10-Q 1 d89585e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 1 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, 2001 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) Louisiana 72-0395707 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2121 Airline Drive Suite 400 P.O. Box 578, Metairie, Louisiana 70001-5979 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (504) 828-3323 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.
Class Outstanding at July 31, 2001 ----- ---------------------------- Voting Common Stock 2,793,386 shares Non-Voting Common Stock 2,404,897 shares
2 PETROLEUM HELICOPTERS, INC. INDEX - FORM 10-Q Part I - Financial Information Item 1. Financial Statements - Unaudited Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 ................................... 3 Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 2001 and 2000.......... 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 ........................ 5 Notes to Consolidated Financial Statements ............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................................ 18 Part II - Other Information Item 1. Legal Proceedings .......................................... 18 Item 6. Exhibits and Reports on Form 8-K ........................... 18 Signature .................................................. 19
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) (UNAUDITED)
JUNE 30, DECEMBER 31, 2001 2000 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 1,491 $ 863 Accounts receivable -- net of allowance: Trade 46,024 39,399 Other 1,383 3,490 Inventory 34,676 35,175 Prepaid expenses 5,315 5,112 Refundable income taxes 1,773 3,852 --------- --------- Total current assets $ 90,662 $ 87,891 Property and equipment, net 123,855 131,856 Other 7,626 3,008 --------- --------- Total Assets $ 222,143 $ 222,755 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 26,886 $ 30,047 Accrued vacation payable 7,370 6,553 Current maturities of long-term debt and capital lease obligations 14,823 9,744 --------- --------- Total current liabilities $ 49,079 $ 46,344 Long-term debt and capital lease obligations, net of current maturities 57,447 65,075 Deferred income taxes 19,410 17,600 Other long-term liabilities 12,561 12,114 Commitments and Contingencies (Note 4) Shareholders' Equity Voting common stock -- par value of $0.10; authorized shares of 12,500,000 279 279 Non-voting common stock -- par value of $0.10; authorized shares of 12,500,000 238 237 Additional paid-in capital 12,141 12,045 Accumulated other comprehensive income (loss) (865) -- Retained earnings 71,853 69,061 --------- --------- Total shareholders' equity 83,646 81,622 --------- --------- Total Liabilities and Shareholders' Equity $ 222,143 $ 222,755 ========= =========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 4 PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- REVENUES AND OTHER INCOME: Operating revenues $ 68,534 $ 55,105 $ 131,793 $ 107,764 Other income, net 703 2,400 2,734 2,547 --------- --------- --------- --------- 69,237 57,505 134,527 110,311 --------- --------- --------- --------- EXPENSES: Direct expenses 58,790 52,505 117,606 102,019 Selling, general, and administrative 4,414 4,046 9,094 8,067 Interest expense 1,651 1,473 3,372 2,983 --------- --------- --------- --------- 64,855 58,024 130,072 113,069 --------- --------- --------- --------- Income (loss) before income taxes 4,382 (519) 4,455 (2,758) Income taxes 1,622 (193) 1,649 (1,004) --------- --------- --------- --------- Net income (loss) $ 2,760 $ (326) $ 2,806 $ (1,754) ========= ========= ========= ========= Weighted average common shares outstanding: Basic 5,170 5,161 5,169 5,161 Diluted 5,305 5,161 5,226 5,161 Net Income (loss) per common share: Basic $ 0.53 $ (0.06) $ 0.54 $ (0.34) Diluted $ 0.52 $ (0.06) $ 0.54 $ (0.34)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 5 PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,806 $ (1,754) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 7,861 6,673 Deferred income taxes 1,810 (282) Gain on asset dispositions (2,272) (2,592) Equity in net losses of investee companies, net of distributions -- 14 Other 400 323 Changes in operating assets and liabilities (7,639) 5,674 -------- -------- Net cash provided by operating activities 2,966 8,056 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in and advances to affiliates 71 (1,266) Purchase of property and equipment (12,311) (9,422) Proceeds from asset dispositions 12,441 14,302 -------- -------- Net cash provided by investing activities 201 3,614 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 2,500 6,000 Payments on long-term debt (5,049) (18,194) Other 10 -- -------- -------- Net cash used in financing activities (2,539) (12,194) -------- -------- Increase (decrease) in cash and cash equivalents 628 (524) Cash and cash equivalents, beginning of period 863 1,663 -------- -------- Cash and cash equivalents, end of period $ 1,491 $ 1,139 ======== ========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 6 PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES 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, 2000 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 and 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, 2000. 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. 2. SEGMENT INFORMATION The Company has identified four principal segments: Domestic Oil and Gas and Other, International, Aeromedical, and Technical Services. The Domestic Oil and Gas and Other segment provides helicopter services to oil and gas customers operating in the Gulf of Mexico. The Domestic Oil and Gas and Other segment also provides helicopter services to certain domestic governmental agencies involved with forest-fire fighting activities. The International segment provides helicopters in various foreign countries to oil and gas customers, including national oil companies, and certain U.S. and foreign governmental agencies. The Aeromedical segment provides helicopter services to hospitals and medical programs in several U.S. states. The Company's AirEvac 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. 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. Summarized financial information concerning the Company's reportable operating segments for the quarter and six months ended June 30, 2001 and 2000 is as follows (in thousands): 6 7
QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Segment operating revenues, excluding other income: Domestic Oil and Gas and Other $ 46,302 $ 35,206 $ 86,268 $ 68,705 International 5,230 4,356 11,069 10,077 Aeromedical 11,710 11,059 23,649 22,113 Technical Services 5,292 4,484 10,807 6,869 --------- --------- --------- --------- Total operating revenues, excluding other income $ 68,534 $ 55,105 $ 131,793 $ 107,764 ========= ========= ========= ========= Segment operating income (loss), excluding other income: Domestic Oil and Gas and Other $ 6,517 $ (452) $ 7,208 $ 96 International (75) (418) (535) (240) Aeromedical (40) 91 880 126 Technical Services 1,109 901 1,741 870 --------- --------- --------- --------- Total segment operating income (loss) excluding other income 7,511 122 9,294 852 Other income, net 703 2,400 2,734 2,547 Unallocated selling, general and administrative expense (3,832) (3,041) (7,573) (6,157) --------- --------- --------- --------- Income (loss) before income taxes $ 4,382 $ (519) $ 4,455 $ (2,758) ========= ========= ========= =========
3. OTHER ASSETS In June 2001 the Company executed an agreement for the sale of its 50% equity interest and related assets in Clintondale Aviation, Inc. ("Clintondale") which operated helicopters and fixed-wing aircraft primarily in Kazakhstan. The Company had also previously leased four aircraft to Clintondale. The Company executed a promissory note for $3.1 million due from Clintondale in exchange for the previously leased four aircraft, certain amounts receivable from Clintondale, and the Company's 50% equity interest in Clintondale. The book value of the assets sold totaled $3.1 million, less a provision recorded at December 31, 2000 of $1.3 million, or a net amount of $1.8 million. Other Assets also includes $3.0 million that the Company funded toward the construction cost of a new principal operating facility to be leased by the Company. Any such amounts funded by PHI, up to $4.0 million, will amortize over 10 years at 7% per annum and the resulting monthly amortization amounts will reduce PHI's monthly lease payments for the first 10 years of the lease. 4. COMMITMENTS AND CONTINGENCIES Environmental Matters -- The Company has conducted environmental reviews and assessments at certain of its operating bases. In connection with the assessments, the Company has recorded an aggregated estimated liability of $3.0 million for environmental remediation costs that were probable and estimable at June 30, 2001. The Company recorded no additional provisions for the quarter ended June 30, 2001. 7 8 The Company began conducting environmental site surveys in late 2000 at its Lafayette, Louisiana facility, which will be vacated in 2001 when the Company moves to its new facility. Initial phases of the surveys have identified certain contamination. However, until the surveys and associated work are complete, the Company cannot reasonably estimate the extent of that contamination and the associated costs of remediation. The Company anticipates that it will also conduct environmental site surveys at certain other Gulf Coast facilities during 2001. It is expected that the results of the surveys discussed above will require additional provisions for environmental remediation costs, but the Company is currently unable to estimate the amount of additional provisions that may be necessary. 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 July 3, 2001, the Company executed a revised credit agreement with its lending group. The revised credit agreement provides for a $45.0 million revolving credit facility and a $25.5 million term credit facility. The loan is secured by substantially all of the Company's assets. The secured term and revolving loan permits prime rate based borrowings and "Offshore Base Rate" (equivalent to LIBOR) based borrowings. The term credit facility is payable in scheduled payments of $3.5 million on September 30, 2001, $3.0 million on December 31, 2001, and $1.9 million per quarter beginning on March 31, 2002 to September 30, 2004. At June 30, 2001 and December 31, 2000, $25.5 million and $30.0 million was outstanding on the term credit facility. The revolving credit facility converts to a term loan on January 31, 2002, with scheduled quarterly installments equal to 5% of the principal amount outstanding at the conversion date, with the final balance due January 31, 2003. At June 30, 2001 and December 31, 2000, $44.5 million and $37.5 million was outstanding on the revolving credit facility. The Company is subject to certain financial covenants under its loan agreement with its principal lending group, and was in compliance with those covenants on June 30, 2001 or had received the appropriate waiver. These covenants include maintaining certain levels of cash flow, working capital and shareholders' equity and contain other provisions, some of which restrict the purchases of the Company's stock, capital expenditures, and payment of dividends. The declaration or payment of dividends is restricted to 20% of net earnings for the previous four fiscal quarters. The loan 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 will lease a new principal operating facility for twenty years, including three five-year renewal options, effective September 2001. Under the terms of the new facility lease, there is a commitment by the Company, under certain circumstances, to fund $4.0 million of construction costs. Any such amounts funded by PHI will amortize over 10 years at 7% per annum and the resulting monthly amortization amounts will reduce PHI's monthly lease payments for the first 10 years of the lease. As of June 30, 2001, the Company paid $3.0 million of the commitment. The Company expects that it will pay the remaining $1.0 million in September 2001. The Company leases certain aircraft, 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. The Company has approximately $117.9 million in aggregate lease commitments under operating leases of which approximately $19.0 million is payable during the next twelve months. Purchase Commitments -- At June 30, 2001, the Company had no outstanding purchase commitments. 8 9 5. INTEREST RATE SWAPS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133. SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS No. 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. The Company uses interest rate swaps to hedge its cash flow related to interest. Effective January 1, 2001, the Company began accounting for its interest rate swaps in accordance with SFAS No. 133, as amended, and has designated the interest rate swaps as cash flow hedges. The cumulative effect of adopting SFAS No. 133, as amended, on January 1, 2001 resulted in an increase of $38,000 to other comprehensive income. As of June 30, 2001, the fair market value of these interest rate swaps was a $0.9 million liability and is included in other long-term liabilities on the balance sheet. 6. ACCUMULATED OTHER COMPREHENSIVE INCOME Following is a summary of the Company's comprehensive income (loss) for the quarter and six months ended June 30, 2001 and 2000 (in thousands):
QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income (loss) $ 2,760 $ (326) $ 2,806 $(1,754) Other comprehensive income (loss): Cumulative effect of adopting SFAS No. 133 -- -- 38 -- Unrecognized income (loss) on interest rate swaps 32 -- (903) -- ------- ------- ------- ------- Comprehensive income (loss) $ 2,792 $ (326) $ 1,941 $(1,754) ======= ======= ======= =======
7. 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 $1.3 million and $2.2 million at June 30, 2001 and December 31, 2000, respectively. The Company also establishes valuation reserves related to obsolescent and excess inventory. The inventory valuation reserves were $4.2 million and $3.7 million at June 30, 2001 and December 31, 2000, respectively. 8. SEVERANCE LIABILITY At December 31, 2000, the Company recorded a severance liability of $1.1 million for a plan of termination for approximately 120 employees. That termination plan was executed in the first quarter 2001. There was no additional severance cost incurred in the second quarter ended June 30, 2001. The related severance liability at June 30, 2001 was $0.4 million covering three employees and certain other cost related to the termination of all employees under the plan. The Company expects to pay the remaining severance liability over the next 24 months. 9 10 9. NEW ACCOUNTING PRONOUNCEMENTS On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the Financial Accounting Standards Board ("FASB"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company is required to implement SFAS No. 141 on July 1, 2001 and it has determined that this statement will have no material impact on its consolidated financial position or results of operations. On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was approved by the 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, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and it has determined that this statement will have no material impact on its consolidated financial position or results of operation. 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, 2000. 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. 10 11 OVERVIEW Total revenues during the second quarter of 2001 reflected improvement over the second quarter of 2000 primarily due to rate increases which were implemented January 2001 and May 2001. Those rate increases become effective at customer contract renewal dates unless implemented earlier by mutual agreement. The improvement in earnings is also primarily a result of those rate increases. RESULTS OF OPERATIONS The following tables present certain non-financial operational statistics for the quarter and six months ended June 30, 2001 and 2000:
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- FLIGHT HOURS: Domestic Oil and Gas and Other 40,063 39,619 76,271 74,901 International 5,286 4,842 10,979 11,029 Aeromedical 5,817 5,574 11,098 10,913 Other 34 283 175 368 ------ ------ ------ ------ Total 51,200 50,318 98,523 97,211 ====== ====== ====== ======
JUNE 30, -------------------- 2001 2000 ---- ---- AIRCRAFT OPERATED AT PERIOD END: Domestic Oil and Gas and Other 192 201 International 25 29 Aeromedical 42 42 --- --- Total 259 272 === ===
QUARTER ENDED JUNE 30, 2001 COMPARED WITH QUARTER ENDED JUNE 30, 2000 Combined Operations Operating revenues were $68.5 million for the quarter ended June 30, 2001 as compared to $55.1 million for the quarter ended June 30, 2000. The increase of $13.4 million was primarily due to rate increases implemented January 2001 and May 2001. In addition, there was an increase in demand for medium aircraft offset in part by a decrease in demand for light aircraft. While the number of aircraft at the end of the period declined to 259 as compared to 272 at June 30, 2000, flight hours for the three months ended June 30, 2001 were up 882 hours as compared to the three months ended June 30, 2000. There was a net labor cost increase and an increase in aircraft parts usage cost in the current quarter compared to the same period in the prior year. The labor cost increase was related to compensation increases for pilots and mechanics. That increase was offset to some extent by a reduction in personnel implemented in February 2001. The Company's net income for the quarter was $2.8 million compared to a loss in the same period in the prior year of $0.3 million. Earnings before tax for the quarter were $4.4 million compared to a loss of $0.5 million in the same period of the prior year. Earnings per diluted share for the quarter were $0.52 as compared to a loss per diluted share in the same quarter prior year of $0.06. The improvement in earnings from operations is due primarily to the rate increase implemented May 2001. 11 12 Domestic Oil and Gas and Other Domestic Oil & Gas and Other segment revenues increased 31.5% to $46.3 million for the quarter ended June 30, 2001 compared to $35.2 million during the same period in the prior year. The increase of $11.1 million as compared to the second quarter 2000 was due to rate increases implemented January 2001 and May 2001. In addition, there was an increase in demand for medium aircraft offset in part by a decrease in demand for light aircraft. The Domestic Oil & Gas and Other segment had operating income of $6.5 million for the quarter compared to an operating loss of $0.5 million for the same period in 2000. Operating margin of 14.1% for the second quarter compares favorably to a negative margin of 1.3% in the prior period. International International segment revenues increased 20.1% to $5.2 million for the quarter ended June 30, 2001 compared to $4.4 million during the same period in the prior year. The increase was primarily due to a contract in Taiwan, but was also affected by an increase in activity on two other contracts. The International segment had a $0.1 million operating loss for the quarter compared to $0.4 million operating loss for the same period in 2000. The decrease in the operating loss was due to the contract in Taiwan that commenced earlier this year. The Company expects that it will exit the operation in Taiwan during the third quarter of 2001 because its customer will require additional aircraft. The Company has elected not to make the capital expenditures required to service the customer's expanded operations. Aeromedical Aeromedical segment revenues increased 5.9% to $11.7 million for the quarter ended June 30, 2001 compared to $11.0 million during the same period in the prior year. The increase in operating revenues is the result of a new contract in Grand Junction, Colorado, combined with rate increases on two other aeromedical contracts. The Aeromedical segment generated an operating loss of less than $0.1 million as compared to an operating profit in the same quarter prior year of $0.1 million. The loss in the current period is due to increased compensation cost. Technical Services The Technical Services segment revenues for the quarter ended June 30, 2001 were $5.3 million compared to $4.5 million in the prior year, an increase of 18.0%. This was due to increased activity related to certain long-term contracts. Technical Services operating income improved to $1.1 million for the quarter compared to $0.9 million in the same quarter in the prior year. The increase in operating income is due to the increased activity related to certain long term contracts. 12 13 OTHER INCOME, NET Other income, net was $0.7 million for the three months ended June 30, 2001 as compared to $2.4 million for the three months ended June 30, 2000. Included in other income, net, are gains from aircraft sales which were $0.3 million for the three months ended June 30, 2001 as compared to $2.4 million for the same period in the prior year. DIRECT EXPENSES Direct expenses for the quarter ended June 30, 2001 increased by 12.0% to $58.8 million compared to $52.5 million in the same period in the prior year. Human resource cost increased as a result of increases in compensation to pilots and mechanics. Spare parts usage also increased for the quarter. Technical Services costs increase is related to the increase in activity. Insurance and helicopter lease cost also increased. Depreciation expense included in direct expenses for the quarter ended June 30, 2001 was $3.5 million compared to $3.2 million in the same period prior year. Total depreciation expense was $3.8 million and $3.5 million for the same two periods, respectively. The increase was attributable to depreciation on new aircraft and refurbishments to older aircraft, along with the acceleration of deprecation on certain assets that the Company will abandon when it moves to its new operating facility in Lafayette, Louisiana. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses for the quarter ended June 30, 2001 were $4.4 million compared to $4.0 million in the same period in 2000. The increase for the period was related to certain costs incurred related to improvement and/or replacement of the Company's inventory and accounting systems, corporate legal matters with outside counsel, and costs incurred in reviewing and improving procedures and systems in the Company's aircraft maintenance facility in Lafayette, Louisiana. INTEREST EXPENSE Interest expense for the quarter ended June 30, 2001 increased $0.2 million to $1.7 million. The increase is due primarily to higher debt levels in the current quarter compared to the same quarter in the prior year. Increases in interest rates charged by the Company's lenders also contributed to the increase. INCOME TAXES Income tax expense for the quarter ended June 30, 2001 was $1.6 million compared to an income tax benefit of $0.2 million for the quarter ended June 30, 2000. The effective tax-rate was 37.0% and 37.2% for the quarters ended June 30, 2001 and 2000, respectively. SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000 Combined Operations Operating revenues for the six months ended June 30, 2001 were $131.8 million compared to $107.8 million for the six months ended June 30, 2000. The increase in revenue is primarily related to rate increases implemented in January 2001 and May 2001. Those rate increases become effective at customer contract renewal dates unless implemented earlier by mutual agreement. There was also an increase in revenue related to an increase in demand for medium aircraft offset in part by a decrease in demand for light aircraft. The number of aircraft at the end of the period were 259 as compared to 272 at 13 14 June 30, 2000. Flight hours for the six months ended June 30, 2001 were up 1,312 hours as compared to the six months ended June 30, 2000. There was a labor cost increase and an increase in aircraft parts usage cost in the current six months compared to the same period in the prior year. The labor cost increase was related to compensation increases for pilots and mechanics. That increase was offset to some extent by a reduction in personnel implemented in February 2001. In addition, aircraft lease cost, insurance, and depreciation also increased over the same period in the prior year. The Company's net income for the six months ended June 30, 2001 was $2.8 million compared to a loss for the six months ended June 30, 2000 of $1.8 million. Earnings before tax for the six months ended June 30, 2001 was $4.5 million compared to a loss of $2.8 million for the same period in the prior year. Earnings per diluted share for the six months ended June 30, 2001 was $0.54 as compared to a loss per diluted share for the six months ended June 30, 2000 of ($0.34). The improvement in earnings from operations is due primarily to the rate increase implemented May 2001. Domestic Oil and Gas and Other Domestic Oil & Gas and Other revenues were $86.3 million for the six months ended June 30, 2001 compared to $68.7 million for the six months June 30, 2000, an increase of $17.6 million or 25.6%. The increase in revenue is primarily related to rate increases implemented in January 2001 and May 2001. The May 2001 increase will take several months before it is fully implemented. Those rate increases become effective at customer contract renewal dates unless implemented earlier by mutual agreement. There was also an increase in revenue related to an increase in demand for medium aircraft offset in part by a decrease in demand for light aircraft. Domestic Oil and Gas and Other had operating income of $7.2 million for the six months ended June 30, 2001 compared to operating income of $0.1 million for the same period in 2000. The operating margin for the six months ended June 2001 was 8.4% compared to essentially a breakeven margin in the prior period. The improvement in earnings and operating margin occurred in the second quarter and is the result primarily of the rate increase implemented May 1, 2001. There were increases primarily in human resource cost and parts usage cost, which was offset in part by cost reductions implemented earlier in the year. International International segment revenues were $11.1 million for the six months ended June 30, 2001 compared to $10.1 million during the same period in the prior year. The increase was primarily due to a contract in Taiwan, but also an increase in activity on two other contracts also contributed to the increase. The International segment had a $0.5 million operating loss for the six months ended June 30, 2001 compared to $0.2 million operating loss for the same period in 2000. The increase in the operating loss was due to increased compensation expense, offset in part by operating income from a contract in Taiwan which commenced earlier this year. The Company expects that it will exit the operation in Taiwan during the third quarter of 2001 because its customer will require additional aircraft. The Company has elected not to make the capital expenditures required to service the customer's expanded operations. Aeromedical Aeromedical had revenue of $23.6 for the six months ended June 30, 2001 compared to $22.1 million for 14 15 the same period in the prior year, an increase of 6.9%. This increase was primarily due to a new contract in Grand Junction, Colorado, and an increase in activity in the Company's AirEvac operations in Arizona. Aeromedical had operating income of $0.9 million for the six months ended June 30, 2001 compared to $0.1 million for the same period in 2000. Although the year - to-date earnings reflect an improvement in this segment as compared to the same period in the prior year, the improvement occurred in the first quarter of the current year. The second quarter in this period reflected a decrease in operating income which was due to increases in compensation. Technical Services The Technical Services segment operating revenues for the six months ended June 30, 2001 were $10.8 million compared to $6.9 million in the prior year, an increase of $3.9 million. This increase is due primarily to increased activity on certain long term contracts. The Technical Services segment had operating income of $1.7 million for the six months compared to $0.9 million for the same six months in 2000. The operating margin was 16.1% in the six months ended June 30, 2001 and 12.7% for the six months ended June 30, 2000. The improvement in operating income and in the operating margin is related to an increase in activity on certain long-term contracts. OTHER INCOME, NET Other income, net was $2.7 million for the six months ended June 30, 2001 as compared to $2.5 million for the six months ended June 30, 2000. Included in other income, net, are gains from aircraft sales, which totaled $2.3 million for the six months ended June 30, 2001 as compared to $2.6 million in the same period prior year. DIRECT EXPENSES Direct expenses for the six months ended June 30, 2001 increased by 15.3% to $117.6 million compared to $102.0 million in same period in the prior year. The increase was due to a net increase in human resource costs, an increase in spare parts usage and outside repairs, helicopter lease expense, insurance, and depreciation, and an increase in cost of sales related to an increase in Technical Services activity. The net increase in human resource cost is related to increased compensation for pilots and mechanics offset in part by a reduction in personnel implemented earlier in the year. Depreciation expense included in direct expenses for the six months ended June 30, 2001 was $7.1 million compared to $6.1 million in the same period prior year. Total depreciation expense was $7.9 million and $6.7 million for the same two periods, respectively. The increase was attributable to depreciation on new aircraft and refurbishments to older aircraft, along with the acceleration of deprecation on certain assets that the Company will abandon when it moves to its new operating facility in Lafayette, Louisiana. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses for the six months ended June 30, 2001 increased by 12.7% to $9.1 million compared to $8.1 million in the same period in the prior year. The increase for the period was related to certain costs incurred related to improvement and/or replacement of the Company's 15 16 inventory and accounting systems, corporate legal matters with outside counsel, and costs incurred in reviewing and improving procedures and systems in the Company's aircraft maintenance facility in Lafayette, Louisiana. In addition there were severance charges recorded in the current year related to a reduction in force implemented in the first quarter of $0.3 million. Certain of the severance charges related to the reduction in force. INTEREST EXPENSE Interest expense for the six months ended June 30, 2001 increased $0.4 million to $3.4 million as compared to the six months ended June 30, 2000. The increase is due primarily to higher debt levels in the current period compared to the same period in the prior year. Increases in interest rates charged by the Company's lenders also contributed to the increase. INCOME TAXES Income tax expense for the six months ended June 30, 2001 was $1.6 million, or an effective tax rate of 37.0%. This compares to an income tax benefit recorded in the same period prior year of $1.0 million, also an effective rate of 36.4%. LIQUIDITY AND CAPITAL RESOURCES The Company's cash position as of June 30, 2001 was $1.5 million compared to $0.9 million at December 31, 2000. Working capital increased $0.1 million from $41.5 million at December 31, 2000 to $41.6 million at June 30, 2001. Net cash provided by operating activities for the six months ended June 30, 2001 was $3.0 million. Net cash provided by operating activities along with $12.4 million of aircraft sales funded expenditures for property and equipment of $12.3 million for the six months ended June 30, 2001. Total long-term debt including capital lease obligations decreased $2.5 million since December 31, 2000 to $72.3 million at June 30, 2001. The current portion of the long-term debt was $14.8 million at June 30, 2001. On July 3, 2001, the Company executed a revised credit agreement with its lending group. The revised credit agreement provides for a $45.0 million revolving credit facility and a $25.5 million term credit facility. The loan is secured by substantially all of the Company's assets. The secured term and revolving loan permits prime rate based borrowings and "Offshore Base Rate" based borrowings. The term credit facility is payable in scheduled payments of $3.5 million on September 30, 2001, $3.0 million on December 31, 2001, and $1.9 million per quarter beginning on March 31, 2002 to September 30, 2004. At June 30,2001 and December 31, 2000, $25.5 million and $30.0 million was outstanding on the term credit facility. The revolving credit facility converts to a term loan on January 31, 2002, with scheduled quarterly installments equal to 5% of the principal amount outstanding at the conversion date, with the final balance due January 31, 2003. At June 30, 2001 and December 31, 2000, $44.5 million and $37.5 million was outstanding on the revolving credit facility. During the second quarter the Company paid $4.8 million of term debt. The amount expended for the purchase and completion of aircraft improvements and engines and other property and equipment was $12.3 million for the six months ended June 30, 2001, compared to $9.4 million for the six months ended June 30, 2000. The Company executed a lease agreement for a new principal operating facility for twenty years, effective September 2001. Certain portions of the new facility have been occupied by the Company at June 30, 2001. Under the terms of the new facility lease, the Company has committed to fund $4.0 million of construction costs. As of June 30, 2001, the Company had funded $3.0 million of the 16 17 commitment, and expects to fund the remaining $1.0 million in September 2001. Amounts funded by PHI will amortize over 10 years at 7% per annum and the resulting monthly amortization amounts will reduce PHI's monthly lease payments for the first 10 years of the lease. The Company believes that the combination of improved cash flow from operations and planned aircraft sales will fund required debt principal and interest payments and necessary capital expenditures during 2001. ENVIRONMENTAL MATTERS The Company currently has an aggregate estimated liability of $3.0 million for environmental remediation costs that were probable and estimable at December 31, 2000. The Company recorded no additional provisions for the quarter ended June 30, 2001. However, the Company began conducting environmental site surveys at its Lafayette facility in late 2000, and anticipates that it will also conduct environmental site surveys at certain other facilities during 2001. As a result of information available to date, it is expected that the results of these surveys will require additional provisions for environmental remediation costs, but the Company is currently unable to estimate the amount of additional provisions that may be necessary until such time as sufficient work has been done and approvals received from appropriate regulatory agencies regarding any remediation plans. UNION CONTRACT On April 27, 2001, the Company and the Office & Professional Employees International Union ("OPEIU") reached a tentative agreement on all terms and conditions of a three-year collective bargaining agreement covering its domestic pilots. This agreement was ratified by the Company's domestic pilots on June 13, 2001, and was effective retroactively to June 1, 2001. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133. SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS No. 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. The Company uses interest rate swaps to hedge its cash flow related to interest. Effective January 1, 2001, the Company began accounting for its interest rate swaps in accordance with SFAS No. 133, as amended and has designated the interest rate swaps as cash flow hedges. The cumulative effect of adopting SFAS No. 133, as amended on January 1, 2001 resulted in an increase of $38,000 to other comprehensive income. As of June 30, 2001, the fair market value of these interest rate swaps was a $0.9 million liability and is included in other long-term liabilities on the balance sheet. On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the Financial Accounting Standards Board ("FASB"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company is required to implement SFAS No. 141 on July 1, 2001 and it has determined that this statement will have no material impact on its consolidated financial position or results of operations. 17 18 On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was approved by the 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, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and it has determined that this statement will have no material impact on its consolidated financial position or results of operation. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a result of a decline in market interest rates, the estimated fair value of the Company's interest rate swaps declined to a liability of $0.9 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, 2000. 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 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. 10.23 Second Amended and Restated Loan Agreement to the Loan Agreement originally dated January 31, 1986 as amended and restated in its entirety as of March 31, 1997 and as amended among Petroleum Helicopters, Inc., and Bank of America, NA, Whitney National Bank, Bank One, NA, and Bank of America, N.A. as Agent, and Letter of Credit Issuing Bank dated July 3, 2001. 10.24 Articles of Agreement Between Petroleum Helicopters, Inc. & Office & Professional Employees International Union and its Local 108 dated June 13, 2001. 10.25 Amendment to the Supplemental Executive Retirement Plan dated May 24, 2001. (b) Reports on Form 8-K No reports were filed on Form 8-K during the quarter ended June 30, 2001. 18 19 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, 2001 By: /s/ Carroll W. Suggs ------------------------------------- Carroll W. Suggs Chairman of the Board and Chief Executive Officer August 14, 2001 By: /s/ Lance F. Bospflug ------------------------------------- Lance F. Bospflug President August 14, 2001 By: /s/ Michael J. McCann ------------------------------------- Michael J. McCann Chief Financial Officer and Treasurer 19 20 EXHIBIT INDEX 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. 10.23 Second Amended and Restated Loan Agreement among Petroleum Helicopters, Inc., and Bank of America, NA, Whitney National Bank, Bank One, NA, and Bank of America, N.A. as Agent, and Letter of Credit Issuing Bank dated July 3, 2001. 10.24 Articles of Agreement Between Petroleum Helicopters, Inc. & Office & Professional Employees International Union and its Local 108 dated June 13, 2001. 10.25 Amendment to the Supplemental Executive Retirement Plan dated May 24, 2001. 20