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BRS > SEC Filings for BRS > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for BRISTOW GROUP INC

Form 10-Q for BRISTOW GROUP INC


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto as well as our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 (the "fiscal year 2012 Annual Report") and the MD&A contained therein. In the discussion that follows, the terms "Current Quarter" and "Comparable Quarter" refer to the three months ended September 30, 2012 and 2011, respectively, and the terms "Current Period" and "Comparable Period" refer to the six months ended September 30, 2012 and 2011, respectively. Our fiscal year ends March 31, and we refer to fiscal years based on the end of such period. Therefore, the fiscal year ending March 31, 2013 is referred to as "fiscal year 2013."

Forward-Looking Statements

This Quarterly Report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements are statements about our future business, strategy, operations, capabilities and results; financial projections; plans and objectives of our management; expected actions by us and by third parties, including our clients, competitors, vendors and regulators; and other matters. Some of the forward-looking statements can be identified by the use of words such as "believes", "belief", "expects", "plans", "anticipates", "intends", "projects", "estimates", "may", "might", "would", "could" or other similar words; however, all statements in this Quarterly Report, other than statements of historical fact or historical financial results, are forward-looking statements.

Our forward-looking statements reflect our views and assumptions on the date we are filing this Quarterly Report regarding future events and operating performance. We believe that they are reasonable, but they involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control, that may cause actual results to differ materially from any future results, performance or achievements expressed or implied by the forward-looking statements. Accordingly, you should not put undue reliance on any forward-looking statements.

You should consider the following key factors when evaluating these forward-looking statements:

• the possibility of political instability, war or acts of terrorism in any of the countries where we operate;

• fluctuations in worldwide prices of and demand for natural gas and oil;

• fluctuations in levels of natural gas and oil exploration and development activities;

• fluctuations in the demand for our services;

• the existence of competitors;

• the existence of operating risks inherent in our business, including the possibility of declining safety performance;

• the possibility of changes in tax and other laws and regulations;

• the possibility that the major oil companies do not continue to expand internationally;

• the possibility of significant changes in foreign exchange rates and controls;

• general economic conditions including the capital and credit markets;

• the possibility that we may be unable to acquire additional aircraft due to limited availability or unable to exercise aircraft purchase options;

• the possibility that we may be unable to dispose of older aircraft through sales into the aftermarket;

• the possibility that we may be unable to obtain financing or we may be unable to draw on our credit facilities;

• the possibility that we may be unable to re-deploy our aircraft to regions with greater demand; and

• the possibility that we do not achieve the anticipated benefit of our fleet investment program.


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The above description of risks and uncertainties is by no means all-inclusive, but is designed to highlight what we believe are important factors to consider. For a more detailed description of risk factors, please see the risks and uncertainties described under Item1A. "Risk Factors" included in the fiscal year 2012 Annual Report.

All forward-looking statements in this Quarterly Report are qualified by these cautionary statements and are only made as of the date of this Quarterly Report. We do not undertake any obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

This Executive Overview only includes what management considers to be the most important information and analysis for evaluating our financial condition and operating performance. It provides the context for the discussion and analysis of the financial statements which follow and does not disclose every item impacting our financial condition and operating performance.

General

We are the leading provider of helicopter services to the worldwide offshore energy industry based on the number of aircraft operated and one of two helicopter service providers to the offshore energy industry with global operations. We have a long history in the helicopter services industry through Bristow Helicopters Ltd. and Offshore Logistics, Inc., having been founded in 1955 and 1969, respectively. We have major transportation operations in the North Sea, Nigeria and the U.S. Gulf of Mexico, and in most of the other major offshore energy producing regions of the world, including Alaska, Australia, Brazil, Canada, Russia and Trinidad. We generated 81%, 89% and 88% of our consolidated operating revenue, business unit operating income and business unit adjusted EBITDAR, respectively, from operations outside of the U.S. during the Current Period.

We conduct our business in one segment: Helicopter Services. The Helicopter Services segment operations are conducted primarily through five business units:

• Europe,

• West Africa,

• North America,

• Australia, and

• Other International.

We provide helicopter services to a broad base of major integrated, national and independent offshore energy companies. Our clients charter our helicopters primarily to transport personnel between onshore bases and offshore production platforms, drilling rigs and other installations. To a lesser extent, our clients also charter our helicopters to transport time-sensitive equipment to these offshore locations. In addition to our primary Helicopter Services operations, we also operate a training business unit, Bristow Academy, and provide technical services to clients in the U.S. and U.K. As of September 30, 2012, we operated 349 aircraft (including 292 owned aircraft and 57 leased aircraft; 20 of the owned aircraft are held for sale) and our unconsolidated affiliates operated 197 aircraft in addition to those aircraft leased from us.


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The chart below presents (1) the number of helicopters in our fleet and their distribution among the business units of our Helicopter Services segment as of September 30, 2012; (2) the number of helicopters which we had on order or under option as of November 7, 2012; and (3) the percentage of operating revenue which each of our business units provided during the Current Period. For additional information regarding our commitments and options to acquire aircraft, see Note 6 in the "Notes to Condensed Consolidated Financial Statements" included elsewhere in this Quarterly Report.

                                                                                   Aircraft in Consolidated Fleet


                                      Percentage                           Helicopters
                                      of Current
                                        Period
                                      Operating                                                                  Fixed                             Unconsolidated
                                       Revenue           Small        Medium        Large        Training        Wing         Total  (1)(2)        Affiliates (3)       Total
Europe                                         38 %          -             12           43              -            -                    55                    64         119
West Africa                                    20 %          10            25            7              -             3                   45                    -           45
North America                                  17 %          67            24            2              -            -                    93                    -           93
Australia                                      12 %           2            10           13              -            -                    25                    -           25
Other International                            10 %           4            36           14              -            -                    54                   133         187
Corporate and other                             3 %          -             -            -               77           -                    77                    -           77

Total                                         100 %          83           107           79              77            3                  349                   197         546

Aircraft not currently in fleet:
(4)(5)
On order                                                     -             -            30              -            -                    30
Under option                                                 -             12           37              -            -                    49

(1) Includes 20 aircraft held for sale and 57 leased aircraft as follows:

                                       Held for Sale Aircraft in Consolidated Fleet
                                            Helicopters
                                                                                 Fixed
                         Small        Medium         Large        Training       Wing        Total
  Europe                     -              2             3              -           -            5
  West Africa                -              1            -               -           -            1
  North America              -             -             -               -           -           -
  Australia                  -              2             1              -           -            3
  Other International         1            10            -               -           -           11
  Corporate and other        -             -             -               -           -           -

  Total                       1            15             4              -           -           20

                                           Leased Aircraft in Consolidated Fleet
                                            Helicopters
                                                                                Fixed
                          Small        Medium        Large       Training       Wing        Total
    Europe                    -             -             7             -           -            7
    West Africa               -              1           -              -           -            1
    North America              1            11            2             -           -           14
    Australia                  2            -             3             -           -            5
    Other International       -             -            -              -           -           -
    Corporate and other       -             -            -              30          -           30

    Total                      3            12           12             30          -           57

(2) The average age of our fleet, excluding training aircraft, was 12 years as of September 30, 2012.

(3) The 197 aircraft operated by our unconsolidated affiliates do not include those aircraft leased from us.

(4) This table does not reflect aircraft which our unconsolidated affiliates may have on order or under option.

(5) On November 7, 2012, we entered into an agreement to order ten Sikorsky S-92 large aircraft and obtain options for 16 Sikorsky S-92 large aircraft, which are reflected in this table. The aircraft orders have delivery dates in fiscal years 2014 and 2015. The aircraft options have delivery dates ranging from fiscal years 2015 to 2018.


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The commercial aircraft in our consolidated fleet represented in the above chart are our primary source of revenue. To normalize the consolidated operating revenue of our fleet for the different revenue productivity and cost of our commercial aircraft, we developed a common weighted factor that combines large, medium and small aircraft into a combined standardized number of revenue producing commercial aircraft assets. We call this measure Large AirCraft Equivalent ("LACE"). Our large, medium and small aircraft are weighted as 100%, 50%, and 25%, respectively, to arrive at a single LACE number, which excludes Bristow Academy aircraft, fixed wing aircraft, affiliate aircraft, aircraft held for sale and aircraft construction in process. We divide our operating revenue from commercial contracts, which excludes operating revenue from affiliates and reimbursable revenue, by LACE to develop a LACE rate, which is a standardized rate, similar to a day rate, on which we disclose results and provide guidance. Our current number of LACE aircraft is 142 and our historical LACE and LACE rate is as follows:

                                 Current                 Fiscal Year Ended March 31,
                                 Period        2012       2011       2010       2009       2008
      LACE                            142        149        153        159        164        161
      LACE Rate (in millions)   $    8.95     $ 7.89     $ 7.15     $ 6.49     $ 6.14     $ 5.72

The following table presents the percentage of LACE leased as of September 30, 2012:

                           Europe                  16 %
                           West Africa              2 %
                           North America           25 %
                           Australia               21 %
                           Other International     -  %
                           Total                   13 %

Our Strategy

Our goal is to strengthen our position as a leading helicopter services provider to the offshore energy industry. We intend to employ the following well defined business/commercial and capital allocation strategies to achieve this goal:

Business/Commercial Strategy

• Be the preferred provider of helicopter services. We position our business to be the preferred provider of helicopter services by maintaining strong relationships with our clients and providing safe and high-quality service. In order to create differentiation and add value to our clients, we focus on enhancing our value to our clients through the initiatives of "Target Zero Accidents," "Target Zero Downtime" and "Target Zero Complaints," which comprise our program called the "Bristow Client Promise." This program is designed to deliver continuous improvement in all these important areas and demonstrate our commitment to providing higher hours of zero-accident flight time with on-time and up-time helicopter transportation service. We maintain relationships with our clients' field operations and corporate management that we believe helps us better anticipate client needs and provide our clients with the right aircraft in the right place at the right time, which in turn allows us to better manage our fleet utilization and capital investment program. We also leverage our close relationships with our clients to establish mutually beneficial operating practices and safety standards worldwide. By applying standardized-first-rate operating and safety practices across our global operations, we seek to provide our clients with consistent, high-quality service in each of their areas of operation. By better understanding and delivering on our clients' needs with our global operations and safety standards, we believe we effectively compete against other helicopter service providers based on aircraft availability, client service, safety and reliability, and not just price.


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• Grow our business while managing our assets. We plan to continue to grow our business globally and increase our revenue and profitability over time, while managing through cyclical downturns in the energy industry. We conduct flight operations in most major oil and gas producing regions of the world, and through our strong relationships with our existing clients, we are aware of future business opportunities in the markets we currently serve that would allow us to grow through new contracts. We anticipate these new opportunities will result in the deployment of new or existing aircraft into markets where we expect they will earn desirable rates of return. Additionally, new opportunities may result in growth through acquisitions and investments in existing or new markets, which may include increasing our role and participation with existing unconsolidated affiliates, investing in new companies, or creating partnerships and alliances with existing industry participants. We believe the combination of growth in existing and new markets will deliver improved shareholder returns.

Capital Allocation Strategy

Our capital allocation strategy is based on three principles as follows:

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• Prudent balance sheet management. Throughout our corporate and business unit management, we proactively manage our capital allocation plan with a concentration on achieving business growth and improving rates of return, within the dictates of prudent balance sheet management. We have funded our successful growth plan and maintained adequate liquidity by raising approximately $1.4 billion of debt and equity by means of both public and private financings since fiscal year 2007, and we intend to continue managing our capital structure and liquidity position relative to our commitments with external financings when necessary and through the use of operating leases for 20-30% of our LACE. During fiscal year 2012, we initiated a new financing strategy whereby we are now using operating leases to a larger extent than in the past. As of September 30, 2012, aircraft under operating leases account for 13% of our LACE. Our adjusted debt to total equity ratio and total liquidity were 67.9% and $507.7 million, respectively, as of September 30, 2012 and 70.8% and $401.6 million, respectively, as of March 31, 2012. Adjusted debt includes the net present value of operating leases totaling $224.3 million and $190.2 million, respectively, letters of credit and bank guarantees totaling $2.2 million and $17.5 million, respectively, and the unfunded pension liability of $112.2 million and $111.7 million, respectively, as of September 30 and March 31, 2012.

• Highest return. Our internal financial management framework, called Bristow Value Added ("BVA"), focuses on the returns we deliver across our organization. BVA is computed by subtracting a capital charge for the use of gross invested capital from after tax operating cash flow. Our goal is to achieve strong improvements in BVA over time by (1) improving the returns we earn throughout our organization via cost and capital efficiency improvements as well as through better pricing based on the differentiated value we deliver to clients via aircraft safety, availability, client service and reliability; (2) deploying more capital into commercial opportunities where management believes we can deliver strong returns and when we believe it will benefit the


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Company and our shareholders, including making strategic acquisitions or strategic equity investments; and (3) withdrawing capital from areas where returns are deemed inadequate and unable to be sufficiently improved. When appropriate, we may divest parts of the Company. Improvements in BVA are the primary financial measure in our management incentive plan, which is designed to align the interests of management with shareholders.

• Balanced shareholder return. We have invested $2.0 billion on capital expenditures to grow our business since fiscal year 2007. We believe our liquidity position and cash flows from operations will be adequate to finance operating and maintenance capital expenditures, so we have considered our capital deployment alternatives for the future to deliver a more balanced return to our shareholders. On November 2, 2012, our board of directors approved our seventh consecutive quarterly dividend. Also, on November 2, 2011, our board of directors authorized the expenditure of up to $100 million to repurchase shares of our Common Stock within 12 months from that date, of which $25.1 million was spent through September 30, 2012. On November 2, 2012, our board of directors extended the date to repurchase shares of our Common Stock by 12 months and increased the remaining repurchase amount to $100 million. For additional information on our repurchases of Common Stock, see "Share Repurchases" in Note 11 to the fiscal year 2012 Financial Statements. The timing and method of any repurchases under the program will depend on a variety of factors, is subject to our results of operations, financial condition, cash requirements, and other factors and restrictions under applicable law and our debt instruments, and may be suspended or discontinued at any time.

Market Outlook

Our core business is providing helicopter services to the worldwide oil and gas industry. Our clients' operating expenditures in the production sector are the principal source of our revenue, while their exploration and development capital expenditures provide a lesser portion of our revenue. Our clients typically base their capital expenditure budgets on their long-term commodity price expectations and not exclusively on the current spot price. In 2009, the credit, equity and commodity markets were quite volatile causing many of our oil and gas company clients to reduce capital spending plans and defer projects. Growing confidence among our clients has led to increased capital expenditure budgets resulting in some larger projects moving ahead that were previously on hold. This led to the recovery in our fiscal year 2011 financial performance and continued slow and steady growth in fiscal year 2012 and into fiscal year 2013.

While we are cautiously optimistic that the economic conditions will continue to recover over the remainder of fiscal year 2013 and into fiscal year 2014, we continue to seek ways to operate more efficiently and work with our clients to improve the efficiency of their operations. Our global operations and critical mass of helicopters provide us with geographic and client diversity which helps mitigate risks associated with a single market or client. This economic recovery should lead to an accelerated expansion throughout fiscal year 2013 and beyond and increased demand in many of our core markets.

We recently announced that we have secured several major new multi-year contracts for the provision of a total of 20 large aircraft that are expected to generate in excess of $2 billion in revenue in Europe, Australia and Brazil. This contract work, with higher pricing and improved terms, is expected to commence over the period beginning in the Current Quarter through fiscal year 2015. Three of these aircraft started work under these contracts in the Current Quarter, ten aircraft are expected to commence work in fiscal year 2014 and seven aircraft are expected to commence work in fiscal year 2015.

The limited availability of some new aircraft models and the need throughout the industry to retire many of the older aircraft in the worldwide fleet is a driver for our industry. Currently manufacturers have some available aircraft; however, there are some constraints on supply of new large aircraft.

The management of our global aircraft fleet involves a careful evaluation of the expected demand for helicopter services across global energy markets, including the type of aircraft needed to meet this demand. As offshore oil and gas drilling and production globally moves to deeper water, more medium and large aircraft and newer technology aircraft may be required. As older aircraft models come off of current contracts and are replaced by new aircraft, our management evaluates our future needs for these aircraft models and ultimately the ability to recover our remaining investments in these aircraft through sales into the aftermarket. We depreciate our aircraft over their expected useful life to the expected salvage value to be received for the aircraft at the end of that life; however, depending on the market for aircraft or changes in the expected future use of aircraft within our fleet, we may record gains or losses on aircraft sales,


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impairment charges for aircraft operating or held for sale or accelerate depreciation on aircraft used in our operations. In certain instances where a cash return can be made on newer aircraft in excess of the expected return available through the provision of helicopter services, we may sell newer aircraft. The number of aircraft sales and the amount of gains and losses recorded on these sales is unpredictable. While aircraft sales are common in our business and are reflected in our operating results, gains and losses on aircraft sales may result in our operating results not reflecting the ordinary operating performance of our primary business, which is providing helicopter services to our clients. The gains and losses on aircraft sales are not included in the calculation of adjusted earnings per share or gross cash flows for purposes of calculating BVA.

Brazil continues to represent a significant part of our positive growth outlook. The discovery of pre-salt deepwater fields in Brazil along with the national mandate to significantly increase its production over the next five years will necessitate investment in infrastructure and associated services. The Petrobras five year plan, approved by their board, demands a helicopter fleet growth from 100 to 168 medium and large aircraft. During fiscal year 2012, Lνder, our affiliate in Brazil, was awarded contracts for 14 medium aircraft. Seven aircraft commenced operations in fiscal year 2012 and the other seven will commence operations in fiscal year 2013. Aircraft being procured in this market tend to be newer and more sophisticated which is aligned with both Bristow Group's "Client Promise" and Lνder's "Decolar" service differentiation programs. More recently, Lνder was awarded five-year contracts by Petrobras for five large aircraft. One of these aircraft is leased to Lνder by Bristow and began work in September 2012, and the remaining four aircraft are scheduled to commence work starting in late 2012 through April 2013. Continuing the fleet growth plan, . . .

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