Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.D. C. 20549

___________________________________________________________ 
FORM 10-Q

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

___________________________________________________________ 
 ☒    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended SeptemberJune 30, 2016

2017

or

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

☐    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period fromto

Commission file number: 0-9827

PHI, Inc.

(Exact name of registrant as specified in its charter)

Louisiana72-0395707

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2001 SE Evangeline Thruway 
Lafayette, Louisiana70508
(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, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“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)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, 2016

Voting Common Stock

2,905,757 shares

Non-Voting Common Stock

12,777,358 shares


PHI, INC.

Index – Form 10-Q

Part I – Financial Information

Item 1.

Class
 

Outstanding at July 31, 2017

Voting Common Stock2,905,757 shares
Non-Voting Common Stock12,892,321 shares

PHI, INC.
Index – Form 10-Q

Item 1. 
 

 3

 4

 5

 6

 7

  8

Item 2.

  28

Item 3.

  42

Item 4.

43
 

Item 1.

Legal Proceedings

  
44Item 1.
 

Item 1A.

  44

Item 2.

  44

Item 3.

  
44Item 4.
 
Item 5.

Item 4.

Mine Safety Disclosures

  
44Item 6.
 

Item 5.

Other Information

44

Item 6.

Exhibits

45

47


PART I – FINANCIAL INFORMATION

Item 1.FINANCIAL STATEMENTS

Item 1. FINANCIAL STATEMENTS
PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars, except share data)

(Unaudited)

   September 30,  December 31, 
   2016  2015 
ASSETS   

Current Assets:

   

Cash

  $2,639   $2,407  

Short-term investments

   289,520    284,523  

Accounts receivable – net

   

Trade

   131,295    138,309  

Other

   11,180    6,469  

Inventories of spare parts – net

   69,409    69,491  

Prepaid expenses

   6,976    8,951  

Deferred income taxes

   10,379    10,379  

Income taxes receivable

   863    761  
  

 

 

  

 

 

 

Total current assets

   522,261    521,290  

Property and equipment – net

   916,560    883,529  

Restricted cash and investments

   13,038    15,336  

Other assets

   7,334    6,178  
  

 

 

  

 

 

 

Total assets

  $1,459,193   $1,426,333  
  

 

 

  

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current Liabilities:

   

Accounts payable

  $20,843   $31,373  

Accrued and other current liabilities

   32,178    44,759  
  

 

 

  

 

 

 

Total current liabilities

   53,021    76,132  

Long-term debt:

   

Revolving credit facility

   132,400    57,500  

Senior Notes issued March 17, 2014, net of debt issuance costs of $3,064 and $3,999, respectively

   496,936    496,001  

Deferred income taxes

   147,058    153,645  

Other long-term liabilities

   8,291    16,057  

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; 25,000,000 shares authorized, 12,777,358 and 12,685,725 issued and outstanding at September 30, 2016 and December 31, 2015, respectively

   1,278    1,269  

Additional paid-in capital

   308,690    304,884  

Accumulated other comprehensive loss

   (271  (567

Retained earnings

   311,499    321,121  
  

 

 

  

 

 

 

Total shareholders’ equity

   621,487    626,998  
  

 

 

  

 

 

 

Total liabilities and shareholders’ equity

  $1,459,193   $1,426,333  
  

 

 

  

 

 

 

  June 30,
2017
 December 31, 2016
ASSETS    
Current Assets:    
Cash $2,323
 $2,596
Short-term investments 237,433
 289,806
Accounts receivable – net    
Trade 133,934
 128,662
Other 13,570
 9,603
Inventories of spare parts – net 76,155
 70,402
Prepaid expenses 13,131
 9,259
Deferred income taxes 10,798
 10,798
Income taxes receivable 414
 540
Total current assets 487,758
 521,666
Property and equipment – net 918,134
 903,977
Restricted cash and investments 12,396
 13,038
Other assets 10,172
 9,759
Total assets $1,428,460
 $1,448,440
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Current Liabilities:    
Accounts payable $27,791
 $28,704
Accrued and other current liabilities 33,384
 28,346
Total current liabilities 61,175
 57,050
Long-term debt:    
Revolving credit facility 133,225
 134,000
Senior Notes issued March 17, 2014, net of debt issuance costs of $2,129 and $2,753, respectively 497,871
 497,247
Deferred income taxes 143,030
 151,713
Other long-term liabilities 9,098
 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, 12,892,321 and 12,779,646 issued and outstanding at June 30, 2017 and December 31, 2016, respectively 1,289
 1,278
Additional paid-in capital 305,787
 304,246
Accumulated other comprehensive loss (254) (478)
Retained earnings 276,948
 294,441
Total shareholders’ equity 584,061
 599,778
Total liabilities and shareholders’ equity $1,428,460
 $1,448,440

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


PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

   Quarter Ended  Nine Months Ended 
   September 30,  September 30, 
   2016  2015  2016  2015 

Operating revenues, net

  $158,093   $214,733   $489,245   $617,477  

Expenses:

     

Direct expenses

   144,938    182,064    449,909    520,099  

Selling, general and administrative expenses

   13,381    11,575    36,832    34,859  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   158,319    193,639    486,741    554,958  

Loss (gain) on disposal of assets

   85    (165  (3,854  (238

Equity in loss of unconsolidated affiliate

   198    75    274    249  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating (loss) income

   (509  21,184    6,084    62,508  

Interest expense

   7,719    7,366    22,792    21,691  

Other income, net

   (462  (472  (1,571  (1,501
  

 

 

  

 

 

  

 

 

  

 

 

 
   7,257    6,894    21,221    20,190  
  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) earnings before income taxes

   (7,766  14,290    (15,137  42,318  

Income tax (benefit) expense

   (2,799  6,621    (5,515  17,832  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) earnings

  $(4,967 $7,669   $(9,622 $24,486  
  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average shares outstanding:

     

Basic

   15,683    15,587    15,655    15,558  

Diluted

   15,683    15,652    15,655    15,640  

Net (loss) earnings per share:

     

Basic

  $(0.32 $0.49   $(0.61 $1.57  

Diluted

  $(0.32 $0.49   $(0.61 $1.57  

  Quarter Ended  
 June 30,
 Six Months Ended 
 June 30,
  2017 2016 2017 2016
Operating revenues, net $146,424
 $167,136
 $281,042
 $331,152
Expenses:     
  
Direct expenses 126,951
 152,417
 263,464
 304,971
Selling, general and administrative expenses 14,247
 11,778
 27,290
 23,451
Total operating expenses 141,198
 164,195
 290,754
 328,422
Loss (gain) on disposal of assets 7
 (4,298) 7
 (3,939)
Equity in loss of unconsolidated affiliates, net 991
 76
 1,994
 76
Operating income (loss) 4,228
 7,163
 (11,713) 6,593
Interest expense 8,083
 7,540
 16,278
 15,073
Other income – net (705) (494) (1,768) (1,109)
  7,378
 7,046
 14,510
 13,964
(Loss) earnings before income taxes (3,150) 117
 (26,223) (7,371)
Income tax expense (benefit) 123
 (4,160) (7,702) (2,716)
Net (loss) earnings $(3,273) $4,277
 $(18,521) $(4,655)
Weighted average shares outstanding:     
  
Basic 15,716
 15,677
 15,716
 15,650
Diluted 15,716
 15,718
 15,716
 15,650
Net (loss) earnings per share:     
  
Basic $(0.21) $0.27
 $(1.18) $(0.30)
Diluted $(0.21) $0.27
 $(1.18) $(0.30)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Thousands of dollars)

(Unaudited)

   Quarter Ended  Nine Months Ended 
   September 30,  September 30, 
   2016  2015  2016  2015 

Net (loss) earnings

  $(4,967 $7,669   $(9,622 $24,486  

Unrealized (loss) gain on short-term investments

   (494  12    523    (7

Other unrealized gain

   —      —      —      24  

Changes in pension plan assets and benefit obligations

   1    4    3    4  

Tax effect of adjustments

   178    (6  (229  3  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive (loss) income

  $(5,282 $7,679   $(9,325 $24,510  
  

 

 

  

 

 

  

 

 

  

 

 

 

  Quarter Ended  
 June 30,
 Six Months Ended 
 June 30,
  2017 2016 2017 2016
Net (loss) earnings $(3,273) $4,277
 $(18,521) $(4,655)
Unrealized gain on short-term investments 167
 210
 329
 1,017
Changes in pension plan assets and benefit obligations 23
 1
 22
 2
Tax effect of the above-listed adjustments (68) (75) (127) (407)
Total comprehensive (loss) income $(3,151) $4,413
 $(18,297) $(4,043)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Thousands of dollars and shares)

(Unaudited)

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

Balance at December 31, 2014

  2,906   $291    12,576   $1,258   $301,533   $—     $(211 $294,197   $597,068  

Net earnings

  —      —      —      —      —      —      —      24,486    24,486  

Unrealized loss on short-term investments

  —      —      —      —      —      —      (3  —      (3

Changes in pension plan assets and benefit obligations

  —      —      —      —      —      —      2    —      2  

Amortization of unearned stock- based compensation

  —      —      —      —      5,059    —      —      —      5,059  

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

  —      —      177    18    —      —      —      —      18  

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

  —      —      (69  (7  (2,200  —      —      —      (2,207

Purchase of treasury stock

  —      —      —      —      —      (252  —      —      (252

Other

  —      —      —      —      —      —      24    —      24  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at September 30, 2015

  2,906   $291    12,684   $1,269   $304,392   $(252 $(188 $318,683   $624,195  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                 Accumulated     Total 
  Voting  Non-Voting  Additional  Other Com-     Share- 
  Common Stock  Common Stock  Paid-in  prehensive  Retained  Holders’ 
  Shares  Amount  Shares  Amount  Capital  Income (Loss)  Earnings  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, 2015 2,906
 $291
 12,685
 $1,269
 $304,884
 $(567) $321,121
 $626,998
Net loss 
 
 
 
 
 
 (4,655) (4,655)
Unrealized gain on short-term investments 
 
 
 
 
 611
 
 611
Changes in pension plan assets and benefit obligations 
 
 
 
 
 1
 
 1
Amortization of unearned stock-based compensation 
 
 
 
 2,882
 
 
 2,882
Issuance of non-voting common stock (upon vesting of restricted stock units) 
 
 121
 12
 
 
 
 12
Cancellation of restricted non-voting stock units for tax withholdings on vested shares 
 
 (27) (3) (500) 
 
 (503)
Retirement of treasury stock 
 
 (8) 
 
 
 
 
Balance at June 30, 2016 2,906
 $291
 12,771
 $1,278
 $307,266
 $45
 $316,466
 $625,346
                 
  
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 
 
 
 
 
 
 (18,521) (18,521)
Unrealized gain on short-term investments 
 
 
 
 
 210
 
 210
Changes in pension plan assets and benefit obligations 
 
 
 
 
 14
 
 14
Amortization of unearned stock-based compensation 
 
 
 
 1,816
 
 
 1,816
Issuance of non-voting common stock (upon vesting of restricted stock units) 
 
 134
 13
 
 
 
 13
Cancellation of restricted non-voting stock units for tax withholdings on vested shares 
 
 (21) (2) (275) 
 
 (277)
Cumulative effect adjustment of unrecognized tax benefits 
 
 
 
 
 
 1,028
 1,028
Balance at June 30, 2017 2,906
 $291
 12,892
 $1,289
 $305,787
 $(254) $276,948
 $584,061
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

   Nine Months Ended 
   September 30, 
   2016  2015 

Operating activities:

   

Net (loss) earnings

  $(9,622 $24,486  

Adjustments to reconcile net earnings to net cash provided by operating activities:

   

Depreciation and amortization

   53,054    54,312  

Deferred income taxes

   (6,775  15,983  

Gain on asset dispositions

   (3,854  (238

Equity in loss of unconsolidated affiliate

   274    249  

Inventory valuation reserves

   3,766    1,576  

Changes in operating assets and liabilities

   (43,991  11,787  
  

 

 

  

 

 

 

Net cash (used in) provided by operating activities

   (7,148  108,155  
  

 

 

  

 

 

 

Investing activities:

   

Purchase of property and equipment

   (74,950  (48,244

Proceeds from asset dispositions

   13,233    3,469  

Purchase of short-term investments

   (263,204  (560,148

Proceeds from sale of short-term investments

   259,322    458,468  

Refund of deposits on aircraft

   —      6,010  

Payment of deposits on aircraft

   (197  (1,207

Loan to unconsolidated affiliate

   (1,200  —    
  

 

 

  

 

 

 

Net cash used in investing activities

   (66,996  (141,652
  

 

 

  

 

 

 

Financing activities:

   

Proceeds from line of credit

   213,900    206,660  

Payments on line of credit

   (139,000  (171,440

Repurchase of common stock

   (524  (2,441
  

 

 

  

 

 

 

Net cash provided by financing activities

   74,376    32,779  
  

 

 

  

 

 

 

Increase (decrease) in cash

   232    (718

Cash, beginning of period

   2,407    6,270  
  

 

 

  

 

 

 

Cash, end of period

  $2,639   $5,552  
  

 

 

  

 

 

 

Supplemental Disclosures Cash Flow Information

   

Cash paid during the period for:

   

Interest

  $28,258   $27,161  
  

 

 

  

 

 

 

Income taxes

  $2,856   $3,061  
  

 

 

  

 

 

 

Noncash investing activities:

   

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

  $3,717   $45  
  

 

 

  

 

 

 

  Six Months Ended 
 June 30,
  2017 2016
Operating activities:    
Net loss $(18,521) $(4,655)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 34,011
 34,761
Deferred income taxes (7,791) (3,572)
Loss (gain) on asset dispositions 7
 (3,939)
Equity in loss of unconsolidated affiliate, net 1,994
 76
Inventory valuation reserves 2,214
 2,613
Changes in operating assets and liabilities (19,863) (24,485)
Net cash (used in) provided by operating activities (7,949) 799
Investing activities:    
Purchase of property and equipment (43,892) (39,908)
Proceeds from asset dispositions 17
 10,998
Purchase of short-term investments (134,518) (151,436)
Proceeds from sale of short-term investments 187,217
 148,838
Payment of deposits on aircraft (110) (131)
Net cash provided by (used in) investing activities 8,714
 (31,639)
Financing activities:    
Proceeds from line of credit 66,525
 150,800
Payments on line of credit (67,300) (113,300)
Repurchase of common stock (263) (500)
Net cash (used in) provided by financing activities (1,038) 37,000
(Decrease) increase in cash (273) 6,160
Cash, beginning of period 2,596
 2,407
Cash, end of period $2,323
 $8,567
Supplemental Disclosures Cash Flow Information    
Cash paid during the period for:    
Interest $15,250
 $14,329
Income taxes $1,131
 $1,879
Noncash investing activities:    
Other current liabilities and accrued payables related to purchase of property and equipment $15
 $64
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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, 2015 and the accompanying notes.

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, 2015.2016. 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.

New


Recently Adopted Accounting Pronouncements—In May 2014,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 June 30, 2017.  Accordingly, we recorded income tax expense of $1.5 million in our consolidated statement of income for the six months ended June 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”)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 and will supersede most current revenue recognition guidance. In mid-2015customers. Entities can transition to the FASB deferredstandard either retrospectively or as a cumulative effect adjustment as of the effective date of ASU 2014-09 by one year until annual and interim periods beginning after December 15, 2017. Early adoption will be permitted as of January 1, 2017; however we have not yet determined if we will adopt this ASU prior to the effective date.adoption. The effects of thisnew standard on our financial position, results of operations and cash flows are not yet known.

In August 2014, the FASB issued ASU 2014-15Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to assess the entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. ASU 2014-15 is effective for annual periodsthe Company beginning after December 15, 2016,on January 1, 2018. Revenues from our Oil and annualGas segment and interim periods thereafter. Early adoption is permitted.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 do not believe that the impact of the implementation of this new guidancealso generate revenue on a cost-plus basis in our Technical Services segment. Based on our consolidated financial statements and disclosures will be significant.

In November 2015,initial assessment, the FASB issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes, which amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, with early adoption permitted, and the guidance may be applied either prospectively or retrospectively. We doCompany does not expect the adoption of this ASU to have a material impact on ourits condensed consolidated financial statements.

  Remaining implementation matters include establishing new policies, procedures, and controls and quantifying any adoption date adjustments.  The Company will 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 required to adopt this ASU for fiscal years after December 31, 2018, with early adoption permitted. Thecurrently evaluating the effects of this standard, on our financial position, results of operations, and cash flows are not yet known.

In March 2016,expect the FASB issued ASU 2016-09,Compensation – Stock Compensation (Topic 718); Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The effectsadoption of this standard will result in a material change to our consolidated assets and liabilities based on our financial position, resultslease portfolio as of operations, and cash flows are not yet known.

June 30, 2017. We plan to adopt this standard no later than 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. The 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.





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 gain (loss),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 SeptemberJune 30, 2016:

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

Investments:

        

Money market mutual funds

  $17,608    $—      $—      $17,608  

Commercial paper

   32,820     —       (75   32,745  

U.S. Government agencies

   16,296     5     (3   16,298  

Corporate bonds and notes

   236,215     33     (355   235,893  
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   302,939     38     (433   302,544  

Deferred compensation plan assets included in other assets

   2,392     —       —       2,392  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $305,331    $38    $(433  $304,936  
  

 

 

   

 

 

   

 

 

   

 

 

 

2017:

  Cost Basis Unrealized
Gains
 Unrealized
Losses
 Fair
Value
  (Thousands of dollars)
Investments:        
Money market mutual funds $18,079
 $
 $
 $18,079
Commercial paper 17,008
 
 (10) 16,998
U.S. Government agencies 15,301
 
 (19) 15,282
Corporate bonds and notes 199,772
 1
 (318) 199,455
Subtotal 250,160
 1
 (347) 249,814
Deferred compensation plan assets included in other assets 2,562
 
 
 2,562
Total $252,722
 $1
 $(347) $252,376



Investments consisted of the following as of December 31, 2015:

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

Investments:

        

Money market mutual funds

  $18,181    $—      $—      $18,181  

Commercial paper

   5,986     —       (5   5,981  

U.S. Government agencies

   11,499     —       (30   11,469  

Corporate bonds and notes

   265,069     —       (841   264,228  
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   300,735     —       (876   299,859  

Deferred compensation plan assets included in other assets

   2,294     —       —       2,294  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $303,029    $—      $(876  $302,153  
  

 

 

   

 

 

   

 

 

   

 

 

 

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


At SeptemberJune 30, 20162017 and December 31, 2015,2016, we classified $12.4 million and $13.0 million and $15.3 millionrespectively, 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, 2016   December 31, 2015 
   Amortized   Fair   Amortized   Fair 
   Costs   Value   Costs   Value 
   (Thousands of dollars) 

Due in one year or less

  $171,336    $171,152    $152,444    $152,212  

Due within two years

   113,995     113,784     130,110     129,466  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $285,331    $284,936    $282,554    $281,678  
  

 

 

   

 

 

   

 

 

   

 

 

 

  June 30, 2017 December 31, 2016
  Amortized
Costs
 Fair
Value
 Amortized
Costs
 Fair
Value
  (Thousands of dollars)
Due in one year or less $175,910
 $175,682
 $184,587
 $184,334
Due within two years 56,171
 56,053
 100,816
 100,378
Total $232,081
 $231,735
 $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, 2016   December 31, 2015 
   Average   Average   Average   Average 
   Coupon   Days To   Coupon   Days To 
   Rate (%)   Maturity   Rate (%)   Maturity 

Commercial paper

   0.978     253     0.553     154  

U.S. Government agencies

   0.979     512     0.865     599  

Corporate bonds and notes

   1.643     330     1.757     331  

  June 30, 2017 December 31, 2016
  Average
Coupon
Rate (%)
 Average
Days To
Maturity
 Average
Coupon
Rate (%)
 Average
Days To
Maturity
Commercial paper 0.985
 83 1.001
 184
U.S. Government agencies 1.056
 264 0.970
 400
Corporate bonds and notes 1.720
 246 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, 2016   December 31, 2015 
       Unrealized       Unrealized 
   Fair Value   Losses   Fair Value   Losses 
   (Thousands of dollars) 

Commercial paper

  $31,753    $(75  $5,981    $(5

U.S. Government agencies

   7,001     (2   8,969     (30

Corporate bonds and notes

   169,833     (320   232,347     (793
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $208,587    $(397  $247,297    $(828
  

 

 

   

 

 

   

 

 

   

 

 

 

  June 30, 2017 December 31, 2016
  Fair Value Unrealized
Losses
 Fair Value Unrealized
Losses
  (Thousands of dollars)
Commercial paper $16,998
 $(10) $27,867
 $(39)
U.S. Government agencies 13,287
 (15) 13,263
 (32)
Corporate bonds and notes 172,179
 (286) 210,836
 (602)
Total $202,464
 $(311) $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, 2016   December 31, 2015 
       Unrealized       Unrealized 
   Fair Value   Losses   Fair Value   Losses 
   (Thousands of dollars) 

Corporate bonds and notes

  $34,002    $(36  $28,866    $(48
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $34,002    $(36  $28,866    $(48
  

 

 

   

 

 

   

 

 

   

 

 

 

  June 30, 2017 December 31, 2016
  Fair Value Unrealized
Losses
 Fair Value Unrealized
Losses
  (Thousands of dollars)
U.S. Government agencies $1,996
 $(4) $
 $
Corporate bonds and notes 19,064
 (32) 24,196
 (20)
Total $21,060
 $(36) $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 SeptemberJune 30, 20162017 or December 31, 2015.2016. 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 SeptemberJune 30, 2016.2017. 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, 2015.

2016.


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 $5.4$6.0 million at SeptemberJune 30, 2016,2017, and $5.2 million at December 31, 2015.

2016.


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 $119.7$110.9 million and $103.6$111.9 million as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. The allowance for uncompensated care was $35.6$46.2 million and $41.9$46.3 million as of SeptemberJune 30, 20162017 and December 31, 2015,2016, 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 $2.0 million and $2.2 million for the quarters ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The value of these services was $6.9$4.4 million and $7.0$4.7 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The estimated cost of providing charity services was $0.5 million and $0.4 million for the quartersquarter ended SeptemberJune 30, 20162017 and 2015, respectively.$0.5 million for the quarter ended June 30, 2016. The estimated cost of providing charity services was $1.8$1.0 million and $1.5$1.2 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, 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:

   As of 
   September 30,
2016
  December 31,
2015
 

Allowance for Contractual Discounts

   60  56

Allowance for Uncompensated Care

   18  23

  June 30, 2017 December 31, 2016
Allowance for Contractual Discounts 56% 56%
Allowance for Uncompensated Care 23% 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 elsewhere herein,in our Form 10-K for year ended December 2016, 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 $17.1$17.7 million and $15.4$17.3 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, 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.









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, 2016 
   Total   (Level 1)   (Level 2) 
       (Thousands of dollars) 

Investments:

      

Money market mutual funds

  $17,608    $17,608    $—    

Commercial paper

   32,745     —       32,745  

U.S. Government agencies

   16,298     —       16,298  

Corporate bonds and notes

   235,893     —       235,893  
  

 

 

   

 

 

   

 

 

 
   302,544     17,608     284,936  

Deferred compensation plan assets

   2,392     2,392     —    
  

 

 

   

 

 

   

 

 

 

Total

  $304,936    $20,000    $284,936  
  

 

 

   

 

 

   

 

 

 

       December 31, 2015 
   Total   (Level 1)   (Level 2) 
       (Thousands of dollars) 

Investments:

      

Money market mutual funds

  $18,181    $18,181    $—    

Commercial paper

   5,981     —       5,981  

U.S. Government agencies

   11,469     —       11,469  

Corporate bonds and notes

   264,228     —       264,228  
  

 

 

   

 

 

   

 

 

 
   299,859     18,181     281,678  

Deferred compensation plan assets

   2,294     2,294     —    
  

 

 

   

 

 

   

 

 

 

Total

  $302,153    $20,475    $281,678  
  

 

 

   

 

 

   

 

 

 

    June 30, 2017
  Total (Level 1) (Level 2)
  (Thousands of dollars)
Investments:      
Money market mutual funds $18,079
 $18,079
 $
Commercial paper 16,998
 
 16,998
U.S. Government agencies 15,282
 
 15,282
Corporate bonds and notes 199,455
 
 199,455
  249,814
 18,079
 231,735
Deferred compensation plan assets 2,562
 2,562
 
Total $252,376
 $20,641
 $231,735
       
    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 shares ofinvestments 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 SeptemberJune 30, 20162017 and December 31, 2015.2016. 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 $485.6$463.0 million and $403.1$474.4 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.


5. LONG-TERM DEBT

The components of long-term debt as of the dates indicated below were as follows:

   September 30, 2016   December 31, 2015 
   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    $3,064    $500,000    $3,999  

Revolving Credit Facility due October 1, 2017 with a group of commercial banks, interest payable at variable rates

   132,400     —       57,500     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term debt

  $632,400    $3,064    $557,500    $3,999  
  

 

 

   

 

 

   

 

 

   

 

 

 

In April 2015, the FASB issued ASU No. 2015-03,Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in the financial statements. These costs are now presented as a direct deduction from the debt liability, rather than as an asset. We adopted the new standard effective January 1, 2016. As a result, we reclassified unamortized debt issuances cost in the amount of $3.1 million and $4.0 million as of September 30, 2016 and December 31, 2015, respectively, and reduced the carrying value of long-term debt by the same amounts.

  June 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
 $2,129
 $500,000
 $2,753
Revolving Credit Facility due October 1, 2018 with a group of commercial banks, interest payable at variable rates 133,225
 
 134,000
 
Total long-term debt $633,225
 $2,129
 $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’sPHI, 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–On September 30, 2016, weFacility – We have an amended ourand restated revolving credit facility to, among other things, (a) extend the maturity date to(our “credit facility”) that matures on October 1, 2018, and (b) modify the fixed charge coverage ratio such that it shall only be tested when the total of our Short Term Investments are less than $150.0 million at the end of any fiscal quarter.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 amended and restated revolving credit facility), at our option. Our revolving 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 the amended and restated revolvingour credit facility). As of SeptemberJune 30, 2016,2017, we believe we were in compliance with these covenants.

Cash paid to fund interest expense was $13.9$1.2 million for the quarter ended SeptemberJune 30, 20162017 and $13.5$0.6 million for the quarter ended SeptemberJune 30, 2015.2016. Cash paid to fund interest expense was $28.3$15.3 million for the ninesix months ended SeptemberJune 30, 20162017 and $27.2$14.3 million for the ninesix months ended SeptemberJune 30, 2015.

2016.

Letter of Credit Facility—Facility -We maintain a separate letter of credit facility that had $13.0$12.4 million and $15.3$13.0 million in letters of credit outstanding at SeptemberJune 30, 20162017 and December 31, 2015,2016 respectively. We have letters of credit securing our workers compensation policies, and a traditional provider contract.

contract, and a bond relating to foreign operations.

We also have outstanding a letter of credit for $7.6 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 -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.


6. EARNINGS PER SHARE

The components of basic and diluted earnings per share for the quarter and ninesix months ended SeptemberJune 30, 20162017 and 20152016 are as follows:

   Quarter Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
   (Thousands of dollars) 

Weighted average outstanding shares of common stock, basic

   15,683     15,587     15,655     15,558  

Dilutive effect of unvested restricted stock units

   —       65     —       82  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   15,683     15,652     15,655     15,640  
  

 

 

   

 

 

   

 

 

   

 

 

 

  Quarter Ended  
 June 30,
 Six Months Ended 
 June 30,
  2017 2016 2017 2016
  (Thousands of dollars)
Weighted average outstanding shares of common stock, basic 15,716
 15,677
 15,716
 15,650
Dilutive effect of unvested restricted stock units 
 41
 
 
Weighted average outstanding shares of common stock, diluted (1)
 15,716
 15,718
 15,716
 15,650
(1)
(1)For the threesix months ended SeptemberJune 30, 2017, and 2016, 52,126438,812 and 3,180 unvested restricted stock units were excluded from the weighted average outstanding shares of common stock, diluted, as they were anti-dilutive to earnings per share. For the nine months ended September 30, 2016, 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 ninesix months and quartersquarter ended SeptemberJune 30, 20162017 and 2015.

   Quarter Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
   (Thousands of dollars) 

Stock-based compensation expense:

  

Time-based restricted stock units

  $631    $619    $1,847    $1,827  

Performance-based restricted stock units

   823     1,081     2,502     3,232  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $1,454    $1,700    $4,349    $5,059  
  

 

 

   

 

 

   

 

 

   

 

 

 

2016. 

  Quarter Ended  
 June 30,
 Six Months Ended 
 June 30,
  2017 2016 2017 2016
  (Thousands of dollars)
Stock-based compensation expense:      
Time-based restricted stock units $556
 $597
 $1,111
 $1,216
Performance-based restricted stock units 705
 809
 705
 1,680
Total stock-based compensation expense $1,261
 $1,406
 $1,816
 $2,896
During the quarter and ninesix months ended SeptemberJune 30, 2017, 417,266 and 447,477 time-based restricted units, respectively, were awarded to managerial employees and 365,539 performance-based restricted units were awarded to managerial employees.
During the quarter and six months ended June 30, 2016, 10,992 and 25,28014,288 time-based restricted stock units were awarded to managerial employees respectively.

During the quarter and nine months ended September 30, 2016, 2,3185,102 and 310,481308,163 performance-based restricted stock units were awarded to managerial employees, respectively.

During the quarter and nine months ended September 30, 2015, 13,545 and 33,593 time-based restricted stock units were awarded to managerial employees, respectively.

During the quarter and nine months ended September 30, 2015, 765 and 152,331 performance-based restricted stock units were awarded to managerial employees, respectively.

8. ASSET DISPOSALS

There were no sales or disposals of aircraft during the first quarter of 2017. During the thirdsecond quarter of 2017, we disposed five medium aircraft and related parts inventory utilized in the Oil and Gas segment. These aircraft no longer met our strategic needs.
During the first quarter of 2016, we sold fourone light aircraft previously utilized in the Oil and Gas segment. Cash proceeds totaled $2.2$0.9 million, resulting in athe loss of $0.1 million on the sale of these assets. These aircraft no longer met our strategic needs. Inthis asset of $0.4 million. During the first two quarterssecond quarter of 2016, we sold fivefour light and three medium aircraft and related parts inventory utilized in the Oil and Gas segment. Cash proceeds totaled $11.0$10.1 million, resulting in a gain on the sale of these assets of $3.9$4.3 million. These aircraft no longer met our strategic needs.

During the third quarter of 2015, we sold or disposed of six light aircraft previously utilized in the Oil and Gas segment. Cash proceeds totaled $2.3 million, resulting in a gain on the sale of these assets of $0.2 million. These aircraft no longer met our strategic needs.

9. COMMITMENTS AND CONTINGENCIES

Commitments In 2014, we exercised an option to We currently have no aircraft purchase six additional heavy aircraft for delivery in 2015 and 2016. In 2015, we executed an amendment to terminate the purchase of four of the heavy aircraft for delivery in 2016. We took delivery of one aircraft in 2015 and delivery of the final aircraft in January 2016.

commitments.

Total aircraft deposits of $2.8$0.5 million were included in Other assetsAssets as of SeptemberJune 30, 2016.2017. This amount represents deposits paid by us under aircraft leases whicha deposit on a future lease buyout option. In the event we do not exercise the buyout option, the deposit will be applied either to the future purchase of the aircraft or the finalagainst lease payments depending upon whether or not we elect to purchase the aircraft when that option under the lease becomes available to us.

payments.

As of SeptemberJune 30, 2016,2017, we had options to purchase various aircraft that we currently operate under lease agreementsleases, with the aircraft owners. Thesesuch purchase options will becomebecoming exercisable at various datesin 2017 through 2020. The aggregate option purchase prices are $50.3 million in 2016, $55.7$18.5 million in 2017, $127.0 million in 2018, $150.4$129.0 million in 2019, and $22.7 million in 2020. Whether we exercise these options will depend upon several factors, including market conditions and our available cash atIn the respective exercise dates; however, we currently do not anticipate exercising the buyout options during 2016. During the quarter ended September 30, 2016, we declined the early buyout option on one aircraft.

During the thirdsecond quarter of 2016,2017, we purchased one heavy aircraft previously leased by usfrom a lessor for $26.7$17.0 million. This aircraftUnder current conditions, we believe it is unlikely that we will exercise the remaining 2017 purchase was made available for sale by the lessor prior to its early buy out option date and is not one of the above-mentioned aircraft available for purchase in 2016. We intend to use this aircraft in our international operations.

Subsequent to September 30, 2016, we entered into a contract to purchase two medium aircraft for use in our Oil and Gas segment. We expect to take delivery of the aircraft in the first quarter of 2017. The total purchase commitment is $19.9 million.

options, unless opportunistic conditions arise.


Environmental Matters –We have PHI has recorded an aggregate estimated probable liability of $0.2$0.15 million as of SeptemberJune 30, 20162017 for environmental response costs. We havePreviously, PHI conducted environmental surveys of ourits former Lafayette facilityFacility located at the Lafayette Regional Airport, which we vacated in 2001, and havePHI has determined that limited soil and groundwater contamination existsexist at two parcels of land at the former facility. We submitted an assessment reportAn Assessment Report for both sitesparcels was submitted in 2003 (and updated it in 2006, and received approvals of our remediation plan from2006) to the Louisiana Department of Environmental Quality (“LDEQ”)(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 suchthat time, we have installedPHI has performed groundwater monitoring wellssampling of the required groundwater monitor well installations at both parcels and submitted these sites and furnished periodicsampling reports on contamination levels to the LDEQ. Pursuant to ouran agreement with the LDEQ, we are providing samples annuallyPHI provided groundwater sample results semi-annually to the LDEQ for both sites.parcels from 2005 to 2015. LDEQ approved a reduction in the sampling program from semi-annual to annual groundwater monitoring in 2015. Based upon ouron PHI’s working relationship and agreements with the LDEQ, and the results of our ongoing siteformer facility parcel monitoring, we believe, based on current circumstances,PHI believes that our ultimate remediation costs for these sitesthe subject parcels will not be material to ourPHI’s consolidated financial position, results of operations or cash flows.

Legal Matters –From time to time, we are involved in various legal actions incidental to our business, including actions relating to employee claims, medical malpractice claims, various 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 SeptemberJune 30, 2016,2017, we had approximately $239.0$205.2 million in aggregate commitments under operating leases of which approximately $12.0$21.6 million is payable through December 31, 2016.the second half of 2017. The total lease commitments include $226.2$191.4 million for aircraft and $12.8$13.8 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.

Each


A segment’s operating profit or loss is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has aA portion of our total selling, general and administrative expenses that is charged directly to theeach segment, and a small portion that 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 direct expensescosts as a percentage of total direct expenses. Unallocated overhead consists primarily of corporate selling, general and administrative expenses that we do not allocate to the reportable segments.

In January 2016, we offered a Voluntary Employee Retirement Package (“VERP”) to all pilots who had attained age 64. Fifteen employees accepted this VERP, resulting in severance costs of $1.6 million recorded in the first quarter of 2016. At September 30, 2016, the severance costs from these offerings had been paid.

During the quarter ended March 31, 2016, we also offered a voluntary furlough program to our operating costs.

Oil and Gas pilots whereby pilots who elect to participate in the program will receive severance pay and may continue medical coverage at their current employee-paid premiums. Twenty-six pilots accepted the offer with a total severance cost of $0.4 million. Under the terms of the furlough agreement, we must, no later than twelve months from the date of furlough, offer each furloughed employee a right to return to work.

Oil and Gas Segment.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 SeptemberJune 30, 2016,2017, we had available for use 139128 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 rate forpayments 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 ourthe Oil and Gas segment are primarily aircraft operationsoperation costs, including costs for pilots and maintenance personnel. Total fuel cost is included in direct expense and any reimbursement ofWe typically operate under fixed-term contracts with our customers, a substantial portion of these costs above a contracted per-gallon amount is includedwhich 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 revenue.U.S. dollars. For the quarters ended SeptemberJune 30, 20162017 and 2015,2016, respectively, approximately 49%51% and 56%52% of our total operating revenues were generated by our Oil and Gas segment. Oursegment, with approximately 88% and 92% of these revenues from fixed-term customer contracts. For the six months ended June 30, 2017 and 2016, respectively, approximately 52% of our total operating revenues were generated by our Oil and Gas segment, generatedwith approximately 51%88% and 57%92% of our total operating revenuethese revenues from fixed-term customer contracts. The remaining 12% and 8% of these revenues were attributable to work in the spot market and ad hoc flights for the nine months ended September 30, 2016 and 2015, respectively.

contracted customers.


Air Medical Segment.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.

As of September 30, 2016, 104 aircraft were available for use by our


We provide Air Medical segment. At such date, we operated approximately 97 aircraft domestically, providing air medical transportation services for hospitals and emergency service agencies throughout the U.S. As of June 30, 2017, our Air Medical segment operated approximately 104 aircraft in 18 states at 72 separate locations. Through September 30, 2016, we also provided air medical transportation services for a customer overseas. For our overseas program, we deployed eight customer-owned aircraft at three locations, with four aircraft generating revenues during the quarter and nine months ended September 30, 2016.


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 quartersquarter ended SeptemberJune 30, 2017 and 2016, approximately 46% and 2015, approximately 47% and 40%45% of our total operating revenues were generated by our Air Medical segment, respectively. For the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, approximately 45% and 37%44% of our total operating revenues were generated by our Air Medical segment, respectively.

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:

   Revenue 
   Quarter Ended  Nine Months Ended 
   September 30,  September 30, 
   2016  2015  2016  2015 

Provision for contractual discounts

   65  63  67  65

Provision for uncompensated care

   9  11  6  9

  Quarter Ended  
 June 30,
 Quarter Ended  
 June 30,
  2017 2016 2017 2016
Provision for contractual discounts 63% 65% 66% 69%
Provision for uncompensated care 10% 7% 7% 4%

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  Nine Months Ended 
   September 30,  September 30, 
   2016  2015  2016  2015 

Insurance

   75  74  72  74

Medicare

   17  17  18  17

Medicaid

   8  8  9  8

Self-Pay

   0  1  1  1

  Quarter Ended  
 June 30,
 Quarter Ended  
 June 30,
  2017 2016 2017 2016
Insurance 72% 69% 71% 70%
Medicare 18% 18% 18% 18%
Medicaid 8% 9% 9% 10%
Self-Pay 2% 4% 2% 2%

We also have several traditional providera limited number of contracts with hospitals under which we receive a fixed monthly ratefee component for aircraft availability and an hourly ratea 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 27%18% and 34%29% of the segment’s revenues for the quarters ended SeptemberJune 30, 20162017 and 2015,2016, respectively. For the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, these contracts generated approximately 29% and 37%30% of the segment’s revenues, respectively.

segment's revenues.

Technical Services Segment.Segment -Our Technical Services segment provides maintenancehelicopter repair and repairsoverhaul services for our existingflight operations customers that own their aircraft. TheseCosts associated with these services are primarily labor, and customers are generally labor intensive with higher operating margins as comparedbilled at a percentage above our service costs. We also periodically provide flight services to other segments. Depending on when we commence and complete special projects forgovernmental customers our results forunder this segment, can vary significantly from periodincluding our agreement to period, although these variances typically have a limited impact on our consolidated operating results. The Technical Services segment also conducts flight operationsoperate six aircraft for the National Science Foundation in Antarctica, which are typically conducted in the first and fourth

quarters each year. Also included in this segment are the results ofis our proprietary Helipass operations, which provides software as a service to certain of our Oil and Gas customers for the purpose of passenger check-in and compliance verification.

Approximately 4%

For the quarters ended June 30, 2017 and 2016, approximately 3% and 5%, respectively, of our total operating revenues were generated by our Technical Services segment during eachsegment. For the six month period ended June 30, 2017 and 2016, approximately 4%, respectively, of the three and nine-month periods ended September 30, 2016 and 2015.

our total operating revenues were generated by our Technical Services segment.


Summarized financial information concerning our reportable operating segments for the quarters and ninesix months ended SeptemberJune 30, 20162017 and 20152016 is as follows:

   Quarter Ended   Nine Months Ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
   (Thousands of dollars)   (Thousands of dollars) 

Segment operating revenues, net

        

Oil and Gas

  $77,551    $121,190    $249,173    $354,425  

Air Medical

   74,482     85,516     220,089     239,543  

Technical Services

   6,060     8,027     19,983     23,509  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues, net

   158,093     214,733     489,245     617,477  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment direct expenses(1)

        

Oil and Gas(2)

   82,832     109,500     262,148     310,093  

Air Medical

   56,562     65,474     172,603     189,089  

Technical Services

   5,742     7,165     15,432     21,166  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total direct expenses

   145,136     182,139     450,183     520,348  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment selling, general and administrative expenses

        

Oil and Gas

   1,705     1,397     4,838     3,831  

Air Medical

   3,056     2,302     8,293     7,458  

Technical Services

   266     230     763     552  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment selling, general and administrative expenses

   5,027     3,929     13,894     11,841  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment expenses

   150,163     186,068     464,077     532,189  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net segment (loss) profit

        

Oil and Gas

   (6,986   10,293     (17,813   40,501  

Air Medical

   14,864     17,740     39,193     42,996  

Technical Services

   52     632     3,788     1,791  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   7,930     28,665     25,168     85,288  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other, net(3)

   377     637     5,425     1,739  

Unallocated selling, general and administrative costs(1)

   (8,354   (7,646   (22,938   (23,018

Interest expense

   (7,719   (7,366   (22,792   (21,691
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) earnings before income taxes

  $(7,766  $14,290    $(15,137  $42,318  
  

 

 

   

 

 

   

 

 

   

 

 

 

  Quarter Ended  
 June 30,
 Six Months Ended 
 June 30,
  2017 2016 2017 2016
  (Thousands of dollars)
Segment operating revenues        
Oil and Gas $74,668
 $83,185
 $146,399
 $171,622
Air Medical 67,222
 75,547
 122,559
 145,607
Technical Services 4,534
 8,404
 12,084
 13,923
Total operating revenues, net 146,424
 167,136
 281,042
 331,152
Segment direct expenses (1)
        
Oil and Gas (2)
 73,681
 87,400
 155,410
 179,316
Air Medical 50,402
 58,997
 101,243
 116,041
Technical Services 3,858
 6,096
 8,804
 9,690
Total segment direct expenses 127,941
 152,493
 265,457
 305,047
Segment selling, general and administrative expenses        
Oil and Gas 1,635
 1,605
 3,354
 3,132
Air Medical 3,263
 2,642
 6,144
 5,237
Technical Services 356
 273
 694
 497
Total segment selling, general and administrative expenses 5,254
 4,520
 10,192
 8,866
Total segment expenses 133,195
 157,013
 275,649
 313,913
Net segment (loss) profit        
Oil and Gas (648) (5,820) (12,365) (10,826)
Air Medical 13,557
 13,908
 15,172
 24,329
Technical Services 320
 2,035
 2,586
 3,736
Total net segment profit 13,229
 10,123
 5,393
 17,239
         
Other, net (3)
 697
 4,792
 1,761
 5,048
Unallocated selling, general and administrative costs (1)
 (8,993) (7,258) (17,099) (14,585)
Interest expense (8,083) (7,540) (16,278) (15,073)
(Loss) earnings before income taxes $(3,150) $117
 $(26,223) $(7,371)
(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   Nine Months Ended 
   September 30,   September 30, 
   2016   2015   2016   2015 

Segment Direct Expense:

        

Oil and Gas

  $10,616    $11,194    $30,558    $32,797  

Air Medical

   5,267     4,100     14,654     12,948  

Technical Services

   141     130     426     390  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $16,024    $15,424    $45,638    $46,135  
  

 

 

   

 

 

   

 

 

   

 

 

 

Unallocated SG&A

  $2,269    $2,376    $7,416    $8,177  
  

 

 

   

 

 

   

 

 

   

 

 

 

  Depreciation and Amortization Expense
  Quarter Ended  
 June 30,
 Six Months Ended 
 June 30,
  2017 2016 2017 2016
  (Thousands of dollars)
Segment Direct Expense:        
Oil and Gas $9,824
 $10,024
 $19,686
 $19,942
Air Medical 5,219
 5,132
 10,696
 9,387
Technical Services 148
 157
 294
 285
Total $15,191
 $15,313
 $30,676
 $29,614
Unallocated SG&A $622
 $2,476
 $3,335
 $5,147
(2)Includes Equity in loss of unconsolidated affiliate.affiliates, net.
(3)Consists of gains on disposition of property and equipment and other income.


11. INVESTMENT IN VARIABLE INTEREST ENTITY

AND OTHER INVESTMENTS AND AFFILIATES

PHI Century Limited -We account for our investment in our West African operations as a variable interest entity, 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. As of SeptemberJune 30, 2016,2017, 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 SeptemberJune 30, 2017, we recorded income in equity of this unconsolidated affiliate of $0.1 million relative to our 49% equity ownership. For the six months ended June 30, 2017 and 2016, we recorded a loss in equity of this unconsolidated affiliate of $0.2$0.9 million compared to a loss ofand $0.1 million for the quarter ended September 30, 2015, relative to our 49% equity ownership. For the nine months ended September 30, 2016, we recorded a loss in equity of unconsolidated affiliate of $0.3 million, compared to a loss of $0.2 million for the nine months ended September 30, 2015, relative to our 49% equity ownership. ownership, respectively.We had $0$2.4 million and $2.0 million of trade receivables as of SeptemberJune 30, 2016 from PHIC. At2017 and December 31, 2015, we recorded an allowance for bad debts against this trade receivable of $1.5 million, as we do not anticipate that we will be able to recover them.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 $0.9$0.4 million and $0$0.2 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.


PHI-HNZ Australia Ltd -In the fourth quarter of 2016, the Company and HNZ Group, Inc. (HHNZ) jointly formed PHI-HNZ Australia Pty Ltd., a legal entity held 50% by PHI, Inc. and 50% by HNZ Group, Inc. (“HNZ”), to provide helicopter transportation services in support of a gas development project offshore of western Australia. PHI-HNZ Australia Pty, Ltd began operations in April, 2017. For the quarter and six months ended June 30, 2017, we recorded a loss in equity of unconsolidated affiliate of $1.1 million, primarily related to startup costs associated with the contract.
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 ourPHI, 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”) and the guarantor subsidiaries and the non-guarantor subsidiaries, each under separate headings.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 companyParent 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 have begun reporting all of our non-guarantors subs in a separate column beginning with the quarter ended June 30, 2017.




PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(Thousands of dollars)

(Unaudited)

   September 30, 2016 
   Parent          
   Company  Guarantor       
   Only (issuer)  Subsidiaries (1)  Eliminations  Consolidated 
ASSETS     

Current Assets:

     

Cash

  $36   $2,603   $—     $2,639  

Short-term investments

   289,520    —      —      289,520  

Accounts receivable – net

   64,564    77,911    —      142,475  

Intercompany receivable

   —      41,796    (41,796  —    

Inventories of spare parts – net

   60,416    8,993    —      69,409  

Prepaid expenses

   4,412    2,564    —      6,976  

Deferred income taxes

   10,379    —      —      10,379  

Income taxes receivable

   950    (87  —      863  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total current assets

   430,277    133,780    (41,796  522,261  

Investment in subsidiaries

   351,440    —      (351,440  —    

Property and equipment – net

   602,296    314,264    —      916,560  

Restricted cash and investments

   13,023    15    —      13,038  

Other assets

   6,181    1,153    —      7,334  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  $1,403,217   $449,212   $(393,236 $1,459,193  
  

 

 

  

 

 

  

 

 

  

 

 

 

LIABILITIES AND

SHAREHOLDERS’ EQUITY

     

Current Liabilities:

     

Accounts payable

  $17,232   $3,611   $—     $20,843  

Accrued and other current liabilities

   21,894    10,284    —      32,178  

Intercompany payable

   41,796    —      (41,796  —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Total current liabilities

   80,922    13,895    (41,796  53,021  

Long-term debt:

     

Revolving credit facility

   132,400    —      —      132,400  

Senior Notes dated March 17, 2014, net of debt issuance costs of $3,064

   496,936    —      —      496,936  

Deferred income taxes and other long-term liabilities

   71,472    83,877    —      155,349  

Shareholders’ Equity:

     

Common stock and paid-in capital

   310,259    79,191    (79,191  310,259  

Accumulated other comprehensive income

   (271  —      —      (271

Retained earnings

   311,499    272,249    (272,249  311,499  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total shareholders’ equity

   621,487    351,440    (351,440  621,487  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities and shareholders’ equity

  $1,403,217   $449,212   $(393,236 $1,459,193  
  

 

 

  

 

 

  

 

 

  

 

 

 

  June 30, 2017
  Parent
Company
Only (issuer)
 Guarantor
Subsidiaries
 Non-Guarantor Subsidiaries Eliminations Consolidated
ASSETS          
Current Assets:          
Cash $48
 $1,328
 $947
 $
 $2,323
Short-term investments 237,433
 
 
 
 237,433
Accounts receivable – net 78,334
 63,020
 8,969
 (2,819) 147,504
Intercompany receivable 
 105,938
 
 (105,938) 
Inventories of spare parts – net 67,148
 9,007
 
 
 76,155
Prepaid expenses 10,554
 2,394
 183
 
 13,131
Deferred income taxes 10,798
 
 
 
 10,798
Income taxes receivable 418
 (4) 
 
 414
Total current assets 404,733
 181,683
 10,099
 (108,757) 487,758
           
Investment in subsidiaries 376,032
 
 
 (376,032) 
Property and equipment – net 626,402
 291,118
 614
 
 918,134
Restricted cash and investments 12,382
 
 14
 
 12,396
Other assets 9,168
 1,004
 
 
 10,172
Total assets $1,428,717
 $473,805
 $10,727
 $(484,789) $1,428,460
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current Liabilities:          
Accounts payable $24,177
 $3,200
 $3,233
 $(2,819) $27,791
Accrued and other current liabilities 24,508
 7,836
 1,040
 
 33,384
Intercompany payable 97,739
 
 8,199
 (105,938) 
Total current liabilities 146,424
 11,036
 12,472
 (108,757) 61,175
           
Long-term debt 631,096
 
 
 
 631,096
Deferred income taxes and other long-term liabilities 67,136
 83,926
 1,066
 
 152,128
Shareholders’ Equity:          
Common stock and paid-in capital 307,367
 77,951
 1,375
 (79,326) 307,367
Accumulated other comprehensive loss (254) 
 
 
 (254)
Retained earnings 276,948
 300,892
 (4,186) (296,706) 276,948
Total shareholders’ equity 584,061
 378,843
 (2,811) (376,032) 584,061
Total liabilities and shareholders’ equity $1,428,717
 $473,805
 $10,727
 $(484,789) $1,428,460








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 guarantor subsidiaries’guarantors’ subsidiaries amounts.














PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

STATEMENTS OF OPERATIONS

(Thousands of dollars)

(Unaudited)

   December 31, 2015 
   Parent          
   Company  Guarantor       
   Only (issuer)  Subsidiaries (1)  Eliminations  Consolidated 
ASSETS     

Current Assets:

     

Cash

  $46   $2,361   $—     $2,407  

Short-term investments

   284,523    —      —      284,523  

Accounts receivable – net

   70,336    74,442    —      144,778  

Intercompany receivable

   —      90,943    (90,943  —    

Inventories of spare parts – net

   60,060    9,431    —      69,491  

Prepaid expenses

   7,162    1,789    —      8,951  

Deferred income taxes

   10,379    —      —      10,379  

Income taxes receivable

   1,002    (241  —      761  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total current assets

   433,508    178,725    (90,943  521,290  

Investment in subsidiaries

   330,848    —      (330,848  —    

Property and equipment – net

   632,759    250,770    —      883,529  

Restricted investments

   15,336    —      —      15,336  

Other assets

   5,975    203    —      6,178  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  $1,418,426   $429,698   $(421,791 $1,426,333  
  

 

 

  

 

 

  

 

 

  

 

 

 

LIABILITIES AND

SHAREHOLDERS’ EQUITY

     

Current Liabilities:

     

Accounts payable

  $25,512   $5,861   $—     $31,373  

Accrued liabilities

   29,138    15,621    —      44,759  

Intercompany payable

   90,943    —      (90,943  —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Total current liabilities

   145,593    21,482    (90,943  76,132  

Long-term debt:

     

Revolving credit facility

   57,500    —      —      57,500  

Senior Notes dated March 17, 2014, net of debt issuance costs of $3,999

   496,001    —      —      496,001  

Deferred income taxes and other long-term liabilities

   92,334    77,368    —      169,702  

Shareholders’ Equity:

     

Common stock and paid-in capital

   306,444    79,061    (79,061  306,444  

Accumulated other comprehensive loss

   (567  —      —      (567

Retained earnings

   321,121    251,787    (251,787  321,121  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total shareholders’ equity

   626,998    330,848    (330,848  626,998  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities and shareholders’ equity

  $1,418,426   $429,698   $(421,791 $1,426,333  
  

 

 

  

 

 

  

 

 

  

 

 

 

  For the quarter ended June 30, 2017
  Parent
Company
Only (issuer)
 Guarantor
Subsidiaries
 Non-Guarantor Subsidiaries Eliminations Consolidated
Operating revenues, net $75,045
 $68,857
 $5,341
 $(2,819) $146,424
Expenses:          
Direct expenses 72,598
 51,806
 5,366
 (2,819) 126,951
Selling, general and administrative expenses 10,916
 3,269
 66
 (4) 14,247
Total operating expenses 83,514
 55,075
 5,432
 (2,823) 141,198
Loss (gain) on disposal of assets, net 8
 (1) 
 
 7
Equity in (income) loss of unconsolidated affiliates, net (75) 
 1,066
 
 991
Operating (loss) income (8,402) 13,783
 (1,157) 4
 4,228
Equity in net income of consolidated subsidiaries (14,613) 
 
 14,613
 
Interest expense 8,082
 1
 
 
 8,083
Other income, net (708) (1) 
 4
 (705)
  (7,239) 
 
 14,617
 7,378
(Loss) earnings before income taxes (1,163) 13,783
 (1,157) (14,613) (3,150)
Income tax expense (benefit) 2,110
 (1,987) 
 
 123
Net (loss) earnings $(3,273) $15,770
 $(1,157) $(14,613) $(3,273)

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
  For the quarter ended June 30, 2016
  Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries 
(1)
 Eliminations Consolidated
Operating revenues, net $89,365
 $77,771
 $
 $167,136
Expenses:        
Direct expenses 89,535
 62,882
 
 152,417
Selling, general and administrative expenses 9,232
 2,871
 (325) 11,778
Total operating expenses 98,767
 65,753
 (325) 164,195
Gain on disposal of assets, net (4,298) 
 
 (4,298)
Equity in loss of consolidated affiliates, net 76
 
 
 76
Operating (loss) income (5,180) 12,018
 325
 7,163
Equity in net income of consolidated subsidiaries (7,035) 
 7,035
 
Interest expense 7,534
 6
 
 7,540
Other income, net (819) 
 325
 (494)
  (320) 6
 7,360
 7,046
(Loss) earnings before income taxes (4,860) 12,012
 (7,035) 117
Income tax (benefit) expense (9,137) 4,977
 
 (4,160)
Net earnings $4,277
 $7,035
 $(7,035) $4,277
(1)Foreign subsidiaries represent minor subsidiaries and are included in the guarantor subsidiaries’guarantors’ subsidiaries amounts.

PHI, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(Thousands of dollars)

(Unaudited)

   For the quarter ended September 30, 2016 
   Parent          
   Company  Guarantor       
   Only (issuer)  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 unconsolidated affiliate

   198    —      —      198  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating 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
  

 

 

  

 

 

  

 

 

  

 

 

 
   For the quarter ended September 30, 2015 
   Parent          
   Company  Guarantor       
   Only (issuer)  Subsidiaries(1)  Eliminations  Consolidated 

Operating revenues, net

  $124,505   $90,228   $—     $214,733  

Expenses:

     

Direct expenses

   111,876    70,192    (4  182,064  

Selling, general and administrative expenses

   9,219    2,356    —      11,575  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   121,095    72,548    (4  193,639  

Gain on disposal of assets, net

   (165  —      —      (165

Equity in loss of unconsolidated affiliate

   75    —      —      75  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   3,500    17,680    4    21,184  

Equity in net income of consolidated subsidiaries

   (10,682  —      10,682    —    

Interest expense

   7,274    92    —      7,366  

Other income, net

   (474  (2  4    (472
  

 

 

  

 

 

  

 

 

  

 

 

 
   (3,882  90    10,686    6,894  
  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings before income taxes

   7,382    17,590    (10,682  14,290  

Income tax (benefit) expense

   (287  6,908    —      6,621  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net earnings

  $7,669   $10,682   $(10,682 $7,669  
  

 

 

  

 

 

  

 

 

  

 

 

 

  For the six months ended June 30, 2017
  Parent
Company
Only (issuer)
 Guarantor
Subsidiaries
 Non-Guarantor Subsidiaries Eliminations Consolidated
Operating revenues, net $149,329
 $126,330
 $8,202
 $(2,819) $281,042
Expenses:          
Direct expenses 154,942
 104,187
 7,154
 (2,819) 263,464
Selling, general and administrative expenses 21,024
 6,155
 120
 (9) 27,290
Total operating expenses 175,966
 110,342
 7,274
 (2,828) 290,754
Loss (gain) on disposal of assets, net 8
 (1) 
 
 7
Equity in loss (income) of unconsolidated affiliates, net 928
 
 1,066
 
 1,994
Operating income (loss) (27,573) 15,989
 (138) 9
 (11,713)
Equity in net income of consolidated subsidiaries (17,243) 
 
 17,243
 
Interest expense 16,256
 22
 
 
 16,278
Other income, net (1,776) (1) 
 9
 (1,768)
  (2,763) 21
 
 17,252
 14,510
(Loss) earnings before income taxes (24,810) 15,968
 (138) (17,243) (26,223)
Income tax (benefit) expense (6,289) (1,413) 
 
 (7,702)
Net (loss) earnings $(18,521) $17,381
 $(138) $(17,243) $(18,521)

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
  For the six months ended June 30, 2016
  Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries 
(1)
 Eliminations Consolidated
Operating revenues, net $181,234
 $149,918
 $
 $331,152
Expenses:        
Direct expenses 181,572
 123,399
 
 304,971
Selling, general and administrative expenses 18,275
 5,674
 (498) 23,451
Total operating expenses 199,847
 129,073
 (498) 328,422
Gain on disposal of assets, net (3,939) 
 
 (3,939)
Equity in loss of unconsolidated affiliate 76
 
 
 76
Operating (loss) income (14,750) 20,845
 498
 6,593
Equity in net income of consolidated subsidiaries (12,090) 
 12,090
 
Interest expense 15,047
 26
 
 15,073
Other income, net (1,603) (4) 498
 (1,109)
  1,354
 22
 12,588
 13,964
(Loss) earnings before income taxes (16,104) 20,823
 (12,090) (7,371)
Income tax (benefit) expense (11,449) 8,733
 
 (2,716)
Net (loss) earnings $(4,655) $12,090
 $(12,090) $(4,655)
(1)Foreign subsidiaries represent minor subsidiaries and are included in the guarantor subsidiaries’guarantors’ subsidiaries amounts.



PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

COMPREHENSIVE INCOME (LOSS)

(Thousands of dollars)

(Unaudited)

   For the nine months ended September 30, 2016 
   Parent             
   Company   Guarantor         
   Only (issuer)   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 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
  

 

 

   

 

 

   

 

 

   

 

 

 
   For the nine months ended September 30, 2015 
   Parent             
   Company   Guarantor         
   Only (issuer)   Subsidiaries(1)   Eliminations   Consolidated 

Operating revenues, net

  $368,202    $249,275    $—      $617,477  

Expenses:

        

Direct expenses

   321,841     198,271     (13   520,099  

Selling, general and administrative expenses

   27,198     7,661     —       34,859  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   349,039     205,932     (13   554,958  

Gain on disposal of assets, net

   (238   —       —       (238

Equity in loss of unconsolidated affiliate

   249     —       —       249  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   19,152     43,343     13     62,508  

Equity in net income of consolidated subsidiaries

   (26,044   —       26,044     —    

Interest expense

   21,599     92     —       21,691  

Other income, net

   (1,508   (6   13     (1,501
  

 

 

   

 

 

   

 

 

   

 

 

 
   (5,953   86     26,057     20,190  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

   25,105     43,257     (26,044   42,318  

Income tax expense

   619     17,213     —       17,832  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

  $24,486    $26,044    $(26,044  $24,486  
  

 

 

   

 

 

   

 

 

   

 

 

 

  For the quarter ended June 30, 2017
  Parent
Company
Only (issuer)
 Guarantor
Subsidiaries
 Non-Guarantor Subsidiaries Eliminations Consolidated
Net (loss) earnings $(3,273) $15,770
 $(1,157) $(14,613) $(3,273)
Unrealized gain on short-term investments 167
 
 
 
 167
Changes in pension plan asset and benefit obligation 23
 
 
 
 23
Tax effect of the above-listed adjustments (68) 
 
 
 (68)
Total comprehensive (loss) income $(3,151) $15,770
 $(1,157) $(14,613) $(3,151)






PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Thousands of dollars)
  For the quarter ended June 30, 2016
  Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries
(1)
 Eliminations Consolidated
Net earnings $4,277
 $7,035
 $(7,035) $4,277
Unrealized gain on short-term investments 210
 
 
 210
Changes in pension plan asset and benefit obligations 1
 
 
 1
Tax effect of the above-listed adjustments (75) 
 
 (75)
Total comprehensive (loss) income $4,413
 $7,035
 $(7,035) $4,413
(1)Foreign subsidiaries represent minor subsidiaries and are included in the guarantor subsidiaries’guarantors’ subsidiaries amounts.



PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

 (LOSS)

(Thousands of dollars)

(Unaudited)

   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 loss on short-term investments

   (494  —       —      (494

Changes in pension plan assets and benefit obligations

   1    —       —      1  

Tax effect

   178    —       —      178  
  

 

 

  

 

 

   

 

 

  

 

 

 

Total comprehensive (loss) income

  $(5,282 $8,372    $(8,372 $(5,282
  

 

 

  

 

 

   

 

 

  

 

 

 
   For the quarter ended September 30, 2015 
   Parent
Company
Only (issuer)
  Guarantor
Subsidiaries(1)
   Eliminations  Consolidated 

Net earnings

  $7,669   $10,682    $(10,682 $7,669  

Unrealized gain on short-term investments

   12    —       —      12  

Changes in pension plan assets and benefit obligations

   4    —       —      4  

Tax effect

   (6  —       —      (6
  

 

 

  

 

 

   

 

 

  

 

 

 

Total comprehensive income

  $7,679   $10,682    $(10,682 $7,679  
  

 

 

  

 

 

   

 

 

  

 

 

 

  For the six months ended June 30, 2017
  Parent
Company
Only (issuer)
 Guarantor
Subsidiaries
 Non-Guarantor Subsidiaries Eliminations Consolidated
Net (loss) earnings $(18,521) $17,381
 $(138) $(17,243) $(18,521)
Unrealized gain on short-term investments 329
 
 
 
 329
Changes in pension plan asset and benefit obligation 22
 
 
 
 22
Tax effect of the above-listed adjustments (127) 
 
 
 (127)
Total comprehensive (loss) income $(18,297) $17,381
 $(138) $(17,243) $(18,297)






PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Thousands of dollars)
  For the six months ended June 30, 2016
  Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries 
(1)
 Eliminations Consolidated
Net (loss) earnings $(4,655) $12,090
 $(12,090) $(4,655)
Unrealized gain on short-term investments 1,017
 
 
 1,017
Changes in pension plan asset and benefit obligations 2
 
 
 2
Tax effect of the above-listed adjustments (407) 
 
 (407)
Total comprehensive (loss) income $(4,043) $12,090
 $(12,090) $(4,043)
(1)Foreign subsidiaries represent minor subsidiaries and are included in the guarantor subsidiaries’guarantors’ subsidiaries amounts.



PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CASH FLOWS

(Thousands of dollars)

(Unaudited)

   For the nine months ended September 30, 2016 
   Parent           
   Company  Guarantor        
   Only (issuer)  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 assets and benefit obligations

   3    —       —      3  

Tax effect

   (229  —       —      (229
  

 

 

  

 

 

   

 

 

  

 

 

 

Total comprehensive (loss) income

  $(9,325 $20,462    $(20,462 $(9,325
  

 

 

  

 

 

   

 

 

  

 

 

 
   For the nine months ended September 30, 2015 
   Parent           
   Company  Guarantor        
   Only (issuer)  Subsidiaries(1)   Eliminations  Consolidated 

Net earnings

  $24,486   $26,044    $(26,044 $24,486  

Unrealized loss on short-term investments

   (7  —       —      (7

Unrealized realized gain

   24    —       —      24  

Changes in pension plan assets and benefit obligations

   4    —       —      4  

Tax effect

   3    —       —      3  
  

 

 

  

 

 

   

 

 

  

 

 

 

Total comprehensive income

  $24,510   $26,044    $(26,044 $24,510  
  

 

 

  

 

 

   

 

 

  

 

 

 

  For the six months ended June 30, 2017
  Parent
Company
Only (issuer)
 Guarantor
Subsidiaries
 Non-Guarantor Subsidiaries Eliminations Consolidated
Net cash (used in) provided by operating activities $(34,236) $18,916
 $7,371
 $
 $(7,949)
Investing activities:          
Purchase of property and equipment (43,892) 
 
 
 (43,892)
Proceeds from asset dispositions 17
 
 
 
 17
Purchase of short-term investments (134,518) 
 
 
 (134,518)
Proceeds from sale of short-term investments 187,217
 
 
 
 187,217
Payments of deposits on aircraft (110) 
 
 
 (110)
Net cash provided by (used in) investing activities 8,714
 
 
 
 8,714
Financing activities:          
Proceeds from line of credit 66,525
 
 
 
 66,525
Payments on line of credit (67,300) 
 
 
 (67,300)
Repurchase of common stock (263) 
 
 
 (263)
Due to/from affiliate, net 26,572
 (19,688) (6,884) 
 
Net cash provided by (used in) financing activities 25,534
 (19,688) (6,884) 
 (1,038)
Increase (decrease) in cash 12
 (772) 487
 
 (273)
Cash, beginning of period 36
 2,100
 460
 
 2,596
Cash, end of period $48
 $1,328
 $947
 $
 $2,323

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
  For the six months ended June 30, 2016
  Parent
Company
Only (issuer)
 
Guarantor
Subsidiaries 
(1)
 Eliminations Consolidated
Net cash (used in) provided by operating activities $(12,954) $13,753
 $
 $799
Investing activities:        
Purchase of property and equipment (39,535) (373) 
 (39,908)
Proceeds from asset dispositions 10,998
 
 
 10,998
Purchase of short-term investments (151,436) 
 
 (151,436)
Proceeds from sale of short-term investments 148,838
 
 
 148,838
Payments of deposits on aircraft (131) 
 
 (131)
Net cash used in investing activities (31,266) (373) 
 (31,639)
Financing activities:        
Proceeds from line of credit 150,800
 
 
 150,800
Payments on line of credit (113,300) 
 
 (113,300)
Repurchase of common stock (500) 
 
 (500)
Due to/from affiliate, net 7,214
 (7,214) 
 
Net cash provided by (used in) financing activities 44,214
 (7,214) 
 37,000
(Decrease) increase in cash (6) 6,166
 
 6,160
Cash, beginning of period 46
 2,361
 
 2,407
Cash, end of period $40
 $8,527
 $
 $8,567
(1)Foreign subsidiaries represent minor subsidiaries and are included in the guarantor subsidiaries’guarantors’ subsidiaries amounts.

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

   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 guarantor subsidiaries’ amounts.

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

   For the nine months ended September 30, 2015 
   Parent
Company
Only (issuer)
  Guarantor
Subsidiaries (1)
  Eliminations   Consolidated 

Net cash provided by operating activities

  $39,490   $68,665   $—      $108,155  

Investing activities:

      

Purchase of property and equipment

   (48,244  —      —       (48,244

Proceeds from asset dispositions

   3,469    —      —       3,469  

Purchase of short-term investments

   (560,148  —      —       (560,148

Proceeds from sale of short-term investments

   458,468    —      —       458,468  

Refund of deposits on aircraft

   6,010    —      —       6,010  

Payments of deposits on aircraft

   (1,207  —      —       (1,207
  

 

 

  

 

 

  

 

 

   

 

 

 

Net cash used in investing activities

   (141,652  —      —       (141,652
  

 

 

  

 

 

  

 

 

   

 

 

 

Financing activities:

      

Proceeds from line of credit

   206,660    —      —       206,660  

Payments on line of credit

   (171,440  —      —       (171,440

Repurchase of common stock for payroll tax withholding requirements

   (2,441  —      —       (2,441

Due to/from affiliate, net

   70,792    (70,792  —       —    
  

 

 

  

 

 

  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

   103,571    (70,792  —       32,779  
  

 

 

  

 

 

  

 

 

   

 

 

 

Increase (decrease) in cash

   1,409    (2,127  —       (718

Cash, beginning of period

   51    6,219    —       6,270  
  

 

 

  

 

 

  

 

 

   

 

 

 

Cash, end of period

  $1,460   $4,092   $—      $5,552  
  

 

 

  

 

 

  

 

 

   

 

 

 

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



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

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, 2015,2016, 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: changesreduction 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 and retain 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 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; the risk of work stoppages and other labor problems; 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 statements, whether as a result of new information, future events, or otherwise. Further, we may make changes tochange 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.



Overview


As described further in Note 10, we are primarily a provider of helicopter transport services and derive most of our revenue from providing helicopter transportthese 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. 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 70%, 65%, 61% and 61% of our Air Medical segment revenues for the nine months ended September 30, 2016, and the years ended December 31, 2015, 2014 and 2013, 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. 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.


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 81%, 74%, 65% and 61% of our Air Medical segment revenues for the six months ended June 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, 2015.2016. 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, notwithstanding a recent stabilization in commodity

prices.future. Although we can neither control nor predict with any reasonable degree of certainty the length or impact of current weak market in conditions, we currently expect further reductions in the operating revenues and net profit of our Oil and Gas segment in future periods2017, as compared to amounts previously reported.2016. These reductions could be quite substantial. For information on the impact of the market downturn on our liquidity, see “- Liquidity and Capital Resources – Historical Cash and- Cash Flow Information –- Liquidity” below.


For a discussion of recent developments expected to impact the future performance ofseveral years our Air Medical segment,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 “- Other Matters” below.

Note 3.


Results of Operations

The following table presentstables present operating revenues, expenses, and earnings, along with certain non-financial operational statistics, for the quarter and six months ended SeptemberJune 30, 20162017 and 2015.

   Quarter Ended   Favorable 
   September 30,   (Unfavorable) 
   2016   2015     
   (Thousands of dollars, except flight hours,
patient transports, and aircraft)
 

Segment operating revenues, net

      

Oil and Gas

  $77,551    $121,190    $(43,639

Air Medical

   74,482     85,516     (11,034

Technical Services

   6,060     8,027     (1,967
  

 

 

   

 

 

   

 

 

 

Total operating revenues, net

   158,093     214,733     (56,640

Segment direct expenses

      

Oil and Gas(1)

   82,832     109,500     26,668  

Air Medical

   56,562     65,474     8,912  

Technical Services

   5,742     7,165     1,423  
  

 

 

   

 

 

   

 

 

 

Total segment direct expenses

   145,136     182,139     37,003  

Segment selling, general and administrative expenses

      

Oil and Gas

   1,705     1,397     (308

Air Medical

   3,056     2,302     (754

Technical Services

   266     230     (36
  

 

 

   

 

 

   

 

 

 

Total segment selling, general and administrative expenses

   5,027     3,929     (1,098
  

 

 

   

 

 

   

 

 

 

Total segment expenses

   150,163     186,068     35,905  
  

 

 

   

 

 

   

 

 

 

Net segment (loss) profit

      

Oil and Gas

   (6,986   10,293     (17,279

Air Medical

   14,864     17,740     (2,876

Technical Services

   52     632     (580
  

 

 

   

 

 

   

 

 

 

Total net segment profit(2)

   7,930     28,665     (20,735

Other, net(3)

   377     637     (260

Unallocated selling, general and administrative costs(4)

   (8,354   (7,646   (708

Interest expense

   (7,719   (7,366   (353
  

 

 

   

 

 

   

 

 

 

(Loss) earnings before income taxes

   (7,766   14,290     (22,056

Income tax (benefit) expense

   (2,799   6,621     9,420  
  

 

 

   

 

 

   

 

 

 

Net (loss) earnings

  $(4,967  $7,669    $(12,636
  

 

 

   

 

 

   

 

 

 

Flight hours:

      

Oil and Gas

   19,583     25,985     (6,402

Air Medical(5)

   9,681     10,261     (580

Technical Services

   14     50     (36
  

 

 

   

 

 

   

 

 

 

Total

   29,278     36,296     (7,018
  

 

 

   

 

 

   

 

 

 

Air Medical Transports(6)

   5,156     5,440     (284
  

 

 

   

 

 

   

 

 

 

2016. 

  Quarter Ended  
 June 30,
 
Favorable
(Unfavorable)
  2017 2016  
  
(Thousands of dollars, except flight hours,
patient transports, and aircraft)
Segment operating revenues      
Oil and Gas $74,668
 $83,185
 $(8,517)
Air Medical 67,222
 75,547
 (8,325)
Technical Services 4,534
 8,404
 (3,870)
Total operating revenues 146,424
 167,136
 (20,712)
Segment direct expenses      
Oil and Gas (1)
 73,681
 87,400
 13,719
Air Medical 50,402
 58,997
 8,595
Technical Services 3,858
 6,096
 2,238
Total segment direct expenses 127,941
 152,493
 24,552
Segment selling, general and administrative expenses      
Oil and Gas 1,635
 1,605
 (30)
Air Medical 3,263
 2,642
 (621)
Technical Services 356
 273
 (83)
Total segment selling, general and administrative expenses 5,254
 4,520
 (734)
Total segment expenses 133,195
 157,013
 23,818
Net segment (loss) profit      
Oil and Gas (648) (5,820) 5,172
Air Medical 13,557
 13,908
 (351)
Technical Services 320
 2,035
 (1,715)
Total net segment profit (2)
 13,229
 10,123

3,106
       
Other, net (3)
 697
 4,792
 (4,095)
Unallocated selling, general and administrative costs (4)
 (8,993) (7,258) (1,735)
Interest expense (8,083) (7,540) (543)
(Loss) earnings before income taxes (3,150) 117
 (3,267)
Income tax expense (benefit) 123
 (4,160) (4,283)
Net (loss) earnings $(3,273) $4,277
 $(7,550)
       
Flight hours:      
Oil and Gas 19,683
 20,724
 (1,041)
Air Medical (5)
 9,652
 9,519
 133
Technical Services 
 9
 (9)
Total 29,335
 30,252
 (917)
       
Air Medical Transports (6)
 5,121
 4,823
 298


(1)Includes Equity in loss of unconsolidated affiliate.affiliates, net.
(2)Total net segment profit hasThese 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 thisthese non-GAAP financial measure providesmeasures provide meaningful supplemental information regarding our results of operations. A description of the adjustments to and reconciliations of total net segment profitthese non-GAAP financial measures to the most comparable GAAP financial measuremeasures is as follows:

   Quarter Ended
September 30,
 
   2016   2015 

Total net segment profit

  $7,930    $28,665  

Other, net

   377     637  

Unallocated selling, general and administrative costs

   (8,354   (7,646

Interest expense

   (7,719   (7,366
  

 

 

   

 

 

 

Earnings before income taxes

  $(7,766  $14,290  
  

 

 

   

 

 

 

  Quarter Ended  
 June 30,
  2017 2016
Total net segment profit $13,229
 $10,123
Other, net 697
 4,792
Unallocated selling, general and administrative costs (8,993) (7,258)
Interest expense (8,083) (7,540)
(Loss) earnings before income taxes $(3,150) $117
(3)Consists of gains on disposition of property and equipment, and other income.
(4)Represents corporate overhead expenses not allocable to segments.
(5)Flight hours include 2,5502,298 flight hours associated with traditional provider contracts during the thirdsecond quarter of 2016,2017, compared to 2,7992,452 flight hours in the prior year quarter.
(6)Represents individual patient transports for the period.

The following table presents operating revenues, expenses, and earnings, along with certain non-financial operational statistics, for the nine months ended September 30, 2016 and 2015.

   Nine Months Ended   Favorable 
   September 30,   (Unfavorable) 
   2016   2015     
   (Thousands of dollars, except flight hours,
patient transports, and aircraft)
 

Segment operating revenues, net

      

Oil and Gas

  $249,173    $354,425    $(105,252

Air Medical

   220,089     239,543     (19,454

Technical Services

   19,983     23,509     (3,526
  

 

 

   

 

 

   

 

 

 

Total operating revenues, net

   489,245     617,477     (128,232

Segment direct expenses

      

Oil and Gas(1)

   262,148     310,093     47,945  

Air Medical

   172,603     189,089     16,486  

Technical Services

   15,432     21,166     5,734  
  

 

 

   

 

 

   

 

 

 

Total segment direct expenses

   450,183     520,348     70,165  

Segment selling, general and administrative expenses

      

Oil and Gas

   4,838     3,831     (1,007

Air Medical

   8,293     7,458     (835

Technical Services

   763     552     (211
  

 

 

   

 

 

   

 

 

 

Total segment selling, general and administrative expenses

   13,894     11,841     (2,053
  

 

 

   

 

 

   

 

 

 

Total segment expenses

   464,077     532,189     68,112  
  

 

 

   

 

 

   

 

 

 

Net segment (loss) profit

      

Oil and Gas

   (17,813   40,501     (58,314

Air Medical

   39,193     42,996     (3,803

Technical Services

   3,788     1,791     1,997  
  

 

 

   

 

 

   

 

 

 

Total net segment profit(2)

   25,168     85,288     (60,120

Other, net(3)

   5,425     1,739     3,686  

Unallocated selling, general and administrative costs(4)

   (22,938   (23,018   80  

Interest expense

   (22,792   (21,691   (1,101
  

 

 

   

 

 

   

 

 

 

(Loss) earnings before income taxes

   (15,137   42,318     (57,455

Income tax (benefit) expense

   (5,515   17,832     23,347  
  

 

 

   

 

 

   

 

 

 

Net (loss) earnings

  $(9,622  $24,486    $(34,108
  

 

 

   

 

 

   

 

 

 

Flight hours:

      

Oil and Gas

   61,043     76,864     (15,821

Air Medical(5)

   27,889     27,081     808  

Technical Services

   546     529     17  
  

 

 

   

 

 

   

 

 

 

Total

   89,478     104,474     (14,996
  

 

 

   

 

 

   

 

 

 

Air Medical Transports(6)

   14,482     14,142     340  
  

 

 

   

 

 

   

 

 

 

Aircraft operated at period end:(7)

      

Oil and Gas(8)

   139     161    

Air Medical (9)

   104     106    

Technical Services

   6     6    
  

 

 

   

 

 

   

Total

   249     273    
  

 

 

   

 

 

   




  Six Months Ended 
 June 30,
 
Favorable
(Unfavorable)
  2017 2016  
  
(Thousands of dollars, except flight hours,
patient transports, and aircraft)
Segment operating revenues      
Oil and Gas $146,399
 $171,622
 $(25,223)
Air Medical 122,559
 145,607
 (23,048)
Technical Services 12,084
 13,923
 (1,839)
Total operating revenues 281,042
 331,152
 (50,110)
Segment direct expenses      
Oil and Gas (1)
 155,410
 179,316
 23,906
Air Medical 101,243
 116,041
 14,798
Technical Services 8,804
 9,690
 886
Total segment direct expenses 265,457
 305,047
 39,590
Segment selling, general and administrative expenses      
Oil and Gas 3,354
 3,132
 (222)
Air Medical 6,144
 5,237
 (907)
Technical Services 694
 497
 (197)
Total segment selling, general and administrative expenses 10,192
 8,866
 (1,326)
Total segment expenses 275,649
 313,913
 38,264
Net segment (loss) profit      
Oil and Gas (12,365) (10,826) (1,539)
Air Medical 15,172
 24,329
 (9,157)
Technical Services 2,586
 3,736
 (1,150)
Total net segment profit (2)
 5,393
 17,239
 (11,846)
       
Other, net (3)
 1,761
 5,048
 (3,287)
Unallocated selling, general and administrative costs (4)
 (17,099) (14,585) (2,514)
Interest expense (16,278) (15,073) (1,205)
Loss before income taxes (26,223) (7,371) (18,852)
Income tax benefit (7,702) (2,716) 4,986
Net loss $(18,521) $(4,655) $(13,866)
       
Flight hours:      
Oil and Gas 37,157
 41,461
 (4,304)
Air Medical (5)
 18,045
 18,208
 (163)
Technical Services 511
 532
 (21)
Total 55,713
 60,201
 (4,488)
       
Air Medical Transports (6)
 9,418
 9,326
 92
       
Aircraft operated at period end: (7)
      
Oil and Gas 128
 145
  
Air Medical (8)
 104
 105
  
Technical Services 6
 6
  
Total 238
 256
  




(1)Includes Equity in loss of unconsolidated affiliate.affiliates, net.
(2)Total net segment profit hasThese financial measures have not been prepared in accordance with GAAP.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 thisthese non-GAAP financial measure providesmeasures provide meaningful supplemental information regarding our results of operations. A description of the adjustments to and reconciliationreconciliations of total net segment profitthese non-GAAP financial measures to the most comparable GAAP financial measuremeasures is as follows:

   Nine Months Ended
September 30,
 
   2016   2015 

Total net segment profit

  $25,168    $85,288  

Other, net

   5,425     1,739  

Unallocated selling, general and administrative costs

   (22,938   (23,018

Interest expense

   (22,792   (21,691
  

 

 

   

 

 

 

(Loss) earnings before income taxes

  $(15,137  $42,318  
  

 

 

   

 

 

 

  Six Months Ended 
 June 30,
  2017 2016
Total net segment profit $5,393
 $17,239
Other, net 1,761
 5,048
Unallocated selling, general and administrative costs (17,099) (14,585)
Interest expense (16,278) (15,073)
Loss before income taxes $(26,223) $(7,371)
(3)Consists of gains on disposition of property and equipment, and other income.
(4)Represents corporate overhead expenses not allocable to segments.
(5)Flight hours include 7,2794,594 flight hours associated with traditional provider contracts for the nine months ended September 30, 2016,first half of 2017, compared to 7,5144,729 flight hours forin the same periodfirst half of the prior 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 eight6 aircraft as of SeptemberJune 30, 20152017 that were owned or leased by customers but operated by us.
(9)Includes six aircraft as of September 30, 2016 that were owned or leased by customers but operated by us, compared to 13 aircraft as of September 30, 2015.















Quarter Ended SeptemberJune 30, 20162017 compared with Quarter Ended SeptemberJune 30, 2015

2016


Combined Operations


Operating Revenues -Operating revenues for the quarterthree months ended SeptemberJune 30, 20162017 were $158.1$146.4 million, compared to $214.7$167.1 million for the quarterthree months ended SeptemberJune 30, 2015,2016, a decrease of $56.6$20.7 million. Oil and Gas segment operating revenues decreased $43.6$8.5 million for the quarterthree months ended SeptemberJune 30, 2016,2017, related primarily to decreased aircraft flight revenues for allheavy and medium model types resulting predominately from fewer aircraft on contract and decreased flight hours. Air Medical segment operating revenues decreased $11.0$8.3 million due principally to decreased traditional provider program revenues resulting from reducedthe termination of our overseas operations.operations in late 2016. Technical Services segment operating revenues decreased $2.0$3.9 million due primarily to a decrease in technical services provided to a third party customer.


Total flight hours for the quarterthree months ended SeptemberJune 30, 20162017 were 29,27829,335 compared to 36,29630,252 for the quarterthree months ended SeptemberJune 30, 2015.2016. Oil and Gas segment flight hours decreased 6,4021,041 hours, due to decreases in flight hours for allheavy and medium model types. Air Medical segment flight hours decreased 580increased 133 hours fromfor the quarterthree months ended SeptemberJune 30, 2015,2016, due to decreasedincreased flight hours in our traditional provider and independent provider operations. IndividualAs discussed further below, individual patient transports in the Air Medical segment were 5,1565,121 for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to transports of 5,4404,823 for the quarterthree months ended SeptemberJune 30, 2015.

2016.


Direct Expenses -Direct operating expense was $145.1$127.9 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to $182.1$152.5 million for the quarterthree months ended SeptemberJune 30, 2015,2016, a decrease of $37.0$24.6 million, or 20%16.1%. Employee compensation expense decreased $18.1$7.4 million primarily due to a reduction in employees in our Oil and Gas segment resulting from implementation of voluntary early retirement programs (“VERPs”) in the second half of 2015 and the first quarter of 2016, and a reduction in the number of employees in our Air Medical segment’s Middle East operations. Employee compensation expense represented approximately 46%48% and 45% of total direct expense for the quarters ended SeptemberJune 30, 2017 and 2016, and 2015.respectively. We also experienced decreasesa decrease in aircraft fuel of $2.8 million, aircraft insurance of $0.9 million, and aircraft warranty costs of $2.5$10.5 million (which expenses represent 3%, 1%, and 6% of total direct expense, respectively) as a result of the reduction incancellation of a warranty program on some of our fleet of medium aircraft and decreased flight hours. Aircraft parts expense decreased $0.5The cancellation of the warranty program resulted in a non-recurring credit of $9.8 million and componentfrom the warranty provider, which is attributable to unused accumulated warranty payments for repair expense decreased $4.0 million. Other decreases included contract services expense of $2.8 million, pilot training expense of $1.0 million, travel expenses of $0.6 million, and costthat will not be utilized in the future. Costs of goods sold decreased $5.2 million due to the termination of $3.2 million.our above-referenced contract in the Middle East and due to reduction in services for a third party technical services customer. Aircraft lease expense and aircraft repairs decreased $1.5 million and $1.2 million, respectively. Other direct costsitems increased $0.6$1.2 million, on a net basis.

net.


Selling, General and Administrative Expenses -Selling, general and administrative expenses were $13.4$14.2 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to $11.6$11.8 million for the quarterthree months ended SeptemberJune 30, 2015.2016. The $1.8$2.4 million increase was primarily attributable to $1.3 million of severance costs associated with the final lease settlement for two aircraft returnedrelated to the lessor,a reductions in force and $0.7 million of legal and consulting fees related to a special project. Other items increased fees for contract services in our Oil and Gas segment, and higher promotional and rent expense in our Air Medical segment.

$0.4 million, net.


Loss/Gain on Disposal of Assets, net – LossNet -The loss on asset dispositions was $0.1 million for the quarterthree months ended SeptemberJune 30, 2017 was less than $0.1 million. For the three months ended June 30, 2016, compared towe recorded a gain of $0.2$4.3 million forresulting from the quarter ended September 30, 2015. This decrease was primarily due to the sale or disposition of four light aircraft that no longer met our strategic needs.and three medium aircraft. See Note 8.


Equity in Loss of Unconsolidated Affiliate -Equity in the lossgain of our unconsolidated affiliate attributable to our mid-2011 investment in a Ghanaian entity was $0.2$0.1 million forand equity in the quarter ended September 30, 2016, compared toloss of $0.1 million for the quarterthree months ended SeptemberJune 30, 2015, resulting from increases expenses2017 and 2016, respectively. See Note 11. We also had equity in the loss of our unconsolidated Australian affiliate of $1.1 million for the three months ended June 30, 2017, related to increased production activitythe startup of operations which commenced in the region. See Note 11.

April, 2017.


Interest Expense -Interest expense was $7.7$8.1 million for the quarterthree months ended SeptemberJune 30, 20162017 and $7.4$7.5 million for the quarterthree months ended SeptemberJune 30, 2015,2016. The $0.6 million increase is principally due to higher average outstanding debt balances.


Other Income, netNet -Other income was $0.7 million for the three months ended June 30, 2017 compared to $0.5 million for the quarters ended September 30,same period in 2016, and September 30, 2015, and represents primarily interest income.


Income Taxes - Income tax benefitexpense for the quarterthree months ended SeptemberJune 30, 20162017 was $2.8$0.1 million compared to income tax expensebenefit of $6.6$4.2 million for the quarterthree months ended SeptemberJune 30, 2015.2016. Our $2.8$0.1 million income tax expense for the three months ended June 30, 2017 includes a non-cash $1.2 million income tax deficit related to the permanent difference resulting from the difference between the book and tax deductions for equity-based compensation. The $4.2 million income tax benefit forrecorded in the quarterthree months ended SeptemberJune 30, 2016 is attributablereflects a $4.2 million tax benefit related to our net loss from operationsthe impact of $7.8 million. Oura change in Louisiana tax law which amends the manner in which profits are apportioned to the state of Louisiana for income tax reporting purposes. Excluding these discrete adjustments, our effective tax rate was 36%35.0% and 46%10% for the quarterthree months ended SeptemberJune 30, 2017 and June 30, 2016, and September 30, 2015, respectively. The higher10% effective rate for the quarter ended SeptemberJune 30, 20152016 reflects a cumulative year to date true up of the effective tax rate from 36.2% to 36.0%. The impact of recording during that quarter a one-time increase in the valuation allowance on our foreign tax credits.

this adjustment was less than $0.1 million.


Net (Loss) Earnings -Net loss for the quarterthree months ended SeptemberJune 30, 20162017 was $5.0$3.3 million compared to net earnings of $7.7$4.3 million for the quarterthree months ended SeptemberJune 30, 2015.2016. Loss before income taxes for the quarterthree months ended SeptemberJune 30, 20162017 was $7.8$3.2 million compared to earnings before income taxtaxes of $14.3$0.1 million for the same period in 2015. Losses2016. Loss per diluted share were $0.32was $0.21 for the thirdcurrent quarter of 2016 compared to earnings per diluted share of $0.49$0.27 for the prior year quarter. The decreaseincrease in earningsloss before taxes for the quarter ended SeptemberJune 30, 20162017 is attributable principally to higher corporate overhead expense and an unfavorable comparison to the decreased profits in all segments.second quarter of 2016, when we recognized a $4.3 million gain on the disposal of assets. We had 15.7 and 15.6 million weighted average diluted common shares outstanding during the quarter ended SeptemberJune 30, 20162017 and 2015, respectively.

2016.

Segment Discussion


Oil and Gas -Oil and Gas segment revenues were $77.6$74.7 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to $121.2$83.2 million for the quarterthree months ended SeptemberJune 30, 2015,2016, a decrease of $43.6$8.5 million. Our Oil and Gas segment revenues are primarily driven by the amount of contracted aircraft and flight hours. 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 19,58319,683 for the most recent quarter compared to 25,98520,724 for the same quarter in the prior year, a decrease of 6,4021,041 flight hours. The decline in revenues and flight hours is attributable to fewer aircraft on contract and lower utilization rates for allheavy and medium model types due to reduced oil and gas exploration and production activities in response to lower prevailing oilcommodity prices.

Partially offsetting the decrease in revenue and flight hours 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 139128 at SeptemberJune 30, 2016,2017, compared to 161145 at SeptemberJune 30, 2015. We added one new heavy aircraft to our Oil and Gas segment since September 30, 2015.2016. We have sold or disposed of tenseven light and eightnine medium aircraft in the Oil and Gas segment since SeptemberJune 30, 2015. Changes2016. We also purchased two light aircraft in customer-owned aircraftthe Oil and transfersGas segment since June 30, 2016. Transfers between segments account for the remainder.


Direct expense in our Oil and Gas segment was $82.8$73.7 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to $109.5$87.4 million for the quarterthree months ended SeptemberJune 30, 2015,2016, a decrease of $26.7$13.7 million. Employee compensation expense decreased $14.2$4.4 million due to a reduction in employees resulting from implementation of our VERPs. See Note 10.employees. There were also decreaseswas a decrease in aircraft fuel expenses of $2.5 million, aircraft warranty costs of $2.4$9.5 million, and aircraft insurance of $0.7 million, eachprimarily due to a credit related to the cancellation a warranty program on some our medium aircraft fleet, and due to a reduction in flight hours. Other decreases included contractThe cancellation of the 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 $1.2 million due to fewer aircraft on lease. Losses in the equity of $2.5our unconsolidated affiliates increased $0.9 million pilot training expense of $0.8 million, travel expense of $0.4 million, and property taxes of $1.1 million.for the reasons discussed above. Other items decreased $2.1increased $0.5 million, on a net basis.

net.


Selling, general and administrative segment expenses were $1.7$1.6 million for the quarterthree months ended SeptemberJune 30, 20162017 and $1.4$1.6 million for the quarterthree months ended SeptemberJune 30, 2015. The $0.3 million increase is primarily attributable to increased fees for contract services of $0.3 million.

2016.


Oil and Gas segment loss was $7.0$0.6 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to segment profita loss of $10.3$5.8 million for the quarterthree months ended SeptemberJune 30, 2015.2016. The decrease in segment profit wasloss is primarily due to decreased revenues,the warranty credit discussed above, which were onlywas partially offset by decreased expenses attributable to the above-described factors.

revenues discussed above.


Air Medical -Air Medical segment revenues were $74.5$67.2 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to $85.5$75.5 million for the quarterthree months ended SeptemberJune 30, 2015.2016. This decrease of $11.0$8.3 million is primarily attributable to decreased traditional provider program revenues resulting from the reduction in the scopetermination of our overseas operations (as discussed further below under “- Other Matters”)below). We also experienced decreased revenues from our independent provider programs primarily resulting from decreased patient transports. Patient transports were 5,1565,121 for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to 5,4404,823 for the same period in the prior year.


The number of aircraft available for use in the segment at SeptemberJune 30, 20162017 was 104 compared to 106105 at SeptemberJune 30, 2015.2016. Since SeptemberJune 30, 2015,2016, we added threetwo light aircraft to our Air Medical segment. We have soldsegment, which were offset by our sale or disposeddisposition of one light and two medium aircraft in the Air Medical segment since September 30, 2015. Transferssuch date. Changes in customer-owned aircraft and transfers between segments account for the remainder.


Direct expense in our Air Medical segment was $56.6$50.4 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to $65.5$59.0 million for the quarterthree months ended SeptemberJune 30, 2015,2016, a decrease of $8.9$8.6 million. Employee compensation costs decreased $3.7$3.4 million due to a reduction in personnel primarily relating to the termination of our 2012 Middle East project.contract. Component repair costs also decreased $3.3$1.1 million as a result of a reduction in scheduled maintenance for certain aircraft. Cost of goods sold decreased $2.0$2.6 million related to certain items that were previously billed on a cost plus basis onunder our former Middle East project.contract. There was a decrease in aircraft warranty costs of $1.1 million, primarily due to a credit related to the above-described cancellation of the

warranty program on some our medium aircraft fleet. The cancellation of this warranty program resulted in a 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. Other items increased, net $0.1 million.

decreased $0.4 million, net.


Selling, general and administrative segment expenses were $3.1$3.3 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to $2.3$2.6 million for the quarterthree months ended SeptemberJune 30, 2015.2016. The $0.8$0.7 million increase is primarily due to increased promotional and rent expense.

employee incentive compensation costs.


Air Medical segment profit was $14.9$13.6 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to a segment profit of $17.7$13.9 million for the quarterthree months ended SeptemberJune 30, 2015.2016. The $2.8$0.3 million decrease in profit is attributable to the decreased operating revenues described above, partially offset by decreased expenses.


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 $6.1$4.5 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to $8.0$8.4 million for the quarterthree months ended SeptemberJune 30, 2015.2016. 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. We currently have one ongoing project for this customer, which is expected to be completed in the fourth quarter of 2016. At this time, we have no future projects booked for this customer Direct expenses decreased $1.4$2.2 million compared to the prior year quarter,three months, principally due to the decreased operations. Technical Services segment earnings was less than $0.1were $0.3 million for the quarterthree months ended SeptemberJune 30, 2016,2017, compared to segment profit of $0.6$2.0 million for the quarterthree months ended SeptemberJune 30, 2015.

2016.

For additional information on our segments, see Note 10.

Nine

Six Months Ended SeptemberJune 30, 20162017 compared with NineSix Months Ended SeptemberJune 30, 2015

2016


Combined Operations


Operating Revenues -Operating revenues for the ninesix months ended SeptemberJune 30, 20162017 were $489.2$281.0 million, compared to $617.5$331.1 million for the ninesix months ended SeptemberJune 30, 2015,2016, a decrease of $128.3$50.1 million. Oil and Gas segment operating revenues decreased $105.3$25.2 million for the ninesix months ended SeptemberJune 30, 2016,2017, related primarily to decreased aircraft flight revenues for all model types resulting predominately from fewer aircraft on contract and decreased flight hours for these aircraft. Air Medical segment operating revenues decreased $19.5$23.0 million due principally to decreased traditional provider program revenues resulting from reduced overseas operations.operations and reduced revenues from our independent provider programs. This decrease was partially offset by increased revenues attributable to our independentU.S.-based traditional provider programs, driven principally by increased transports.programs. Technical Services segment operating revenues decreased $3.5$1.8 million due to fewervariations in the level of services provided to a third party customer under projects discussed further below.


Total flight hours for the ninesix months ended SeptemberJune 30, 20162017 were 89,47855,713 compared to 104,47460,201 for the ninesix months ended SeptemberJune 30, 2015.2016. Oil and Gas segment flight hours decreased 15,8214,304 hours, due to decreases in flight hours for all model types. Air Medical segment flight hours increased 808decreased 163 hours from the ninesix months ended SeptemberJune 30, 2015,2016, due to increaseddecreased flight hours in our independentoverseas traditional provider programs.program. Individual patient transports in the Air Medical segment were 14,4829,418 for the ninesix months ended SeptemberJune 30, 2016,2017, compared to 14,1429,326 transports for the ninesix months ended SeptemberJune 30, 2015.

2016.


Direct Expenses -Direct operating expense was $450.2$265.4 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $520.3$305.0 million for the ninesix months ended SeptemberJune 30, 2015,2016, a decrease of $70.2$39.6 million, or 13.5%13.0%. Employee compensation expense decreased $33.7$16.4 million due to a reduction in employees in our Oil and Gas segment resulting from implementation of voluntary early retirement programs (“VERPs”) in the second half of 2015 and the first quarter of 2016.Air Medical segments . Employee compensation expense represented approximately 46%47% of total direct expense for the ninesix months ended SeptemberJune 30, 20162017 and 2015.46% for the six months ended June 30, 2016. In addition, we experienced decreases in aircraft fuel expenses of $6.7 million, aircraft warranty costs of $5.7$11.7 million aircraft insuranceprimarily due to a credit received for the cancellation of $2.5a warranty program on some of the medium fleet, and decreased flight hours. The cancellation of the warranty program resulted in a non-recurring credit of $9.8 million componentfrom the warranty provider, which is attributable to unused accumulated warranty payments for repair costsservices that will not be utilized in the future. We also had decreases in cost of $4.5goods sold of $7.2 million, repair cost of $2.5 million and aircraft parts costs of $1.8$2.6 million (representing 3%, 7%, 1%2%, 6% and 4% of total direct expense, respectively), as a result of the reduction in flight hours. Other decreases include contract services expense of $5.6 million, pilot training expense of $2.6 million, travel expenses of $1.0 million, and property taxes of $1.4 million. Costs of goods sold decreased $7.1 million, due to decreasedfewer 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 Air Medical segment. Other direct costs items increased $2.5$0.8 million, net.



Selling, General and Administrative Expenses -Selling, general and administrative expenses were $36.8$27.3 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $34.9$23.5 million for the ninesix months ended SeptemberJune 30, 2015. The $1.92016, an increase of $3.8 million. We incurred $2.9 million increase was primarily attributableof severance costs related to costs associated with the final lease settlement for two aircraft returnedreductions in force and $1.3 million of legal and consulting fees related to the lessor,a special project. Partially offsetting these increases were decreases in equity-based compensation of $1.0 million. Other items increased fees for contract services in our Oil and Gas segment, and higher promotional and rent expense in our Air Medical segment.

$0.6 million, net.


Loss/Gain on Disposal of Assets, net – GainNet -Loss on asset dispositions was $3.9less than $0.1 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to a gain of $0.2$3.9 million for the ninesix months ended SeptemberJune 30, 2015. During2016. In the nine monthsfirst half of 2017, we disposed of five medium aircraft and related parts inventory utilized in the Oil and Gas segment that no longer met our strategic needs. In the first half of 2016, we sold ninefive 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 Affiliate -Equity in the loss of our unconsolidated affiliate attributable to our mid-2011 investment in a Ghanaian entity was $0.3$0.9 million and $0.2$0.1 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. See Note 11.

We also had equity in the loss of our unconsolidated Australian affiliate of $1.1 million for the six months ended June 30, 2017 related to the startup of operations on a contract which began in April 2017.


Interest Expense -Interest expense was $22.8$16.3 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $21.7$15.1 million for the ninesix months ended SeptemberJune 30, 2015,2016, principally due to higher average outstanding debt balances.


Other Income, netNet -Other income was $1.6$1.8 million for the ninesix months ended SeptemberJune 30, 20162017 compared to $1.5$1.1 million for the ninesix months ended SeptemberJune 30, 20152016 and represents primarily interest income. The $0.1$0.7 million increase is primarily attributable to an increase in the amount and rate of return of our short-term investments.


Income Taxes -Income tax benefit for the ninesix months ended SeptemberJune 30, 20162017 was $5.5$7.7 million compared to income tax expensebenefit of $17.8$2.7 million for the ninesix months ended SeptemberJune 30, 2015.2016. Our effective tax rate was 36%29.4% and 41%36.8% for the ninesix months ended SeptemberJune 30, 2017 and June 30, 2016, and September 30, 2015, respectively. The $5.5$7.7 million income tax benefit recorded in the ninesix months ended SeptemberJune 30, 2017 includes a non-cash $1.4 million income tax deficit related to the permanent difference resulting from the difference between the book and tax deductions for equity-based compensation. The $2.7 million tax benefit recorded during the six months ended June 30, 2016 is comprised of a valuation allowance on certain state tax benefits related to net operating loss carryforwards of $4.1 million, 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$2.6 million tax benefit on our loss before income taxes, which were partially offset by recording a valuation allowance on certain statetaxes. Absent these discrete adjustments, our effective tax benefits related to net operating loss carryforwards of $4.1 million. The valuation allowance recordedrate was solely attributable to a change in the Louisiana tax law which limits our ability to fully realize the tax benefit of our existing net operating loss carryforwards in this state. The higher rate34.9% and 36% for the ninesix months ended SeptemberJune 30, 2015 reflects the impact of recording during that period a one-time increase in the valuation allowance on our foreign tax credits.

2017 and June 30, 2016, respectively.


Net (Loss) EarningsLoss -Net loss for the ninesix months ended SeptemberJune 30, 20162017 was $9.6$18.5 million compared to net earningsloss of $24.5$4.7 million for the ninesix months ended SeptemberJune 30, 2015.2016. Loss before income taxes for the ninesix months ended SeptemberJune 30, 20162017 was $15.1$26.2 million compared to earningsa loss before income taxtaxes of $42.3$7.4 million for the same period in 2015.2016. Loss per diluted share was $0.61$1.18 for the ninesix months ended SeptemberJune 30, 20162017 compared to earningsa loss per diluted share of $1.57$0.30 for the prior year ninesix months. The decrease in earnings before taxes for the ninesix months ended SeptemberJune 30, 20162017 is principally attributable to the decreased profits in all of our Oil and Gas and Air Medical segments, partially offset by a small increase in the profits from our Technical Services segment.segments. We had 15.7 and 15.5 million weighted average diluted common shares outstanding during the ninesix months ended SeptemberJune 30, 20162017 and 2015, respectively.

2016.

Segment Discussion


Oil and Gas -Oil and Gas segment revenues were $249.2$146.4 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $354.4$171.6 million for the ninesix months ended SeptemberJune 30, 2015,2016, a decrease of $105.2$25.2 million. Our Oil and Gas segment revenues are primarily driven by the amount of contracted aircraft and flight hours. 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 61,04337,157 for the past ninesix months compared to 76,86441,461 for the same ninesix months in the prior year, a decrease of 15,8214,304 flight hours. The decline in revenues and flight hours is attributable to fewer aircraft on contract and lower utilization rates for all model types 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 139128 at SeptemberJune 30, 2016,2017, compared to 161145 at SeptemberJune 30, 2015. We added one new heavy aircraft to our Oil and Gas segment since September 30, 2015.2016. We have sold or disposed of tenseven light and eightnine medium aircraft in the Oil and Gas segment since SeptemberJune 30, 2015. Changes2016. We also purchased two medium aircraft in customer-owned aircraftthe Oil and transfersGas segment since June 30, 2016. Transfers between segments accountaccounted for the remainder.


Direct expense in our Oil and Gas segment was $262.1$155.4 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $310.1$179.3 million for the ninesix months ended SeptemberJune 30, 2015,2016, a decrease of $48.0$23.9 million. Employee compensation expenses decreased $25.1$10.8 million

due to a reduction in employees primarily resulting from implementation of our VERPs. See Note 10.employees. There were also decreases in aircraft fuel expenses of $6.6 million, aircraft insurance of $1.8 million, aircraft warranty costs of $5.7$10.7 million and aircraft parts costs of $1.8 million, eachrelated to the credit due to the cancellation of a warranty program on some our medium aircraft fleet and reduction in flight hours. Other decreases included contractThe 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 $2.1 million due to fewer leased aircraft and spare parts decreased $2.5 million. Partially offsetting these decreased were increases in the losses from our unconsolidated affiliates of $4.7$1.9 million and pilot training expense of $2.4 million. Otherother items increased $0.1increase $0.3 million, net.


Selling, general and administrative segment expenses were $4.8$3.4 million for the ninesix months ended SeptemberJune 30, 20162017 and $3.8$3.1 million for the ninesix months ended SeptemberJune 30, 2015.2016. The $1.0$0.3 million increase was primarily due to increased legal feesemployee compensation costs associated with newly-added positions and bad debt expense.

bonus accruals.


Oil and Gas segment loss was $17.8$12.4 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to segment profitloss of $40.5$10.8 million for the ninesix months ended SeptemberJune 30, 2015.2016. The decrease in segment profit was due to the decreased revenues detailed above, which were only partially offset by decreased expenses.

warranty and other costs discussed above.


Air Medical -Air Medical segment revenues were $220.1$122.6 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $239.5$145.6 million for the ninesix months ended SeptemberJune 30, 2015,2016, a decrease of $19.4$23.0 million. Operating revenues in our traditional provider programs decreased $24.8$21.4 million due to a reduction in the scope of our overseas operations, (as discussed further below under “- Other Matters”). Operatingpartially offset by a $2.4 million increase in revenues infrom our U.S.-based traditional provider programs. Revenues from our independent provider programs increased $2.9decreased $1.6 million primarily due to an increase in patienta less favorable payor mix, partially offset by increased transports. Patient transports were 14,4829,418 for the ninesix months ended SeptemberJune 30, 2016,2017, compared to 14,1429,326 for the same period in the prior year. Other segment revenue increased $2.5 million.


The number of aircraft available for use in the segment at SeptemberJune 30, 20162017 was 104 compared to 106105 at SeptemberJune 30, 2015.2016. Since SeptemberJune 30, 2015,2016, we added threetwo light aircraft to our Air Medical segment. We have soldsegment, which were offset by our sale or disposeddisposition of one light and fivetwo medium aircraft in the Air MedicalMedial segment since September 30, 2015.

such date. Change in customer-owned aircraft and transfers between segments account for the remainder.


Direct expense in our Air Medical segment was $172.6$101.2 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $189.1$116.0 million for the ninesix months ended SeptemberJune 30, 2015,2016, a decrease of $16.5$14.8 million. Employee compensation expenses decreased $8.3$5.7 million due to a reduction in personnel. There were also decreases in spare parts and component repair costs of $0.1$2.1 million and $6.3 million, respectively, due to a decrease in scheduled maintenance for certain model types. Costtypes, and a decrease of $5.8 million in cost of goods sold decreased $4.0 million duerelated to a decrease in certain items that were previously billed to our Middle East customer on a cost plus basis. Aircraft depreciation increased $1.3basis under our former Middle East contract. There was a decrease in aircraft warranty costs of $1.1 million, primarily due to an increasea credit related to the cancellation of the above-described warranty program on some our medium aircraft fleet. The cancellation of this warranty program resulted in a 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 number of owned aircraft.future. Other direct expense items increased by a net of $0.9 million.

decreased $0.1 million, net.


Selling, general and administrative segment expenses were $8.3$6.1 million for the ninesix months ended SeptemberJune 30, 2016, compared to $7.52017 and $5.3 million for the ninesix months ended SeptemberJune 30, 2015.2016. The $0.8 million increase is primarily attributablerelated to increased expenses for contract services.

higher employee incentive compensation costs.


Air Medical segment profit was $39.2$15.2 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to a segment profit of $43.0$24.3 million for the ninesix months ended SeptemberJune 30, 2015.2016. The decrease in profit is primarily attributable to the decreased revenues described above, which were only partially offset by the decreased aircraft operating expenses described above.

Technical Services -Technical Services segment revenues were $20.0$12.1 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $23.5$13.9 million for the ninesix months ended SeptemberJune 30, 2015.2016, a decrease of $1.8 million. Direct expense decreased $5.8$0.9 million compared to the prior year nine-month period.six months. 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.customer. Technical Services segment profit was $3.8$2.6 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $1.8$3.7 million for the ninesix months ended SeptemberJune 30, 2015.

2016.

For additional information on our segments, see Note 10.

Other Matters

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. Following the expiration of the initial agreement with this customer in late September 2015, we extended the service relationship three times for three-, six- and three-month periods, respectively, on terms that caused our overseas air medical revenues and operating costs to decline significantly compared to prior periods. Our service relationship with this customer reached its contractual end date on September 30, 2016, which will place a commensurate reduction on our Air Medical segment revenues and profit in future periods. We believe that we have remained in good standing with this customer and are in discussions regarding future work. Even if we are ultimately successful in obtaining additional work from this customer, we currently do not expect the arrangement to be effective until 2017.





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 $2.6$2.3 million at SeptemberJune 30, 2016,2017, compared to $2.4$2.6 million at December 31, 2015.2016. Short-term investments were $289.5$237.4 million at SeptemberJune 30, 2016,2017, compared to $284.5$289.8 million at December 31, 2015.2016. We also had $13.0$12.4 million and $15.3$13.0 million in restricted investments at SeptemberJune 30, 20162017 and December 31, 2015,2016, 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, and we expect further reductions in the operating revenues and net profit of our Oil and Gas segment in future periods. Through September 30, 2016, these negative variances did not materially impactperiods as compared to 2016. These reductions have caused us to use a portion of our financial position reportedshort-term investments to fund operations, including an 18% decrease in our consolidated balance sheets, as described inshort-term investments over the first six months of 2017. Nonetheless, we continue to hold substantial short-term investments and have no debt coming due within one year. For these reasons, we expect to be able to fund operations beyond next year even if the oil and gas industry remains challenged over that period. We further detail below. Nonetheless,expect, however, that our liquidity may ultimately be negatively impacted if the current weakness of the energyoil and gas industry persists we expect that it will ultimately havefor a negative impact on our consolidated operating cash flow and liquidity.

prolonged period.


Operating activitiesActivities -Net cash used in operating activities was $7.1$7.9 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to net cash provided of $108.2$0.8 million for the same period in 2015,2016, a decrease of $115.3$8.7 million. Cash receipts from customers were down $152.7$49.8 million primarilywhen compared to the first six months of last year. This decrease in cash receipts was due to a $105.2$24.1 million decrease in revenues from our Oil and Gas segment revenues, relateddue to the downturn in the industry. We hadindustry, and a $57.3$25.2 million decrease in collections relatedrevenues from our Air Medical segment due to ourthe termination of the Middle East contract due in part to timing of payments and in part to alate 2016. The decrease in revenue. Thiscash receipts was partially offset by a $14.3 million decrease in cash required for net payroll, primarily due to a reduction in bonuses paid and staffing levels. The remaining offset was due to a decrease in payments to vendors of $41.3 million, due to the decreased scope of our operations.


Investing activitiesActivities -Net cash used inprovided by investing activities was $67.0$8.7 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $141.6cash used of $31.6 million for the same period in 2015.2016. Net purchasessales of short-term investments used $3.9provided $52.7 million of cash during the ninesix months ended SeptemberJune 30, 2016,2017, compared to $101.7$2.6 million used in the comparable prior year period. Gross proceeds from asset dispositions were less than $0.1 million during the ninesix months of 2016 were $13.2 million,2017, compared to $3.5$11.0 million for the same period in 2015.2016. Capital expenditures were $75.0$43.9 million for the ninesix months ended SeptemberJune 30, 2016,2017, compared to $48.2$39.9 million for the same period in 2015.2016. Capital expenditures for aircraft and aircraft improvements accounted for $72.4$42.8 million and $45.5$38.1 million of these totals for the ninesix months ended 20162017 and 2015,2016, respectively. During the firstsecond quarter of 2017, we purchased a heavy aircraft from a lessor and two medium aircraft. During the same period of 2016, we took delivery of one heavy aircraft that we purchased in the second quarter with borrowings under our revolving credit line. 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 to be purchased in the fourth quarter. During the first nine months of 2015, we (i) exercised a purchase option on one heavy aircraft, (ii) took delivery of another heavy aircraft that we paid for in the third quarter of 2015, and then completed a sale/leaseback following the purchase, and (iii) purchased six light aircraft.


Financing activitiesActivities -Financing activities during the ninesix months of 2017 included net payments of $0.8 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 half of 2016 included net borrowings of $74.9$30.2 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.

Financing activities during the first nine months of 2015 included net borrowings of $35.2 million


For additional information on our revolving credit facility and $2.5 million used to repurchase sharescash flows, see our condensed consolidated statements of our non-voting common stock to satisfy withholding tax obligationscash flows included in Item 1 of employees.

Part I of this report.


Long-Term Debt


As of SeptemberJune 30, 2016,2017, we owed $632.4$633.2 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 $132.4$133.2 million borrowed under our revolving credit facility.


Revolving Credit Facility– On September 30, 2016, we -We have an amended ourand restated revolving credit facility to, among other things, (a) extend the maturity date to(our “credit facility”) that matures on October 1, 2018 and (b) modify the fixed charge coverage ratio such that it will only be tested when the total of2018. Under our short term investments are less than $150.0 million at the end of any fiscal quarter. Under thiscredit 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 amended and restated revolving credit facility), at our option. Our revolving 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 the amended and restated revolvingour credit facility).


At SeptemberJune 30, 2016,2017, we had $132.4$133.2 million in borrowings under our credit facility. At the same date in 2015,2016, we had $78.2$95.0 million in borrowings under our credit facility.

We also have outstanding a letter of credit for $7.6 million issued under our $150.0 million 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 $12.4 million and $13.0 million letters of credit outstanding at SeptemberJune 30, 2016.

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 SeptemberJune 30, 2016,2017, 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 sheet.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 SeptemberJune 30, 2016.2017. As of SeptemberJune 30, 2016,2017, we leased 2519 aircraft included in the lease obligations below.

       Payment Due by Year 
                           Beyond 
   Total   2016(1)   2017   2018   2019   2020   2020 
       (Thousands of dollars) 

Aircraft lease obligations

  $226,242    $10,607    $40,560    $36,879    $30,226    $26,387    $81,583  

Other lease obligations

   12,842     1,396     3,917     2,863     2,288     1,595     783  

Long-term debt(2)

   632,400     —       —       132,400     500,000     —       —    

Senior notes interest(2)

   65,625     —       26,250     26,250     13,125     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $937,109    $12,003    $70,727    $198,392    $545,639    $27,982    $82,366  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

    Payment Due by Year
  Total 
2017(1)
 2018 2019 2020 2021 
Beyond
2021
    (Thousands of dollars)
Aircraft lease obligations $191,401
 $18,500
 $34,705
 $30,226
 $26,387
 $26,253
 $55,330
Other lease obligations 13,788
 3,144
 4,129
 3,088
 2,189
 1,181
 57
Long-term debt (2)
 633,225
 
 133,225
 500,000
 
 
 
Senior notes interest (2)
 52,500
 13,125
 26,250
 13,125
 
 
 
  $890,914
 $34,769
 $198,309
 $546,439
 $28,576
 $27,434
 $55,387
(1)Payments due during the last threesix months of 20162017 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 SeptemberJune 30, 20162017 and excludes, among other things, (i) commitments made thereafter, (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, and (v) open purchase orders.

orders and (vi) other long-term liabilities, such as accruals for litigation or taxes, that are not contractual in nature.


As of SeptemberJune 30, 2016,2017, we had options to purchase various aircraft that we currently operate under lease agreements with the aircraft owners. These options will becomeleases becoming exercisable at various datesin 2017 through 2020. The aggregate option purchase prices are $50.3 million in 2016, $55.7$18.5 million in 2017, $127.0 million in 2018, $150.4$129.0 million in 2019, and $22.7 million in 2020. WhetherIn the second quarter of 2017, we exercise these options will depend upon several factors, including market conditions and our available cash at the respective exercise dates.

On January 15, 2016, we took initial delivery ofpurchased one heavy aircraft. We fundedaircraft from a lessor for $17.0 million. Under current conditions, we believe it is unlikely that we will exercise the payment for this aircraft with borrowing from our credit facility in June 2016.

remaining 2017 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.


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, 2015.

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.

Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 $88.3$137.6 million weighted average loan balance during the ninesix months ended SeptemberJune 30, 2016,2017, a 10% increase (0.272%(0.3474%) in interest rates would have reduced our annual pre-tax earnings approximately $0.2$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 SeptemberJune 30, 2016,2017, the market value of the notes was approximately $485.6$463.0 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

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.


PART II – OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

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

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 Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015.

2016.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

During the thirdsecond quarter of 2016,2017, we withheld from employees and canceled 1,03112,151 shares of our non-voting common stock in connection with the vesting of their stock-based awards to satisfy the related minimum tax withholding obligation. The following table provides additional information about these transactions.

   Total Number of   Average Price 

Period

  Shares Purchased   Paid per Share 

August 1, 2016 – August 31, 2016

   1,031    $19.22  

Period 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
April 1, 2017 – June 30, 2017 12,151
 $10.28

Item 3.DEFAULTS UPON SENIOR SECURITIES

Item 3.    DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.MINE SAFETY DISCLOSURES

Item 4.    MINE SAFETY DISCLOSURES

None.

Item 5.OTHER INFORMATION

Item 5.    OTHER INFORMATION

None.



Item 6.EXHIBITS

Item 6.    EXHIBITS
(a)Exhibits
(a)Exhibits
3.1  (i)  
Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.13(i) to PHI’s Report on Form 10-Q for the quarterly period ended March 31, 2015,2017, filed on May 7, 2015)9, 2017).

 
  (ii)  Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3(ii) to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2015, filed November 6, 2015).
 
4.1  
Second Amended and Restated Loan Agreement dated as of September 18, 2013, by and among PHI, Inc., PHI Air Medical, L.L.C, successor to Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 4.1 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2013, filed on November 8, 2013).

 
4.2  First Amendment to Second Amended and Restated Loan Agreement, dated as of March 5, 2014, by and among PHI, Inc., PHI Air Medical, L.L.C., PHI Tech Services, Inc., International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 4.1 to PHI’s Report on Form 8-K filed March 6, 2014).
 
4.3  Second Amendment to Second Amended and Restated Loan Agreement, dated as of September 26, 2014, by and among PHI, Inc., PHI Air Medical, L.L.C., PHI Tech Services, Inc., International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 4.3 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2014, filed November 7, 2014).
 
4.4  Third Amendment to Second Amended and Restated Loan Agreement, dated as of September 25, 2015, by and among PHI, Inc., PHI Air Medical, L.L.C., PHI Tech Services, Inc., International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 4.4 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2015, filed November 6, 2015).
4.5*4.5  Fourth Amendment to Second Amended and Restated Loan Agreement, dated as of September 30, 2016, by and among PHI, Inc., PHI Air Medical, L.L.C., PHI Tech Services, Inc., International Helicopter Transport, Inc. and Whitney National Bank. (incorporated by reference to Exhibit 4.5 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2016, filed November 7, 2016).
 
4.6  Indenture, dated as of March 17, 2014, by and among PHI, Inc., the subsidiary guarantors and U.S. Bank National Association, relating to the issuance by PHI, Inc. of its 5.25% Senior Notes due 2019 (incorporated by reference to Exhibit 4.2 to PHI’s Report on Form 8-K filed March 17, 2014).
 
4.7  Form of 5.25% Senior Note due 2019 (incorporated by reference to Exhibit 4.2 to PHI’s Report on Form 8-K filed on March 6, 2014).
 
10.1†  Second Amended and Restated PHI Inc. Long-Term Incentive Plan (incorporated by reference to Appendix BA to PHI’s Information Statement on Schedule 14C filed April 13, 2015)12, 2017).

 10.2†Form of Indemnity Agreement between the Company and each of its directors, as adopted on November 5, 2015 (incorporated by reference to Exhibit 10.2 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2015, filed November 6, 2015).

31.1*  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chairman and Chief Executive Officer.
 
31.2*  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Trudy P. McConnaughhay, Chief Financial Officer.
 
32.1*  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chairman and Chief Executive Officer.
 
32.2*  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by 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

* Filed herewith
† Indicates management contract or compensatory plan or arrangement

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 7, 2016 By:
PHI, Inc.
 

August 4, 2017By:/s/ Al A. Gonsoulin

 Al A. Gonsoulin
 Chairman and Chief Executive Officer
November 7, 2016 
August 4, 2017By:

/s/ Trudy P. McConnaughhay

 Trudy P. McConnaughhay
 Chief Financial Officer

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