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PHII > SEC Filings for PHII > Form 10-Q on 5-Nov-2012All Recent SEC Filings

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Form 10-Q for PHI INC


5-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto as well as our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2011, management's discussion and analysis, risk factors and other information contained therein.

Forward-Looking Statements

All statements other than statements of historical fact contained in this Form 10-Q and other periodic reports filed by PHI, Inc. ("PHI" or the "Company" or "we" or "our") under the Securities Exchange Act of 1934 and other written or oral statements made by it or on its behalf, are forward-looking statements. When used herein, the words "anticipates", "expects", "believes", "goals", "intends", "plans", "projects" and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are based on a number of assumptions about future events and are subject to significant risks, uncertainties, and other factors that may cause the Company's actual results to differ materially from the expectations, beliefs, and estimates expressed or implied in such forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, no assurance can be given that such assumptions will prove correct or even approximately correct. Factors that could cause the Company's results to differ materially from the expectations expressed in such forward-looking statements include but are not limited to the following: unexpected variances in flight hours, the effect on demand for our services caused by volatility of oil and gas prices and the level of exploration and production activity in the Gulf of Mexico, the effect on the demand for our services as a result of the Macondo incident, the effect on our operating costs of volatile fuel prices, the availability of capital required to acquire aircraft, environmental risks, hurricanes and other adverse weather conditions, the activities of our competitors, changes in government regulation, unionization, operating hazards, risks related to operating in foreign countries, the ability to obtain adequate insurance at an acceptable cost and the ability of the Company to develop and implement successful business strategies. For a more detailed description of risks, see the "Risk Factors" section in Item 1.A. of our Form 10-K for the year ended December 31, 2011 and in Part II Item 1.A. of our subsequently filed quarterly reports on Form 10-Q (the "SEC Filings"). All forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph and the Risk Factors section of our SEC Filings. PHI undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

Operating revenues for the three months ended September 30, 2012 were $170.9 million, compared to $145.6 million for the three months ended September 30, 2011, an increase of $25.3 million. Oil and Gas segment operating revenues increased $18.4 million for the quarter ended September 30, 2012, related primarily to increased medium and heavy aircraft flight hours and revenues resulting mainly from the continuing improvement in deepwater drilling activity since the Macondo incident in 2010. Operating revenues in the Air Medical segment increased $7.1 million primarily due to an increase in revenues in the independent provider programs of $6.0 million. This increase was due to increased patient transports, improvement in the payor mix, and also due to rate increases implemented in the prior and current years. Operating revenues related to hospital based contracts increased $1.1 million, primarily due to revenue recorded in the quarter related to aircraft mobilization for the SRCA project.

In April 2012, our subsidiary PHI Air Medical, L.L.C. entered into a three-year contract with the SRCA to provide helicopter emergency medical services in the Kingdom of Saudi Arabia. See Notes to Condensed Consolidated Financial Statements, Note 3. Commitments and Contingencies regarding a description of this contract. As of September 30, 2012, all seven of the new aircraft have been delivered by the manufacturer to PHI. We commenced flight operations in late September 2012, with two aircraft in service.


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Flight hours for the quarter ended September 30, 2012 were 40,789 compared to 39,223 for the quarter ended September 30, 2011. Oil and Gas segment flight hours increased 1,707 hours due to increases in medium and heavy aircraft flight hours attributable to improvements in deepwater drilling activity subsequent to the Macondo incident. Air Medical segment flight hours decreased 141 hours for the quarter ended September 30, 2012, due to decreased flight hours in the hospital-based programs. Individual patient transports in the Air Medical segment were 4,986 for the quarter ended September 30, 2012, compared to transports of 4,881 for the quarter ended September 30, 2011.

Net Oil and Gas segment profit was $19.4 million for the quarter ended September 30, 2012, compared to $13.5 million for the quarter ended September 30, 2011. The increase of $5.9 million was due to increased revenues of $18.4 million, primarily in medium and heavy aircraft revenue, partially offset by an increase in direct expense of $12.4 million, discussed further in the Segment Discussion below.

Net segment profit for the Air Medical segment was $7.0 million for the quarter ended September 30, 2012, compared to $6.1 million for the quarter ended September 30, 2011. The increase in segment profit in the Air Medical segment was primarily due to increased revenues of $7.1 million, partially offset by an increase in direct expense of $5.6 million, as discussed in the Segment Discussion below.

Net earnings for the quarter ended September 30, 2012 was $6.4 million, or $0.41 per diluted share, compared to net earnings of $3.6 million for the quarter ended September 30, 2011, or $0.23 per diluted share. Pre-tax earnings were $11.4 million for the quarter ended September 30, 2012, compared to pre-tax earnings of $6.0 million for the same period in 2011. The SRCA contract is structured as a hospital contract, but had minimal revenue in the third quarter 2012, with only two aircraft operational. This project reflected a pre-tax loss of $2.8 million for the third quarter due only to startup delays. However, we expect the SRCA project to generate slightly positive earnings for 2012 due to revenue operations increasing throughout the fourth quarter for aircraft and contracted ground resources.

Year to date operating revenues for September 30, 2012 were $469.5 million, compared to $401.2 million for the nine months ended September 30, 2011, an increase of $68.3 million. Oil and Gas operating revenues increased $48.0 million for the nine months ended September 30, 2012, related primarily to increased medium and heavy aircraft flight hours and revenues, attributable mainly to the continuing improvement in deepwater drilling activity since the Macondo incident in 2010. Operating revenues in the Air Medical segment increased $21.1 million primarily due to increased revenues in the independent provider programs of $17.7 million, primarily due to increased patient transports, improvement in the payor mix, and rate increases implemented in the prior and current years. Revenues related to hospital based contracts increased $3.3 million, including revenue of $1.5 million recorded in the nine months ended September 30, 2012 related to aircraft mobilization for the SRCA project.

Flight hours for the nine months ended September 30, 2012 were 115,034 compared to 110,395 for the nine months ended September 30, 2011. Oil and Gas segment's flight hours increased 4,004 hours due to an increase in medium and heavy aircraft flight hours. Air Medical segment flight hours increased 647 hours for the nine months ended September 30, 2012. Individual patient transports in the Air Medical segment were 13,954 for the nine months ended September 30, 2012, compared to transports of 13,441 for the nine months ended September 30, 2011, an increase of 513 transports.

Net Oil and Gas segment profit was $45.7 million for the nine months ended September 30, 2012, compared to $30.0 million for the nine months ended September 30, 2011. The increase of $15.7 million was primarily due to increased revenues of $48.0, primarily in medium and heavy aircraft revenue, partially offset by an increase in direct expense of $32.2 million, discussed further in the Segment Discussion.


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Net segment profit for the Air Medical segment was $20.2 million for the nine months ended September 30, 2012, compared to $11.5 million for the nine months ended September 30, 2011. The increase in segment profit in the Air Medical segment was primarily due to the increased revenues in the independent provider programs, partially offset by an increase in direct expenses of $10.2 million, discussed further in the Segment Discussion.

Net earnings for the nine months ended September 30, 2012 was $14.6 million, or $0.94 per diluted share, compared to net earnings of $1.6 million for the nine months ended September 30, 2011, or $0.11 per diluted share. Pre-tax earnings were $25.2 million for the nine months ended September 30, 2012, compared to pre-tax earnings of $2.7 million for the same period in 2011. The SRCA project reflected a pre-tax loss of $3.7 million for the nine months ended September 30, 2012, due only to startup delays. However, the SRCA project is expected to generate slightly positive earnings for 2012 due to revenue operations increasing throughout the fourth quarter for aircraft and contracted ground resources.

Our Oil and Gas segment continues to improve with additional deepwater drilling activity by our customers, with such activity projected to exceed pre-Macondo levels by the end of 2012 and require us to provide additional medium and heavy aircraft.

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

Operating Statistics

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



                                            Quarter Ended            Nine Months Ended
                                            September 30,              September 30,
                                          2012         2011         2012          2011
     Flight hours:
     Oil and Gas                          31,608       29,901        88,155        84,151
     Air Medical (1)                       9,181        9,322        26,329        25,682
     Technical Services                       -            -            550           562

     Total                                40,789       39,223       115,034       110,395

     Air Medical Transports (2)            4,986        4,881        13,954        13,441


                                                                       September 30,
                                                                    2012          2011
     Aircraft operated at period end:
     Oil and Gas (3)                                                    162           164
     Air Medical (4)                                                     97            88
     Technical Services                                                   6             5

     Total (3) (4)                                                      265           257

(1) Flight hours include 2,542 flight hours associated with hospital-based contracts, compared to 2,729 flight hours in the prior year quarter, and 7,340 flight hours year-to-date, compared to 7,415 in the prior year-to-date.

(2) Represents individual patient transports for the period.

(3) Includes nine aircraft as of September 30, 2012 and 2011 that are customer owned.

(4) Includes 13 aircraft as of September 30, 2012 and seven aircraft as of September 30, 2011 that are customer owned.


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Results of Operations

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

Combined Operations

Revenues - Operating revenues for the three months ended September 30, 2012 were $170.9 million, compared to $145.6 million for the three months ended September 30, 2011, an increase of $25.3 million. Oil and Gas operating revenues increased $18.4 million for the quarter ended September 30, 2012, related primarily to increased medium and heavy aircraft flight hours and revenues. Operating revenues in the Air Medical segment increased $7.1 million primarily due to increased revenues in the independent provider programs due to $6.0 million to improvements in the payor mix, rate increases implemented in the prior and current years, and increased patient transports. Operating revenues related to hospital based contracts increased $1.1 million, primarily due to revenue recorded in the quarter related to aircraft mobilization for the SRCA project.

Flight hours for the quarter ended September 30, 2012 were 40,789 compared to 39,223 for the quarter ended September 30, 2011. Oil and Gas segment's flight hours increased 1,707 hours due to increases in medium and heavy aircraft flight hours. Air Medical segment flight hours decreased 141 hours for the quarter ended September 30, 2012, due to decreased flight hours in the traditional programs. Individual patient transports in the Air Medical segment were 4,986 for the quarter ended September 30, 2012, compared to transports of 4,881 for the quarter ended September 30, 2011.

Direct Expenses - Direct operating expense was $141.7 million for the three months ended September 30, 2012, compared to $123.6 million for the three months ended September 30, 2011, an increase of $18.1 million. Aircraft rent increased ($3.6 million) due to the acquisition of four heavy aircraft in 2011 and four heavy aircraft in 2012 funded with operating leases. We also experienced increases in aircraft maintenance costs due to an increase in warranty costs ($2.7 million). Aircraft maintenance expense represents approximately 15% of total direct expense. Employee compensation expenses increased ($9.6 million). Employee compensation expense represents approximately 45% of total direct expense. Aircraft depreciation increased ($0.9 million) due to additional aircraft. Fuel expenses increased ($1.2 million) due to increases in per-gallon costs and also due to additional flight hours in heavy and medium aircraft. Fuel expense represents approximately 8% of total direct expense. Other items increased, net ($0.1 million). Included in the foregoing direct expense categories was a total of $3.6 million related to start up and operational delays on the SRCA project.

Selling, General, and Administrative Expenses - Selling, general and administrative expenses were $9.8 million for the three months ended September 30, 2012, compared to $8.4 million for the three months ended September 30, 2011. The $1.4 million increase is due to increased employee compensation expenses ($1.2 million), related to restricted stock units issued under the PHI, Inc. Long-Term Incentive Plan discussed in Note 6.

Interest Expense - Interest expense was $7.5 million for the three months ended September 30, 2012, compared to $7.0 million for the three months ended September 30, 2011. The increase is due to the increased balance on the revolving credit facility.

Other Expense - Losses on asset dispositions were $0.7 million for the three months ended September 30, 2012, compared to a loss of $0.6 million for the three months ended September 30, 2011.

Income Taxes - Income tax expense for the three months ended September 30, 2012 was $5.1 million compared to $2.4 million for the three months ended September 30, 2011. The effective tax rate was 44% for the three months ended September 30, 2012, and 40% for the three months ended September 30, 2011. We recorded a valuation allowance against our foreign tax credit carryforwards of $0.5 million in the third quarter of 2012.


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Net Earnings - Net income for the three months ended September 30, 2012 was $6.4 million compared to net income of $3.6 million for the three months ended September 30, 2011. Earnings before income taxes for the three months ended September 30, 2012 was $11.4 million compared to earnings before tax of $6.0 million for the same period in 2011. Earnings per diluted share was $0.41 for the current quarter compared to earnings per diluted share of $0.23 for the prior year quarter. We had 15.3 million weighted average common shares outstanding during the three months ended September 30, 2012 and 2011. The increase in earnings before taxes for the quarter ended September 30, 2012 is primarily due to increased revenues and segment operating profit in the Oil and Gas and Air Medical segments. Earnings for the three months ended September 30, 2012 also included an operating loss before tax of $2.8 million for the SRCA project due only to operational delays in startup of the project. However, the SRCA project is expected to generate slightly positive earnings for 2012 due to revenue operations increasing throughout the fourth quarter for aircraft and contracted ground resources.

Segment Discussion

Oil and Gas - Oil and Gas segment revenues were $115.0 million for the three months ended September 30, 2012, compared to $96.6 million for the three months ended September 30, 2011, an increase of $18.4 million. Flight hours were 31,608 for the current quarter compared to 29,901 for the same quarter in the prior year. The increase in revenue is primarily due to increased medium and heavy aircraft flight hours and revenues, due to an increase in deepwater drilling activity compared to the same period in 2011 when there was no significant deepwater drilling activity due to the Deepwater Horizon incident.

The number of aircraft in the segment was 162 at September 30, 2012 and 164 at September 30, 2011. We have sold or disposed of nine light and two medium aircraft in the Oil and Gas segment since September 30, 2011. We added 14 new aircraft to the Oil and Gas segment since September 30, 2011, consisting of five light, three medium and six heavy aircraft. Inter-segment aircraft transfers account for the remaining amount.

Direct expense in our Oil and Gas segment was $94.6 million for the three months ended September 30, 2012, compared to $82.2 million for the three months ended September 30, 2011, an increase of $12.4 million. Aircraft rent expense increased ($3.3 million) due to the acquisition of four heavy aircraft in 2011 and four heavy aircraft in 2012, funded with operating leases. Employee compensation expenses increased ($6.1 million) due to compensation rate increases and an increase in the number of employees in the Oil and Gas segment. Aircraft warranty costs increased ($2.3 million) due to increased flight hours. Other items increased, net ($0.7 million).

Our Oil and Gas segment profit was $19.4 million for the quarter ended September 30, 2012, compared to $13.5 million for the quarter ended September 30, 2011. Operating margins (segment profit divided by operating revenues) were 17% for the three months ended September 30, 2012, compared to 14% for the three months ended September 30, 2011. The increase in segment profit of $5.9 million was primarily due to increased revenues of $18.4 million, partially offset by increased direct expenses of $12.4 million as previously discussed. The Oil and Gas segment revenues are primarily driven by contracted aircraft and flight hours. Costs are primarily fixed, and are driven by the number of aircraft, and a portion is variable which is driven by flight hours.

Air Medical - Air Medical segment revenues were $54.0 million for the three months ended September 30, 2012, compared to $46.9 million for the three months ended September 30, 2011, an increase of $7.1 million. The increase was primarily due to increased revenue of $6.0 million in the independent provider programs related to improved payor mix, rate increases implemented in 2011 and 2012, and increased patient transports. Operating revenues related to hospital based contracts increased $1.1 million primarily due to revenue recorded in the quarter related to aircraft mobilization for the SRCA project. Total patient transports were 4,986 for the three months ended September 30, 2012, compared to 4,881 for the three months ended September 30, 2011.


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Flight hours were 9,181 for the three months ended September 30, 2012, compared to 9,322 for the three months ended September 30, 2011 due to decreased flight hours in the traditional programs. The number of aircraft in the segment was 97 at September 30, 2012 and 88 at September 30, 2011. Since September 30, 2011, we added seven medium aircraft related to the SRCA project. These aircraft will ultimately be owned by the lessor who is leasing the aircraft to SRCA. We sold or disposed of two light aircraft. Inter-segment aircraft transfers account for the remaining amount.

Direct expense in our Air Medical segment was $45.3 million for the three months ended September 30, 2012, compared to $39.7 million for the three months ended September 30, 2011. There was an increase in employee compensation expense ($3.5 million) due to additional employees and rate increases. There was also increases in aircraft rent ($0.3 million) and aircraft depreciation ($0.3 million) due to additional aircraft added to the fleet. Aircraft warranty costs increased ($0.3 million) and component repair costs increased ($1.9 million). Other items decreased, net ($0.7 million). Included in the above categories was $3.6 million direct expense related to the startup and operational delays on the SRCA project.

Selling, general and administrative expenses were $1.7 million for the three months ended September 30, 2012, compared to $1.1 million for the three months ended September 30, 2011. Allocations of shared services increased the segment's quarterly expense $0.3 million. There was also an increase in employee compensation expenses ($0.3 million).

Our Air Medical segment's profit was $7.0 million for the quarter ended September 30, 2012, compared to $6.1 million for the quarter ended September 30, 2011. Operating margins were 13% for the three months ended September 30, 2012, and the three months ended September 30, 2011. The improvement in segment operating income was primarily due to an increase in transports, increase in rates in 2011 and 2012, closure of unprofitable bases, and cost reductions. Earnings for the three months ended September 30, 2012 also included a net loss before tax of $2.8 million for the SRCA project due to operational delays in startup of the project. However, the SRCA project is expected to generate slightly positive earnings for 2012 due to revenue operations increasing throughout the fourth quarter for aircraft and contracted ground resources.

Technical Services - Technical Services revenues were $1.9 million for the three months ended September 30, 2012, compared to $2.1 million for the three months ended September 30, 2011. Direct expenses in our Technical Services segment were $1.8 million for the three months ended September 30, 2012, and for the three months ended September 30, 2011. Our Technical Services segment's operating income was $0.1 million for the three months ended September 30, 2012, compared to $0.3 million for the three months ended September 30, 2011.

Nine Months Ended September 30, 2012 compared with Nine Months Ended September 30, 2011

Combined Operations

Revenues - Operating revenues for the nine months ended September 30, 2012 were $469.5 million, compared to $401.2 million for the nine months ended September 30, 2011, an increase of $68.3 million. Oil and Gas operating revenues increased $48.0 million for the nine months ended September 30, 2012, related primarily to increased medium and heavy aircraft revenue due to increased flight hours attributable to the continuing improvement in deepwater drilling activity since the Macondo incident in 2010. Operating revenues in the Air Medical segment increased $21.1 million primarily due to increased revenues in the independent provider programs of $17.7 million, primarily due to increased patient transports, improvement in the payor mix, and rate increases implemented in the prior and current years. Revenues related to hospital based contracts increased $3.3 million, with revenue of $1.5 million recorded in the nine month period related to aircraft mobilization for the SRCA project.


Table of Contents

Flight hours for the nine months ended September 30, 2012 were 115,034 compared to 110,395 for the nine months ended September 30, 2011. Oil and Gas segment's flight hours increased 4,004 hours due to an increase in deepwater drilling activity in the Gulf of Mexico. Air Medical segment flight hours increased 647 hours for the nine months ended September 30, 2012, primarily due to increased flight hours in the independent provider programs. Transports in the independent provider programs were 13,954 for the nine months ended September 30, 2012, compared to 13,441 transports for the nine months ended September 30, 2011.

Direct Expenses - Direct operating expense was $394.5 million for the nine months ended September 30, 2012, compared to $352.3 million for the nine months ended September 30, 2011, an increase of $42.2 million. There was an increase in employee compensation expense ($22.5 million) due to additional employees and rate increases compared to the prior year. Employee compensation expense represents approximately 45% of total direct expense. We also experienced increases in aircraft rent ($8.1 million) and aircraft depreciation ($2.5 million) due to additional aircraft added to the fleet. Fuel expense increased ($3.7 million) due to increased flight hours, particularly in medium and heavy aircraft. Fuel expense represents approximately 7% of total direct expense. Aircraft maintenance costs increased due to increases in aircraft warranty costs ($6.6 million), and component repair costs ($5.2 million). Aircraft maintenance expense represents approximately 15% of total direct expense. There were decreases in aircraft parts usage ($7.1 million). Other items increased, net ($0.7 million). Included in the above categories of expense is a total of $5.0 million representing startup costs and operational delays on the SRCA project. This amount includes employee compensation costs ($2.6 million), airfares, lodging, freight costs ($1.4 million), pilot training cost ($0.4 million), base operating costs ($0.3 million) and other items ($0.3 million).

Selling, General, and Administrative Expenses - Selling, general and administrative expenses were $28.3 million for the nine months ended September 30, 2012, compared to $25.7 million for the nine months ended September 30, 2011. The $2.6 million increase was primarily due to increased employee compensation expense ($3.0 million), partially offset by decreases in legal and accounting fees ($0.8 million). Other items increased, net ($0.4 million).

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