the contracts typically awarded or renewed through competitive bidding. For the quarter ended September 30, 2017 and 2016, approximately 47% and 47% of our total operating revenues were generated by our Air Medical segment, respectively. For the nine months ended September 30, 2017 and 2016, approximately 45% of our total operating revenues were generated by our Air Medical segment.

As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per patient-loaded mile, regardless of aircraft model, and are typically compensated by private insurance, Medicaid or Medicare, or directly by transported patients who self-pay. As further described in Note 3, revenues are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care at the time the services are provided. Contractual allowances and uncompensated care are estimated based on historical collection experience by payor category (consisting mainly of insurance, Medicaid, Medicare, and self-pay). Estimates regarding the payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute a historical payment analysis of accounts fully closed, by category.
Provisions for contractual discounts and estimated uncompensated care for our Air Medical segment (expressed as a percentage of gross segment billings) were as follows: 
 
 
Quarter Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
Provision for contractual discounts
 
65
%
 
65
%
 
66
%
 
67
%
Provision for uncompensated care
 
6
%
 
9
%
 
7
%
 
6
%

These percentages are affected by various factors, including rate increases and changes in the number of transports by payor mix.

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

Net revenue attributable to Insurance, Medicare, Medicaid, and Self-Pay (expressed as a percentage of net Air Medical revenues) were as follows: 
 
 
Quarter Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
Insurance
 
73
%
 
75
%
 
72
%
 
72
%
Medicare
 
17
%
 
17
%
 
18
%
 
18
%
Medicaid
 
9
%
 
8
%
 
9
%
 
9
%
Self-Pay
 
1
%
 
%
 
1
%
 
1
%

16


We also have a limited number of contracts with hospitals under which we receive a fixed fee component for aircraft availability and a variable fee component for flight time. Most of our contracts with hospitals contain provisions permitting early termination by the hospital, typically with 180 days’ notice for any reason and generally with penalty. Those contracts generated approximately 15% and 27% of the segment’s revenues for the quarters ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, these contracts generated approximately 17% and 29% of the segment's revenues, respectively.
Technical Services Segment - Our Technical Services segment provides helicopter repair and overhaul services for flight operations customers that own their aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above our service costs. We also periodically provide flight services to governmental customers under this segment, including our agreement to operate six aircraft for the National Science Foundation in Antarctica, typically in the first and fourth quarters each year. Also included in this segment are our proprietary Helipass operations, which provide software as a service to certain of our Oil and Gas customers for the purpose of passenger check-in and compliance verification.
For the quarter ended September 30, 2017 and 2016, approximately 3% and 4%, respectively, of our total operating revenues were generated by our Technical Services segment. For the nine months ended September 30, 2017 and 2016, approximately 4%, respectively, of our total operating revenues were generated by our Technical Services segment.

17


Summarized financial information concerning our reportable operating segments for the three and nine months ended September 30, 2017 and 2016 is as follows: 
 
 
Quarter Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Thousands of dollars)
Segment operating revenues, net
 
 
 
 
 
 
 
 
Oil and Gas
 
$
75,700

 
$
77,551

 
$
222,098

 
$
249,173

Air Medical
 
70,280

 
74,482

 
192,840

 
220,089

Technical Services
 
4,187

 
6,060

 
16,271

 
19,983

Total operating revenues, net
 
150,167

 
158,093

 
431,209

 
489,245

Segment direct expenses (1)
 
 
 
 
 
 
 
 
Oil and Gas (2)
 
81,467

 
82,832

 
236,878

 
262,148

Air Medical
 
51,120

 
56,562

 
152,363

 
172,603

Technical Services
 
3,761

 
5,742

 
12,565

 
15,432

Total segment direct expenses
 
136,348

 
145,136

 
401,806

 
450,183

Segment selling, general and administrative expenses
 
 
 
 
 
 
 
 
Oil and Gas
 
1,148

 
1,705

 
4,501

 
4,838

Air Medical
 
3,136

 
3,056

 
9,280

 
8,293

Technical Services
 
338

 
266

 
1,032

 
763

Total segment selling, general and administrative expenses
 
4,622

 
5,027

 
14,813

 
13,894

Total segment expenses
 
140,970

 
150,163

 
416,619

 
464,077

Net segment (loss) profit
 
 
 
 
 
 
 
 
Oil and Gas
 
(6,915
)
 
(6,986
)
 
(19,281
)
 
(17,813
)
Air Medical
 
16,024

 
14,864

 
31,197

 
39,193

Technical Services
 
88

 
52

 
2,674

 
3,788

Total net segment profit
 
9,197

 
7,930

 
14,590

 
25,168

 
 
 
 
 
 
 
 
 
Other, net (3)
 
710

 
377

 
2,471

 
5,425

Unallocated selling, general and administrative costs (1)
 
(6,779
)
 
(8,354
)
 
(23,878
)
 
(22,938
)
Interest expense
 
(8,027
)
 
(7,719
)
 
(24,305
)
 
(22,792
)
(Loss) earnings before income taxes
 
$
(4,899
)
 
$
(7,766
)
 
$
(31,122
)
 
$
(15,137
)

(1)
 Included in direct expenses and unallocated selling, general, and administrative costs are the depreciation and amortization expense amounts below:
 
 
Depreciation and Amortization Expense
 
 
Quarter Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Thousands of dollars)
Segment Direct Expense:
 
 
 
 
 
 
 
 
Oil and Gas
 
$
9,615

 
$
10,616

 
$
29,301

 
$
30,558

Air Medical
 
4,885

 
5,267

 
15,581

 
14,654

Technical Services
 
146

 
141

 
440

 
426

Total
 
$
14,646

 
$
16,024

 
$
45,322

 
$
45,638

Unallocated SG&A
 
$
1,936

 
$
2,269

 
$
5,271

 
$
7,416

(2)
Includes Equity in (earnings) of unconsolidated affiliates, net.
(3)
Consists of (gains) losses on disposition of property and equipment and other income.



18


11. INVESTMENT IN VARIABLE INTEREST ENTITY AND OTHER INVESTMENTS AND AFFILIATES
We account for our investment in certain international operations as variable interest entities, which is defined as an entity that either (a) has insufficient equity to permit the entity to finance its operations without additional subordinated financial support or (b) has equity investors who lack the characteristics of a controlling financial interest.

PHI Century Limited - As of September 30, 2017, we had a 49% investment in the common stock of PHI Century Limited (“PHIC”), a Ghanaian entity. We acquired our 49% interest on May 26, 2011, PHIC’s date of incorporation. The purpose of PHIC is to provide oil and gas flight services in Ghana and the West African region. For the quarter ended September 30, 2017, we recorded income in equity of this unconsolidated affiliate of $0.1 million compared to a loss of $0.2 million for the quarter ended September 30, 2016 relative to our 49% equity ownership. For the nine months ended September 30, 2017 and 2016, we recorded a loss in equity of this unconsolidated affiliate of $1.0 million and $0.3 million relative to our 49% equity ownership, respectively. We had $3.6 million and $2.0 million of trade receivables as of September 30, 2017 and December 31, 2016, respectively, from PHIC. Our investment in the common stock of PHIC is included in Other Assets on our Condensed Consolidated Balance Sheets and was $0.4 million and $0.2 million at September 30, 2017 and December 31, 2016, respectively.

PHI-HNZ Australia Ltd - In the fourth quarter of 2016, the Company and HNZ Group, Inc. ("HNZ") jointly formed PHI-HNZ Australia Pty Ltd. ("PHI-HNZ"), a legal entity held 50% by PHI, Inc. and 50% by HNZ, to provide helicopter transportation services in support of a gas development project offshore of western Australia. PHI-HNZ began operations in April, 2017. For the quarter ended September 30, 2017, we recorded $0.5 million of income in equity of this unconsolidated affiliate. For the nine months ended September 30, 2017, we recorded a loss in equity of unconsolidated affiliate of $0.5 million, primarily related to startup costs associated with the contract. We had $5.9 million of trade receivables as of September 30, 2017 from PHI-HNZ. Our investment in common stock of PHI-HNZ is included in other long-term liabilities on our Consolidated Balance Sheets and was $(0.5) million at September 30, 2017.
12. OTHER COMPREHENSIVE INCOME
Amounts reclassified from Accumulated other comprehensive income are not material and, therefore, not presented separately in the Condensed Consolidated Statements of Comprehensive Income.
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
As discussed further in Note 5, on March 17, 2014, PHI, Inc. issued $500.0 million aggregate principal amount of 5.25% Senior Notes due 2019 that are fully and unconditionally guaranteed on a joint and several, senior basis by all of PHI, Inc.’s domestic subsidiaries. PHI, Inc. directly or indirectly owns 100% of all of its domestic subsidiaries.

The supplemental condensed financial information on the following pages sets forth, on a consolidated basis, the balance sheet, statement of operations, statement of comprehensive income, and statement of cash flows information for PHI, Inc. (“Parent Company”) the guarantor subsidiaries and the non-guarantor subsidiaries, each under separate headings (except for periods ending on or before December 31, 2016, in which case such information for the guarantor and non-guarantor subsidiaries is presented together). The eliminating entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenues and expenses. The condensed consolidating financial statements have been prepared on the same basis as the consolidated financial statements of PHI, Inc. The equity method is followed by the Parent Company within the financial information presented below.

The transactions reflected in “Due to/from affiliates, net” in the following condensed consolidated statements of cash flows primarily consist of centralized cash management activities between PHI, Inc. and its subsidiaries, pursuant to which cash earned by the guarantor subsidiaries is regularly transferred to PHI, Inc. to be centrally managed. Because these balances are treated as short-term borrowings of the Parent Company, serve as a financing and cash management tool to meet our short-term operating needs, turn over quickly and are payable to the guarantor subsidiaries on demand, we present borrowings and repayments with our affiliates on a net basis within the condensed consolidating statement of cash flows. Net receivables from our affiliates are considered advances and net payables to our affiliates are considered borrowings, and both changes are presented as financing activities in the following condensed consolidating statements of cash flows.

Due to the growth of our international affiliates in Trinidad and Australia which no longer qualify as minor subsidiaries under regulation S-X 210.3-10(h)6, we began reporting all of our non-guarantors subs in a separate column beginning with the quarter ended June 30, 2017.

19


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
 
 
 
September 30, 2017
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
Cash
 
$
50

 
$
1,071

 
$
1,870

 
$

 
$
2,991

Short-term investments
 
204,036

 

 

 

 
204,036

Accounts receivable – net
 
77,061

 
71,727

 
14,721

 
(10,772
)
 
152,737

Intercompany receivable
 

 
120,376

 

 
(120,376
)
 

Inventories of spare parts – net
 
70,617

 
8,628

 

 

 
79,245

Prepaid expenses
 
9,916

 
1,948

 
142

 

 
12,006

Deferred income taxes
 
10,798

 

 

 

 
10,798

Income taxes receivable
 
500

 
9

 

 

 
509

Total current assets
 
372,978

 
203,759

 
16,733

 
(131,148
)
 
462,322

 
 
 
 
 
 
 
 
 
 
 
Investment in subsidiaries
 
390,840

 

 

 
(390,840
)
 

Property and equipment – net
 
621,885

 
287,841

 
601

 

 
910,327

Restricted cash and investments
 
12,381

 

 
15

 

 
12,396

Other assets
 
8,076

 
956

 

 

 
9,032

Total assets
 
$
1,406,160

 
$
492,556

 
$
17,349

 
$
(521,988
)
 
$
1,394,077

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
26,587

 
$
3,557

 
$
11,235

 
$
(10,772
)
 
$
30,607

Accrued and other current liabilities
 
22,198

 
9,961

 
1,544

 

 
33,703

Intercompany payable
 
112,015

 

 
8,361

 
(120,376
)
 

Total current liabilities
 
160,800

 
13,518

 
21,140

 
(131,148
)
 
64,310

 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
598,182

 

 

 

 
598,182

Deferred income taxes and other long-term liabilities
 
65,117

 
83,891

 
516

 

 
149,524

Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
Common stock and paid-in capital
 
308,634

 
77,951

 
1,375

 
(79,326
)
 
308,634

Accumulated other comprehensive loss
 
(244
)
 

 

 

 
(244
)
Retained earnings
 
273,671

 
317,196

 
(5,682
)
 
(311,514
)
 
273,671

Total shareholders’ equity
 
582,061

 
395,147

 
(4,307
)
 
(390,840
)
 
582,061

Total liabilities and shareholders’ equity
 
$
1,406,160

 
$
492,556

 
$
17,349

 
$
(521,988
)
 
$
1,394,077

 








20


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars) 
 
 
December 31, 2016
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries 
(1)
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
Cash
 
$
36

 
$
2,560

 
$

 
$
2,596

Short-term investments
 
289,806

 

 

 
289,806

Accounts receivable – net
 
71,458

 
66,807

 

 
138,265

Intercompany receivable
 

 
57,904

 
(57,904
)
 

Inventories of spare parts – net
 
61,834

 
8,568

 

 
70,402

Prepaid expenses
 
6,990

 
2,269

 

 
9,259

Deferred income taxes
 
10,798

 

 

 
10,798

Income taxes receivable
 
558

 
(18
)
 

 
540

Total current assets
 
441,480

 
138,090

 
(57,904
)
 
521,666

 
 
 
 
 
 
 
 
 
Investment in subsidiaries and others
 
353,160

 

 
(353,160
)
 

Property and equipment – net
 
589,104

 
314,873

 

 
903,977

Restricted investments
 
13,023

 
15

 

 
13,038

Other assets
 
8,660

 
1,099

 

 
9,759

Total assets
 
$
1,405,427

 
$
454,077

 
$
(411,064
)
 
$
1,448,440

 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
22,744

 
$
5,960

 
$

 
$
28,704

Accrued and other current liabilities
 
18,725

 
9,621

 

 
28,346

Intercompany payable
 
57,904

 

 
(57,904
)
 

Total current liabilities
 
99,373

 
15,581

 
(57,904
)
 
57,050

 
 
 
 
 
 
 
 
 
Long-term debt
 
631,247

 

 

 
631,247

Deferred income taxes and other long-term liabilities
 
75,029

 
85,336

 

 
160,365

Shareholders’ Equity:
 
 
 
 
 
 
 
 
Common stock and paid-in capital
 
305,815

 
79,191

 
(79,191
)
 
305,815

Accumulated other comprehensive loss
 
(478
)
 

 

 
(478
)
Retained earnings
 
294,441

 
273,969

 
(273,969
)
 
294,441

Total shareholders’ equity
 
599,778

 
353,160

 
(353,160
)
 
599,778

Total liabilities and shareholders’ equity
 
$
1,405,427

 
$
454,077

 
$
(411,064
)
 
$
1,448,440

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













21


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited) 
 
 
For the Quarter Ended September 30, 2017
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Operating revenues, net
 
$
79,644

 
$
70,692

 
$
7,784

 
$
(7,953
)
 
$
150,167

Expenses:
 
 
 
 
 
 
 
 
 
 
Direct expenses
 
83,727

 
51,247

 
9,765

 
(7,953
)
 
136,786

Selling, general and administrative expenses
 
8,240

 
3,141

 
24

 
(4
)
 
11,401

Total operating expenses
 
91,967

 
54,388

 
9,789

 
(7,957
)
 
148,187

(Gain) Loss on disposal of assets, net
 
(4
)
 

 

 

 
(4
)
Equity in (income) loss of unconsolidated affiliates, net
 
112

 

 
(550
)
 

 
(438
)
Operating (loss) income
 
(12,431
)
 
16,304

 
(1,455
)
 
4

 
2,422

Equity in net income of consolidated subsidiaries
 
(14,850
)
 

 

 
14,850

 

Interest expense
 
8,027

 

 

 

 
8,027

Other income, net
 
(709
)
 
(1
)
 

 
4

 
(706
)
 
 
(7,532
)
 
(1
)
 

 
14,854

 
7,321

(Loss) earnings before income taxes
 
(4,899
)
 
16,305

 
(1,455
)
 
(14,850
)
 
(4,899
)
Income tax (benefit) expense
 
(1,622
)
 

 

 

 
(1,622
)
Net (loss) earnings
 
$
(3,277
)
 
$
16,305

 
$
(1,455
)
 
$
(14,850
)
 
$
(3,277
)
 

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
 
 
For the Quarter Ended September 30, 2016
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries 
(1)
 
Eliminations
 
Consolidated
Operating revenues, net
 
$
79,532

 
$
78,561

 
$

 
$
158,093

Expenses:
 
 
 
 
 
 
 
 
Direct expenses
 
83,188

 
61,750

 

 
144,938

Selling, general and administrative expenses
 
10,639

 
3,092

 
(350
)
 
13,381

Total operating expenses
 
93,827

 
64,842

 
(350
)
 
158,319

Loss on disposal of assets, net
 
85

 

 

 
85

Equity in loss of consolidated affiliate
 
198

 

 

 
198

Operating (loss) income
 
(14,578
)
 
13,719

 
350

 
(509
)
Equity in net income of consolidated subsidiaries
 
(8,372
)
 

 
8,372

 

Interest expense
 
7,716

 
3

 

 
7,719

Other income, net
 
(812
)
 

 
350

 
(462
)
 
 
(1,468
)
 
3

 
8,722

 
7,257

(Loss) earnings before income taxes
 
(13,110
)
 
13,716

 
(8,372
)
 
(7,766
)
Income tax (benefit) expense
 
(8,143
)
 
5,344

 

 
(2,799
)
Net (loss) earnings
 
$
(4,967
)
 
$
8,372

 
$
(8,372
)
 
$
(4,967
)
(1)
 Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.


22


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)
 
 
For the Nine Months Ended September 30, 2017
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Operating revenues, net
 
$
228,973

 
$
197,022

 
$
15,987

 
$
(10,773
)
 
$
431,209

Expenses:
 
 
 
 
 
 
 
 
 
 
Direct expenses
 
238,669

 
155,434

 
16,920

 
(10,773
)
 
400,250

Selling, general and administrative expenses
 
29,265

 
9,296

 
144

 
(14
)
 
38,691

Total operating expenses
 
267,934

 
164,730

 
17,064

 
(10,787
)
 
438,941

Loss (gain) on disposal of assets, net
 
4

 
(1
)
 

 

 
3

Equity in loss (income) of unconsolidated affiliates, net
 
1,040

 

 
516

 

 
1,556

Operating (loss) income
 
(40,005
)
 
32,293

 
(1,593
)
 
14

 
(9,291
)
Equity in net income of consolidated subsidiaries
 
(32,093
)
 

 

 
32,093

 

Interest expense
 
24,283

 
22

 

 

 
24,305

Other income, net
 
(2,486
)
 
(2
)
 

 
14

 
(2,474
)
 
 
(10,296
)
 
20

 

 
32,107

 
21,831

(Loss) earnings before income taxes
 
(29,709
)
 
32,273

 
(1,593
)
 
(32,093
)
 
(31,122
)
Income tax (benefit) expense
 
(7,911
)
 
(1,413
)
 

 

 
(9,324
)
Net (loss) earnings
 
$
(21,798
)
 
$
33,686

 
$
(1,593
)
 
$
(32,093
)
 
$
(21,798
)
 

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
 
 
For the Nine Months Ended September 30, 2016
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries 
(1)
 
Eliminations
 
Consolidated
Operating revenues, net
 
$
260,766

 
$
228,479

 
$

 
$
489,245

Expenses:
 
 
 
 
 
 
 
 
Direct expenses
 
264,761

 
185,148

 

 
449,909

Selling, general and administrative expenses
 
28,914

 
8,766

 
(848
)
 
36,832

Total operating expenses
 
293,675

 
193,914

 
(848
)
 
486,741

Gain on disposal of assets, net
 
(3,854
)
 

 

 
(3,854
)
Equity in loss of unconsolidated affiliate
 
274

 

 

 
274

Operating (loss) income
 
(29,329
)
 
34,565

 
848

 
6,084

Equity in net income of consolidated subsidiaries
 
(20,462
)
 

 
20,462

 

Interest expense
 
22,762

 
30

 

 
22,792

Other income, net
 
(2,415
)
 
(4
)
 
848

 
(1,571
)
 
 
(115
)
 
26

 
21,310

 
21,221

(Loss) earnings before income taxes
 
(29,214
)
 
34,539

 
(20,462
)
 
(15,137
)
Income tax (benefit) expense
 
(19,592
)
 
14,077

 

 
(5,515
)
Net (loss) earnings
 
$
(9,622
)
 
$
20,462

 
$
(20,462
)
 
$
(9,622
)
(1)
 Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.


23


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Thousands of dollars)
(Unaudited) 
 
 
For the Quarter Ended September 30, 2017
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net (loss) earnings
 
$
(3,277
)
 
$
16,305

 
$
(1,455
)
 
$
(14,850
)
 
$
(3,277
)
Unrealized gain on short-term investments
 
41

 

 

 

 
41

Changes in pension plan asset and benefit obligation
 
(24
)
 

 

 

 
(24
)
Tax effect of the above-listed adjustments
 
(8
)
 

 

 

 
(8
)
Total comprehensive (loss) income
 
$
(3,268
)
 
$
16,305

 
$
(1,455
)
 
$
(14,850
)
 
$
(3,268
)






PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Thousands of dollars)
 
 
For the Quarter Ended September 30, 2016
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries
(1)
 
Eliminations
 
Consolidated
Net (loss) earnings
 
$
(4,967
)
 
$
8,372

 
$
(8,372
)
 
$
(4,967
)
Unrealized gain on short-term investments
 
(494
)
 

 

 
(494
)
Changes in pension plan asset and benefit obligations
 
1

 

 

 
1

Tax effect of the above-listed adjustments
 
178

 

 

 
178

Total comprehensive (loss) income
 
$
(5,282
)
 
$
8,372

 
$
(8,372
)
 
$
(5,282
)
(1)
 Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.


24


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Thousands of dollars)
(Unaudited) 
 
 
For the Nine Months Ended September 30, 2017
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net (loss) earnings
 
$
(21,798
)
 
$
33,686

 
$
(1,593
)
 
$
(32,093
)
 
$
(21,798
)
Unrealized gain on short-term investments
 
370

 

 

 

 
370

Changes in pension plan asset and benefit obligation
 
(2
)
 

 

 

 
(2
)
Tax effect of the above-listed adjustments
 
(134
)
 

 

 

 
(134
)
Total comprehensive (loss) income
 
$
(21,564
)
 
$
33,686

 
$
(1,593
)
 
$
(32,093
)
 
$
(21,564
)






PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Thousands of dollars)
 
 
For the Quarter Ended September 30, 2016
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries 
(1)
 
Eliminations
 
Consolidated
Net (loss) earnings
 
$
(9,622
)
 
$
20,462

 
$
(20,462
)
 
$
(9,622
)
Unrealized gain on short-term investments
 
523

 

 

 
523

Changes in pension plan asset and benefit obligations
 
3

 

 

 
3

Tax effect of the above-listed adjustments
 
(229
)
 

 

 
(229
)
Total comprehensive (loss) income
 
$
(9,325
)
 
$
20,462

 
$
(20,462
)
 
$
(9,325
)
(1)
 Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.


25


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 
 
 
For the Nine Months Ended September 30, 2017
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(43,328
)
 
$
33,670

 
$
7,790

 
$

 
$
(1,868
)
Investing activities:
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment
 
(49,227
)
 

 

 

 
(49,227
)
Proceeds from asset dispositions
 
21

 

 

 

 
21

Purchase of short-term investments
 
(268,525
)
 

 

 

 
(268,525
)
Proceeds from sale of short-term investments
 
354,250

 

 

 

 
354,250

Net cash provided by (used in) investing activities
 
36,519

 

 

 

 
36,519

Financing activities:
 
 
 
 
 
 
 
 
 
 
Proceeds from line of credit
 
99,150

 

 

 

 
99,150

Payments on line of credit
 
(133,150
)
 

 

 

 
(133,150
)
Repurchase of common stock
 
(256
)
 

 

 

 
(256
)
Due to/from affiliate, net
 
41,079

 
(34,699
)
 
(6,380
)
 

 

Net cash provided by (used in) financing activities
 
6,823

 
(34,699
)
 
(6,380
)
 

 
(34,256
)
Increase (decrease) in cash
 
14

 
(1,029
)
 
1,410

 

 
395

Cash, beginning of period
 
36

 
2,100

 
460

 

 
2,596

Cash, end of period
 
$
50

 
$
1,071

 
$
1,870

 
$

 
$
2,991

 

26


PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
 
 
For the Nine Months Ended September 30, 2016
 
 
Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries 
(1)
 
Eliminations
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(32,467
)
 
$
25,319

 
$

 
$
(7,148
)
Investing activities:
 
 
 
 
 
 
 
 
Purchase of property and equipment
 
(74,647
)
 
(303
)
 

 
(74,950
)
Proceeds from asset dispositions
 
13,233

 

 

 
13,233

Purchase of short-term investments
 
(263,204
)
 

 

 
(263,204
)
Proceeds from sale of short-term investments
 
259,322

 

 

 
259,322

Payments of deposits on aircraft
 
(197
)
 

 

 
(197
)
Loan to unconsolidated affiliate
 
(1,200
)
 

 

 
(1,200
)
Net cash used in investing activities
 
(66,693
)
 
(303
)
 

 
(66,996
)
Financing activities:
 
 
 
 
 
 
 
 
Proceeds from line of credit
 
213,900

 

 

 
213,900

Payments on line of credit
 
(139,000
)
 

 

 
(139,000
)
Repurchase of common stock
 
(524
)
 

 

 
(524
)
Due to/from affiliate, net
 
24,774

 
(24,774
)
 

 

Net cash provided by (used in) financing activities
 
99,150

 
(24,774
)
 

 
74,376

(Decrease) increase in cash
 
(10
)
 
242

 

 
232

Cash, beginning of period
 
46

 
2,361

 

 
2,407

Cash, end of period
 
$
36

 
$
2,603

 
$

 
$
2,639

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


27


14.    SUBSEQUENT EVENT
On October 30, 2017, we entered into an arrangement agreement with HNZ Group Inc. (“HNZ”), 2075568 Alberta ULC (the "Canadian Purchaser”), and Don E. Wall. Under this agreement, the Canadian Purchaser had agreed to (i) acquire 100% of the capital stock of HNZ, with a portion of the purchase price funded with the proceeds of CAN$167.5 million of term loans from us (collectively, the “PHI Loan”), and (ii) sell to us HNZ’s offshore aviation services business in New Zealand, Australia, the Philippines and Papua New Guinea (the “Offshore Business”) as payment of most of the amount owed under the PHI Loan. The balance of the PHI Loan is expected to be repaid on or prior to December 31, 2019 or at such other time as mutually agreed between us and the Canadian Purchaser.

Completion of the transactions contemplated under the arrangement agreement is subject to various closing conditions, including receipt of HNZ shareholder approval and certain court approvals. Subject to these conditions, we currently anticipate acquiring the Offshore Business by the end of January 2018.

If the arrangement agreement is terminated under certain circumstances, HNZ may be obligated to make certain termination payments, including a termination fee of CAN$6.5 million payable to us.
Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with (i) the accompanying unaudited condensed consolidated financial statements and the notes thereto (the “Notes”) and (ii) our Annual Report on Form 10-K for the year ended December 31, 2016, including the audited consolidated financial statements and notes thereto, management’s discussion and analysis, and the risk factor disclosures contained therein.
Special Note Regarding Forward-Looking Statements

All statements other than statements of historical fact contained in this Form 10-Q and other periodic reports filed by PHI, Inc. (“PHI” or the “Company” or “we,” “us” or “our”) under the Securities Exchange Act of 1934, and other written or oral statements made by it or on its behalf, are “forward-looking statements,” as defined by (and subject to the “safe harbor” protections under) the federal securities laws. When used herein, the words “anticipates,” “expects,” “believes,” “goals,” “intends,” “plans,” “projects” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are based on a number of judgments and assumptions about future developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions on which they are based, (i) are not guarantees of future events, (ii) are inherently speculative and (iii) are subject to significant risks, uncertainties, and other factors that may cause our actual results to differ materially from the expectations, beliefs, and estimates expressed or implied in such forward-looking statements. Factors that could cause our results to differ materially from the expectations expressed or implied in such forward-looking statements include but are not limited to the following: the ability of the parties to timely and successfully receive the approvals of shareholders and governmental entities required to consummate the transactions contemplated by our October 30, 2017 agreement with HNZ discussed elsewhere herein; reduction in demand for our services due to volatility of oil and gas prices and the level of domestic and overseas exploration and production activity, which depends on several factors outside of our control; our dependence on a small number of customers for a significant amount of our revenue and our significant credit exposure within the oil and gas industry; any failure to maintain our strong safety record; our ability to secure favorable customer contracts or otherwise remain able to profitably deploy our existing fleet of aircraft; our ability to receive timely delivery of ordered aircraft and parts from a limited number of suppliers, and the availability of working capital, loans or lease financing to acquire such assets; the availability of adequate insurance; adverse changes in the value of our aircraft or our ability to sell them in the secondary markets; weather conditions and seasonal factors, including tropical storms and hurricanes; the effects of competition and changes in technology; the adverse impact of customers electing to terminate or reduce our services; the risk of work stoppages and other labor problems, the impact of current or future governmental regulations, including but not limited to the impact of new and pending regulation of healthcare, aviation safety and export controls; the special risks of our air medical operations, including collections risks and potential medical malpractice claims; political, economic, payment, regulatory and other risks and uncertainties associated with our international operations; our substantial indebtedness and operating lease commitments; the hazards associated with operating in an inherently risky business, including the possibility that regulators could ground our aircraft for extended periods of time or indefinitely; our ability to develop and implement successful business strategies; changes in fuel prices; changes in currency exchange rates; changes in our future cash requirements; environmental and litigation risks; the effects of more general factors, such as changes in interest rates, operating costs, tax rates, or general economic or geopolitical conditions; and other risks referenced in this and other annual, quarterly or current reports filed by us with the SEC. All of our above-described forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and the Risk Factors disclosures in our SEC filings. Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements. PHI undertakes no obligation to update publicly any forward-looking

28


statements, whether as a result of new information, future events, or otherwise. Further, we may change our business strategies and plans (including our capital spending plans) at any time and without notice, based on any changes in the above-listed factors, our assumptions or otherwise, any of which could or will affect our results.

29


Overview

As described further in Note 10, we are primarily a provider of helicopter transport services and derive most of our revenue from providing these services to the energy and medical industries. Our consolidated results of operations are principally driven by the following factors:

The level of offshore oil and gas exploration and production activities in the areas in which we operate, primarily in the Gulf of Mexico. Operating revenues from our Oil and Gas segment relate substantially to operations in the Gulf of Mexico. Many of the helicopters we have purchased recently are larger aircraft intended to service deepwater activities and the margins we earn on these aircraft are generally higher than on smaller aircraft. During periods when the level of offshore activity increases, demand for our offshore flight services typically increases, directly affecting our revenue and profitability. Also, during periods when deepwater offshore activity increases, the demand for our medium and heavy aircraft usually increases, creating a positive impact on revenue and earnings. Conversely, a reduction in offshore oil and gas activities generally, or deepwater offshore activity particularly, typically negatively impacts our aircraft utilization, flight volumes, and overall demand for our aircraft, thereby creating a negative impact on our revenue and earnings.

Patient transports and flight volume in our Air Medical segment. In the independent provider programs under our Air Medical segment, our revenue is directly dependent upon the number and length of patient transports provided in a given period, which is impacted primarily by the number of bases operated by us, competitive factors and weather. The volume of flight utilization of our aircraft by our customers under our traditional provider Air Medical programs also has a direct impact on the amount of revenue earned in a given period, although to a lesser degree than under our independent provider programs. Independent provider programs generated approximately 82%, 74%, 65% and 61% of our Air Medical segment revenues for the nine months ended September 30, 2017, and the years ended December 31, 2016, 2015 and 2014, respectively, with the balance of our Air Medical segment revenue attributable to our traditional provider programs.

Payor mix and reimbursement rates in our Air Medical segment. Under our independent provider programs, our revenue recognition, net of allowances, during any particular period is dependent upon the rate at which our various types of customers reimburse us for our Air Medical services, which we refer to as our “payor mix.” Reimbursement rates vary among payor types and typically the reimbursement rate of commercial insurers is higher than Medicare, Medicaid, and self-pay reimbursement rates. Moreover, Medicare and Medicaid reimbursement rates have decreased in recent years and our receipt of payments from these programs is subject to various regulatory and appropriations risks discussed in this and other of our periodic reports filed with the SEC. Changes during any particular period in our payor mix, reimbursement rates, or uncompensated care rates will have a direct impact on our revenues.

Direct expenses. Our business is capital-intensive and highly competitive. Salaries and aircraft maintenance comprise a large portion of our operating expenses. Our aircraft must be maintained to a high standard of quality and undergo periodic and routine maintenance procedures. Higher utilization of our aircraft will result in more frequent maintenance, resulting in higher maintenance costs. In periods of low flight activity, we continue to maintain our aircraft, consequently reducing our margins. In addition, we are also dependent upon pilots, mechanics, and medical crew to operate our business. To attract and retain qualified personnel, we must maintain competitive wages, which places downward pressure on our margins.

As noted above, the performance of our oil and gas operations is largely dependent upon the level of offshore oil and gas activities, which in turn is based largely on volatile commodity prices. See “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016. Since mid-2014, prevailing oil prices have been substantially lower than prices for several years before then. Consequently, several of our oil and gas customers have curtailed their exploration or production levels, lowered their capital expenditures, reduced their staffs or requested arrangements with vendors designed to reduce their operating costs, including flight sharing arrangements and alternative platform staffing rotations. As explained further below, these changes have negatively impacted our oil and gas operations since the first quarter of 2015. Over the course of the downturn, several of our offshore customers have requested reductions in the volume or pricing of our flight services or have re-bid existing contracts, all of which has further reduced our aircraft utilization rates and intensified pricing pressures. We believe that we may receive additional such requests in the future. These reductions could be quite substantial. For information on the impact of the market downturn on our liquidity, see “- Liquidity and Capital Resources - Cash Flow - Liquidity” below.

30


For several years our Air Medical affiliate received substantive benefits under its three-year service contract with a Middle East customer dated September 29, 2012. Pursuant to contact extensions, our Air Medical affiliate continued providing services at reduced levels for another year through September 30, 2016, when the contract expired. Consequently, since September 30, 2016, our overseas air medical revenues and operating costs have declined significantly as compared to prior periods. For additional information, see Note 3.

31


Results of Operations
The following tables present operating revenues, expenses, and earnings, along with certain non-financial operational statistics, for the quarter ended September 30, 2017 and 2016
 
 
Quarter Ended  
 September 30,
 
Favorable
(Unfavorable)
 
 
2017
 
2016
 
 
 
 
(Thousands of dollars, except flight hours,
patient transports, and aircraft)
Segment operating revenues, net
 
 
 
 
 
 
Oil and Gas
 
$
75,700

 
$
77,551

 
$
(1,851
)
Air Medical
 
70,280

 
74,482

 
(4,202
)
Technical Services
 
4,187

 
6,060

 
(1,873
)
Total operating revenues, net
 
150,167

 
158,093

 
(7,926
)
Segment direct expenses (1)
 
 
 
 
 
 
Oil and Gas (2)
 
81,467

 
82,832

 
1,365

Air Medical
 
51,120

 
56,562

 
5,442

Technical Services
 
3,761

 
5,742

 
1,981

Total segment direct expenses
 
136,348

 
145,136

 
8,788

Segment selling, general and administrative expenses
 
 
 
 
 
 
Oil and Gas
 
1,148

 
1,705

 
557

Air Medical
 
3,136

 
3,056

 
(80
)
Technical Services
 
338

 
266

 
(72
)
Total segment selling, general and administrative expenses
 
4,622

 
5,027

 
405

Total segment expenses
 
140,970

 
150,163

 
9,193

Net segment (loss) profit
 
 
 
 
 
 
Oil and Gas
 
(6,915
)
 
(6,986
)
 
71

Air Medical
 
16,024

 
14,864

 
1,160

Technical Services
 
88

 
52

 
36

Total net segment profit (2)
 
9,197

 
7,930


1,267

 
 
 
 
 
 
 
Other, net (3)
 
710

 
377

 
333

Unallocated selling, general and administrative costs (4)
 
(6,779
)
 
(8,354
)
 
1,575

Interest expense
 
(8,027
)
 
(7,719
)
 
(308
)
(Loss) earnings before income taxes
 
(4,899
)
 
(7,766
)
 
2,867

Income tax benefit
 
(1,622
)
 
(2,799
)
 
(1,177
)
Net loss
 
$
(3,277
)
 
$
(4,967
)
 
$
1,690

 
 
 
 
 
 
 
Flight hours:
 
 
 
 
 
 
Oil and Gas
 
21,178

 
19,583

 
1,595

Air Medical (5)
 
9,743

 
9,681

 
62

Technical Services
 

 
14

 
(14
)
Total
 
30,921

 
29,278

 
1,643

 
 
 
 
 
 
 
Air Medical Transports (6)
 
5,162

 
5,156

 
6

 


32


(1)
Includes Equity in (income) of unconsolidated affiliates, net.
(2)
These financial measures have not been prepared in accordance with generally accepted accounting principles (“GAAP”) and have not been audited or reviewed by our independent registered public accounting firm. These financial measures are therefore considered non-GAAP financial measures. Management believes these non-GAAP financial measures provide meaningful supplemental information regarding our results of operations. A description of the adjustments to and reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures is as follows:
 
 
Quarter Ended  
 September 30,
 
 
2017
 
2016
Total net segment profit
 
$
9,197

 
$
7,930

Other, net
 
710

 
377

Unallocated selling, general and administrative costs
 
(6,779
)
 
(8,354
)
Interest expense
 
(8,027
)
 
(7,719
)
(Loss) before income taxes
 
$
(4,899
)
 
$
(7,766
)
(3)
Consists of net (gains) losses on disposition of property and equipment, and other income.
(4)
Represents corporate overhead expenses not allocable to segments.
(5)
Flight hours include 2,283 flight hours associated with traditional provider contracts during the third quarter of 2017, compared to 2,550 flight hours in the prior year quarter.
(6)
Represents individual patient transports for the period.










































33


The following tables present operating revenues, expenses, and earnings, along with certain non-financial operational statistics, for the nine months ended September 30, 2017 and 2016.

 
 
Nine Months Ended 
 September 30,
 
Favorable
(Unfavorable)
 
 
2017
 
2016
 
 
 
 
(Thousands of dollars, except flight hours,
patient transports, and aircraft)
Segment operating revenues, net
 
 
 
 
 
 
Oil and Gas
 
$
222,098

 
$
249,173

 
$
(27,075
)
Air Medical
 
192,840

 
220,089

 
(27,249
)
Technical Services
 
16,271

 
19,983

 
(3,712
)
Total operating revenues, net
 
431,209

 
489,245

 
(58,036
)
Segment direct expenses (1)
 
 
 
 
 
 
Oil and Gas (2)
 
236,878

 
262,148

 
25,270

Air Medical
 
152,363

 
172,603

 
20,240

Technical Services
 
12,565

 
15,432

 
2,867

Total segment direct expenses
 
401,806

 
450,183

 
48,377

Segment selling, general and administrative expenses
 
 
 
 
 
 
Oil and Gas
 
4,501

 
4,838

 
337

Air Medical
 
9,280

 
8,293

 
(987
)
Technical Services
 
1,032

 
763

 
(269
)
Total segment selling, general and administrative expenses
 
14,813

 
13,894

 
(919
)
Total segment expenses
 
416,619

 
464,077

 
47,458

Net segment (loss) profit
 
 
 
 
 
 
Oil and Gas
 
(19,281
)
 
(17,813
)
 
(1,468
)
Air Medical
 
31,197

 
39,193

 
(7,996
)
Technical Services
 
2,674

 
3,788

 
(1,114
)
Total net segment profit
 
14,590

 
25,168

 
(10,578
)
 
 
 
 
 
 
 
Other, net (3)
 
2,471

 
5,425

 
(2,954
)
Unallocated selling, general and administrative costs (4)
 
(23,878
)
 
(22,938
)
 
(940
)
Interest expense
 
(24,305
)
 
(22,792
)
 
(1,513
)
(Loss) earnings before income taxes
 
(31,122
)
 
(15,137
)
 
(15,985
)
Income tax benefit
 
(9,324
)
 
(5,515
)
 
3,809

Net loss
 
$
(21,798
)
 
$
(9,622
)
 
$
(12,176
)
 
 
 
 
 
 
 
Flight hours:
 
 
 
 
 
 
Oil and Gas
 
58,335

 
61,043

 
(2,708
)
Air Medical (5)
 
27,787

 
27,889

 
(102
)
Technical Services
 
511

 
546

 
(35
)
Total
 
86,633

 
89,478

 
(2,845
)
 
 
 
 
 
 
 
Air Medical Transports (6)
 
14,580

 
14,482

 
98

 
 
 
 
 
 
 
Aircraft operated at period end: (7)
 
 
 
 
 
 
Oil and Gas
 
126

 
139

 
 
Air Medical (8)
 
105

 
104

 
 
Technical Services
 
6

 
6

 
 
Total
 
237

 
249

 
 



34


(1)
Includes Equity in loss of unconsolidated affiliates, net.
(2)
These financial measures have not been prepared in accordance with generally accepted accounting principles (“GAAP”) and have not been audited or reviewed by our independent registered public accounting firm. These financial measures are therefore considered non-GAAP financial measures. Management believes these non-GAAP financial measures provide meaningful supplemental information regarding our results of operations. A description of the adjustments to and reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures is as follows:
 
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
Total net segment profit
 
$
14,590

 
$
25,168

Other, net
 
2,471

 
5,425

Unallocated selling, general and administrative costs
 
(23,878
)
 
(22,938
)
Interest expense
 
(24,305
)
 
(22,792
)
Loss before income taxes
 
$
(31,122
)
 
$
(15,137
)
(3)
Consists of net (gains) losses on disposition of property and equipment, and other income.
(4)
Represents corporate overhead expenses not allocable to segments.
(5)
Flight hours include 6,877 flight hours associated with traditional provider contracts during the nine months ended September 30, 2017, compared to 7,279 flight hours during the prior period year.
(6)
Represents individual patient transports for the period.
(7)
Represents the total number of aircraft available for use, not all of which were deployed in service as of the date indicated.
(8)
Includes 6 aircraft as of September 30, 2017 that were owned or leased by customers but operated by us.













35


Quarter Ended September 30, 2017 compared with Quarter Ended September 30, 2016

Combined Operations

Operating Revenues - Operating revenues for the three months ended September 30, 2017 were $150.2 million, compared to $158.1 million for the three months ended September 30, 2016, a decrease of $7.9 million. Oil and Gas segment operating revenues decreased $1.9 million for the three months ended September 30, 2017, related primarily to decreased aircraft flight revenues for medium and heavy aircraft models. These decreases resulted predominately from fewer aircraft on contract, decreased flight hours for our medium aircraft models and decreased rates for our heavy aircraft models. Air Medical segment operating revenues decreased $4.2 million due principally to decreased traditional provider program revenues resulting from the termination of our overseas operations in late 2016, offset by an increase in revenue from our independent provider operations related to improve cash collections and lower allowances for doubtful accounts. Technical Services segment operating revenues decreased $1.9 million due primarily to a decrease in technical services provided to a third party customer.

Total flight hours for the three months ended September 30, 2017 were 30,921 compared to 29,278 for the three months ended September 30, 2016. Oil and Gas segment flight hours increased 1,595 hours, due to an increase in flight hours for light and heavy aircraft models, partially offset by a decrease in flight hours for our medium aircraft model. Air Medical segment flight hours increased 62 hours for the three months ended September 30, 2017, due to increased flight hours in our independent provider operations, partially offset by the decrease in flight hours due to the termination of our overseas operations. As discussed further below, individual patient transports in the Air Medical segment were 5,162 for the three months ended September 30, 2017, compared to transports of 5,156 for the three months ended September 30, 2016.

Direct Expenses - Direct operating expense was $136.3 million for the three months ended September 30, 2017, compared to $145.1 million for the three months ended September 30, 2016, a decrease of $8.8 million, or 6.0%. Employee compensation expense decreased $5.8 million primarily due to a reduction in employees in our Oil and Gas segment and a reduction in the number of employees in our Air Medical segment’s Middle East operations. Employee compensation expense represented approximately 44% and 46% of total direct expense for the quarters ended September 30, 2017 and 2016, respectively. We experienced an increase in aircraft warranty costs of $2.5 million as a result of increased flight hours for our heavy aircraft in our international operations. Costs of goods sold decreased $4.9 million due to the termination of our above-referenced Middle East operations and due to a reduction in services for a third party technical services customer. Aircraft lease expense decreased $1.0 million, spare parts expense decreased $1.4 million and aircraft component repair expense increased $1.6 million. Other items increased $0.2 million, net.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $11.4 million for the three months ended September 30, 2017, compared to $13.4 million for the three months ended September 30, 2016. The $2.0 million decrease was principally attributable to a $1.5 million of savings related to 2016 charges for aircraft lease returns that did not recur in 2017. The $2.0 is further attributable to a $0.2 million decrease in bad debt reserves and a $0.2 million decrease in equity-based compensation expense. Other items decreased $0.1 million, net.

Loss/Gain on Disposal of Assets, Net - The gain on asset dispositions for the three months ended September 30, 2017 was less than $0.1 million. For the three months ended September 30, 2016, we recorded a loss of less than $0.1 million.

Equity in (Income) Loss of Unconsolidated Affiliates - Equity in the loss of our unconsolidated affiliate attributable to our investment in a Ghanaian entity was $0.1 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively. We also had equity in the income of our unconsolidated Australian affiliate of $0.5 million for the three months ended September 30, 2017. Our Australia affiliate commenced operations in April, 2017. See Note 11.

Interest Expense - Interest expense was $8.0 million for the three months ended September 30, 2017 and $7.7 million for the three months ended September 30, 2016. The $0.3 million increase is principally due to higher average outstanding debt balances.

Other Income, Net - Other income was $0.7 million for the three months ended September 30, 2017 compared to $0.5 million for the same period in 2016, and represents primarily interest income.

Income Taxes - Income tax benefit for the three months ended September 30, 2017 was $1.6 million compared to income tax benefit of $2.8 million for the three months ended September 30, 2016. Our $1.6 million income tax benefit for the quarter ended September 30, 2017 is attributable to our net loss from operations of $4.9 million. Our effective tax rate was 33% and 36% for the quarter ended September 30, 2017 and September 30, 2016, respectively.


36


Net (Loss) Earnings - Net loss for three months ended September 30, 2017 was $3.3 million compared to net loss of $5.0 million for the three months ended September 30, 2016. Loss before income taxes for the three months ended September 30, 2017 was $4.9 million compared to loss before income taxes of $7.8 million for the same period in 2016. Loss per diluted share was $0.21 for the current quarter compared to loss per diluted share of $0.32 for the prior year quarter. The decrease in loss before taxes for the quarter ended September 30, 2017 is attributable to a reduction in expenses in comparison to the third quarter of 2016, mentioned above. We had 15.8 million, and 15.7 million weighted average diluted common shares outstanding for the quarter ended September 30, 2017 and 2016, respectively.
Segment Discussion

Oil and Gas - Oil and Gas segment revenues were $75.7 million for the three months ended September 30, 2017, compared to $77.6 million for the three months ended September 30, 2016, a decrease of $1.9 million. Our Oil and Gas segment revenues are primarily driven by the amount of contracted aircraft flight hours and prevailing rates. Costs are primarily fixed based on the number of aircraft operated, with a variable portion that is driven by flight hours.

Oil and Gas segment flight hours were 21,178 for the most recent quarter compared to 19,583 for the same quarter in the prior year, an increase of 1,595 flight hours. The decline in revenues is attributable to fewer aircraft on contract, lower utilization rates for medium aircraft models and a decrease in the number of heavy aircraft on contract, in each case due to reduced oil and gas exploration and production activities in response to lower prevailing commodity prices. Partially offsetting the decrease in revenue from our heavy and medium model types were increased revenues and flight hours from our light model types due to increased activity in the shallow waters of the Gulf of Mexico.

The number of aircraft available for use in the segment was 127 at September 30, 2017, compared to 139 at September 30, 2016. We have disposed of seven light and nine medium aircraft in the Oil and Gas segment since September 30, 2016. We also purchased two light aircraft in the Oil and Gas segment since September 30, 2016. Transfers between segments account for the remainder.

Direct expense in our Oil and Gas segment was $81.5 million for the three months ended September 30, 2017, compared to $82.8 million for the three months ended September 30, 2016, a decrease of $1.3 million. Employee compensation expense decreased $3.0 million due to a reduction in employees. Aircraft lease expense decreased $.8 million due to fewer aircraft on lease. Gains or losses in the equity of our unconsolidated affiliates improved $0.6 million due to the April commencement of our Australian operations. We experienced an increase in aircraft warranty costs of $2.2 million as a result of increased flight hours for our heavy aircraft for our international operations. Aircraft component repairs increased $1.1 million. Other items decreased $0.2 million, net.

Selling, general and administrative segment expenses were $1.1 million for the three months ended September 30, 2017 and $1.7 million for the three months ended September 30, 2016.

Oil and Gas segment loss was $6.9 million for the three months ended September 30, 2017, compared to a loss of $7.0 million for the three months ended September 30, 2016. The $0.1 million decrease in segment loss is attributable to a $2.0 million decrease in expenses, partially offset by the $1.9 million decrease in revenues.

Air Medical - Air Medical segment revenues were $70.2 million for the three months ended September 30, 2017, compared to $74.5 million for the three months ended September 30, 2016. This decrease of $4.3 million is primarily attributable to decreased traditional provider program revenues resulting from the termination of our overseas operations (as discussed further below), partially offset by an increase in revenue from our independent provider operations related to improved cash collections and lower allowances for doubtful accounts. Patient transports were 5,162 for the three months ended September 30, 2017, compared to 5,156 for the same period in the prior year.

The number of aircraft available for use in the segment was 104 at September 30, 2017 and September 30, 2016. Since September 30, 2016 our Air Medical segment has received two light aircraft transferred from our Oil & Gas segment. These additions were offset by our sale or disposition of two medium aircraft in the Air Medical segment since such date.

Direct expense in our Air Medical segment was $51.1 million for the three months ended September 30, 2017, compared to $56.6 million for the three months ended September 30, 2016, a decrease of $5.5 million. Employee compensation costs decreased $3.0 million due to a reduction in personnel primarily relating to the termination of our 2012 Middle East contract. Cost of goods sold decreased $1.4 million related to certain items that were previously billed on a cost plus basis under our former Middle East contract. Helicopter rent decreased $0.1 million due to fewer aircraft on lease, aircraft parts cost decreased $0.8 million, and aircraft warranty costs decreased $0.1 million.


37


Selling, general and administrative segment expenses were $3.1 million for both the three months ended September 30, 2017 and the three months ended September 30, 2016.

Air Medical segment profit was $16.0 million for the three months ended September 30, 2017, compared to a segment profit of $14.9 million for the three months ended September 30, 2016. The $1.1 million increase in profit is primarily attributable to increased revenues and profit from our independent provider programs, partially offset by decreased revenues and profits from our traditional provider programs.

For several years our Air Medical affiliate received substantial benefits under its three-year service contract with a Middle East customer dated September 29, 2012. Pursuant to contract extensions, our Air Medical affiliate continued providing services at reduced levels for another year through September 30, 2016, when the contract expired. Consequently, since September 30, 2016, the overseas revenues and operating results of our Air Medical segment have declined significantly as compared to prior periods. For additional information, see Note 3.

Technical Services - Technical Services segment revenues were $4.1 million for the three months ended September 30, 2017, compared to $6.1 million for the three months ended September 30, 2016. The decrease in revenue is due primarily to a decrease of technical services provided to a third party customer whose service requirements typically vary from period to period. Direct expenses decreased $2.0 million compared to the prior year three months, principally due to the decreased operations. Technical Services segment earnings were less than $0.1 million for the three months ended September 30, 2017, and September 30, 2016, respectively.
    
For additional information on our segments, see Note 10.
Nine Months Ended September 30, 2017 compared with the Nine Months Ended September 30, 2016

Combined Operations

Operating Revenues - Operating revenues for the nine months ended September 30, 2017 were $431.2 million, compared to $489.2 million for the nine months ended September 30, 2016, a decrease of $58.0 million. Oil and Gas segment operating revenues decreased $27.1 million for the nine months ended September 30, 2017, related primarily to decreased aircraft flight revenues for all model types resulting predominately from fewer aircraft on contract, decreased flight hours for our medium and heavy aircraft, and decreased rates. Air Medical segment operating revenues decreased $27.2 million due principally to decreased traditional provider program revenues resulting from reduced overseas operations. This decrease was partially offset by increased revenues attributable to our independent provider programs and our U.S.-based traditional provider programs. Technical Services segment operating revenues decreased $3.7 million due to variations in the level of services provided to a third party customer under projects discussed further below.

Total flight hours for the nine months ended September 30, 2017 were 86,633 compared to 89,478 for the nine months ended September 30, 2016. Oil and Gas segment flight hours decreased 2,708 hours, due to decreases in flight hours for medium and heavy aircraft models. Air Medical segment flight hours decreased 102 hours compared to the same period in the prior year, primarily due to decreased flight hours in our overseas traditional provider program. Individual patient transports in the Air Medical segment were 14,580 for the nine months ended September 30, 2017, compared to 14,482 transports for the nine months ended September 30, 2016.

Direct Expenses - Direct operating expense was $401.8 million for the nine months ended September 30, 2017, compared to $450.2 million for the nine months ended September 30, 2016, a decrease of $48.4 million, or 10.8%. Employee compensation expense decreased $22.2 million due to a reduction in employees in our Oil and Gas and Air Medical segments. Employee compensation expense represented approximately 46% of total direct expense for the nine months ended September 30, 2017 and September 30, 2016. In addition, we experienced decreases in aircraft warranty costs of $9.3 million primarily due to a credit related to the cancellation of a warranty program on some of the medium aircraft fleet, and decreased flight hours. The cancellation of the warranty program resulted in a non-recurring credit of $9.8 million from the warranty provider, which is attributable to unused accumulated warranty payments for repair services that will not be utilized in the future. We also had decreases in component repair cost of $1.0 million and aircraft parts costs of $4.0 million (representing 6% and 4% of total direct expense, respectively), as a result of the reduction in flight hours. Costs of goods sold decreased $12.1 million due to fewer services provided to an external customer by our Technical Services segment, and a decrease in certain items that are billed on a cost plus basis in our Technical Services segment. Other items increased $0.2 million, net.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $38.7 million for the nine months ended September 30, 2017, compared to $36.8 million for the nine months ended September 30, 2016, an increase of $1.9

38


million. We incurred $3.2 million of severance costs related to reductions in force and $1.5 million of legal and consulting fees related to a special project. Partially offsetting these increases were decreases in equity-based compensation of $1.3 million and a decrease in bad debt reserve of $0.6 million, as well as a decrease of $1.5 million related to 2016 costs associated with aircraft lease returns. Other items increased $0.7 million, net.

Loss/Gain on Disposal of Assets, Net - Loss on asset dispositions was less than $0.1 million for the nine months ended September 30, 2017, compared to a gain of $3.9 million for the nine months ended September 30, 2016. In the nine months ended September 30, 2017, we disposed of six medium aircraft and related parts inventory utilized in the Oil and Gas segment that no longer met our strategic needs. In the nine months ended September 30, 2016, we sold nine light and three medium aircraft, along with spare parts inventory, that no longer met our strategic needs. See Note 8.

Equity in Loss of Unconsolidated Affiliates - Equity in the loss of our unconsolidated affiliate attributable to our investment in a Ghanaian entity was $1.0 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively. See Note 11. We also had equity in the income of our unconsolidated Australian affiliate of $0.5 million for the nine months ended September 30, 2017 primarily related to the startup of operations on a contract which began in April 2017. See Note 11.

Interest Expense - Interest expense was $24.3 million for the nine months ended September 30, 2017, compared to $22.8 million for the nine months ended September 30, 2017, principally due to higher average outstanding debt balances.

Other Income, Net - Other income was $2.5 million for the nine months ended September 30, 2017 compared to $1.6 million for the nine months ended September 30, 2016 and represents primarily interest income. The $0.9 million is primarily attributable to an increase related to interest earned on our investments.

Income Taxes - Income tax benefit for the nine months ended September 30, 2017 was $9.3 million compared to income tax benefit of $5.5 million for the nine months ended September 30, 2016. Our effective tax rate was 29.9% and 36.4% for the nine months ended September 30, 2017 and 2016, respectively. The $9.3 million income tax benefit recorded for the nine months ended September 30, 2017 includes a non-cash $1.5 million income tax deficit related to the permanent difference resulting from the difference between the book and tax deductions for equity-based compensation. The $5.5 million tax benefit recorded during the nine months ended September 30, 2016 is comprised of a $4.2 million tax benefit related to the impact of a change in Louisiana tax law which amends the manner in which profits are apportioned to the state of Louisiana for income tax reporting purposes, and a $5.4 million tax benefit relating our loss before income taxes, which were partially offset by recording a $4.1 million valuation allowance on certain state tax benefits related to net operating loss carryforwards. Absent these discrete adjustments, our effective tax rate was 34.9% and 35.6% for the nine months ended September 30, 2017 and 2016, respectively.

Net Loss - Net loss for the nine months ended September 30, 2017 was $21.8 million compared to net loss of $9.6 million for the nine months ended September 30, 2016. Loss before income taxes for the nine months ended September 30, 2017 was $31.1 million compared to a loss before income taxes of $15.1 million for the same period in 2016. Loss per diluted share was $1.38 for the nine months ended September 30, 2017 compared to a loss per diluted share of $0.61 for the prior year nine months. The decrease in earnings before taxes for the nine months ended September 30, 2017 is principally attributable to the decreased profits in all of our segments. We had 15.8 million and 15.7 million weighted average diluted common shares outstanding during the nine months ended September 30, 2017 and 2016, respectively.
Segment Discussion

Oil and Gas - Oil and Gas segment revenues were $222.1 million for the nine months ended September 30, 2017, compared to $249.2 million for the nine months ended September 30, 2016, a decrease of $27.1 million. Our Oil and Gas segment revenues are primarily driven by the amount of contracted aircraft, flight hours and prevailing rates. Costs are primarily fixed based on the number of aircraft operated, with a variable portion that is driven by flight hours.

Oil and Gas segment flight hours were 58,335 for the past nine months compared to 61,043 for the same nine months in the prior year, a decrease of 2,708 flight hours. The decline in flight hours is attributable to fewer aircraft on contract, lower utilization rates for all model types and decreased rates for our heavy aircraft models, in each case due to reduced oil and gas exploration and production activities in response to lower prevailing oil prices.

The number of aircraft available for use in the segment was 127 at September 30, 2017, compared to 139 at September 30, 2016. We have sold or disposed of three light and ten medium aircraft in the Oil and Gas segment since September 30, 2016. We also purchased two medium aircraft in the Oil and Gas segment since September 30, 2016. Transfers between segments accounted for the remainder.


39


Direct expense in our Oil and Gas segment was $236.9 million for the nine months ended September 30, 2017, compared to $262.1 million for the nine months ended September 30, 2016, a decrease of $25.2 million. Employee compensation expenses decreased $9.3 million due to a reduction in employees. There were also decreases in aircraft warranty costs of $8.5 million related to a credit due to the cancellation of a warranty program on some our medium aircraft fleet and a reduction in flight hours. The cancellation of this warranty program resulted in a non-recurring credit of $8.9 million from the warranty provider, which is attributable to unused accumulated warranty payments for repair services that will not be utilized in the future. Aircraft lease expense decreased $3.0 million due to fewer leased aircraft, insurance expense decreased $0.5 million, and spare parts decreased $3.7 million. Partially offsetting these decreased were increases in the losses from our unconsolidated affiliates of $1.3 million. Other items decreased $1.5 million, net.

Selling, general and administrative segment expenses were $4.5 million for the nine months ended September 30, 2017 and $4.8 million for the nine months ended September 30, 2016. The $0.3 million increase was primarily due to increased due to a $0.6 million decrease in bad debt reserves. Other items increased $0.3 million, net.

Oil and Gas segment loss was $19.3 million for the nine months ended September 30, 2017, compared to segment loss of $17.8 million for the nine months ended September 30, 2016. The decrease in segment profit was due to the decreased revenues detailed above, which were only partially offset by decreased warranty and other costs discussed above.

Air Medical - Air Medical segment revenues were $192.8 million for the nine months ended September 30, 2017, compared to $220.1 million for the nine months ended September 30, 2016, a decrease of $27.3 million. Operating revenues in our traditional provider programs decreased $30.8 million due to a $34.1 million reduction in revenue from our overseas operations, partially offset by a $3.3 million increase in revenues from our U.S.-based traditional provider programs. Revenues from our independent provider programs increased $4.0 million due to increases in cash collections. Patient transports were 14,580 for the nine months ended September 30, 2017, compared to 14,482 for the same period in the prior year. Other revenues decreased $0.4 million, net.

The number of aircraft available for use in the segment at September 30, 2017 and 2016 was 104. Since September 30, 2016, our Air Medical segment received two light aircraft transferred from our Oil and Gas segment, which were offset by our sale or disposition of two medium aircraft in the Air Medial segment since such date.

Direct expense in our Air Medical segment was $152.4 million for the nine months ended September 30, 2017, compared to $172.6 million for the nine months ended September 30, 2016, a decrease of $20.2 million. Employee compensation expenses decreased $8.8 million due to a reduction in personnel. There were also decreases in component repair costs of $1.7 million due to a decrease in scheduled maintenance for certain model types, and a decrease of $7.2 million in cost of goods sold related to certain items that were previously billed on a cost plus basis under our former Middle East contract. There was a decrease in aircraft warranty costs of $1.2 million, primarily due to a credit related to the cancellation of the above-described warranty program on some of our medium aircraft fleet. The cancellation of this warranty program resulted in a non-recurring credit of $1.0 million from the warranty provider, which is attributable to unused accumulated warranty payments for repair services that will not be utilized in the future. Helicopter rent decreased $0.7 million. Other items decreased $0.6 million, net.

Selling, general and administrative segment expenses were $9.2 million for the nine months ended September 30, 2017 and $8.3 million for the nine months ended September 30, 2016. The $0.9 million increase is primarily related to higher employee incentive compensation costs and increased legal fees.

Air Medical segment profit was $31.2 million for the nine months ended September 30, 2017, compared to a segment profit of $39.2 million for the nine months ended September 30, 2016. The decrease in profit is primarily attributable to the decreased revenues described above, partially offset by the decreased aircraft operating expenses described above.
 
Technical Services - Technical Services segment revenues were $16.3 million for the nine months ended September 30, 2017, compared to $20.0 million for the nine months ended September 30, 2016, a decrease of $3.7 million. The decrease in revenue is due primarily to a decrease of technical services provided to a third party customer whose service requirements typically vary from period to period. Direct expense decreased $2.9 million compared to the prior year nine months, principally due to the decreased operations. Technical Services segment profit was $2.7 million for the nine months ended September 30, 2017, compared to $3.8 million for the nine months ended September 30, 2016.
    
For additional information on our segments, see Note 10.


40


Liquidity and Capital Resources

General

Our ongoing liquidity requirements arise primarily from the purchase or leasing of aircraft, the maintenance and refurbishment of aircraft, the opening of new aircraft bases, the expansion or improvement of facilities, the acquisition of equipment and inventory, and other working capital needs. Our principal sources of liquidity historically have been net cash provided by our operations, borrowings under our revolving credit facility, and proceeds from periodic senior note offerings. To the extent we do not use cash, short-term investments or borrowings to finance our aircraft acquisitions, we frequently enter into sale-leaseback transactions to fund these acquisitions.

Historical Cash and Cash Flow Information

Liquidity - Our cash position was $3.0 million at September 30, 2017, compared to $2.6 million at December 31, 2016. Short-term investments were $204.0 million at September 30, 2017, compared to $289.8 million at December 31, 2016. We also had $12.4 million and $13.0 million in restricted investments at September 30, 2017 and December 31, 2016, respectively, securing outstanding letters of credit and a bond for foreign operations.

As noted in greater detail above, current weakness in the oil and gas industry has negatively impacted our offshore operations since the first quarter of 2015. These reductions have caused us to use a portion of our cash and cash equivalents (collectively, “cash assets”) to fund operations, including a 30% decrease in our short-term investments over the first nine months of 2017. Moreover, we intend to use some of our cash assets to finance our obligations under the HNZ acquisition transaction summarized below under the heading “- Impact of Pending HNZ Acquisition.” After accounting for the recent and anticipated depletion of our cash assets, we nonetheless believe we will continue to hold sufficient cash assets to support operations, especially since we continue to hold no debt coming due within one year of the date of this report. For these reasons, while we expect that our liquidity will be negatively impacted if the oil and gas industry further deteriorates, we expect based on current conditions to be able to fund operations over the next four quarters, although we can provide no assurances to this effect.

Operating Activities - Net cash used in operating activities was $1.9 million for the nine months ended September 30, 2017, compared to net cash used of $7.1 million for the same period in 2016, an improvement of $5.2 million. Cash receipts from customers were down $73.0 million when compared to the first nine months of last year. This decrease in cash receipts was due to a $27.1 million decrease in revenues from our Oil and Gas segment due to the downturn in the industry, and a $27.2 million decrease in revenues from our Air Medical segment due to the termination of the Middle East contract in late 2016, with the remaining variance attributable to timing of payments received for accounts receivable. The decrease in cash receipts was partially offset by a reduction in cash required for net payroll of $18.8 million due in part to a reduction in staff. The remaining offset of $54.2 million is attributable to a decrease in payments to vendors related to the decreased scope of operations.

Investing Activities - Net cash provided by investing activities was $36.5 million for the nine months ended September 30, 2017, compared to cash used by investing activities of $67.0 million for the same period in 2016. Net sales of short-term investments provided $85.7 million of cash during the nine months ended September 30, 2017, compared to $3.9 million used in the comparable prior year period. Gross proceeds from asset dispositions were less than $0.1 million during the nine months of 2017, compared to $13.2 million for the same period in 2016. Capital expenditures were $49.2 million for the nine months ended September 30, 2017, compared to $75.0 million for the same period in 2016. Capital expenditures for aircraft and aircraft improvements accounted for $45.1 million and $72.4 million of these totals for the nine months ended 2017 and 2016, respectively. During the second quarter of 2017, we purchased a heavy aircraft from a lessor and two medium aircraft. During the second quarter of 2016, we purchased a heavy aircraft that we took delivery of in the first quarter of 2016. During the third quarter of 2016, we purchased a heavy aircraft pursuant to a lease purchase option, purchased one light aircraft, and took delivery of one light aircraft that we purchased in the fourth quarter.

Financing Activities - Financing activities during the nine months of 2017 included net payments of $34.0 million on our revolving credit facility and $0.3 million used to repurchase shares of our non-voting common stock to satisfy withholding tax obligations of employees. Financing activities during the first nine months of 2016 included net borrowings of $74.9 million on our revolving credit facility and $0.5 million used to repurchase shares of our non-voting common stock to satisfy withholding tax obligations of employees.

For additional information on our cash flows, see our condensed consolidated statements of cash flows included in Item 1 of Part I of this report.



41


Long-Term Debt
As of September 30, 2017, we owed $600.0 million under our total long-term debt, consisting of $500.0 million principal amount of 5.25% Senior Notes due 2019 (excluding debt issuance costs) and $100.0 million borrowed under our revolving credit facility.

Revolving Credit Facility - We have an amended and restated revolving credit facility (our “credit facility”) that matures on October 1, 2018. Under our credit facility, we can borrow up to $150.0 million at floating interest rates based on either the London Interbank Offered Rate plus 225 basis points or the prime rate (each as defined in our credit facility), at our option. Our credit facility includes usual and customary covenants and events of default for credit facilities of its type. Our ability to borrow under the credit facility is conditioned upon our continued compliance with such covenants, including, among others, (i) covenants that restrict our ability to engage in certain asset sales, mergers or other fundamental changes, to incur liens or to engage in certain other transactions or activities and (ii) financial covenants that stipulate that PHI will maintain a consolidated working capital ratio of at least 2 to 1, a net funded debt to consolidated net worth ratio not greater than 1.5 to 1, a fixed charge coverage ratio of at least 1.1 to 1 if our short-term investments fall below $150.0 million, and consolidated net worth of at least $450.0 million (with all such terms or amounts as defined in or determined under our credit facility).

At September 30, 2017, we had $100.0 million in borrowings under our credit facility. At the same date in 2016, we had $132.4 million in borrowings under our credit facility. We also have outstanding letters of credit for $7.8 million issued under our credit facility that reduces the amount we can borrow under that facility.

Other - We maintain a separate letter of credit facility described in Note 5 that had $12.3 million and $13.0 million letters of credit outstanding at September 30, 2017 and December 31, 2016, respectively.

For additional information on our long-term debt and letters of credit, see Note 5.
Contractual Obligations

The table below sets out our contractual obligations as of September 30, 2017, related to our aircraft and other operating lease obligations, revolving credit facility, and 5.25% Senior Notes due 2019. Our obligations under the operating leases are not recorded as liabilities on our balance sheets included in this report. Each contractual obligation included in the table contains various terms, conditions, and covenants that, if violated, accelerate the payment of that obligation under certain specified circumstances. We believe we were in compliance with the covenants applicable to these contractual obligations as of September 30, 2017. As of September 30, 2017, we leased 19 aircraft included in the lease obligations data below.
 
 
 
 
Payment Due by Year
 
 
Total
 
2017(1)
 
2018
 
2019
 
2020
 
2021
 
Beyond
2021
 
 
 
 
(Thousands of dollars)
Aircraft lease obligations
 
$
182,062

 
$
9,161

 
$
34,705

 
$
30,226

 
$
26,387

 
$
26,253

 
$
55,330

Other lease obligations
 
$
12,866

 
1,509

 
4,452

 
3,240

 
2,324

 
1,284

 
57

Long-term debt (2)
 
$
600,000

 

 
$
100,000

 
$
500,000

 

 

 

Senior notes interest (2)
 
39,375

 

 
26,250

 
13,125

 

 

 

 
 
$
834,303

 
$
10,670

 
$
165,407

 
$
546,591

 
$
28,711

 
$
27,537

 
$
55,387

(1)
Payments due during the last three months of 2017 only.
(2)
“Long-term debt” reflects the principal amount of debt due under our outstanding senior notes and our revolving credit facility, whereas “senior notes interest” reflects interest accrued under our senior notes only. The actual amount of principal and interest paid in all years may differ from the amounts presented above due to the possible future payment or refinancing of outstanding debt or the issuance of new debt.

The table above reflects only contractual obligations as of September 30, 2017 and excludes, among other things, (i) commitments made thereafter, (including those discussed in Note 14), (ii) options to purchase assets, including those described in the next paragraph, (iii) contingent liabilities, (iv) capital expenditures that we plan, but are not committed, to make, (v) open purchase orders and (vi) other long-term liabilities, such as accruals for litigation or taxes, that are not contractual in nature.

As of September 30, 2017, we had options to purchase aircraft under leases becoming exercisable in 2018 through 2020. The aggregate option purchase prices are $127.0 million in 2018, $129.0 million in 2019, and $22.7 million in 2020. Under current conditions, we believe it is unlikely that we will exercise the 2018 purchase options, unless opportunistic conditions arise.

We intend to fund the above-described contractual obligations and any exercised purchase options through a combination of cash on hand, cash flow from operations, borrowings under our credit facility, refinancing transactions or sale-leaseback transactions.

42



For additional information on our contemplated capital expenditures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital Expenditures” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.

We have not paid dividends on either class of our common stock since 1999 and do not expect to pay dividends in the foreseeable future.

Impact of Pending HNZ Acquisition.

We have entered into an agreement that commits us, subject to certain conditions, to loan CAN$167.5 million to Don E. Wall or an entity controlled by him in connection with the acquisition transactions summarized in Note 14. Based on current currency exchange rates, we currently have sufficient cash and short-term investments to fund this loan. Nonetheless, we are considering the possibility of raising additional funds through a financing transaction, subject to market conditions. For additional information on our pending acquisition, see Note 14 and Item 5 of Part II of this report.
Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of changes in the value of financial instruments, or in future net income or cash flows, in response to changing market conditions. 

Our earnings are subject to changes in short-term interest rates due to the variable interest rate payable under our credit facility debt. Based on the $134.1 million weighted average loan balance during the nine months ended September 30, 2017, a 10% increase (0.3481%) in interest rates would have reduced our annual pre-tax earnings approximately $0.5 million, but would not have changed the fair market value of this debt.

Our $500.0 million principal amount of outstanding 5.25% Senior Notes due 2019 bear interest at a fixed rate of 5.25% and therefore changes in market interest rates do not affect our interest payment obligations on the notes. The fair market value of our 5.25% Senior Notes will vary as changes occur to general market interest rates, the remaining maturity of the notes, and our creditworthiness. At September 30, 2017, the market value of the notes was approximately $489.2 million, based on quoted market prices. See Note 4.

The interest and other payments we earn and recognize on our investments in money market funds, U.S. Government agencies debt, commercial paper, and corporate bonds and notes are subject to the risk of declines in general market interest rates. 

See Note 4 for additional information.
Item 4.    CONTROLS AND PROCEDURES

The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by us in the reports that we file or furnish under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, including to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, we cannot assure you that our disclosure controls and procedures will detect all errors or fraud.

43


PART II – OTHER INFORMATION
 
Item 1.    LEGAL PROCEEDINGS

For information regarding legal proceedings, see “Legal Matters” in Note 9 to our financial statements included in this report, incorporated herein by reference.
 
Item 1A. RISK FACTORS

For information regarding certain risks relating to our operations, any of which could negatively affect our business, financial condition, operating results or prospects, see (i) Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016 and (ii) the supplemental disclosures appearing below:

Risks Relating to Our Pending Acquisition of HNZ’s Offshore Business

Our ability to complete our pending acquisition of HNZ’s offshore aviation services business is subject to the receipt of various approvals from shareholders and governmental entities.

We are unable to complete the acquisition of HNZ’s offshore aviation services business until we receive approvals from HNZ’s shareholders and from the superior court of Quebec (Commercial Division). We can provide no assurance that we will obtain the necessary approvals or that any required conditions imposed in correction therewith will not materially adversely affect us following the acquisition. For additional information, see Item 5 of Part II of this report.

Failure to complete the acquisition of HNZ’s offshore business could negatively impact us.

If the acquisition of HNZ’s offshore aviation services business is not completed, our ongoing business may be adversely affected and we will be subject to several risks, including the following:

having to pay certain costs relating to the proposed acquisition, such as legal, accounting and financial advisory fees; and

diverting the focus of management from pursuing other opportunities that could be beneficial to us, in each case, without realizing any of the benefits of having the acquisition completed.

The pendency of the acquisition of HNZ’s offshore business could adversely affect our business and operations.

During the pendency of our acquisition of HNZ's offshore aviation services business, we may be unable to pursue other strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other similar actions, even if such actions would prove beneficial. In addition, our current and prospective employees may experience uncertainty about their future roles following the acquisition, which may materially adversely affect our ability to attract and retain key personnel during the pendency of the acquisition.

We expect to incur substantial expenses related to the acquisition of HNZ’s offshore business.

We expect to incur substantial expenses in connection with completing the acquisition of HNZ’s offshore aviation services business and integrating certain of HNZ’s offshore operations, networks, systems, technologies, policies and procedures with ours. While we have assumed that a certain level of transaction and integration expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Due to these factors, the expenses associated with the acquisition of HNZ’s offshore business could potentially exceed the savings that we hope to achieve following the completion of the acquisition. As a result of these expenses, we expect to take charges against our earnings before and after the completion of the acquisition, although the aggregate amount and timing of such charges are uncertain at present.


44


Following the acquisition of HNZ’s offshore business, we may be unable to realize the anticipated benefits of the acquisition.

Following the acquisition of HNZ’s offshore aviation services business, we will be required to devote management attention and resources to integrating certain of our business practices and operations with those of HNZ’s offshore business. We may encounter difficulties in the integration process, including the following:

the complexities associated with managing the combined businesses out of several different locations and integrating personnel from the two companies, while at the same time attempting to provide consistent, high quality services under a unified culture;

the additional complexities of combining businesses with different markets, customer bases, histories and regulatory restrictions;

the failure to retain key employees of either of the two companies;

the inability to successfully integrate HNZ’s offshore business in a manner that permits the us to achieve anticipated cost savings, which would result in the anticipated benefits of the acquisition not being realized partly or wholly in the time frame currently anticipated or at all;

potential unknown liabilities and unforeseen increased expenses or regulatory conditions associated with the acquisition; and

performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the acquisition and integrating the companies’ operations.

For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the our management, the disruption of the our ongoing business or inconsistencies in our services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the acquisition, or could otherwise adversely affect our business and financial results.

Following the acquisition of HNZ’s offshore business, we may be unable to retain key employees.

Our success after the acquisition of HNZ’s offshore aviation services business will depend in part upon our ability to retain key PHI and HNZ offshore employees. Key employees may depart either before or after the acquisition because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the acquisition. Accordingly, no assurance can be given that we will be able to retain key employees to the same extent that we or HNZ have been able to in the past.

Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.


Item 3.    DEFAULTS UPON SENIOR SECURITIES
None.
 
Item 4.    MINE SAFETY DISCLOSURES
None.
 


45


Item 5.    OTHER INFORMATION

On October 30, 2017, PHI, Inc. (the “Company”) entered into an Arrangement Agreement (the “Arrangement Agreement”), by and among the Company, HNZ Group Inc. (“HNZ”), Don E. Wall (“Don Wall”), who is the Chief Executive Officer and a Director of HNZ, and 2075568 Alberta ULC, which is a beneficially wholly-owned by Don Wall (the “Canadian Purchaser” and, together with the Company, the “Purchasers”), pursuant to which (i) the Canadian Purchaser has agreed to acquire all of the common shares and variable voting shares of HNZ (the “HNZ Acquisition”), and (ii) the Company (or a designated subsidiary thereof) has agreed to acquire the offshore helicopter services business conducted by HNZ and/or its subsidiaries in New Zealand, Australia, the Philippines and Papua New Guinea (the “International Business”) from the Canadian Purchaser immediately after the HNZ Acquisition is complete, in each case in accordance with a court-approved plan of arrangement (the “Arrangement”) under the Canada Business Corporations Act. The Boards of Directors of each of the Company and HNZ have unanimously approved the Arrangement (in the case of HNZ, with Don Wall abstaining).

Under the Arrangement Agreement, at the effective time of the Arrangement, (i) each outstanding common share and variable voting share of HNZ (other than shares held by holders who properly exercise dissent rights and shares held by Don Wall or the Canadian Purchaser), will be transferred to the Canadian Purchaser in exchange for a cash payment equal to CAD$18.70 (the “Consideration”), and (ii) each unit issued under the cash settled long-term incentive plan of HNZ and each deferred share unit of HNZ outstanding immediately prior to the effective time of the Arrangement will be deemed to be vested and transferred to HNZ in exchange for a cash payment equal to the Consideration.

Also on October 30, 2017, in conjunction with the Arrangement Agreement and to partially fund the Consideration, the Company entered into a debt commitment letter with the Canadian Purchaser (the “PHI Commitment Letter”) with respect to a senior unsecured credit facility to be extended by the Company to the Canadian Purchaser in connection with the completion of the Arrangement, pursuant to which the Company has committed to fund term loans in an aggregate principal amount of approximately CAD $167.5 million (collectively, the “PHI Loan”) on the terms and subject to the conditions specified therein. It is expected that the PHI Loan will be principally repaid in connection with the sale of the International Business to the Company on the effective date of the Arrangement. The balance of the PHI Loan is expected to be repaid on or prior to December 31, 2019, or at such other time as mutually agreed between the Company and the Canadian Purchaser. The Canadian Purchaser has committed senior and subordinated debt financing to finance the remainder of the aggregate Consideration.

The Arrangement is subject to the approval of the shareholders of HNZ and the Superior Court of Quebec (Commercial Division) and other customary closing conditions, including among other things:

no law being in effect that makes the consummation of the Arrangement illegal or otherwise prohibits or enjoins HNZ or either Purchaser from consummating the Arrangement;

the accuracy of representations and warranties of, and compliance with covenants by, each party, subject to specified materiality limitations;

the absence of pending or threatened actions or proceedings that would be reasonably likely to prohibit or restrict the Arrangement, prevent or materially delay the consummation of the Arrangement or result in a material adverse effect on either the International Business or the remainder of HNZ’s business (the “Canadian Business”), measured separately; and

HNZ’s shareholders not having exercised their dissent rights in connection with the Arrangement with respect to more than 10% of the outstanding Company shares.    

Subject to the satisfaction or waiver of these closing conditions, the parties plan to complete the Arrangement by the end of January 2018.

The Arrangement Agreement prohibits HNZ from soliciting, or participating in discussions or negotiations or providing information with respect to, alternative acquisition proposals, subject to certain exceptions.
The Arrangement Agreement provides that the parties may mutually agree to terminate the Arrangement Agreement before completing the Arrangement. In addition, the Arrangement Agreement may be terminated by:

any party if (i) HNZ shareholder approval is not obtained at the HNZ shareholder meeting, (ii) a final and non-appealable law, judgment, order or similar award is enacted or made that prohibits the consummation of the Arrangement, or (iii) the effective time of the Arrangement does not occur on or before February 28, 2018 (the “Outside Date”);


46


HNZ if (i) either Purchaser has breached a representation, warranty or covenant which would result in failure of a closing condition that cannot be cured prior to the Outside Date or is not cured within a specified cure period, or (ii) prior to receipt of HNZ shareholder approval, HNZ’s board changes its recommendation in favor of the Arrangement or HNZ (or any subsidiary thereof) enters into a contract with respect to a superior acquisition proposal, in each case in compliance with the terms of the Arrangement Agreement; or

either Purchaser if prior to receipt of HNZ shareholder approval, (i) HNZ’s board changes its recommendation in favor of the Arrangement, (ii) HNZ’s board approves an alternative takeover proposal, (iii) HNZ materially breaches its non-solicitation covenants, (iv) HNZ or the other Purchaser has breached a representation, warranty or covenant which would result in failure of a closing condition that cannot be cured prior to the Outside Date or is not cured within a specified cure period, or (v) there has occurred a material adverse effect with respect to the International Business (in the case of the Company) or the Canadian Business (in the case of the Canadian Purchaser).

If the Arrangement Agreement is terminated under certain specified circumstances, including in connection with HNZ accepting a superior acquisition proposal from a third party prior to the HNZ shareholder meeting, HNZ will be obligated to pay a termination fee of CAD$6.5 million to the Company and an expense reimbursement fee of up to CAD$1 million to the Canadian Purchaser. Further, if either Purchaser terminates the Arrangement Agreement due to a breach by HNZ of its representations, warranties or covenants, HNZ will be required to reimburse each Purchaser for all of its fees and expenses, up to a maximum of CAD$1.75 million to the Company and CAD$1 million to the Canadian Purchaser.

The parties have agreed to customary representations, warranties and covenants in the Arrangement Agreement, including, among others, covenants of HNZ with respect to the conduct of its business during the period between the execution of the Arrangement Agreement and consummation of the Arrangement.

Holders of approximately 19.24% of HNZ’s outstanding common and variable voting shares, including Sentry Investments Inc. and all of HNZ’s directors and executive officers that hold shares, but excluding Don Wall, have signed voting support agreements pursuant to which they have agreed, among other things, to vote their shares in favor of the Arrangement subject to the terms and conditions of such voting support agreements. Including Don Wall, holders of approximately 23.26% of HNZ's outstanding common and variable voting shares have agreed to vote their shares in favor of the Arrangement.



47


 Item 6.    EXHIBITS
(a)Exhibits
 
 
 
 
 
 
3.1
  
  

 
 
 
 
  
  
 
 
  

 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 

48


 
 
 
  
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chairman and Chief Executive Officer.
 
 
  
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Trudy P. McConnaughhay, Chief Financial Officer.
 
 
  
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chairman and Chief Executive Officer.
 
 
  
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Trudy P. McConnaughhay, Chief Financial Officer.
 
 
101.INS*
  
XBRL Instance Document
 
 
101.SCH*
  
XBRL Taxonomy Extension Schema
 
 
101.CAL*
  
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF*
  
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB*
  
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE*
  
XBRL Taxonomy Extension Presentation Linkbase
 
* Filed herewith
† Indicates management contract or compensatory plan or arrangement

49


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
PHI, Inc.
 
 
 
November 3, 2017
By:
/s/ Al A. Gonsoulin
 
 
Al A. Gonsoulin
 
 
Chairman and Chief Executive Officer
 
 
 
November 3, 2017
By:
/s/ Trudy P. McConnaughhay
 
 
Trudy P. McConnaughhay
 
 
Chief Financial Officer

50