================================================================================
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: June 30, 2002
OR
[ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period __________ from to __________
Commission file number 0-9827
PETROLEUM HELICOPTERS, INC.
(Exact name of registrant as specified in its charter)
<Table>
LOUISIANA 72-0395707
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
2001 SE EVANGELINE THRUWAY
LAFAYETTE, LOUISIANA 70508
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</Table>
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 [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
<Table>
<Caption>
Class Outstanding at July 31, 2002
----- ----------------------------
Voting Common Stock 2,851,866 shares
Non-Voting Common Stock 2,503,702 shares
</Table>
================================================================================
PETROLEUM HELICOPTERS, INC.
INDEX - FORM 10-Q
<Table>
Part I - Financial Information
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001 ................................................ 3
Condensed Consolidated Statements of Operations - Three
Months and Six Months Ended June 30, 2002 and 2001................ 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2002 and 2001 .............................. 5
Notes to Consolidated Financial Statements .......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ......................................................... 25
Part II - Other Information
Item 1. Legal Proceedings ....................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders ..................... 26
Item 6. Exhibits and Reports on Form 8-K ........................................ 26
Signature ............................................................... 27
</Table>
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 19,167 $ 5,435
Accounts receivable -- net of allowance:
Trade 42,654 45,361
Other 2,515 1,649
Inventory 35,339 34,382
Other current assets 8,076 5,799
Refundable income taxes 780 --
---------- ----------
Total current assets 108,531 92,626
Property and equipment, net 239,383 122,168
Other 11,586 10,851
---------- ----------
Total Assets $ 359,500 $ 225,645
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 28,685 $ 28,247
Accrued vacation payable 5,789 7,020
Income taxes payable -- 2,428
Current maturities of long-term debt and capital lease
obligations -- 7,944
---------- ----------
Total current liabilities 34,474 45,639
Long-term debt and capital lease obligations, net of current
maturities 200,000 58,672
Deferred income taxes 18,777 17,612
Other long-term liabilities 7,554 11,850
Commitments and contingencies (Note 3)
Shareholders' Equity
Voting common stock -- par value of $0.10;
authorized shares of 12,500,000 285 285
Non-voting common stock -- par value of $0.10;
authorized shares of 12,500,000 249 241
Additional paid-in capital 14,517 13,327
Accumulated other comprehensive loss -- (2,030)
Retained earnings 83,644 80,049
---------- ----------
Total shareholders' equity 98,695 91,872
---------- ----------
Total Liabilities and Shareholders' Equity $ 359,500 $ 225,645
========== ==========
</Table>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating revenues $ 69,596 $ 68,534 $ 136,454 $ 131,793
Gain on disposition of property
and equipment 285 273 848 2,304
Other 1,026 430 1,092 430
---------- ---------- ---------- ----------
70,907 69,237 138,394 134,527
---------- ---------- ---------- ----------
Expenses:
Direct expenses 56,967 58,790 115,060 117,606
Selling, general, and
administrative expenses 5,319 4,414 10,032 9,094
Interest expense 5,983 1,651 7,291 3,372
---------- ---------- ---------- ----------
68,269 64,855 132,383 130,072
---------- ---------- ---------- ----------
Earnings before income taxes 2,638 4,382 6,011 4,455
Income taxes 1,058 1,622 2,403 1,649
---------- ---------- ---------- ----------
Net earnings $ 1,580 $ 2,760 $ 3,608 $ 2,806
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic 5,319 5,170 5,299 5,169
Diluted 5,434 5,305 5,410 5,226
Net earnings per common share:
Basic $ 0.30 $ 0.53 $ 0.68 $ 0.54
Diluted $ 0.29 $ 0.52 $ 0.67 $ 0.54
</Table>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
--------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,608 $ 2,806
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 9,568 7,861
Deferred income taxes 1,165 1,810
Gain on asset dispositions (848) (2,272)
Bad debt recovery related to notes receivable (731) --
Other (20) 400
Changes in operating assets and liabilities 4,022 (7,639)
---------- ----------
Net cash provided by operating activities 16,764 2,966
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from notes receivable 429 71
Purchase of property and equipment (14,883) (12,311)
Purchase of aircraft previously leased (118,076) --
Proceeds from asset dispositions 2,418 12,441
---------- ----------
Net cash provided by (used in) investing activities (130,112) 201
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 200,000 2,500
Less fees and expenses (5,627) --
Payments on long-term debt and capital lease obligations (5,845) (5,049)
Payment of long term debt from bond proceeds (60,771) --
Payment of interest rate swap settlement (1,575) --
Proceeds from exercise of stock options 898 10
---------- ----------
Net cash provided by (used in) financing activities 127,080 (2,539)
---------- ----------
Increase in cash and cash equivalents 13,732 628
Cash and cash equivalents, beginning of period 5,435 863
---------- ----------
Cash and cash equivalents, end of period $ 19,167 $ 1,491
========== ==========
SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:
Interest paid (excluding interest rate swap settlement) $ 2,134 $ 3,195
========== ==========
Taxes paid (refunded), net $ 4,124 $ (2,682)
========== ==========
</Table>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying unaudited condensed consolidated financial statements include
the accounts of Petroleum Helicopters, Inc. and subsidiaries ("PHI" or the
"Company"). In the opinion of management, these 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 financial statements contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 and the accompanying notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The Company's financial results, particularly as they relate to the Company's
Domestic Oil & Gas operations, are influenced by seasonal fluctuations as
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. Therefore, the results of operations for interim periods are
not necessarily indicative of the operating results that may be expected for a
full fiscal year.
On April 23, 2002, the Company issued $200 million of 9 3/8% Senior Unsecured
Notes ("Notes") that are due in 2009. The Company used the proceeds to acquire
substantially all of the aircraft that it leased and to pay all amounts
outstanding under its then existing bank loan agreement ("Terminated Loan
Agreement"). As a result, the Company will incur significantly increased
depreciation and interest expense and decreased aircraft lease expense. In the
first quarter of 2002, lease expenses related to the acquired aircraft were $3.8
million.
2. SEGMENT INFORMATION
The Company has identified four principal segments: Domestic Oil and Gas,
International, Aeromedical, and Technical Services. The Domestic Oil and Gas
segment primarily provides helicopter services to oil and gas customers
operating in the Gulf of Mexico. The International segment provides helicopter
services in various foreign countries to oil and gas customers, which primarily
consists of operations in the west coast of Africa. The Aeromedical segment
provides helicopter services to hospitals and medical programs in several U.S.
states. The Company's Air Evac subsidiary is included in the Aeromedical
segment. The Technical Services segment provides helicopter repair and overhaul
services for a variety of helicopter owners and operators.
Beginning late 2001, the Company changed the strategic focus of Technical
Services from providing maintenance and overhaul services to all customers, to
providing such services only to customers that are currently serviced by the
Company's helicopter operations. The Company also plans to fulfill a contractual
obligation to provide maintenance to certain military aircraft.
Segment operating income is operating revenues less direct expenses, selling,
general, and administrative costs, and interest expense allocated to the
operating segment. Unallocated overhead consists primarily of corporate selling,
general, and administrative costs that the Company does not allocate to the
operating segments.
6
<Table>
<Caption>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Segment operating revenues
Domestic Oil and Gas $ 44,177 $ 46,302 $ 86,110 $ 86,268
International 5,253 5,230 11,442 11,069
Aeromedical 12,550 11,710 24,256 23,649
Technical Services 7,616 5,292 14,646 10,807
---------- ---------- ---------- ----------
Total operating revenues $ 69,596 $ 68,534 $ 136,454 $ 131,793
========== ========== ========== ==========
Segment operating profit (loss):
Domestic Oil and Gas $ 4,015 $ 6,517 $ 7,764 $ 7,208
International 310 (75) 936 (535)
Aeromedical 1,968 (40) 3,221 880
Technical Services 1,203 1,109 2,060 1,741
---------- ---------- ---------- ----------
Total segment operating profit 7,496 7,511 13,981 9,294
Other, net (1) 1,311 703 1,940 2,734
Unallocated overhead (6,169) (3,832) (9,910) (7,573)
---------- ---------- ---------- ----------
Earnings before income taxes $ 2,638 $ 4,382 $ 6,011 $ 4,455
========== ========== ========== ==========
</Table>
- ----------
(1) Includes gains on dispositions of property and equipment and other income.
During the quarter ended June 30, 2002, the Company acquired substantially all
of the aircraft that it leased. As a result, Domestic Oil & Gas segment assets
increased by approximately $103.8 million and Aeromedical segment assets
increased by approximately $11.6 million.
3. COMMITMENTS AND CONTINGENCIES
Environmental Matters -- The Company has an aggregate estimated liability of
$1.8 million as of June 30, 2002 for environmental remediation costs at various
operation facilities that are probable and estimable. The Company has conducted
environmental surveys of the Lafayette facility that it vacated in 2001, and has
determined that contamination exists at that facility. To date, borings have
been installed to determine the type and extent of contamination. Preliminary
results indicate limited soil and groundwater impacts. Once the extent and type
of contamination are fully defined, a risk evaluation in accordance with
regulatory standards will be submitted and evaluated by the appropriate agency.
At that point, the regulatory agency will establish what cleanup standards must
be met at the site. When the process is complete, the Company will be in a
position to develop the appropriate remediation plan and the resulting cost of
remediation. The Company has not recorded any estimated liability for
remediation at the facility, but based on preliminary surveys and ongoing
monitoring, the Company believes the ultimate remediation costs for the
Lafayette facility will not be material.
Legal Matters -- The Company is named as a defendant in various legal actions
that have arisen in the ordinary course of its business and have not been
finally adjudicated. The amount, if any, of ultimate liability with respect to
such matters cannot be determined. In the opinion of management, the amount of
the ultimate liability with respect to these actions will not have a material
adverse effect on results of operations, cash flow or financial position of the
Company.
Long-Term Debt -- On April 23, 2002, the Company issued Notes of $200 million
that have an interest rate of 9 3/8% payable semi-annually on May 1 and November
1 of each year, beginning November 1, 2002, and mature in May 2009. The Notes
contain certain covenants, including limitations on indebtedness, liens,
dividends, repurchases of capital stock and other payments affecting restricted
7
subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of
proceeds of asset sales, and mergers and consolidations or sales of assets.
The proceeds of the Notes were used to retire existing bank debt, interest rate
swap agreements ("Swaps"), and to purchase 101 aircraft previously under leases.
As of June 30, 2002, the Company used $186.0 million of the proceeds as follows
(in thousands):
<Table>
Pay amounts outstanding under the Terminated Loan Agreement:
Revolving credit facility $ 44,500
Term debt facility 16,271
Acquisition of 101 aircraft from leasing companies and
financial institutions:
Capital leases 2,679
Operating leases 115,397
Settlement of interest rate swap agreements 1,575
Fees and expenses related to the issue of the Notes 5,627
--------
Total $186,049
========
</Table>
Also on April 23, 2002, the Company entered into a new credit agreement with a
commercial bank for a $50 million revolving credit and letter of credit
facility. The credit agreement permits both prime rate based borrowings and
"LIBOR" rate borrowings plus a spread. The spread for LIBOR borrowings is from
2.0% to 3.0%. Any amounts outstanding under the revolving credit facility are
due July 31, 2004. The Company will pay an annual 0.375% commitment fee on the
unused portion of the revolving credit facility. The Company may also obtain
letters of credit issued under the credit facility up to $5.0 million with a
0.125% fee payable on the amount of letters of credit issued. As of July 31,
2002, the Company had no borrowings and a $0.6 million letter of credit
outstanding under the revolving credit facility.
The Company is subject to certain financial covenants under the credit
agreement. These covenants include maintaining certain levels of working capital
and shareholders' equity and contain other provisions including a restriction on
purchases of the Company's stock. The credit agreement also limits the creation,
incurrence, or assumption of Funded Debt (as defined, which includes long-term
debt) and the acquisition of investments in unconsolidated subsidiaries.
Operating Leases -- The Company leases three aircraft and certain facilities and
equipment used in its operations. The related lease agreements, which include
both non-cancelable and month-to-month terms, generally provide for fixed
monthly rentals and, for certain real estate leases, renewal options. During the
second quarter ended June 30, 2002, the Company acquired 99 aircraft that it had
previously leased under operating leases. At June 30, 2002, the Company had
approximately $21.4 million in aggregate lease commitments under operating
leases of which approximately $2.2 million is payable during the next twelve
months.
Purchase Commitments -- At June 30, 2002, the Company had a commitment of $9
million for the upgrade of certain aircraft. The upgrade is to be performed in
2002 and 2003.
8
4. ACCUMULATED OTHER COMPREHENSIVE INCOME
Following is a summary of the Company's comprehensive income (loss) for the
quarter and six months ended June 30, 2002 and 2001 (in thousands):
<Table>
<Caption>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 1,580 $ 2,760 $ 3,608 $ 2,806
Other comprehensive income
(loss):
Cumulative effect of adopting
SFAS No. 133 -- -- -- 38
Unrecognized gain (loss) on
interest rate swaps during the
period -- 32 455 (903)
Add reclassification
adjustments for losses
included in net income 1,575 -- 1,575 --
-------- -------- -------- --------
Comprehensive income $ 3,155 $ 2,792 $ 5,638 $ 1,941
======== ======== ======== ========
</Table>
During the second quarter ended June 30, 2002, the Company settled its interest
rate swaps with the counterparties in conjunction with the payment of
outstanding bank debt on April 23, 2002.
5. VALUATION ACCOUNTS
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, current market conditions,
and other information. The allowance for doubtful accounts was $0.6 million and
$0.4 million at June 30, 2002 and December 31, 2001, respectively.
The Company also establishes valuation reserves related to obsolescent and
excess inventory. The inventory valuation reserves were $4.7 million and $4.3
million at June 30, 2002 and December 31, 2001, respectively.
6. SEVERANCE LIABILITY
At December 31, 2001, the Company carried a severance liability of $0.3 covering
two employees. During the six months ended June 30, 2002, the Company recorded
costs of approximately $1.7 million related to a plan of termination and early
retirement covering approximately 50 employees. At June 30, 2002, the Company
carried severance liabilities of $0.8 million. The Company expects to pay the
remaining severance liability, covering 15 employees, over the next 12 months.
7. EMPLOYEE INCENTIVE COMPENSATION
For the year ended December 31, 2001, the Company recorded $1.3 million of
compensation expense for a discretionary incentive bonus payable in 2002 to
non-executive employees. As of June 30, 2002, the Company paid $0.8 million of
the discretionary bonus and expects to pay the remaining amount in the third
quarter of 2002.
During the second quarter of 2002, the Company recorded $1.1 million of
compensation expense for a discretionary incentive bonus paid to certain
executive employees.
Also during the second quarter of 2002, the Company implemented an incentive
compensation plan for non-executive employees. Under the plan, the Company
expects that it will pay incentive compensation of up to 7% of earnings before
tax, net of the incentive compensation. In the second quarter of 2002, the
9
Company recorded $0.6 million of incentive compensation expense related to the
first six months of 2002 that is payable in 2003.
8. PROPERTY AND EQUIPMENT
The Company used $118.1 million of proceeds from the issuance of the Notes to
acquire aircraft that it had previously leased. The Company will depreciate the
acquired aircraft over five to 15 years using a 30% residual value.
9. NOTES FEES AND EXPENSES
As a result of the issuance of the Notes, the Company incurred $5.6 million of
fees and expenses. The Company has recorded these costs in other assets and will
amortize the costs over the term of the Notes as an addition to interest
expense.
10. RECEIVABLE FROM CLINTONDALE AVIATION, INC.
As a result of the Company's previous divestiture of its 50% equity interest and
related assets of Clintondale Aviation, Inc. ("Clintondale"), the Company had a
promissory note receivable of $0.5 million recorded at its estimated net
realizable value. During May 2002, the Company entered into a final agreement
and received a $1.2 million payment from Clintondale in August 2002, resulting
in a settlement that was $0.7 million better than previously estimated, which
has been included in the accompanying results of operations (in "Other") during
the quarter ended June 30, 2002.
11. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On April 23, 2002, the Company issued Notes of $200 million that are fully and
unconditionally guaranteed on a senior basis, jointly and severally, by all of
the Company's existing operating subsidiaries ("Guarantor Subsidiaries").
The following supplemental condensed financial information sets forth, on a
consolidating basis, the balance sheet, statement of operations, and statement
of cash flows information for Petroleum Helicopters, Inc. ("Parent Company
Only") and the Guarantor Subsidiaries. The principal eliminating entries
eliminate investments in subsidiaries, intercompany balances, and intercompany
revenues and expenses.
10
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<Table>
<Caption>
JUNE 30, 2002
-------------------------------------------------------
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 19,150 $ 17 $ -- $ 19,167
Accounts receivable - net of allowance 41,230 3,939 -- 45,169
Inventory 35,339 -- -- 35,339
Other current assets 7,928 148 -- 8,076
Refundable income taxes 663 117 -- 780
-------- -------- -------- --------
Total current assets 104,310 4,221 -- 108,531
Property and equipment, net 235,735 3,648 -- 239,383
Investment in subsidiaries and other 19,809 6,268 (14,491) 11,586
-------- -------- -------- --------
Total Assets $359,854 $ 14,137 $(14,491) $359,500
======== ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 29,473 $ 3,838 $ (4,626) $ 28,685
Accrued vacation payable 5,533 256 -- 5,789
-------- -------- -------- --------
Total current liabilities 35,006 4,094 (4,626) 34,474
Long-term debt net of current maturities 200,000 -- -- 200,000
Deferred income taxes and other long-term
liabilities 26,153 -- 178 26,331
Shareholders' Equity:
Paid-in capital 15,051 4,403 (4,403) 15,051
Retained earnings 83,644 5,640 (5,640) 83,644
-------- -------- -------- --------
Total shareholders' equity 98,695 10,043 (10,043) 98,695
-------- -------- -------- --------
Total Liabilities and
Shareholders' Equity $359,854 $ 14,137 $(14,491) $359,500
======== ======== ======== ========
</Table>
11
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<Table>
<Caption>
DECEMBER 31, 2001
-----------------------------------------------------------
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,422 $ 13 $ -- $ 5,435
Accounts receivable - net of
allowance 42,844 4,166 -- 47,010
Inventory 34,382 -- -- 34,382
Other current assets 5,764 35 -- 5,799
---------- ---------- ---------- ----------
Total current assets 88,412 4,214 -- 92,626
Property and equipment, net 118,401 3,767 -- 122,168
Investment in subsidiaries and other 16,138 4,635 (9,922) 10,851
---------- ---------- ---------- ----------
Total Assets $ 222,951 $ 12,616 $ (9,922) $ 225,645
========== ========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities $ 25,986 $ 4,193 $ (1,932) $ 28,247
Accrued vacation payable 6,777 243 -- 7,020
Income taxes payable 2,428 -- -- 2,428
Current maturities of long-term debt
and capital lease obligations 7,944 -- -- 7,944
---------- ---------- ---------- ----------
Total current liabilities 43,135 4,436 (1,932) 45,639
Long-term debt and capital lease
obligations, net of current maturities 58,672 -- -- 58,672
Deferred income taxes and
other long-term liabilities 29,272 -- 190 29,462
Shareholders' Equity:
Paid-in capital 13,853 4,403 (4,403) 13,853
Accumulated other comprehensive
income (loss) (2,030) -- -- (2,030)
Retained earnings 80,049 3,777 (3,777) 80,049
---------- ---------- ---------- ----------
Total shareholders' equity 91,872 8,180 (8,180) 91,872
---------- ---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $ 222,951 $ 12,616 $ (9,922) $ 225,645
========== ========== ========== ==========
</Table>
12
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
FOR THE QUARTER ENDED JUNE 30, 2002
----------------------------------------------------------
Operating revenues $ 57,030 $ 12,566 $ -- $ 69,596
Management fees 1,760 -- (1,760) --
Equity in net income of consolidated
subsidiaries 1,376 -- (1,376) --
Gain on dispositions of property and
equipment 285 -- -- 285
Other 1,026 -- -- 1,026
---------- ---------- ---------- ----------
61,477 12,566 (3,136) 70,907
---------- ---------- ---------- ----------
Expenses:
Direct expenses 48,985 7,982 -- 56,967
Management fees -- 1,760 (1,760) --
Selling, general, and administrative 4,794 525 -- 5,319
Interest expense 5,976 7 -- 5,983
---------- ---------- ---------- ----------
59,755 10,274 (1,760) 68,269
---------- ---------- ---------- ----------
Earnings before income taxes 1,722 2,292 (1,376) 2,638
Income taxes 142 916 -- 1,058
---------- ---------- ---------- ----------
Net earnings $ 1,580 $ 1,376 $ (1,376) $ 1,580
========== ========== ========== ==========
</Table>
<Table>
<Caption>
FOR THE QUARTER ENDED JUNE 30, 2001
---------------------------------------------------------
Operating revenues $ 57,672 $ 10,862 $ -- $ 68,534
Management fees 1,907 -- (1,907) --
Equity in net income of consolidated
subsidiaries 47 -- (47) --
Gain on dispositions of property and
equipment 273 -- -- 273
Other 403 27 -- 430
---------- ---------- ---------- ----------
60,302 10,889 (1,954) 69,237
---------- ---------- ---------- ----------
Expenses:
Direct expenses 50,624 8,166 -- 58,790
Management fees -- 1,907 (1,907) --
Selling, general, and administrative 4,022 392 -- 4,414
Interest expense 1,552 99 -- 1,651
---------- ---------- ---------- ----------
56,198 10,564 (1,907) 64,855
---------- ---------- ---------- ----------
Earnings before income taxes 4,104 325 (47) 4,382
Income taxes 1,344 278 -- 1,622
---------- ---------- ---------- ----------
Net earnings $ 2,760 $ 47 $ (47) $ 2,760
========== ========== ========== ==========
</Table>
13
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------
Operating revenues $ 112,911 $ 23,543 $ -- $ 136,454
Management fees 2,831 -- (2,831) --
Equity in net income of consolidated
subsidiaries 1,997 -- (1,997) --
Gain on dispositions of property and
equipment 848 -- -- 848
Other 1,094 (2) -- 1,092
---------- ---------- ---------- ----------
119,681 23,541 (4,828) 138,394
---------- ---------- ---------- ----------
Expenses:
Direct expenses 98,661 16,399 -- 115,060
Management fees -- 2,831 (2,831) --
Selling, general, and administrative 9,063 969 -- 10,032
Interest expense 7,276 15 -- 7,291
---------- ---------- ---------- ----------
115,000 20,214 (2,831) 132,383
---------- ---------- ---------- ----------
Earnings before income taxes 4,681 3,327 (1,997) 6,011
Income taxes 1,073 1,330 -- 2,403
---------- ---------- ---------- ----------
Net earnings $ 3,608 $ 1,997 $ (1,997) $ 3,608
========== ========== ========== ==========
</Table>
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, 2001
---------------------------------------------------------
Operating revenues $ 109,488 $ 22,305 $ -- $ 131,793
Management fees 3,873 -- (3,873) --
Equity in net income of consolidated
subsidiaries 1,021 -- (1,021) --
Gain on dispositions of property and
equipment 2,304 -- -- 2,304
Other 403 27 -- 430
---------- ---------- ---------- ----------
117,089 22,332 (4,894) 134,527
---------- ---------- ---------- ----------
Expenses:
Direct expenses 101,928 15,678 -- 117,606
Management fees -- 3,873 (3,873) --
Selling, general, and administrative 8,317 777 -- 9,094
Interest expense 3,152 220 -- 3,372
---------- ---------- ---------- ----------
113,397 20,548 (3,873) 130,072
---------- ---------- ---------- ----------
Earnings before income taxes 3,692 1,784 (1,021) 4,455
Income taxes 886 763 -- 1,649
---------- ---------- ---------- ----------
Net earnings $ 2,806 $ 1,021 $ (1,021) $ 2,806
========== ========== ========== ==========
</Table>
14
PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<Table>
<Caption>
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------
Net cash provided by (used in) operating
activities $ 16,684 $ 80 $ -- $ 16,764
Cash flows from investing activities:
Proceeds from notes receivable 429 -- -- 429
Purchase of property and equipment (14,807) (76) -- (14,883)
Purchase of aircraft previously leased (118,076) -- -- (118,076)
Proceeds from asset dispositions 2,418 -- -- 2,418
---------- ---------- ---------- ----------
Net cash used in investing activities (130,036) (76) -- (130,112)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt, net 194,373 -- -- 194,373
Payments on long-term debt (5,845) -- -- (5,845)
Payment of long-term debt with bond
proceeds (60,771) -- -- (60,771)
Payment of interest rate swap settlement (1,575) -- -- (1,575)
Proceeds from exercise of stock options 898 -- -- 898
---------- ---------- ---------- ----------
Net cash provided by financing activities 127,080 -- -- 127,080
---------- ---------- ---------- ----------
Increase in cash and cash equivalents 13,728 4 -- 13,732
Cash and cash equivalents, beginning of year 5,422 13 -- 5,435
---------- ---------- ---------- ----------
Cash and cash equivalents, end of year $ 19,150 $ 17 $ -- $ 19,167
========== ========== ========== ==========
</Table>
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, 2001
---------------------------------------------------------
Net cash provided by operating activities $ 2,462 $ 504 $ -- $ 2,966
Cash flows from investing activities:
Proceeds from notes receivable 71 -- -- 71
Purchase of property and equipment (12,300) (11) -- (12,311)
Proceeds from asset dispositions 12,441 -- -- 12,441
---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities 212 (11) -- 201
---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 2,500 -- -- 2,500
Payments on long-term debt (4,549) (500) -- (5,049)
Proceeds from exercise of stock options 10 -- -- 10
---------- ---------- ---------- ----------
Net cash used in financing activities (2,039) (500) -- (2,539)
---------- ---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents 635 (7) -- 628
Cash and cash equivalents, beginning of year 844 19 -- 863
---------- ---------- ---------- ----------
Cash and cash equivalents, end of year $ 1,479 $ 12 $ -- $ 1,491
========== ========== ========== ==========
</Table>
15
12. NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" was approved by the Financial Accounting
Standards Board ("FASB"). SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, ceased upon adoption
of this statement. The Company had implemented SFAS No. 142 on January 1, 2002.
The implementation had no material impact on the Company's consolidated
financial position or results of operation.
SFAS No. 143, Accounting for Asset Retirement Obligations, requires the
recording of liabilities for all legal obligations associated with the
retirement of long-lived assets that result from the normal operation of those
assets. These liabilities are required to be recorded at their fair values
(which are likely to be the present values of the estimated future cash flows)
in the period in which they are incurred. SFAS No. 143 requires the associated
asset retirement costs to be capitalized as part of the carrying amount of the
long-lived asset. The asset retirement obligation will be accreted each year
through a charge to expense. The amounts added to the carrying amounts of the
assets will be depreciated over the useful lives of the assets. The Company is
required to implement SFAS No. 143 on January 1, 2003, and does not expect that
this statement will have a material impact on its consolidated financial
position or results of operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets,
promulgates standards for measuring and recording impairments of long-lived
assets. Additionally, this standard establishes requirements for classifying an
asset as held for sale, and changes existing accounting and reporting standards
for discontinued operations and exchanges for long-lived assets. The Company
implemented SFAS No. 144 on January 1, 2002. The implementation of this standard
did not have a material effect on the Company's financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 eliminates SFAS No. 4 and as a result, gains and losses from
extinguishments of debt should be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30. SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also updates and amends existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
has not determined the impact that this statement will have on its consolidated
financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for fiscal periods after
December 31, 2002. SFAS No. 146 requires companies to recognize costs associated
with restructurings, discontinued operations, plant closings, or other exit or
disposal activities, when incurred rather than at the date a plan is committed
to. The Company plans to adopt the standard as of the effective date and will
implement its provisions on a prospective basis.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements and the notes thereto, as
well as the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
16
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in this Form
10-Q, other periodic reports filed by the Company under the Securities Exchange
Act of 1934, and other written or oral statements made by it or on its behalf,
are forward-looking statements. When used herein, the words "anticipates",
"expects", "believes", "goals", "intends", "plans", or "projects" and similar
expressions are intended to identify forward-looking statements. It is important
to note that forward-looking statements are based on a number of assumptions
about future events and are subject to various risks, uncertainties, and other
factors that may cause the Company's actual results to differ materially from
the views, beliefs, and estimates expressed or implied in such forward-looking
statements. Although the Company believes that the assumptions reflected in
forward-looking statements are reasonable, no assurance can be given that such
assumptions will prove correct. Factors that could cause the Company's results
to differ materially from the results discussed in such forward-looking
statements include but are not limited to the following: flight variances from
expectations, volatility of oil and gas prices, the substantial capital
expenditures and commitments required to acquire aircraft, environmental risks,
competition, government regulation, unionization, operating hazards, risks
related to international operations, the ability to obtain insurance, and the
ability of the Company to implement its business strategy. All forward-looking
statements in this document are expressly qualified in their entirety by the
cautionary statements in this paragraph. PHI undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events, or otherwise.
OVERVIEW
Operating revenues increased $1.1 million for the quarter ended June 30, 2002,
compared to the June 30, 2001 quarter, primarily as a result of a $2.3 million
increase in Technical Services revenues due to a project for the upgrade and
refurbishment of a customer's aircraft, and a $0.9 million increase in
Aeromedical segment revenues. These increases were offset in part by a $2.1
million decrease in Domestic Oil and Gas segment revenues due to a decline in
oil and gas activity in the Gulf of Mexico.
Operating revenues for the six months ended June 30, 2002, compared to the six
months ended June 30, 2001, increased $4.7 million due to the increase in
revenues from the above-mentioned Technical Services contract and from
International and Aeromedical operations. There was a slight decline in revenues
in the Domestic Oil and Gas segment due to a decrease in activity essentially
offset by customer rate increases implemented in 2001.
Flight hours declined in all flight segments during both the quarter and
six-month periods, primarily as a result of decreased activity in the Gulf of
Mexico and termination of certain contracts in the Aeromedical segment as a
result of proposed rate increases on those contracts. The effect of the decline
on revenues was offset to a large extent by rate increases.
Direct expenses plus selling, general, and administrative expense decreased in
total for the quarter and six months. There were increases in Technical Services
costs ($2.2 million for the quarter and $3.5 million for the six months),
severance costs ($0.4 million in the quarter and $1.7 million for the six
months), management bonuses ($1.1 million in the second quarter), and
depreciation expense ($1.2 million in the second quarter and $1.0 million for
the six months). These increases were substantially offset by decreases in
maintenance costs ($0.6 million for the quarter and $3.1 million for the six
months), fuel costs ($0.5 million for the quarter and $1.5 million for the six
months), helicopter rent ($2.6 million for the quarter and $2.9 million for the
six months) insurance costs ($0.6 million for the quarter and the six months)
and other human resource costs decreased ($1.1 million for the quarter and $0.7
million for the six months).
17
Interest expense increased $4.3 million for the quarter and $3.9 million for
the six months because of interest on the Note issuance described below, and
$1.9 million of costs related to the retirement of the Company's bank debt and
liquidation of the Company's interest rate swap agreements in the second
quarter, which were charged to interest expense.
On April 23, 2002, the Company issued $200 million in 9 3/8% Notes due May 1,
2009. The proceeds from the offering were used to retire $62.3 million of
existing bank debt and the Swaps, and to acquire 101 aircraft for $118.1
million, that the Company previously leased. Also on April 23, 2002, the Company
entered into a new $50 million revolving credit facility with a commercial bank.
There have been no borrowings under the new revolving credit facility.
As a result of the Notes issuance and the purchases of the leased aircraft, the
Company has incurred and will incur increased interest and depreciation expense,
and decreased aircraft rent expense. Although the Company expects that these
changes will reduce earnings before income taxes by approximately $1.2 million
per quarter, management believes that the changes will improve overall liquidity
over the next several years, which will allow the Company to pursue earnings
growth opportunities, by increasing cash from operations by approximately $5.7
million in 2002 and $10.5 million in 2003, including incremental tax effects. In
later years, this amount reduces due to the effects of lower tax depreciation.
Additionally, until 2009 when the Notes become due, the Company will be able to
retain cash that would have otherwise been needed for bank debt principal
payments.
OPERATIONS STATISTICS
The following tables present certain non-financial operational statistics for
the quarter and six months ended June 30, 2002 and 2001:
<Table>
<Caption>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
FLIGHT HOURS:
Domestic Oil and Gas 34,184 40,063 65,644 76,271
International 4,207 5,286 9,133 10,979
Aeromedical 4,638 5,817 9,362 11,098
Other 75 34 116 175
---------- ---------- ---------- ----------
Total 43,104 51,200 84,255 98,523
========== ========== ========== ==========
</Table>
<Table>
<Caption>
JUNE 30,
---------------------
2002 2001
-------- --------
AIRCRAFT OPERATED AT PERIOD END:
Domestic Oil and Gas 179 192
International 21 25
Aeromedical 33 42
-------- --------
Total 233 259
======== ========
</Table>
QUARTER ENDED JUNE 30, 2002 COMPARED WITH QUARTER ENDED JUNE 30, 2001
COMBINED OPERATIONS
REVENUES -- Operating revenues were $69.6 million for the quarter ended June 30,
2002, as compared to $68.5 million for the quarter ended June 30, 2001, an
increase of $1.1 million. The increase was due to
18
revenues from a Technical Services contract for the upgrade and refurbishment of
an aircraft for a customer and to increases in International and Aeromedical
flight related operating revenues. The increases in International and
Aeromedical operating revenues were due to rate increases implemented in 2001
and 2002, offset in part by decreases in flight activity. Operating revenues in
the Domestic Oil and Gas segment decreased $2.1 million for the quarter as a
result of decreased flight activity in the Gulf of Mexico. This decrease in
activity in the Domestic Oil and Gas segment was offset in part by increases in
rates implemented in 2001 in that segment.
OTHER INCOME AND LOSSES -- Gains on property and equipment dispositions for each
of the quarters ended June 30, 2002 and June 30, 2001 were $0.3 million. The
Company also had interest income of $0.3 million in the second quarter of 2002,
related to cash deposits, as compared to $0.4 million for the second quarter of
2001, which was related to federal and state tax refunds. The Company also
recorded $0.7 million for a favorable settlement of a note receivable from
Clintondale.
DIRECT EXPENSES -- Direct expenses for the quarter ended June 30, 2002 were
$57.0 million, compared to $58.8 million for the same period in the prior year.
The decrease in direct expenses was the result of a decrease in maintenance
costs due to the decline in activity ($0.6 million), decreased helicopter rent
as a result of the purchase of leased aircraft ($2.6 million), decreased fuel
cost due to the decline in activity ($0.5 million), and insurance costs due to a
competitive bidding process ($0.6 million), offset by increases in depreciation
expense of $1.2 million as a result of the purchase of leased aircraft, $2.2
million increase in Technical Services costs due to the contract previously
mentioned, $0.3 million for severance charges, and $0.3 million for management
bonuses. Excluding the severance charges and management bonus mentioned above,
other human resource costs decreased for the quarter and six months due to the
decrease in head count. At June 30, 2002 there were 1,700 employees as compared
to 1,752 at June 30, 2001.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES -- Selling, general, and
administrative expenses for the quarter ended June 30, 2002 were $5.3 million,
as compared to $4.4 million for the quarter ended June 30, 2001. The $0.9
million increase is the result of severance costs of $0.1 million and a charge
of $0.8 million for management bonuses.
INTEREST EXPENSE -- Interest expense for the quarter ended June 30, 2002
increased to $6.0 million from $1.7 million in the prior year. Included in
interest expense was the $1.9 million related to liquidating the Swaps and
retirement of bank debt. The remaining increase in interest expense is related
to the Notes sold on April 23, 2002. As a result of the issuance of Notes and
related debt repayment, the Company expects interest expense to increase by
approximately $3.4 million per quarter.
INCOME TAXES -- Income tax expense for the quarter ended June 30, 2002 was $1.1
million, compared to $1.6 million for the quarter ended June 30, 2001. The
effective tax-rate was 40% for the quarter ended June 30, 2002, and 37% for the
quarter ended June 30, 2001. The increase in the effective tax rate is primarily
due to increased permanent book and tax differences, and higher state taxes for
the Company's Arizona operations.
EARNINGS -- The Company's net earnings for the quarter were $1.6 million,
compared to $2.8 million in the same period in the prior year. Earnings before
tax for the quarter were $2.6 million compared to $4.4 million in the same
period of the prior year. Earnings per diluted share for the quarter were $0.29
as compared to $0.52 per diluted share for the same quarter prior year. Although
there was a decline in flight hour activity, the principal reason for the
earnings decline was the increase in interest expense, described below.
19
SEGMENT DISCUSSION
Domestic Oil and Gas -- Domestic Oil & Gas segment revenues were $44.2 million
for the quarter ended June 30, 2002, compared to $46.3 million for the quarter
ended June 30, 2001, a decrease of $2.1 million. There was a decrease in flight
activity offset in part by an increase in rates implemented in 2001. The
decrease in flight activity was the result of reduced oil and gas activity in
the Gulf of Mexico, as indicated by a 14.7% decrease in flight hours for the
quarter. The number of aircraft in the segment was 179 at June 30, 2002 as
compared to 192 at June 30, 2001.
The Domestic Oil & Gas segment operating income decreased $2.5 million.
Operating margin of 9.1% for the second quarter compares to 14.1% for the same
quarter in the prior year. The decrease in operating income and operating margin
is due to the decrease in activity, and to a $1.1 million increase in
depreciation expense, a $2.3 million increase in interest expense, partially
offset by a $1.9 million decrease in helicopter rent expense as a result of the
purchase of leased aircraft. Also included in direct expense is $0.3 million of
severance costs and $0.3 million related to management bonuses.
International -- International segment revenues were $5.3 million for the
quarter ended June 30, 2002, compared to $5.2 million for the quarter ended June
30, 2001. The increase was due to rate increases recently implemented by the
Company, offset in part by reduced demand and flight activity in West Africa.
Flight hours declined 20.4% in the International segment in the period. The
number of aircraft in the segment was 21 at June 30, 2002, as compared to 25 at
June 30, 2001.
The International segment had $0.3 million operating income for the quarter,
compared to a $0.1 million operating loss for the same period in 2001. Operating
margin of 5.9% for the second quarter 2002 compares to (1.4)% for the same
quarter in the prior year. The improvement in operating income and operating
margin was due and a net decrease in direct expenses. The decrease in direct
expenses was primarily due to fewer aircraft in the segment in the quarter,
which was partially offset by a slight increase in depreciation expense and a
$0.2 million increase in interest expense.
Aeromedical -- Aeromedical segment revenues were $12.6 million for the quarter
ended June 30, 2002, compared to $11.7 million during the quarter ended June 30,
2001, an increase of $0.9 million. The increase was due to customer rate
increases implemented by the Company offset in part by a 20.3% decrease in
flight hours due to the termination of certain Aeromedical contracts as a result
of proposed rate increases on those contracts. The number of aircraft in the
segment was 33 at June 30, 2002 as compared to 42 for June 30, 2001.
The Aeromedical segment operating income was $2.0 million for the quarter,
compared to an operating loss of less than $0.1 million for the same period in
2001. Operating margin was 15.7% for the quarter and compares to (0.3)% for the
same quarter in 2001. The increase in operating income and operating margin is
attributable to increased customer rates and a $1.1 million decrease in costs.
Costs in the Aeromedical segment decreased due to the decrease in the number of
aircraft in the segment resulting in decreases in maintenance costs and fuel
costs, which was partially offset by a $1.0 million increase in depreciation
expense and a $0.3 million increase in interest expense.
Technical Services -- Technical Services segment revenues for the quarter ended
June 30, 2002 were $7.6 million, compared to $5.3 million in the prior year, an
increase of $2.3 million. The increase in Technical Services revenues is related
to a contract for the refurbishment and upgrade of a customer's aircraft.
The Technical Services segment had operating income of $1.2 million for the
quarter ended June 30, 2002, compared to $1.1 million for the quarter ended June
30, 2001. The operating margin was 15.8% in the quarter, compared to 21.0% in
the same quarter of the prior year. The increase in operating revenues
20
was largely offset by an increase in costs in the Technical Services segment of
$2.2 million related to the previously mentioned contract.
During 2001, the Company changed the strategic focus of Technical Services from
providing maintenance and overhaul services to all customers to only those
customers that are currently serviced by the Company's helicopter operations.
The Company implemented this change to allow the Technical Services segment to
focus on the Company's aircraft and components. The Company believes that the
change in the focus of Technical Services will contribute to increased
availability of the Company's aircraft, with a consequent favorable impact on
flight operations revenue. However, this change in strategic focus may result in
lower revenues from this segment.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
COMBINED OPERATIONS
REVENUES -- Operating revenues for the six months ended June 30, 2002 were
$136.5 million, compared to $131.8 million for the six months ended June 30,
2001, an increase of $4.7 million. The increase in operating revenues was due
primarily to revenues from a Technical Services segment maintenance contract for
the upgrade and refurbishment of two aircraft for a customer. Flight related
revenues also increased 1% for the six months ended June 30, 2002 as compared to
the six months ended June 30, 2001. The increase in flight revenue was due to
customer rate increases implemented in 2001, offset by a decrease in flight
activity. Flight hours for the six months ended June 30, 2002 were 84,255, as
compared to 98,523 for the six months ended June 30, 2001, a decrease of 14,268
flight hours, or approximately 14.5%. This decrease was primarily due to reduced
oil and gas activity in the Gulf of Mexico. The number of aircraft at June 30,
2002 was 233 as compared to 259 at June 30, 2001.
OTHER INCOME -- Gains on property and equipment dispositions was $0.8 million
for the six months ended June 30, 2002, compared to $2.3 million for the six
months ended June 20, 2001, as fewer aircraft were available for sale in 2002.
There was interest income of $0.4 million for the six months ended June 20,
2002, compared to $0.4 million for the six months June 30, 2001. Interest income
in the prior period was related to interest income on federal and state tax
refunds. The Company also recorded $0.7 million for a favorable settlement of a
note receivable from Clintondale.
DIRECT EXPENSES -- Direct expenses for the six months ended June 30, 2002 were
$115.1 million, compared to $117.6 million for the comparable period in 2001.
The decrease in direct expenses was the result of decreases in helicopter rent
($2.9 million) as a result of the purchase of leased aircraft, insurance costs
($0.6 million) as a result of a competitive bidding process, maintenance costs
($3.1 million) due to the decline in activity, and fuel costs ($1.5 million)
also due to decreased activity. In addition, there was a decrease in recurring
compensation cost ($0.6 million) due to the decrease in head count. The above
amounts were offset in part by a $3.5 million increase in Technical Services
costs due to the contract described above, severance charges ($1.4 million),
management bonuses ($0.3 million) and depreciation expense included in direct
expenses ($1.0 million) due to the purchase of leased aircraft.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES -- Selling, general, and
administrative expenses for the six months ended June 30, 2002 were $10.0
million, compared to $9.1 million for the six months June 30, 2001, an increase
of $0.9 million. The increase is due to $0.3 million of severance charges and
$0.8 million related to management bonuses, offset in part by a $0.2 million
decrease in legal costs.
21
INTEREST EXPENSE -- Interest expense for the six months ended June 30, 2002 was
$7.3 million, as compared to $3.4 million for the six months ended June 30,
2001. Included in interest expense is $1.9 million related to liquidating the
Swaps and retirement of bank debt. The remaining increase in interest expense is
related to the Notes issued on April 23, 2002.
As a result of the $200 million issuance of Notes and related debt repayment,
the Company expects interest expense to increase by approximately $13.6 million
per year.
INCOME TAXES -- Income tax expense for the six months ended June 30, 2002 was
$2.4 million, compared to $1.6 million for the six months ended June 30, 2001.
The effective tax rate for the six months ended June 30, 2002 was 40%, as
compared to 37% for the six months ended June 30, 2001. The increase in the
effective tax rate is primarily due to increased permanent book and tax
differences, and higher state taxes for the Company's Arizona operations.
EARNINGS -- The Company's net income for the six months ended June 30, 2002 was
$3.6 million, compared to net income of $2.8 million for the six months ended
June 30, 2001. Earnings before tax for the six months ended June 30, 2002 was
$6.0 million, compared to earnings before tax of $4.5 million for the same
period in the prior year. Earnings per diluted share for the six months ended
June 30, 2002 was $0.67 as compared to earnings per diluted share of $0.54 for
the six months ended June 30, 2001. Earnings for the six months were impacted by
$2.4 million of interest on the issuance of the Notes, $1.9 million for the
retirement of the bank debt and the Swaps, which was recorded as interest costs,
and $1.7 million of severance costs. Flight hours were down 14,268 for the six
months due largely to a decrease in oil and gas activity in the Gulf of Mexico.
The impact on revenues of this decline was offset by the effect of rate
increases.
SEGMENT DISCUSSION
Domestic Oil and Gas -- Domestic Oil & Gas segment revenues were $86.1 million
for the quarter ended June 30, 2002, compared to $86.3 million for the quarter
ended June 30, 2001. A decrease of 10,627 flight hours was offset by customer
rate increases implemented in 2001. The decrease in flight activity was due to a
decline in oil and gas activity in the Gulf of Mexico. The number of aircraft in
the segment was 179 at June 30, 2002 as compared to 192 at June 30, 2001.
Domestic Oil & Gas segment operating income was $7.8 million for the six months
ended June 30, 2002, compared to $7.2 million for the six months ended June 30,
2001. The operating margin for the six months ended June 30, 2002 was 9.0%,
compared to 8.4% for the six months ended June 30, 2001. The improvement in
operating income and operating margin was due to rate increases implemented by
the Company, offset in part by a decrease in flight hour activity. There was
also a decrease in costs primarily as a result of decreased maintenance and fuel
costs due to the decline in activity ($3.1 million) and a decrease in helicopter
rent ($2.0 million), partially offset by increases in severance costs ($1.0
million), management bonuses ($0.3 million), depreciation expense ($1.2 million)
and interest expense ($2.1 million) as a result of the purchase of leased
aircraft.
International -- International segment revenues were $11.4 million for the six
months ended June 30, 2002, compared to $11.1 million for the six months June
30, 2001, an increase of $0.3 million. The increase in revenues was due to rate
increases recently implemented by the Company. This was partially offset by a
1,846 decline in flight hour activity caused by reduced demand in West Africa.
The number of aircraft at June 30, 2002 in the International segment was 21, as
compared to 25 at June 30, 2001.
International segment operating income was $0.9 million for the six months ended
June 30, 2002, compared to a $0.5 million loss for the six months ended June 30,
2001. Operating margin of 8.2% for the six months ended June 30, 2002, compares
to (4.8)% for the six months ended June 30, 2001. The
22
improvement in operating income and operating margin was due to rate increases
implemented by the Company, decreased maintenance and fuel costs resulting from
the decline in flight activity, and a decrease in depreciation expense ($0.1
million), offset in part by an increase in interest expense ($0.1 million).
Aeromedical -- Aeromedical segment revenues were $24.3 million for the six
months ended June 30, 2002, compared to $23.6 million for the same period in the
prior year, an increase of $0.7 million. The increase in operating revenues for
the Aeromedical segment is attributable to customer rate increases offset in
part by a decrease of 1,736 flight hours due to the termination of certain
Aeromedical contracts as a reaction to proposed rate increases. The number of
aircraft in the segment was 33 at June 30, 2002, as compared to 42 for June 30,
2001.
Aeromedical segment operating income was $3.2 million for the six months ended
June 30, 2002, compared to $0.9 million for the six months ended June 30, 2001.
The operating margin for the six months ended June 30, 2002 was 13.3%, compared
to 3.7% for the six months ended June 30, 2001. The improvement in operating
income and operating margin was due to rate increases and also due to decreased
costs, which primarily is the result of decreased maintenance and fuel costs
resulting from the decline in flight activity, slightly offset by increases in
depreciation expense ($0.1 million) and interest expense ($0.1 million).
Technical Services -- The Technical Services segment operating revenues for the
six months ended June 30, 2002 were $14.6 million, compared to $10.8 million in
the comparable period in the prior year, an increase of $3.8 million. The
increase in Technical Services revenues was related to revenue from a contract
for the refurbishment and upgrade of two aircraft.
The Technical Services segment had operating income of $2.1 million for the six
months ended June 30, 2002, compared to $1.7 million for the six months ended
June 30, 2001. The operating margin was 14.1% in the six months ended June 30,
2002, compared to 16.1% for the six months ended June 30, 2001. The increase in
operating income is due to the increase in activity. Costs in the Technical
Services segment increased $3.5 million due to the contract previously
mentioned.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position on June 30, 2002 was $19.2 million, compared to $5.4
million at December 31, 2001. Working capital was $74.1 million at June 30,
2002, as compared to $47.0 million at June 30, 2001, an increase of $27.1
million. An increase in cash of $13.7 million, primarily the remaining proceeds
of the Note issuance, and a decrease in current maturities of long-term debt of
$14.8 million as bank debt was repaid with the proceeds of long-term Notes
account for the increase in working capital. Net cash provided by operating
activities funded capital expenditure requirements of $14.9 million in 2002.
Note issuance costs of $5.6 million were funded with proceeds from the sale of
the Notes.
On April 23, 2002, the Company issued Notes of $200 million that carry an
interest rate of 9 3/8% payable semi-annually on May 1 and November 1 of each
year, beginning November 1, 2002, and mature in May 2009. The Notes contain
certain covenants, including limitations on indebtedness, liens, dividends,
repurchases of capital stock and other payments affecting restricted
subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of
proceeds of asset sales, and mergers and consolidations or sales of assets.
Proceeds from the Notes, net of $5.6 million of fees and expenses, were used to
retire the Company's $16.3 million term credit facility and $44.5 million
revolving credit facility, and to terminate the related Swaps for $1.6 million.
The Company also purchased 101 aircraft, which were previously leased, for
$118.1 million.
23
Also, on April 23, 2002, the Company executed a new credit agreement with a
commercial bank for a $50 million revolving credit facility. The Company has not
borrowed under this new credit facility.
Capital expenditures totaled $14.9 million for the six months ended June 30,
2002. Capital expenditures primarily include amounts for the refurbishment of
aircraft and the upgrade of capability of certain aircraft. As discussed above,
the Company also purchased $118.1 million of aircraft it previously leased. At
June 30, 2002, the Company had a commitment of $9 million for the upgrade of
certain aircraft. The upgrade is to be performed in 2002 and 2003.
The effect of the purchases of the aircraft will be to improve cash flow by the
reduced lease payments, less the increased interest expense from the issuance of
the Notes. The Company believes that cash flow from operations will be
sufficient to fund required interest payments on the Notes and capital
expenditures during 2002.
ENVIRONMENTAL MATTERS
As of June 30, 2002, the Company has an aggregate estimated liability of $1.8
million for environmental remediation costs that are probable and estimable. The
Company has conducted environmental surveys of its Lafayette facility, which it
vacated in 2001, and has determined that contamination exists at that facility.
To date, borings have been installed to determine the type and extent of
contamination. Preliminary results indicate limited soil and groundwater
impacts. Once the extent and type of contamination are fully defined, a risk
evaluation in accordance with regulatory standards will be submitted and
evaluated by the appropriate agency. At that point, the regulatory agency will
establish what cleanup standards must be met at the site. When the process is
complete, the Company will be in a position to develop the appropriate
remediation plan and the resulting cost of remediation. The Company has not
recorded any estimated liability for remediation at the site, but based on
preliminary surveys and ongoing monitoring, the Company believes the ultimate
remediation costs for the Lafayette facility will not be material.
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" was approved by the Financial Accounting
Standards Board ("FASB"). SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, ceased upon adoption
of this statement. The Company had implemented SFAS No. 142 on January 1, 2002.
The implementation had no material impact on the Company's consolidated
financial position or results of operation.
SFAS No. 143, Accounting for Asset Retirement Obligations, requires the
recording of liabilities for all legal obligations associated with the
retirement of long-lived assets that result from the normal operation of those
assets. These liabilities are required to be recorded at their fair values
(which are likely to be the present values of the estimated future cash flows)
in the period in which they are incurred. SFAS No.143 requires the associated
asset retirement costs to be capitalized as part of the carrying amount of the
long-lived asset. The asset retirement obligation will be accreted each year
through a charge to expense. The amounts added to the carrying amounts of the
assets will be depreciated over the useful lives of the assets. The Company is
required to implement SFAS No. 143 on January 1, 2003, and does not expect that
this statement will have a material impact on its consolidated financial
position or results of operations.
24
SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets,
promulgates standards for measuring and recording impairments of long-lived
assets. Additionally, this standard establishes requirements for classifying an
asset as held for sale, and changes existing accounting and reporting standards
for discontinued operations and exchanges for long-lived assets. The Company
implemented SFAS No. 144 on January 1, 2002. The implementation of this standard
did not have a material effect on the Company's financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 eliminates SFAS No. 4 and as a result, gains and losses from
extinguishments of debt should be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30. SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also updates and amends existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
has not determined the impact that this statement will have on its consolidated
financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for fiscal periods after
December 31, 2002. SFAS No. 146 requires companies to recognize costs associated
with restructurings, discontinued operations, plant closings, or other exit or
disposal activities, when incurred rather than at the date a plan is committed
to. The Company plans to adopt the standard as of the effective date and will
implement its provisions on a prospective basis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On April 23, 2002, the Company paid its Terminated Loan Agreement. The
Terminated Loan Agreement had variable interest rates. In conjunction with the
payment of the Terminated Loan Agreement, the Company settled its interest rate
swaps by paying $1.6 to the counterparties.
Also on April 23, 2002, the Company issued Notes of $200 million that have an
interest rate of 9 3/8% payable semi-annually on May 1 and November 1 of each
year, beginning November 1, 2002, and mature in May 2009. The market value of
the Notes will vary as changes occur to general market interest rates, the
remaining maturity of the Notes, and the Company's credit worthiness. A
hypothetical 100 basis-point increase to the Notes' imputed interest rate
immediately after issue would have resulted in a market value decline to
approximately $190.2 million.
There were no other material changes to the Company's disclosures regarding
derivatives in its Form 10-K for the year ended December 31, 2001.
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings primarily involving claims
for personal injury. The Company believes that the outcome of all such
proceedings, even if determined adversely, would not have a material adverse
effect on its consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2002 Annual Meeting of Stockholders on April 30, 2002. At
the meeting, shareholders elected each of the following persons listed below to
PHI's Board of Directors for a term ending at the Company's 2003 Annual Meeting
of Stockholders. The number of votes cast with respect to the election of each
such person is opposite such person's name. The persons listed below constituted
the entire Board of Directors of the Company at that time.
<Table>
<Caption>
NUMBER OF VOTES CAST
---------------------------------------
BROKER
NAME OF DIRECTOR FOR WITHHOLD NON-VOTE
--------- ---------- ----------
Al A. Gonsoulin 1,482,266 0 0
Lance F. Bospflug 1,482,266 0 0
Arthur J. Breault, Jr 1,482,266 0 0
Thomas H. Murphy 1,482,266 0 0
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 (i) Articles of Incorporation of the Company (incorporated by
reference to Exhibit No. 3.1 (i) to PHI's Report on Form 10-Q for
the quarterly period ended October 31, 1994).
(ii) By-laws of the Company as amended (incorporated by reference to
Exhibit No. 3.1 (ii) to PHI's Report on Form 10-Q for the
quarterly period ended March 31, 2002).
10.1 Indenture dated April 23, 2002 among Petroleum Helicopters, Inc., the
Subsidiary Guarantors named therein and The Bank of New York, as
Trustee (incorporated by reference to Exhibit 4.1 to PHI's
Registration Statement on Form S-4, filed on April 30, 2002, File Nos.
333-87288 through 333-87288-08).
10.2 Form of 9 3/8% Senior Note (incorporated by reference to Exhibit 4.1
to PHI's Registration Statement on Form S-4, filed on April 30, 2002,
File Nos. 333-87288 through 333-87288-08).
10.3 Loan Agreement dated as of April 23, 2002 by and among Petroleum
Helicopters, Inc., Air Evac Services, Inc., Evangeline Airmotive,
Inc., and International Helicopter Transport, Inc. and Whitney
National Bank
26
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by Lance F. Bospflug, Chief Executive Officer.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by Michael J. McCann, Chief Financial Officer.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended June 30, 2002.
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.
Petroleum Helicopters, Inc.
August 14, 2002 By: /s/ Michael J. McCann
--------------------------------------
Michael J. McCann
Chief Financial Officer and Treasurer
27
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 (i) Articles of Incorporation of the Company (incorporated by
reference to Exhibit No. 3.1 (i) to PHI's Report on Form 10-Q
for the quarterly period ended October 31, 1994).
(ii) By-laws of the Company as amended (incorporated by reference
to Exhibit No. 3.1 (ii) to PHI's Report on Form 10-Q for the
quarterly period ended March 31, 2002).
10.1 Indenture dated April 23, 2002 among Petroleum Helicopters, Inc.,
the Subsidiary Guarantors named therein and The Bank of New York,
as Trustee (incorporated by reference to Exhibit 4.1 to PHI's
Registration Statement on Form S-4, filed on April 30, 2002, File
Nos. 333-87288 through 333-87288-08).
10.2 Form of 9 3/8% Senior Note (incorporated by reference to Exhibit
4.1 to PHI's Registration Statement on Form S-4, filed on April 30,
2002, File Nos. 333-87288 through 333-87288-08).
10.3 Loan Agreement dated as of April 23, 2002 by and among Petroleum
Helicopters, Inc., Air Evac Services, Inc., Evangeline Airmotive,
Inc., and International Helicopter Transport, Inc. and Whitney
National Bank
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by Lance F. Bospflug, Chief Executive Officer.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by Michael J. McCann, Chief Financial Officer.
</Table>