Item 1. Business
Overview
We are the leading provider of helicopter services to the worldwide offshore energy industry based on the number of aircraft operated and one of two helicopter service providers to the offshore energy industry with global operations. We have a long history in the helicopter services industry through Bristow Helicopters Ltd. and Offshore Logistics, Inc., having been founded in 1955 and 1969, respectively. We have major transportation operations in the North Sea, Nigeria and the U.S. Gulf of Mexico, and in most of the other major offshore oil and gas producing regions of the world, including Alaska, Australia, Brazil, Mexico, Russia and Trinidad. We generated 82% and 94% of our consolidated gross revenue and business unit operating income, respectively, from operations outside of the U.S. in fiscal year 2011.
Our well established global safety program called “Target Zero” focused on improved safety performance, as our safety vision is to have zero accidents, zero harm to people and zero harm to the environment. In order to create further differentiation and add value to our clients, we are expanding “Target Zero” to now focus on additional areas related to maximizing uptime and service levels. The new expanded program called “Target Zero Accidents, Target Zero Downtime and Target Zero Complaints” is designed to deliver continuous improvements in all these important areas and demonstrate our commitment to providing higher hours of zero-accident flight time with on-time and up-time helicopter transportation service.
We conduct our business in one segment: Helicopter Services. The Helicopter Services segment operations are conducted primarily through five business units:
•
Europe,
•
West Africa,
•
North America,
•
Australia, and
•
Other International.
We provide helicopter services to a broad base of major integrated, national and independent oil and gas companies. Our clients charter our helicopters primarily to transport personnel between onshore bases and offshore production platforms, drilling rigs and other installations. To a lesser extent, our clients also charter our helicopters to transport time-sensitive equipment to these offshore locations. Our client’s operating expenditures in the production sector are the principle source of our revenue, while their exploration and development capital expenditures provide a lesser portion of our revenue.
Helicopters are generally classified as small (four to eight passengers), medium (12 to 16 passengers) and large (18 to 25 passengers), each of which serves a different transportation need of the offshore energy industry. Medium and large helicopters, which can fly in a wider variety of operating conditions, over longer distances, at higher speeds and carry larger payloads than small helicopters, are most commonly used for crew changes on large offshore production facilities and drilling rigs. With these enhanced capabilities, medium and large helicopters have historically been preferred in international markets, where the offshore facilities tend to be larger, the drilling locations tend to be more remote and the onshore infrastructure tends to be more limited. Additionally, local governmental regulations in certain international markets require us to operate twin-engine medium and large aircraft in those markets. Global demand for medium and large helicopters is driven by drilling, development and production activity levels in deepwater locations throughout the world, as the medium and large aircraft are able to travel to these deepwater locations. Small helicopters are generally used for shorter routes and to reach production facilities that cannot accommodate medium and large helicopters. Our small helicopters operate primarily over the shallow waters of Nigeria and the U.S. Gulf of Mexico. Worldwide there are more than 8,000 production platforms and 700 offshore rigs.
We are able to deploy our aircraft to the regions with the greatest demand, subject to the satisfaction of local governmental regulations. There are also additional markets for helicopter services beyond the offshore energy industry, including agricultural support, air medical, tourism, firefighting, corporate transportation, traffic monitoring, police and military. The existence of these alternative markets enables us to better manage our helicopter fleet by providing potential purchasers for older aircraft and for our excess aircraft during times of reduced demand in the offshore energy industry.
Most countries in which we operate limit foreign ownership of aviation companies. To comply with these regulations and yet expand internationally, we have formed or acquired interests in a number of foreign helicopter operators. These investments typically combine a local ownership interest with our experience in providing helicopter services to the offshore energy industry. These arrangements have allowed us to expand operations while diversifying the risks and reducing the capital outlays associated with independent expansion. We lease some of our aircraft to a number of unconsolidated affiliates which in turn provide helicopter services to clients locally.
Since fiscal year 2007, we have made strategic investments and acquisitions including investment in new generations of aircraft that are in heavy demand by our clients, expanded or increased investments in new markets, such as our acquisition of a 42.5% ownership interest in Líder Aviação Holding S.A. (“Líder”) in Brazil (giving us access to one of the fastest growing offshore helicopter markets in the world), acquisition of the remaining 51% interest of Bristow Norway and acquisition of Bristow Academy in order to ensure a source for new talented pilots.
In addition to our primary Helicopter Services operations, we also operate a training business unit, Bristow Academy, and provide technical services to clients in the U.S. and U.K. See “- Bristow Academy” and “- Technical Services” below for further discussion of these operations.
Since the beginning of fiscal year 2007, we have been able to raise $1.3 billion of capital in a mix of debt and equity with both public and private financings, generate gross proceeds of $101.6 million through the divestiture of non-core businesses, including the sale of Grasso Production Management (“Grasso”), Turbo Engines, Inc. (“Turbo”) and 53 small aircraft and related assets operating in the U.S. Gulf of Mexico and generate proceeds of approximately $200 million through the sale of other aircraft to the helicopter aftermarket. Concurrently, we have invested over $1.6 billion in capital expenditures to grow our business.
While we plan to continue to be disciplined concerning future capital commitments, we also intend to continue prudently managing our capital structure and liquidity position with external financings as needed. Our strategy will involve funding our short-term liquidity requirements with borrowings under our amended and restated revolving credit and term loan agreement (“Amended and Restated Credit Agreement”), which consists of a $175 million revolving credit facility (“Revolving Credit Facility”) and a $200 million term loan (“$200 Million Term Loan”) (together referred to as our “Credit Facilities”), and funding our long-term financing needs, while maintaining a prudent capital structure, among the following alternatives: a) export credit agency-supported financings, b) operating and capital leases, c) bank debt and d) private and public debt and/or equity placements.
Our capital commitments in future periods related to fleet renewal are discussed under Item 7. “Management’s Discussion and Analysis of Financial Condition - Liquidity and Capital Resources - Future Cash Requirements” included elsewhere in this Annual Report and are detailed in the table provided in that section.
Consistent with our growth strategy, we regularly engage in discussions with potential sellers and strategic partners regarding the possible purchase of assets, pursuit of joint ventures or other expansion opportunities that increase our position in existing markets or facilitate expansion into new markets. These potential expansion opportunities consist of both smaller transactions as well as larger transactions that could have a material impact on our financial position, cash flow and results of operations. We cannot predict the likelihood of completing, or the timing of, any such transactions.
As of March 31, 2011, the aircraft in our fleet, the aircraft which we expect to take delivery of in the future and the aircraft which we have the option to acquire were as follows:
(1) All the aircraft on order are under signed client contracts and expected to be delivered during fiscal year 2012. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity - Future Capital Requirements” included elsewhere in this Annual Report.
(2) Represents aircraft which we have the option to acquire. If the options are exercised, the agreements provide that aircraft would be delivered over fiscal years 2012 through 2017. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity - Future Capital Requirements” included elsewhere in this Annual Report.
(3) Represents the approximate normal cruise speed flying at gross weight and at sea level under standard operating conditions.
The following table shows the distribution of our consolidated revenue for fiscal year 2011 and aircraft as of March 31, 2011 among our business units.
(1) Includes 16 aircraft held for sale.
(2) The 196 aircraft operated by our unconsolidated affiliates do not include those aircraft leased from us.
(3) Includes 47 helicopters (primarily medium) and 28 fixed wing aircraft owned by Líder, our unconsolidated affiliate in Brazil, included in our Other International business unit.
Europe
We operate our Europe business unit from four bases in the U.K., one base in Holland and three bases in Norway. Our Europe operations are managed out of our facilities in Aberdeen, Scotland. Based on the number of aircraft operating, we are one of the largest providers of helicopter services in the North Sea, where there are harsh weather conditions and geographically concentrated offshore facilities. The offshore facilities in the Northern North Sea and Norwegian North Sea are large and require frequent crew change flight services. In the Southern North Sea, the facilities are generally smaller with some unmanned platforms requiring shuttle operations to up-man in the morning and down-man in the evening. We deploy the majority of the large aircraft in our consolidated fleet in Europe. Our client base in this business unit consists primarily of major integrated and independent oil and gas companies. In addition to our oil and gas helicopter services, we are a civil supplier of search and rescue services to the Netherlands Oil and Gas Exploration and Production Association. Our Europe operations are subject to seasonality as drilling activity is lower during the winter months due to harsh weather and shorter days.
West Africa
As of March 31, 2011, all of our aircraft in our West Africa business unit operate in Nigeria, where we are the largest provider of helicopter services to the oil and gas industry. We deploy a combination of small, medium and large aircraft in Nigeria and service a client base comprised mostly of major integrated oil and gas companies. We have seven operational bases, with the largest bases located in Escravos, Warri, Port Harcourt and Lagos. The marketplace for our services had historically been concentrated predominantly in the oil rich swamp and shallow waters of the Niger Delta area. More recently we have been undertaking work further offshore in support of deepwater exploration. Operations in West Africa are subject to seasonality as the Harmattan, a dry and dusty trade wind, blows between the end of November and the middle of March. At times when the heavy amount of dust in the air severely limits visibility, our aircraft are unable to operate.
North America
We operate our North America business unit from seven operating facilities in the U.S. Gulf of Mexico and three operating facilities in Alaska. We are one of the largest suppliers of helicopter services in the U.S. Gulf of Mexico. Our client base in this business unit consists of mostly international, independent and major integrated oil and gas companies. The U.S. Gulf of Mexico is a major offshore oil and gas producing region with approximately 2,500 production platforms and 110 drilling rigs. The shallow water platforms are typically unmanned and are serviced by small aircraft. The deepwater platforms are serviced by medium and large aircraft. Among our strengths in this region, in addition to our ten operating facilities, are our advanced flight-following systems and our widespread and strategically located offshore fuel stations. Operations in the U.S. Gulf of Mexico are subject to seasonality as the months of December through March typically have more days of harsh weather conditions than the other months of the year. Additionally,
during the months of June through November, tropical storms and hurricanes may reduce activity as we are unable to operate in the area of the storm. Our principal work in Alaska utilizes five aircraft that provide daily support to the Trans-Alaska pipeline, along with providing small and medium twin engine contract and charter service to onshore and offshore exploration, development and production activities on the North Slope and in the Cook Inlet. Operations in Alaska are subject to seasonality as fall and winter months have fewer hours of daylight and harsh weather conditions limit some oil and gas related activities.
Australia
We are the largest provider of helicopter services to the oil and gas industry in Australia, where we have five bases located in Western Australia, one in Victoria and one in Queensland. These operations are managed from our Australian head office facility in Perth, Western Australia. Our operating bases are located in the vicinity of the major oil and gas exploration and production fields in the North West Shelf, Browse and Carnarvon basins of Western Australia and the Bass Straits in Victoria, where our fleet provides helicopter services solely to offshore oil and gas operators. We also provide airport management services on Barrow Island in Western Australia. Our client base in Australia consists primarily of major integrated oil and gas companies. We also provide engineering support to the Republic of Singapore Air Force’s fleet of helicopters at their base in Oakey, Queensland.
Other International
We currently conduct our Other International operations in the Baltic Sea, Brazil, Egypt, Ghana, India, Malaysia, Mexico, Russia, Suriname, Trinidad, and Turkmenistan and prior to the recent civil unrest and the implementation of sanctions conducted operations in Libya. As of March 31, 2011, we and our unconsolidated affiliates operated a mixture of small, medium, and large aircraft in these markets. While we have a diverse client base in this business unit, a large majority of revenue is generated from monthly fixed charges for production related work. The following is a description of operations in our Other International business unit as of March 31, 2011.
•
Brazil - We own a 42.5% interest Líder, the largest provider of helicopter and corporate aviation services in Brazil, which we acquired on May 26, 2009. Líder was founded in 1973 and has grown to be a market leader in Brazil. Líder has five primary operating units comprising helicopter service; maintenance, chartering, ground handling, and aircraft sales. Líder’s fleet includes 47 rotor wing and 28 fixed wing aircraft. Líder management recently introduced large helicopters into their operational portfolio allowing them to gain competence and positioning them for the anticipated growth associated with Brazil’s pre-salt fields. Líder also has a vast network of over 20 bases distributed strategically in Brazil including locations in Macae, Rio de Janiero, Sao Tome, Urucu and Vitória. We currently lease four medium and two large aircraft to Líder.
•
Egypt - We own a 25% interest in Petroleum Air Services (“PAS”), an Egyptian corporation which provides helicopter and fixed wing transportation to the offshore energy industry. Additionally, spare fixed-wing capacity is chartered to tourism operators. PAS owns 45 aircraft and operates from multiple locations. The remaining 75% interest in PAS is owned by Egyptian General Petroleum Corporation.
•
Malaysia - We lease six aircraft to MHS Aviation Berhad which are operated from bases in Kerteh and Bintulu and provide services to international oil and gas companies. In addition, we have a Technical Services Agreement with MHS Aviation Berhad under which we provide a number of supervisory engineers and other technical services as required.
•
Mexico - We are one of the largest providers of helicopter services in Mexico through our joint venture, and we conduct diverse operations ranging from offshore crew transfers to seismic support. We own a 24% interest in Heliservicio Campeche S.A. de C.V. (“Heliservicio”), which provides offshore helicopter transportation to Petróleos Mexicanos (“PEMEX”) and other companies on a contract and ad hoc basis. Heliservicio leases 21 aircraft from us and leases 13 aircraft from other parties to provide helicopter services to its clients. Heliservicio services clients primarily from bases located in Mexico City, Cuidad del Carmen, Poza Rica, Tampico, Dos Bocas and Vera Cruz. For discussion of the pending sale of our interest in Heliservicio see Note 2 in the “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report.
•
Russia - We operate seven large aircraft from three locations on Sakhalin Island, where we provide helicopter services to international and domestic oil and gas companies.
•
Trinidad - We operate eight medium aircraft that are used to service our clients who are primarily engaged in oil and gas activities. We have one base located at Trinidad’s airport at the Port of Spain.
•
Other - In the Baltic Sea, Ghana, and Suriname, we operate two aircraft in each location that are used to service our clients who are engaged in oil and gas activities. We also operate two aircraft through our 51% interest in Turkmenistan Helicopters Limited (“THL”), a Turkmenistan corporation that provides helicopter services to an international oil and gas company from a single location. In India, we dry lease one aircraft to an Indian helicopter operator from one location. We also operated two aircraft in Libya prior to the commencement of civil unrest.
Bristow Academy
Bristow Academy is a leading provider of helicopter training services with over 20 years of operating history and training facilities in Titusville, Florida; Concord, California; New Iberia, Louisiana and Gloucestershire, England. Bristow Academy trains students from around the world to become helicopter pilots and is approved to provide helicopter flight training at the commercial pilot and flight instructor level by both the U.S. Federal Aviation Administration (“FAA”) and the European Joint Aviation Authority (“JAA”). Bristow Academy operates 76 aircraft (including 53 owned and 23 leased aircraft) and employs approximately 160 people, including 61 primary flight instructors. Additionally, Bristow Academy conducts military training, which generated approximately 33% of Bristow Academy’s revenue for fiscal year 2011.
Technical Services
Our technical services portion of the business provides helicopter repair services from facilities located in New Iberia, Louisiana; Redhill, England and Aberdeen, Scotland. While most of this work is performed on our own aircraft, some of these services are performed for third parties and unconsolidated affiliates.
For additional information about our business units, see Note 12 in the “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report. For a description of certain risks affecting our business and operations, see Item 1A.
Item 1A. Risk Factors
If you hold our securities or are considering an investment in our securities, you should carefully consider the following risks, together with the other information contained in this Annual Report.
Risks Relating to Our Clients and Contracts
The demand for our services is substantially dependent on the level of offshore oil and gas exploration, development and production activity.
We provide helicopter services to companies engaged in offshore oil and gas exploration, development and production activities. As a result, demand for our services, as well as our revenue and our profitability, are substantially dependent on the worldwide levels of activity in offshore oil and gas exploration, development and production. These activity levels are principally affected by trends in, and expectations regarding, oil and gas prices, as well as the capital expenditure budgets of oil and gas companies. We cannot predict future exploration, development and production activity or oil and gas price movements. Historically, the prices for oil and gas and activity levels have been volatile and are subject to factors beyond our control, such as:
•
the supply of and demand for oil and gas and market expectations for such supply and demand;
•
actions of the Organization of Petroleum Exporting Countries and other oil producing countries to control prices or change production levels;
•
general economic conditions, both worldwide and in particular regions;
•
governmental regulation;
•
the price and availability of alternative fuels;
•
weather conditions, including the impact of hurricanes and other weather-related phenomena;
•
advances in exploration, development and production technology;
•
the policies of various governments regarding exploration and development of their oil and gas reserves; and
•
the worldwide political environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in the Middle East or the other geographic areas in which we operate (including, but not limited to, Nigeria), or further acts of terrorism in the U.K., U.S. or elsewhere.
The implementation by our clients of cost-saving measures could reduce the demand for our services.
Oil and gas companies are continually seeking to implement measures aimed at greater cost savings, including efforts to improve cost efficiencies with respect to helicopter transportation services. For example, these companies may reduce staffing levels on both old and new installations by using new technology to permit unmanned installations and may reduce the frequency of transportation of employees by increasing the length of shifts offshore. In addition, these companies could initiate their own helicopter or other transportation alternatives. The continued implementation of these kinds of measures could reduce the demand for helicopter services and have a material adverse effect on our business, financial condition and results of operations.
Our industry is highly competitive and cyclical, with intense price competition.
The helicopter business is highly competitive throughout the world. Chartering of helicopters is often done on the basis of competitive bidding among those providers having the necessary equipment, operational experience and resources. Factors that affect competition in our industry include price, quality of service, operational experience, record of safety, quality and type of equipment, client relationship and professional reputation.
Our industry has historically been cyclical and is affected by the volatility of oil and gas price levels. There have been periods of high demand for our services, followed by periods of low demand for our services. Changes in commodity prices can have a significant effect on demand for our services, and periods of low activity intensify price competition in the industry and often result in our aircraft being idle for long periods of time.
We have several significant competitors in the North Sea, Nigeria, the U.S. Gulf of Mexico and Australia, and a number of smaller local competitors in other markets. Certain of our clients have the capability to perform their own helicopter operations should they elect to do so, which has a limiting effect on our rates.
As a result of significant competition, we must continue to provide safe and efficient service or we will lose market share, which could have a material adverse effect on our business, financial condition and results of operations due to the loss of a significant number of our clients or termination of a significant number of our contracts. See further discussion in Item 1. “Business - Competition” included elsewhere in this Annual Report.
We depend on a small number of large offshore energy industry clients for a significant portion of our revenue.
We derive a significant amount of our revenue from a small number of oil and gas companies. Our loss of one of these significant clients, if not offset by sales to new or other existing clients, could have a material adverse effect on our business, financial condition and results of operations.
Our contracts generally can be terminated or downsized by our clients without penalty.
Many of our fixed-term contracts contain provisions permitting early termination by the client for any reason, generally without penalty, and with limited notice requirements. In addition, many of our contracts permit our clients to decrease the number of aircraft under contract with a corresponding decrease in the fixed monthly payments without penalty. As a result, you should not place undue reliance on our client contracts or the terms of those contracts.
We may not be able to obtain client contracts with acceptable terms covering some of our new helicopters, and some of our new helicopters may replace existing helicopters already under contract, which could adversely affect the utilization of our existing fleet.
We have ordered, and have options for, a substantial number of new helicopters. Many of our new helicopters may not be covered by client contracts when they are placed into service, and we cannot assure you as to when we will be able to utilize these new helicopters or on what terms. To the extent our helicopters are covered by a client contract when they are placed into service, many of these contracts are for a short term, requiring us to seek renewals more frequently. Alternatively, we expect that some of our clients may request new helicopters in lieu of our existing helicopters, which could adversely affect the utilization of our existing fleet.
Risks Relating to Our Business
We are highly dependent upon the level of activity in the North Sea and to a lesser extent the U.S. Gulf of Mexico, which are mature exploration and production regions.
In fiscal years 2011, 2010 and 2009 approximately 53%, 54% and 55% respectively, of our gross revenue was derived from helicopter services provided to clients operating in the North Sea and the U.S. Gulf of Mexico. The North Sea and the U.S. Gulf of Mexico are mature exploration and production regions that have undergone substantial seismic survey and exploration activity for many years. Because a large number of oil and gas properties in these regions have already been drilled, additional prospects of sufficient size and quality could be more difficult to identify. Generally, the production from these drilled oil and gas properties is declining. In the future, production may decline to the point that such properties are no longer economic to operate, in which case, our services with respect to such properties will no longer be needed. Oil and gas companies may not identify sufficient additional drilling sites to replace those that become depleted. In addition, the U.S. government’s exercise of authority under the Outer Continental Shelf Lands Act, as amended, to restrict the availability of offshore oil and gas leases could adversely impact exploration and production activity in the U.S. Gulf of Mexico. If activity in oil and gas exploration, development and production in either the North Sea or the U.S. Gulf of Mexico materially declines, our business, financial condition and results of operations could be materially and adversely affected. We cannot predict the levels of activity in these areas.
Any additional deepwater drilling laws and regulations, delays in the processing and approval of permits and other related developments in the U.S. Gulf of Mexico as well as our other locations resulting from the Deepwater Horizon incident could adversely affect our business.
As was widely reported, on April 20, 2010, a fire and explosion occurred onboard the semisubmersible drilling rig Deepwater Horizon, which led to a significant oil spill that affected the U.S. Gulf of Mexico. In response to this incident, the Bureau of Ocean Energy, Management, Regulation and Enforcement (“BOEMRE”) ceased issuing drilling permits pursuant to a series of moratoria, and all deepwater drilling activities in progress were suspended. Although the moratoria have been lifted, the Department of Interior (“DOI”) has issued only a small number of permits related to the drilling of new exploratory wells in the deepwater Gulf of Mexico. In 2010, the DOI issued new rules designed to improve drilling and workplace safety, and various congressional committees began pursuing legislation to regulate drilling activities and increase liability.
The BOEMRE is expected to continue to issue new safety and environmental guidelines or regulations for drilling in the U.S. Gulf of Mexico, and other regulatory agencies could potentially issue new safety and environmental guidelines or regulations in other geographic regions, and may take other steps that could increase the costs of exploration and production, reduce the area of operations and result in permitting delays. We are monitoring legislation and regulatory developments; however, it is difficult to predict the ultimate impact of any new guidelines, regulations or legislation. A prolonged suspension of drilling activity in the U.S. and abroad and new regulations and increased liability for companies operating in this sector could result in continued reduced demand for our services, resulting in reduced cash flows and profitability.
Our future growth depends on the level of international oil and gas activity and our ability to operate outside of the North Sea and the U.S. Gulf of Mexico.
Our future growth will depend significantly on our ability to expand into markets outside of the North Sea and the U.S. Gulf of Mexico. Expansion of our business depends on our ability to operate in these other regions.
Expansion of our business outside of the North Sea and the U.S. Gulf of Mexico may be adversely affected by:
•
local regulations restricting foreign ownership of helicopter operators;
•
requirements to award contracts to local operators; and
•
the number and location of new drilling concessions granted by foreign governments.
We cannot predict the restrictions or requirements that may be imposed in the countries in which we operate. If we are unable to continue to operate or retain contracts in markets outside of the North Sea and the U.S. Gulf of Mexico, our future business, financial condition and results of operations may be adversely affected, and our operations outside of the North Sea and the U.S. Gulf of Mexico may not grow.
In order to grow our business, we may require additional capital in the future, which may not be available to us.
Our business is capital intensive, and to the extent we do not generate sufficient cash from operations, we will need to raise additional funds through public or private debt or equity financings to execute our growth strategy. Adequate sources of capital funding may not be available when needed, or may not be available on favorable terms. If we raise additional funds by issuing equity or certain types of convertible debt securities, dilution to the holdings of existing stockholders may result. If funding is insufficient at any time in the future, we may be unable to acquire additional aircraft, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business. See discussion of our capital commitments in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Future Cash Requirements” included elsewhere in this Annual Report.
Our operations in certain markets are subject to additional risks.
During each of fiscal years 2011, 2010 and 2009, approximately 30% of our gross revenue was attributable to helicopter services provided to clients operating in the West Africa and Other International business units. Operations in most of these areas are subject to various risks inherent in conducting business in international locations, including:
•
political, social and economic instability, including risks of war, general strikes and civil disturbances;
•
physical and economic retribution directed at U.S. companies and personnel;
•
governmental actions that restrict payments or the movement of funds or result in the deprivation of contract rights;
•
violations of our Code;
•
the taking of property without fair compensation; and
•
the lack of well-developed legal systems in some countries that could make it difficult for us to enforce our contractual rights.
For example, there has been continuing political and social unrest in Nigeria, where we derived 18%, 19% and 17% of our gross revenue in fiscal years 2011, 2010 and 2009, respectively. Future unrest in Nigeria or our other operating regions could adversely affect our business, financial condition and results of operations in those periods. We cannot predict whether any of these events will continue to occur in Nigeria or occur elsewhere in the future.
Foreign exchange risks and controls may affect our financial position and results of operations.
Through our operations outside the U.S., we are exposed to foreign currency fluctuations and exchange rate risks. As a result, a strong U.S. dollar may increase the local cost of our services that are provided under U.S. dollar-denominated contracts, which may reduce the demand for our services in foreign countries. Generally, we do not enter into hedging transactions to protect against foreign exchange risks related to our gross revenue.
Because we maintain our financial statements in U.S. dollars, our financial results are vulnerable to fluctuations in the exchange rate between the U.S. dollar and foreign currencies, such as the British pound sterling, Australian dollar, euro, Nigerian naira and Norwegian kroner. In preparing our financial statements, we must convert all non-U.S. dollar currencies to U.S. dollars. The effect of foreign currency translation is reflected in a component of stockholders’ investment, while foreign currency transaction gains or losses and translation of currency amounts not deemed permanently reinvested are credited or charged to income and reflected in other income (expense), net. Changes in exchange rates could cause significant changes in our financial position and results of operations in the future.
We operate in countries with foreign exchange controls including Brazil, Egypt, India, Malaysia, Nigeria, Russia and Turkmenistan. These controls may limit our ability to repatriate funds from our international operations and unconsolidated affiliates or otherwise convert local currencies into U.S. dollars. These limitations could adversely affect our ability to access cash from these operations.
See further discussion of foreign exchange risks and controls under Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” included elsewhere in this Annual Report.
Labor problems could adversely affect us.
Certain of our employees in the U.K., Norway, Nigeria, the U.S. and Australia (collectively, about 56% of our employees) are represented under collective bargaining or union agreements. Any disputes over the terms of these agreements or our potential inability to negotiate acceptable contracts with the unions that represent our employees under these agreements could result in strikes, work stoppages or other slowdowns by the affected workers. Periodically, certain groups of our employees who are not covered under a collective bargaining agreement consider entering into such an agreement.
If our unionized workers engage in a strike, work stoppage or other slowdown, other employees elect to become unionized, existing labor agreements are renegotiated, or future labor agreements contain terms that are unfavorable to us, we could experience a disruption of our operations or higher ongoing labor costs, which could adversely affect our business, financial condition and results of operations.
See Item 1. “Business - Employees” included elsewhere in this Annual Report for further discussion on the status of collective bargaining or union agreements.
Our failure to attract and retain qualified personnel could have an adverse effect on us.
Our ability to attract and retain qualified pilots, mechanics and other highly-trained personnel is an important factor in determining our future success. For example, many of our clients require pilots with very high levels of flight experience. The market for these experienced and highly-trained personnel is competitive and may become more competitive. Accordingly, we cannot assure you that we will be successful in our efforts to attract and retain such personnel. Some of our pilots, mechanics and other personnel, as well as those of our competitors, are members of the U.K. or U.S. military reserves who have been, or could be, called to active duty. If significant numbers of such personnel are called to active duty, it would reduce the supply of such workers and likely increase our labor costs. Additionally, our fleet renewal program may require us to retain additional pilots, mechanics and other flight-related personnel. Our failure to attract and retain qualified personnel could have a material adverse effect on our current business and our growth strategy.
Helicopter operations involve risks that may not be covered by our insurance, may increase our operating costs and are subject to weather-related and seasonal fluctuations.
The operation of helicopters inherently involves a degree of risk. Hazards such as harsh weather and marine conditions, mechanical failures, crashes and collisions are inherent in our business and may result in personal injury, loss of life, damage to property and equipment and suspension or reduction of operations. Our aircraft have been involved in accidents in the past, some of which have included loss of life and property damage. We may experience similar accidents in the future.
We attempt to protect ourselves against these losses and damage by carrying insurance, including hull and liability, general liability, workers’ compensation, and property and casualty insurance. Our insurance coverage is subject to deductibles and maximum coverage amounts, and we do not carry insurance against all types of losses, including business interruption. We cannot assure you that our existing coverage will be sufficient to protect against all losses, that we will be able to maintain our existing coverage in the future or that the premiums will not increase substantially. In addition, future terrorist activity, risks of war, accidents or other events could increase our insurance premiums. The loss of our liability insurance coverage, inadequate coverage from our liability insurance or substantial increases in future premiums could have a material adverse effect on our business, financial condition and results of operations.
Generally, our operations can be impaired by harsh weather conditions. Poor visibility, high wind, heavy precipitation, sand storms and volcanic ash can affect the operation of helicopters and result in a reduced number of flight hours. A significant portion of our operating revenue is dependent on actual flight hours, and a substantial portion of our direct cost is fixed. Thus, prolonged periods of harsh weather can have a material adverse effect on our business, financial condition and results of operations. In addition, any severe weather patterns, including those resulting from climate change, could affect the operation of helicopters and result in a reduced number of flight hours which may have a material adverse effect on our business, financial condition or results of operations.
The fall and winter months have fewer hours of daylight, particularly in the North Sea and Alaska. While some of our aircraft are equipped to fly at night, we generally do not do so. In addition, drilling activity in the North Sea and Alaska is lower during the winter months than the rest of the year. Anticipation of harsh weather during this period causes many oil companies to limit activity during the winter months. Consequently, flight hours are generally lower during these periods, typically resulting in a reduction in operating revenue during those months. Accordingly, our reduced ability to operate in harsh weather conditions and darkness may have a material adverse effect on our business, financial condition and results of operations.
The Harmattan, a dry and dusty West African trade wind, blows between the end of November and the middle of March. The heavy amount of dust in the air can severely limit visibility and block the sun for several days, comparable to a heavy fog. We are unable to operate aircraft during these harsh conditions. Consequently, flight hours may be lower during these periods resulting in reduced operating revenue which may have a material adverse effect on our business, financial condition and results of operations.
In the Gulf of Mexico, the months of December through March have more days of harsh weather conditions than the other months of the year. Heavy fog during those months often limits visibility. In addition, in the Gulf of Mexico, June through November is tropical storm and hurricane season. When a tropical storm or hurricane is about to enter or begins developing in the Gulf of Mexico, flight activity may increase because of evacuations of offshore workers. However, during a tropical storm or hurricane, we are unable to operate in the area of the storm. In addition, as a significant portion of our facilities are located along the coast of the U.S. Gulf of Mexico, tropical storms and hurricanes may cause substantial damage to our property in these locations, including helicopters. Additionally, we incur costs in evacuating our aircraft, personnel and equipment prior to tropical storms and hurricanes.
We operate in many international areas through entities that we do not control and are subject to government regulation that limits foreign ownership of aircraft companies.
We conduct many of our international operations through entities in which we have a noncontrolling investment or through strategic alliances with foreign partners. For example, we have acquired interests in, and in some cases have lease and service agreements with, entities that operate aircraft in Brazil, Egypt, Mexico, the U.K., Russia and Turkmenistan. We provide engineering and administrative support to certain of these entities. We derive significant amounts of lease revenue, service revenue, equity earnings and dividend income from these entities. In fiscal years 2011, 2010 and 2009, we received approximately $63.6 million, $65.5 million and $70.1 million, respectively, of revenue from the provision of aircraft and other services to unconsolidated affiliates. Because we do not own a majority interest or maintain voting control of our unconsolidated affiliates, we do not have the ability to control their policies, management or affairs. The interests of persons who control these entities or partners may differ from ours, and may cause such entities to take actions that are not in our best interest. If we are unable to maintain our relationships with our partners in these entities, we could lose our ability to operate in these areas, potentially resulting in a material adverse effect on our business, financial condition and results of operations.
We are subject to governmental regulation that limits foreign ownership of aircraft companies. Based on regulations in various markets in which we operate, our aircraft may be subject to deregistration and we may lose our ability to operate within these countries if certain levels of local ownership are not maintained. Deregistration of our aircraft for any reason, including foreign ownership in excess of permitted levels, would have a material adverse effect on our ability to conduct operations within these markets. We cannot assure you that there will be no changes in aviation laws, regulations or administrative requirements or the interpretations thereof, that could restrict or prohibit our ability to operate in certain regions. Any such restriction or prohibition on our ability to operate may have a material adverse effect on our business, financial condition and results of operations. See further discussion in Item 1. “Business - Government Regulation” included elsewhere in this Annual Report.
We are subject to tax and other legal compliance risks
We are subject to a variety of tax and legal compliance risks. These risks include, among other things, possible liability relating to taxes and compliance with U.S. and foreign export laws, competition laws and laws governing improper business practices such as the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act. We or one of our business units could be charged with wrongdoing as a result of such matters. If convicted or found liable, we could be subject to significant fines, penalties, repayments, other damages (in certain cases, treble damages), or suspension or debarment from government contracts. Independently, failure of us or one of our business units to comply with applicable export and trade practice laws could result in civil or criminal penalties and suspension or termination of export privileges. As a global business, we are subject to complex laws and regulations in the U.K., the U.S. and other countries in which we operate. Those laws and regulations may be interpreted in different ways. They may also change from time to time, as may related interpretations and other guidance. Changes in laws or regulations could result in higher expenses and payments, and uncertainty relating to laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights.
Actions taken by agencies empowered to enforce governmental regulations could increase our costs and reduce our ability to operate successfully.
Our operations are regulated by governmental agencies in the various jurisdictions in which we operate. These agencies have jurisdiction over many aspects of our business, including personnel, aircraft and ground facilities. Statutes and regulations in these jurisdictions also subject us to various certification and reporting requirements and inspections regarding safety, training and general regulatory compliance. Other statutes and regulations in these jurisdictions regulate the offshore operations of our clients. The agencies empowered to enforce these statutes and regulations may suspend, curtail or require us to modify our operations. A suspension or substantial curtailment of our operations for any prolonged period, and any substantial modification of our current operations, may have a material adverse effect on our business, financial condition and results of operations. See further discussion in Item 1. “Business - Government Regulation” and “Business - Environmental” included elsewhere in this Annual Report.
Future legislation that may eliminate certain U.S. federal income tax deductions currently available could have an adverse effect on our financial position, results of operations and cash flows as well as impact our clients’ activity levels and demand for our services.
The Obama administration recently announced a broad outline of proposals to modify certain aspects of the rules governing the U.S. taxation of certain non-U.S. subsidiaries. Many details of the various proposals remain unknown at this time and any legislation enacting such proposed modifications would require congressional approval. However, changes to the U.S. tax law related to taxation of non-U.S. subsidiaries could increase our effective tax rate and adversely affect our financial position, results of operations and cash flows. Additionally, the Obama administration’s proposed federal budget for fiscal year 2012 would repeal many tax incentives and deductions that are currently available to oil and natural gas exploration and production companies, and any such change could materially and adversely affect our clients’ activity levels and spending for our services which would have a material adverse effect on our business, financial condition and results of operations.
Environmental regulations and liabilities may increase our costs and adversely affect us.
Our operations are subject to U.S. federal, state and local, and foreign environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage, recycling and disposal of toxic and hazardous wastes. The nature of the business of operating and maintaining helicopters requires that we use, store and dispose of materials that are subject to environmental regulation. Environmental laws and regulations change frequently, which makes it impossible for us to predict their cost or impact on our future operations. Liabilities associated with environmental matters could have a material adverse effect on our business, financial condition and results of operations. We could be exposed to strict, joint and several liability for cleanup costs, natural resource damages and other damages as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties. Additionally, any failure by us to comply with applicable environmental laws and regulations may result in governmental authorities taking action against our business that could adversely impact our operations and financial condition, including the:
•
issuance of administrative, civil and criminal penalties;
•
denial or revocation of permits or other authorizations;
•
imposition of limitations on our operations; and
•
performance of site investigatory, remedial or other corrective actions.
Changes in environmental laws or regulations, including laws relating to greenhouse emissions or other climate change concerns, could require us to devote capital or other resources to comply with those laws and regulations. These changes could also subject us to additional costs and restrictions, including increased energy costs. For additional information see Item 1. “Business - Environmental” and Item 3. “Legal Proceedings” included elsewhere in this Annual Report.
Our dependence on a small number of helicopter manufacturers poses a significant risk to our business and prospects, including our ability to execute our growth strategy.
We contract with a small number of manufacturers for most of our aircraft expansion and replacement needs. If any of these manufacturers face production delays due to, for example, natural disasters, labor strikes or availability of skilled labor, we may experience a significant delay in the delivery of previously ordered aircraft. During these periods, we may not be able to obtain orders for additional aircraft with acceptable pricing, delivery dates or other terms. Delivery delays or our inability to obtain acceptable aircraft orders would adversely affect our revenue and profitability and could jeopardize our ability to meet the demands of our clients and execute our growth strategy. Additionally, lack of availability of new aircraft resulting from a backlog in orders could result in an increase in prices for certain types of used helicopters.
A shortfall in availability of aircraft components and parts required for maintenance and repairs of our aircraft and supplier cost increases could adversely affect us.
In connection with the required routine maintenance and repairs performed on our aircraft in order for them to stay fully operational and available for use in our operations, we rely on a few key vendors for the supply and overhaul of components fitted to our aircraft. Those vendors have historically worked at or near full capacity supporting the aircraft production lines and the maintenance requirements of the aircraft operators who may also operate at or near capacity in certain industries, including operators such as us who support the energy industry. Such conditions can result in backlogs in manufacturing schedules and some parts being in limited supply from time to time, which could have an adverse impact upon our ability to maintain and repair our aircraft. To the extent that these suppliers also supply parts for aircraft used by the U.S. military, parts delivery for our aircraft may be delayed during periods in which there are high levels of military operations. Our inability to perform timely maintenance and repairs can result in our aircraft being underutilized which could have an adverse impact on our operating results. Furthermore, our operations in remote locations, where delivery of these components and parts could take a significant period of time, may also impact our ability to maintain and repair our aircraft. While every effort is made to mitigate such impact, this may pose a risk to our operating results. Additionally, supplier cost increases for critical aircraft components and parts also pose a risk to our operating results. Cost increases are passed through to our clients through rate increases where possible, including as a component of contract escalation charges. However, as certain of our contracts are long-term in nature, cost increases may not be adjusted in our contract rates until the contracts are up for renewal.
Risks Related to Worldwide Economic Activity and Financial Markets
Worldwide economic downturns could have a material adverse effect on our revenue, profitability and financial position.
A slowdown in economic activity caused by a recession could reduce worldwide demand for energy and result in an extended period of lower oil and natural gas prices. Demand for our services depends on oil and natural gas industry activity and expenditure levels that are directly affected by trends in oil and natural gas prices. A reduction in oil and natural gas prices could depress the activity levels of oil and gas companies which in turn would reduce demand for our services. Perceptions of longer-term lower oil and natural gas prices by oil and gas companies can similarly further reduce or defer major expenditures given the long-term nature of many large-scale development projects. Lower levels of activity can result in a corresponding decline in the demand for our services, which could have a material adverse effect on our revenue and profitability. Additionally, these factors may adversely impact our statement of financial position if they are determined to cause impairment of our goodwill, intangible assets, long-lived assets or assets held for sale.
Global financial market instability could impact our business and financial condition.
Financial market instability in the global financial system could have an impact on our business and our financial condition. We may face significant challenges if conditions in the financial markets are poor. Our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access such markets, which could have an impact on our growth plans or on our flexibility to react to changing economic and business conditions. The financial market instability could have an impact on the lenders under our credit facilities or on our clients, causing them to fail to meet their obligations to us. Financial market difficulties could also adversely affect the ability of suppliers to meet scheduled delivery dates for our new aircraft and other aircraft parts.
Risks Related to Our Level of Indebtedness
Our level of indebtedness could adversely affect our financial condition and impair our ability to fulfill our obligations under our indebtedness.
We have a substantial amount of debt and significant debt service requirements. As of March 31, 2011, we had approximately $707.5 million of outstanding indebtedness.
Our level of indebtedness may have important consequences to our business, including:
•
impairing our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other general corporate purposes;
•
requiring us to dedicate a substantial portion of our cash flow to the payment of principal and interest on our indebtedness, which reduces the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes or to repurchase our notes upon a change of control;
•
subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including our borrowings under our Credit Facilities;
•
increasing the possibility of an event of default under the financial and operating covenants contained in our debt instruments; and
•
limiting our ability to adjust to rapidly changing market conditions, reducing our ability to withstand competitive pressures and making us more vulnerable to a downturn in general economic conditions or our business than our competitors with less debt.
If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to refinance all or a portion of our existing debt or obtain additional financing. There is no assurance that any such refinancing would be possible or that any additional financing could be obtained. Our inability to obtain such refinancing or financing may have a material adverse effect on us.
Despite our current level of indebtedness, we may incur substantially more debt, which could further exacerbate the risks associated with our level of indebtedness.
We had $145 million of availability for borrowings under our Credit Facilities as of March 31, 2011, subject to our maintenance of financial covenants and other conditions. Although the agreements governing our Credit Facilities and the indenture governing our 7 1/2% Senior Notes due 2017 (the “7 1/2% Senior Notes”) contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and we could incur substantial additional indebtedness. In addition to amounts that we may borrow under our Credit Facilities, the indenture governing the 7 1/2% Senior Notes also allows us to borrow significant amounts of money from other sources. Also, these restrictions do not prevent us from incurring obligations that do not constitute “indebtedness” as defined in the relevant agreement. If we incur additional indebtedness, the related risks that we now face could intensify.
To service our indebtedness we will continue to require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control.
Our ability to make scheduled payments of principal or interest with respect to our indebtedness will depend on our ability to generate cash and on our financial results. Our ability to generate cash depends on the demand for our services, which is subject to levels of activity in offshore oil and gas exploration, development and production, general economic conditions, the ability of our affiliates to generate and distribute cash flows, and financial, competitive, regulatory and other factors affecting our operations, many of which are beyond our control. We cannot assure you that our operations will generate sufficient cash flow or that future borrowings will be available to us under our Credit Facilities or otherwise in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.
Covenants in our debt agreements may restrict the manner in which we can operate our business.
Our Credit Facilities and the indenture governing the 7 1/2% Senior Notes limit, among other things, our ability and the ability of our restricted subsidiaries to:
•
borrow money or issue guarantees;
•
pay dividends, redeem capital stock or make other restricted payments;
•
incur liens to secure indebtedness;
•
make certain investments;
•
sell certain assets;
•
enter into transactions with our affiliates; or
•
merge with another person or sell substantially all of our assets.
If we fail to comply with these and other covenants, we would be in default under our Credit Facilities and the indenture governing the 7 1/2% Senior Notes, and the principal and accrued interest on our outstanding indebtedness may become due and payable. In addition, our Credit Facilities contain, and our future indebtedness agreements may contain, additional affirmative and negative covenants.
As a result, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be considered beneficial to us. Our Credit Facilities also require, and our future credit facilities may require, us to maintain specified financial ratios and satisfy certain financial condition tests. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those tests in the future. The breach of any of these covenants could result in a default under our Credit Facilities. Upon the occurrence of an event of default under our existing or future credit facilities, the lenders could elect to declare all amounts outstanding under such credit facilities, including accrued interest or other obligations, to be immediately due and payable. There can be no assurance that our assets would be sufficient to repay in full all of our indebtedness.
The instruments governing certain of our indebtedness, including our Credit Facilities and the indentures governing the 7 1/2% Senior Notes and the 3% Convertible Senior Notes, contain cross-default provisions. Under these provisions, a default under one instrument governing our indebtedness may constitute a default under our other instruments of indebtedness.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The number and types of aircraft we operate are described in Item 1. “Business - Overview” above. In addition, we lease various office and operating facilities worldwide, including facilities at the Acadiana Regional Airport in New Iberia, Louisiana, the Redhill Aerodrome near London, England, the Aberdeen Airport, Scotland and along the U.S. Gulf of Mexico, and numerous residential locations near our operating bases in the U.K., Norway, Australia, Russia, Nigeria and Trinidad primarily for housing pilots and staff supporting those areas of operation. We lease office space in a building in Houston, Texas, which we use as our Corporate and Other International business unit headquarters. Additionally, we have multiple properties in Titusville, Florida, where the largest campus of our Bristow Academy business unit is located. These facilities are generally suitable for our operations and can be replaced with other available facilities if necessary.
Additional information about our properties can be found in Note 8 in the “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report (under the captions “Aircraft Purchase Contracts” and “Operating Leases”). A detail of our long-lived assets by geographic area as of March 31, 2011 and 2010 can be found in Note 12 in the “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report.
Item 3.
Item 3. Legal Proceedings
Nigerian Litigation
In November 2005, two of our consolidated foreign affiliates were named in a lawsuit filed with the High Court of Lagos State, Nigeria by Mr. Benneth Osita Onwubalili and his affiliated company, Kensit Nigeria Limited, which allegedly acted as agents of our affiliates in Nigeria. The claimants allege that an agreement between the parties was terminated without justification and seek damages of $16.3 million. We responded to this claim in early 2006. There has been minimal activity on this claim since then.
Civil Class Action Lawsuit
On June 12, 2009, Superior Offshore International, Inc. v. Bristow Group Inc., et al, Case No. 1:09-cv-00438, was filed in the U.S. District Court for the District of Delaware. The purported class action complaint, which also named other providers of offshore helicopter services in the Gulf of Mexico as defendants, alleged violations of Section 1 of the Sherman Act. Among other things, the complaint alleged that the defendants unlawfully conspired to raise and maintain the price of offshore helicopter services between January 1, 2001 and December 31, 2005. The plaintiff was seeking to represent a purported class of direct purchasers of offshore helicopter services and was asking for, among other things, unspecified treble monetary damages and injunctive relief. In September 2010, the court granted our and the other defendants’ motion to dismiss the case on several grounds. The plaintiff then filed a motion seeking a rehearing and seeking leave to amend its original complaint which was partially granted to permit limited discovery. Such limited discovery has now been completed and we and the other defendants have again filed motions to dismiss the lawsuit. We intend to continue to defend against this lawsuit vigorously. We are currently unable to determine whether it could have a material effect on our business, financial condition or results of operations.
Environmental Contingencies
The EPA has in the past notified us that we are a potential responsible party, or PRP, at three former waste disposal facilities that are on the National Priorities List of contaminated sites. Under the federal Comprehensive Environmental Response, Compensation and Liability Act, also known as the Superfund law, persons who are identified as PRPs may be subject to strict, joint and several liability for the costs of cleaning up environmental contamination resulting from releases of hazardous substances at National Priorities List sites. Although we have not yet obtained a formal release of liability from the EPA with respect to any of the sites, we believe that our potential liability in connection with these sites is not likely to have a material adverse effect on our business, financial condition or results of operations.
Other Matters
Although infrequent, aircraft accidents have occurred in the past, and the related losses and liability claims have been covered by insurance subject to a deductible. We also are a defendant in certain claims and litigation arising out of operations in the normal course of business. In the opinion of management, uninsured losses, if any, will not be material to our financial position, results of operations or cash flows.
Item 4.
Item 4. Reserved
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
Our Common Stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “BRS.” The following table shows the range of closing prices for our Common Stock during each quarter of our last two fiscal years.
On May 13, 2011, the last reported sale price of our Common Stock on the NYSE was $42.44 per share. As of May 13, 2011, there were 591 holders of record of our Common Stock.
The following graph compares the cumulative 5-year total shareholder return on our Common Stock relative to the cumulative total returns of the S&P 500 index and the PHLX Oil Service Sector index. The graph assumes that the value of the investment in our Common Stock and in each of the indices (including reinvestment of dividends) was $100 on March 31, 2006 and tracks it through March 31, 2011.
On May 4, 2011, the board of directors of the Company declared a first quarter cash dividend of $0.15 per share of our Common Stock. The dividend will be paid on June 10, 2011 to stockholders of record on May 20, 2011. Based on shares outstanding at May 13, 2011, total dividend payments to be made during the three months ended June 30, 2011 will be approximately $5.4 million. The declaration of future dividends is at the discretion of our board of directors and subject to our results of operations, financial condition, cash requirements and other factors and restrictions under applicable law and our debt instruments.
Item 6.
Item 6. Selected Financial Data
The following table contains our selected historical consolidated financial data. You should read this table along with Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with “Forward-Looking Statements,” Item 1A. “Risk Factors” and our Consolidated Financial Statements for fiscal years 2011, 2010 and 2009, and the related notes thereto, all of which are included elsewhere in this Annual Report.
Executive Overview
This Executive Overview only includes what management considers to be the most important information and analysis for evaluating our financial condition and operating performance. It provides the context for the discussion and analysis of the financial statements which follow and does not disclose every item impacting our financial condition and operating performance.
See discussion of our business and the operations within our Helicopter Services Segment under Part I. Item 1. “Business - Overview” included elsewhere in this Annual Report.
Our Strategy
Our goal is to strengthen our position as a leading helicopter services provider to the offshore energy industry. We intend to employ the following well defined business/commercial and capital allocation strategies to achieve this goal:
Business/Commercial Strategy
•
Be the preferred provider of helicopter services. We position our business to be the preferred provider of helicopter services by maintaining strong relationships with our clients and providing safe and high-quality service. In order to create further differentiation and add value to our clients, we are expanding our well-established and successful global “Target Zero” safety program to also focus on additional areas related to maximizing uptime and service levels. The new expanded program called “Target Zero Accidents, Target Zero Downtime and Target Zero Complaints” is designed to deliver continuous improvement in all these important areas and demonstrate Bristow’s commitment to providing higher hours of zero-accident flight time with on-time and up-time helicopter transportation service. We maintain relationships with our clients’ field operations and corporate management which we believe helps us better anticipate client needs and provide our clients with
the right aircraft in the right place at the right time. This in turn allows us to better manage our fleet utilization and capital investment program. We also leverage our close relationships with our clients to establish mutually beneficial operating practices and safety standards worldwide. By applying standardized-first-rate operating and safety practices across our global operations, we seek to provide our clients with consistent, high-quality service in each of their areas of operation. By better understanding and delivering on our clients’ needs with our global operations and safety standards, we believe we successfully compete against other helicopter service providers based on aircraft availability, client service, safety and reliability, and not just price.
•
Grow our business while managing our assets. We plan to continue to grow our business globally and increase our revenue and profitability over time, while managing through cyclical downturns in the energy industry. We conduct flight operations in most major oil and gas producing regions of the world, and through our strong relationships with our existing clients, we are aware of future business opportunities in the markets we currently serve that would allow us to grow through new contracts. We anticipate these new opportunities will result in the deployment of new or existing aircraft into markets where we expect they will earn desirable rates of return. Additionally, new opportunities may result in growth through acquisitions and investments in existing or new markets, which may include increasing our role and participation with existing unconsolidated affiliates, investing in new companies, or creating partnerships and alliances with existing industry participants. We believe the combination of growth in existing and new markets will deliver improved shareholder returns.
Capital Allocation Strategy
Our capital allocation strategy is based on three principles as follows:
•
Prudent balance sheet management. Throughout our corporate and business unit management, we proactively manage our capital allocation plan with a concentration on achieving business growth and improving rates of return, within the dictates of prudent balance sheet management. We have funded our successful growth plan and maintained adequate liquidity by raising approximately $1.3 billion of debt and equity by means of both public and private financings since fiscal year 2007, and we intend to continue managing our capital structure and liquidity position relative to our commitments with external financings when necessary. In November 2010, we increased our liquidity by $75 million with our Credit Facilities. Our debt to total capitalization ratio and total liquidity were 31.8% and $260.7 million, respectively, and 34.6% and $177.8 million, respectively, as of March 31, 2011 and 2010.
•
Highest return of BVA. We have implemented a new internal financial management framework we call Bristow Value Added (“BVA”) to enhance our focus on the returns we deliver across our organization. BVA is computed by subtracting a capital charge for the use of gross invested capital from after tax operating cash flow. Our goal is to achieve strong improvements in BVA over time by (1) improving the returns we earn throughout our organization via cost and capital efficiency improvements as well as through better pricing based on the differentiated value we deliver to customers via aircraft safety, availability, client service and reliability; (2) deploying more capital into commercial opportunities where management believes we can deliver strong returns; and (3) withdrawing capital from areas where returns are deemed inadequate and unable to be sufficiently improved. In addition to internal investment, we will, when we believe it will benefit the Company and our shareholders, make strategic acquisitions or make strategic equity investments. When appropriate, we may divest parts of the Company. Improvements in BVA will also be the primary financial measure in our management incentive plan to align the interests of management with shareholders.
•
Balanced shareholder return. We have invested $1.6 billion on capital expenditures to grow our business since fiscal year 2007. While we plan to continue to invest in new aircraft, we do not expect capital expenditures to continue at this level over the near term. We believe our liquidity position and cash flows from operations will be more than adequate to finance operating and maintenance capital expenditures, so we have considered our capital deployment alternatives for the future to deliver a more balanced return to our shareholders. On May 4, 2011, our board of directors approved a dividend. We also explore other options on an ongoing basis such as buying back our Common Stock or paying special dividends from time to time when we have excess cash.
Market Outlook
Our core business is providing helicopter services to the worldwide oil and gas industry. Our clients’ operating expenditures in the production sector are the principal source of our revenue, while their exploration and development capital expenditures provide a lesser portion of our revenue. Our clients typically base their capital expenditure budgets on their long-term commodity price expectations and not exclusively on the current spot price. In 2009, the credit, equity and commodity markets were quite volatile causing many of our oil and gas company clients to reduce capital spending plans and defer projects. During 2010 and thus far in 2011, oil prices ranged from approximately $65 to $112 per barrel and access to capital improved significantly. Growing confidence among our clients has led to increased capital expenditure budgets resulting in some larger projects moving ahead that were previously on hold. This has led to the recovery in our fiscal year 2011 financial performance.
While we are cautiously optimistic that the economic conditions will continue to recover in fiscal year 2012, we continue to seek ways to reduce costs and work with our clients to improve the efficiency of their operations. Our global operations and critical mass of helicopters provide us with geographic and client diversity which helps mitigate risks associated with a single market or client. This economic recovery should lead to an accelerated expansion in fiscal year 2012 and beyond and increased demand in many of our core markets.
The limited availability of some new aircraft models and the need throughout the industry to retire many of the older aircraft in the worldwide fleet is a driver for our industry. Currently manufacturers have some available aircraft; however, there are some constraints on supply of new large aircraft. The aftermarket for sales of our aircraft is recovering and sale prices have improved, reflecting buyers with available capital.
Brazil continues to represent a significant part of our positive growth outlook. The recent discovery of pre-salt deepwater fields in Brazil along with the national mandate to significantly increase its production over the next five years will necessitate investment in infrastructure and associated services. As a result, we anticipate and have begun to enjoy growth in both international oil companies and Petrobras activity as they ramp up their procurement of helicopters services. During 2009 and 2010, Petrobras procured 15 large aircraft as they renewed their fleet and added incremental capacity in this category. Since then, they have issued a requirement for a further five large aircraft. Further, Petrobras has recently issued a tender for over 27 medium sized aircraft of which a significant portion could be incremental capacity. Aircraft being procured in this market tend to be newer and more sophisticated which fits with both Bristow and Líder’s market positioning and fleet plans. We believe this growth trend will continue over the next five years to keep pace with Brazil’s national production policies.
As discussed in “Item 1A. Risk Factors” in this Annual Report, we are subject to competition and the political environment in the countries where we operate. In one of these markets, Nigeria, we have seen a recent increase in competitive pressure and new regulation that could impact our ability to win future work at levels previously anticipated. During fiscal year 2011, in both Nigeria and Australia we had major clients re-bid contracts that we were incumbents on and award these contracts to competitors. The contract in Nigeria provided us with annualized revenue of approximately $42 million and ended in fiscal year 2011. The contract in Australia provided us with annualized revenue of approximately $30 million and ends in fiscal year 2012. Despite the current competitive environments in these markets as well as the regulatory environment in Nigeria, we expect the lost revenue to eventually be offset by new contract awards with other clients and increased ad hoc flying in these regions.
We conduct business in various foreign countries, and as such, our cash flows and earnings are subject to fluctuations and related risks from changes in foreign currency exchange rates. Throughout fiscal year 2011, our primary foreign currency exposure was related to the euro, the British pound sterling and the Australian dollar. For details on this exposure and the related impact on our results of operations, see “Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to certain market risks arising from the use of financial instruments in the ordinary course of business. This risk arises primarily as a result of potential changes in the fair market value of financial instruments that would result from adverse fluctuations in foreign currency exchange rates, credit risk and interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ. See the notes to our consolidated financial statements included in Item 8
Item 8. Consolidated Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Bristow Group Inc.:
We have audited the accompanying consolidated balance sheets of Bristow Group Inc. (“the Company”) and subsidiaries as of March 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ investment, and cash flows for each of the years in the three-year period ended March 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bristow Group Inc. and subsidiaries as of March 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2011, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 20, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Houston, Texas
May 20, 2011
BRISTOW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOW GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT
(In thousands, except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
Bristow Group Inc., a Delaware corporation (together with its consolidated entities and predecessors, unless the context requires otherwise, “Bristow Group,” the “Company,” “we,” “us,” or “our”), is the leading provider of helicopter services to the worldwide offshore energy industry based on the number of aircraft operated and one of two helicopter service providers to the offshore energy industry with global operations. With a fleet of 569 aircraft as of March 31, 2011, including 196 held by unconsolidated affiliates, Bristow Group and its affiliates conduct major transportation operations in the North Sea, Nigeria and the U.S. Gulf of Mexico, and in most of the other major offshore oil and gas producing regions of the world, including Alaska, Australia, Brazil, Mexico, Russia and Trinidad. Certain of our affiliates also provide helicopter military training, search and rescue services and helicopter flight training.
Basis of Presentation
The consolidated financial statements include the accounts of Bristow Group Inc. and its consolidated entities after elimination of all significant intercompany accounts and transactions. Investments in affiliates in which we have a majority voting interest and entities that meet the criteria for Variable Interest Entities (“VIEs”) of which we are the primary beneficiary are consolidated. We apply the equity method of accounting for investments in entities if we have the ability to exercise significant influence over an entity that (a) does not meet the variable interest entity criteria or (b) meets the variable interest entity criteria, but for which we are not deemed to be the primary beneficiary. See discussion of VIEs in Note 3. We apply the cost method of accounting for investments in other entities if we do not have the ability to exercise significant influence over the unconsolidated affiliate. These investments in private companies are carried at cost and are adjusted only for capital distributions and other-than-temporary declines in value. Dividends from cost method investments are recognized in earnings from unconsolidated affiliates, net of losses, when paid.
Our fiscal year ends March 31, and we refer to fiscal years based on the end of such period. Therefore, the fiscal year ended March 31, 2011 is referred to as fiscal year 2011.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Areas where accounting estimates are made by management include:
•
Allowances for doubtful accounts;
•
Inventory allowances;
•
Property and equipment;
•
Goodwill, intangible and other long-lived asset impairment;
•
Pension benefits;
•
Contingent liabilities; and
•
Taxes.
Cash and Cash Equivalents - Our cash equivalents include funds invested in highly-liquid debt instruments with original maturities of 90 days or less.
Accounts Receivable - Trade and other receivables are stated at net realizable value. We grant short-term credit to our clients, primarily major integrated, national and independent oil and gas companies. We establish allowances for doubtful accounts on a case-by-case basis when a determination is made that the required payment is unlikely to occur. In establishing these allowances, we consider a number of factors, including our historical experience, change in our clients’ financial position and restrictions placed on the conversion of local currency into U.S. dollars, as well as disputes with clients regarding the application of contract provisions to our services.
Prior to April 1, 2008, because of uncertainty as to collectability, lease revenue from Heliservicio Campeche S.A. de C.V. (“Heliservicio”), an unconsolidated affiliate in Mexico, was recognized as collected. Therefore, during fiscal year 2008 and prior fiscal years, we recorded allowances against all amounts billed to Heliservicio and did not recognize revenue until cash was received. Upon receipt of cash, we reduced the related allowance against the accounts receivable from these entities and recognized revenue. We changed from the cash to accrual basis of recognizing revenue on billings to Heliservicio effective April 1, 2008. During fiscal year 2009, upon collection of amounts previously reserved for Heliservicio, we reversed the allowance amount and recorded revenue of $4.2 million for services provided in prior fiscal years. Additionally, during fiscal years 2011, 2010 and 2009 we recorded additional allowances of $1.0 million, $3.6 million and $0.9 million, respectively, against amounts billed to Heliservicio where collectability was deemed less than probable. In fiscal year 2011, as a result of the settlement of amounts due from Heliservicio in connection with the agreement to sell our remaining interest in Heliservicio, we wrote-off $5.6 million in accounts receivable from Heliservicio, reducing the allowance for prior billings to Heliservicio to zero. See Note 3 for further discussion of operations of and transactions with our unconsolidated affiliates, including Heliservicio.
The following table is a rollforward of the allowance for doubtful accounts, including affiliates and non-affiliates, for fiscal years 2011, 2010 and 2009 (in thousands):
(1) Includes amounts collected from Heliservicio and recorded as revenue in fiscal year 2009 of $4.2 million related to amounts previously for services provided in prior fiscal years.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Inventories - Inventories are stated at the lower of average cost or market and consist primarily of spare parts. The following table is a rollforward of the allowance related to obsolete and excess inventory for fiscal years 2011, 2010 and 2009 (in thousands):
Property and Equipment - Property and equipment are stated at cost. Property and equipment includes construction in progress, primarily consisting of progress payments on aircraft purchases and facility construction, of $112.4 million and $152.8 million as of March 31, 2011 and 2010, respectively. Interest costs applicable to the construction of qualifying assets are capitalized as a component of the cost of such assets.
Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of aircraft range from 5 to 15 years, and the residual value used in calculating depreciation of aircraft ranges from 30% to 50% of cost. The estimated useful lives for buildings on owned properties range from 15 to 40 years. Other depreciable assets are depreciated over estimated useful lives ranging from 3 to 15 years, except for leasehold improvements which are depreciated over the lesser of the useful life of the improvement or the lease term (including any period where we have options to renew if it is probable that we will renew the lease). The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and the resulting gains or losses are included in income.
Goodwill - Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill acquired in a business combination is not amortized. We test the carrying amount of goodwill for impairment annually on March 31 and whenever events or circumstances indicate impairment may have occurred.
Goodwill totaling $32.0 million and $31.8 million as of March 31, 2011 and 2010, respectively, relates to our business units as follows (in thousands):
(1) Relates to the correction of an immaterial error related to the acquisition of an additional interest in Norsk Helikopter AS (“Norsk”) as discussed in Note 2.
We assessed the goodwill associated with the related business units for impairment as of March 31, 2011 and 2010. Our assessments indicated that there was no impairment of goodwill. In applying a fair value based test, estimates are made of the expected future cash flows to be derived from the reporting unit. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future prices for our services, capital needs, economic trends and other factors. The assessments were based in part on assumptions regarding the demand for helicopter services, the necessity for training of new pilots (Bristow Academy only) and current market values for similar businesses and involved the use of a discounted cash flow model utilizing estimated future earnings and cash flows and the Company’s weighted-average cost of capital. Goodwill totaling approximately $4.8 million as of March 31, 2011 is expected to be deductible for tax purposes.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Intangible Assets - Intangible assets with finite useful lives are amortized over their respective estimated useful lives to their estimated residual values. Intangible assets by type were as follows (in thousands):
Future amortization expense of intangible assets for each of the years ending March 31 are as follows (in thousands):
The non-compete agreements relate to Bristow Academy. The client contracts, client relationships and licenses in the table above relate to the Bristow Norway acquisition (see Note 2).
Impairment of Long-Lived Assets - Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset or asset group to be held and used exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Assets held for sale are classified as current assets in prepaid expenses and other current assets in our consolidated balance sheets and recorded at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale (if any) are presented separately in the appropriate asset and liability sections of the consolidated balance sheets. We recorded an impairment charge of $1.5 million included in depreciation and amortization expense to reduce the carrying value of three aircraft held for sale in fiscal year 2011. We did not recognize any impairment charges related to long-lived assets in fiscal years 2010 and 2009.
Impairment of 50% or Less Owned Companies - We perform regular reviews of each investee’s financial condition, the business outlook for its products and services, and its present and projected results and cash flows. When an investee has experienced consistent declines in financial performance or difficulties raising capital to continue operations, and when we expect the decline to be other-than-temporary, the investment is written down to fair value. Actual results may vary from estimates due to the uncertainty regarding the projected financial performance of investees, the severity and expected duration of declines in value, and the available liquidity in the capital markets to support the continuing operations of the investees in which we have investments. During fiscal year 2011, we recorded an impairment charge included in other income (expense), net of $2.4 million related to our investment in Heliservicio, an unconsolidated affiliate in Mexico. See a discussion of the transaction resulting in the impairment of this investment in Note 2. We did not recognize any impairment charges related to our investments in 50% or less owned companies in fiscal years 2010 and 2009.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Assets - In addition to the intangible assets discussed above, other assets as of March 31, 2011 and 2010 primarily include debt issuance costs of $8.9 million and $10.1 million, respectively, which are being amortized over the life of the related debt.
Contingent Liabilities - We establish reserves for estimated loss contingencies when we believe a loss is probable and the amount of the loss can be reasonably estimated. Our contingent liability reserves relate primarily to potential tax assessments, litigation, personal injury claims and environmental liabilities. Income for each reporting period includes revisions to contingent liability reserves resulting from different facts or information which become known or circumstances which change and affect our previous assumptions with respect to the likelihood or amount of loss. Such revisions are based on information which becomes known or circumstances that change after the reporting date for the previous period through the reporting date of the current period. Reserves for contingent liabilities are based upon our assumptions and estimates regarding the probable outcome of the matter. Should the outcome differ from our assumptions and estimates or other events result in a material adjustment to the accrued estimated reserves, revisions to the estimated reserves for contingent liabilities would be required to be recognized.
Proceeds from casualty insurance settlements in excess of the carrying value of damaged assets are recognized in gain on disposal of other assets when we have received proof of loss documentation or are otherwise assured of collection of these amounts.
Revenue Recognition - In general, we recognize revenue when it is both realized or realizable and earned. We consider revenue to be realized or realizable and earned when the following conditions exist: there is persuasive evidence of an arrangement, generally a client contract exists; the services or products have been performed or delivered to the client; the sales price is fixed or determinable; and collection is probable. More specifically, revenue from helicopter services is recognized based on contractual rates as the related services are performed. The charges under these contracts are generally based on a two-tier rate structure consisting of a daily or monthly fixed fee plus additional fees for each hour flown. These contracts are for varying periods and generally permit the client to cancel the contract before the end of the term. We also provide services to clients on an “ad hoc” basis, which usually entails a shorter notice period and shorter duration. The charges for ad hoc services are based on an hourly rate or a daily or monthly fixed fee plus additional fees for each hour flown. In order to offset potential increases in operating costs, our long-term contracts may provide for periodic increases in the contractual rates charged for our services. We recognize the impact of these rate increases when the criteria outlined above have been met. This generally includes written recognition from the clients that they are in agreement with the amount of the rate escalation. In addition, our standard rate structure is based on fuel costs remaining at or below a predetermined threshold. Fuel costs in excess of this threshold are generally reimbursed by the client. Cost reimbursements from clients are recorded as reimbursable revenue in our consolidated statements of income.
Pension Benefits - See Note 10 for a discussion of our accounting for pension benefits.
Maintenance and Repairs - We charge maintenance and repair costs, including major aircraft component overhaul costs, to earnings as the costs are incurred. However, certain major aircraft components, primarily engines and transmissions, are maintained by third-party vendors under contractual arrangements. Under these agreements, we are charged an agreed amount per hour of flying time. The costs charged under these contractual arrangements are recognized in the period in which the flight hours occur. To the extent that we have not yet been billed for costs incurred under these arrangements, these costs are included in accrued maintenance and repairs on our consolidated balance sheets.
We capitalize betterments and improvements to our aircraft and amortize such costs over the useful lives of the aircraft. Betterments and improvements increase the life or utility of an aircraft.
Taxes - We follow the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon temporary differences between the carrying amount and tax basis of our assets and liabilities and measured using enacted tax rates and laws that will be in effect when the differences are
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
expected to reverse. The effect on deferred income tax assets and liabilities of a change in the tax rates is recognized in income in the period in which the change occurs. We record a valuation reserve when we believe that it is more likely than not that any deferred income tax asset created will not be realized.
In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
We recognize tax benefits attributable to uncertain tax positions when it is more-likely-than-not that a tax position will be sustained upon examination by the authorities. The benefit from a position that has surpassed the more-likely-than-not threshold is the largest amount of benefit that is more than 50% likely to be realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits as a component of provision for income taxes.
Foreign Currency - In preparing our financial statements, we must convert all non-U.S. dollar currencies to U.S. dollars. Balance sheet information is presented based on the exchange rate as of the balance sheet date, and statement of income information is presented based on the average conversion rate for the period. The various components of stockholders’ investment are presented at their historical average exchange rates. The resulting difference after applying the different exchange rates is the cumulative translation adjustment. Foreign currency transaction gains and losses result from the effect of changes in exchange rates on transactions denominated in currencies other than a company’s functional currency, including transactions between consolidated companies. An exception is made where an intercompany loan or advance is deemed to be of a long-term investment nature, in which instance foreign currency transaction gains or losses are included as cumulative translation adjustments and are reported in stockholders’ investment as accumulated other comprehensive gains or losses. Changes in exchange rates could cause significant changes in our financial position and results of operations in the future.
As a result of the changes in exchange rates, we recorded foreign currency transaction losses of approximately $0.1 million and $1.2 million during fiscal years 2011 and 2010, respectively, and gains of approximately $1.4 million during fiscal year 2009.
Derivative Financial Instruments - See Note 7 for a discussion of our accounting for derivative financial instruments.
Incentive Compensation - See Note 10 for a discussion of our accounting for incentive compensation arrangements.
Other Income (Expense), Net - The amounts for fiscal years 2011, 2010 and 2009 primarily include the foreign currency transaction gains and losses described under “Foreign Currency” above. Other income (expense), net in fiscal year 2011 also includes $2.4 million for impairment of our investment in Heliservicio, gains on sales of two joint ventures of $0.6 million and a $2.3 million redemption premium as a result of the early redemption of the 6 1/8% Senior Notes due 2013 (“6 1/8% Senior Notes”). Other income (expense), net in fiscal year 2010 includes $3.9 million of hedging gains resulting from termination of forward contracts on euro-denominated aircraft purchase commitments. Fiscal year 2009 includes a $1.4 million gain related to the sale of 25% of our investment in Heliservicio (see Note 2).
Recent Accounting Pronouncements
On April 1, 2010, we adopted new accounting and disclosure requirements for transfers of financial assets which changed the requirements for derecognizing financial assets and require greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them. In addition, the concept of a qualifying special-purpose entity was eliminated. We have no financial assets subject to these requirements and therefore the adoption of these requirements had no impact on our financial position, cash flows and results of operations.
On April 1, 2010, we adopted an amendment to the accounting and disclosure requirements for the consolidation of VIEs. This amendment changes how a reporting entity identifies a controlling financial interest in a VIE from the quantitative risk and rewards approach to a qualitative approach and requires ongoing assessment of whether an entity is
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
a VIE and whether an interest in a VIE makes the entity the primary beneficiary of the VIE. Our adoption of this amendment did not change our conclusions with regard to VIEs and did not have an impact on our financial position, cash flows and results of operations. The additional disclosure requirements included in this amendment are provided in Note 2.
In January 2010, the Financial Accounting Standards Board (“FASB”) issued a standard to amend disclosure requirements related to fair value measurements by requiring additional disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring fair value measurement disclosures for each “class” of assets and liabilities. This standard also requires separate line item disclosure of all purchases, sales, issuances and settlements of financial instruments valued using significant unobservable inputs (Level 3) in the reconciliation for fair value measurements, in contrast to the existing aggregate presentation as a single line item. Certain disclosure requirements of this standard were effective April 1, 2010, while other disclosure requirements of the standard are effective for financial statements issued in fiscal years beginning after December 15, 2010 and interim periods within those years. Since these amended principles require only additional disclosures concerning fair value measurements, adoption did not and will not impact our financial position, cash flows and results of operations.
In October 2009, the FASB issued application guidance on multiple deliverables in revenue arrangements which is effective for us on April 1, 2011. This update provides further guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting and establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. We have no revenue arrangements subject to this guidance and therefore the adoption of these requirements will have no impact on our financial position, cash flows and results of operations.
Note 2 - ACQUISITIONS AND DISPOSITIONS
Líder Acquisition
On May 26, 2009, we acquired a 42.5% interest in Líder, the largest provider of helicopter and executive aviation services in Brazil, for $179.9 million, including transaction costs incurred in fiscal years 2010 and 2009. The investment is accounted for under the equity method of accounting. In connection with this transaction, Líder purchased one large and four medium aircraft from us for $55.0 million, resulting in a net cash outlay of $124.9 million. For the five years after this acquisition, Bristow Group has the right to provide 100% of Líder’s helicopter lease requirements as well as the right to lease 50% of Líder’s total medium and large helicopter requirements that it would otherwise fulfill through purchase or finance lease.
Additionally, the terms of the purchase agreement include incremental earn-out payments of $8.5 million for each year in the three-year period ending December 31, 2011 and a cumulative earn-out payment up to an additional $27.6 million based on the achievement of growth targets over the three-year period ending December 31, 2011. If fully earned, these payments would total $53.1 million. Based on Líder’s audited results for the years ended December 31, 2010 and 2009, $17.0 million in earn-out payments was not earned, leaving maximum total earn-out payments of $36.1 million. In connection with the acquisition of our interest in Líder, we entered into a shareholders’ agreement that defines certain rights held by shareholders of Líder. Pursuant to the shareholders’ agreement, we are entitled to appoint one of the five members of Líder’s board of directors and our approval is required for certain actions. The shareholders’ agreement also includes provisions relating to the transfer of Líder shares, including provisions that restrict the sale by us of our Líder shares for three years, provide us with a right of first refusal on certain secondary sales and a tag along right for transfers of shares and require our consent for an initial public offering by Líder in specified circumstances.
Bristow Norway Acquisition
On October 31, 2008, our then equity method investee, Norsk Helikopter AS (“Norsk”), distributed 100% of the common stock of its wholly-owned subsidiary, Lufttransport AS, to its controlling shareholder. Concurrently, we acquired from the controlling shareholder the remaining 51% interest in Norsk not already owned by us. As a result of these transactions, we now own 100% of Norsk, which we subsequently renamed Bristow Norway, and consolidate this entity effective October 31, 2008.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The purchase consideration related to our acquisition of the remaining 51% interest in Norsk was $16.3 million, representing the fair value of the 51% interest in Norsk. We also recorded in additional paid-in-capital a change of interest gain of $2.5 million in connection with the disposition of our indirect 49% interest in Lufttransport AS. Also, on October 31, 2008, we made a capital contribution of $30.2 million to 100% owned Norsk.
We allocated $26.1 million, comprised of $16.3 million paid to the controlling shareholder plus $9.8 million of the net liabilities of Norsk, on the date of acquisition, to aircraft, property, identifiable intangibles and goodwill. The following table summarizes the assets and liabilities of Norsk consolidated as of October 31, 2008 (in thousands):
Bristow Norway generated $52.1 million of revenue and $3.8 million of operating income in excess of that earned under what are now intercompany leases during the period from October 31, 2008 to March 31, 2009. Revenue from intercompany leasing has been eliminated in consolidation beginning October 31, 2008.
GOM Asset Sale
On October 30, 2008, we sold 53 small aircraft and related assets operating in the U.S. Gulf of Mexico for $65 million (the “GOM Asset Sale”). The buyer entered into agreements with our former clients that were supported by the aircraft included in the GOM Asset Sale.
The following table summarizes the after-tax gain on the GOM Asset Sale recorded in our consolidated statement of income for fiscal year 2009 (in thousands):
Revenue of $24.8 million was generated from these former clients in fiscal year 2009, representing 10% of revenue for the North America business unit in such period.
Heliservicio and RLR
Effective April 1, 2008, we sold a 25% interest in Heliservicio, an unconsolidated affiliate of ours operating in Mexico, in return for a small aircraft with a value of $2.4 million. As a result of this transaction, we owned a 24% interest in Heliservicio as of March 31, 2011. This transaction resulted in a gain of $1.4 million. We also acquired an additional 21% interest in Rotorwing Leasing Resources, L.L.C. (“RLR”) through contribution of a note receivable of $4.1 million owed by RLR to us and the contribution of the $2.4 million small aircraft to RLR, which increased our ownership interest to 70% in this entity. Collectively, these transactions are referred to as the Mexico Reorganization. The contribution of the note receivable and aircraft to RLR and the receipt of the aircraft for a portion of our interest in Heliservicio are included in non-cash investing activities on our consolidated statement of cash flows for fiscal year 2009.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The RLR portion of the Mexico Reorganization was accounted for in consolidation as a step acquisition and resulted in a step up in the basis of aircraft owned by RLR of $1.2 million, additional goodwill of approximately $0.6 million and the consolidation of RLR debt (see Note 5) on our consolidated balance sheet. The following table summarizes the assets and liabilities of RLR consolidated as of April 1, 2008 (in thousands):
The following summarizes the effect of the Mexico Reorganization on April 1, 2008 (in thousands, except per share amount):
(1) From April 1, 2005 to March 31, 2008 because of uncertainties as to collectability, lease revenue from Heliservicio was recognized as collected. As a result of the collection of past due receivables and the improved financial condition of Heliservicio, revenue from Heliservicio has been recognized on an accrual basis since April 1, 2008.
(2) Represents the impact of earnings from unconsolidated affiliates for previously unrecognized lease revenue from Heliservicio prior to April 1, 2008.
In January 2010, we acquired an additional 29% interest in RLR for $7.6 million and as a result owned 99% of RLR as of March 31, 2011. We have the option to purchase the remaining 1% of RLR on January 18, 2015, or earlier if the current 1% interest holder ceases to be a guarantor of 30% of RLR’s outstanding debt to Whitney National Bank. Additionally, in January and February 2010, we and our partner contributed $4.6 million and $14.5 million, respectively, to Heliservicio. This contribution did not change our ownership percentage in Heliservicio. RLR has leased all of its aircraft to Heliservicio. As of December 31, 2009, Heliservicio owed RLR and other Bristow Group subsidiaries $29.7 million. Subsequent to the January 2010 contributions to Heliservicio, Heliservicio settled a portion of the amounts due to us and our partner for services provided to Heliservicio in prior periods. Heliservicio had remaining outstanding amounts due to us totaling $12.8 million as of March 31, 2010 of which we provided an allowance for doubtful accounts of $4.6 million ($0.9 million of which related to disputed invoices).
On January 14, 2011, we entered into an Equity Interest Purchase and Sale Agreement (the “Equity Agreement”) with Controladora De Servicios Aeronauticos, S.A. de C.V. (“CICSA”) and Rotorwing Financial Services, Inc. (“RFS”), the owner of the other 76% of Heliservicio and the owner of the other 1% of RLR, respectively. Through this agreement, we and our partners agreed that CICSA would purchase the remaining 24% interest in Heliservicio. Additionally,
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
concurrent with the sale of our interest in Heliservicio, we would execute our option to purchase the 1% interest in RLR owned by RFS. We anticipate this transaction will close by June 30, 2011. This transaction will result in us having no ownership interest in Heliservicio and full ownership of RLR. Our ownership interest in Heliservicio will transfer to CICSA for no proceeds, resulting in the impairment in Heliservicio of our investment of $2.4 million, which we have recognized as of March 31, 2011 (see discussion in Note 1). We will acquire the remaining 1% interest in RLR for $0.3 million.
The Equity Agreement includes provisions for the settlement of past due amounts (including past due accounts receivable) due from Heliservicio to us and settlement of other matters. As part of this agreement, on January 31, 2011, we received a net payment from Heliservicio of $2.7 million that was applied to outstanding accounts receivable and wrote-off $5.6 million of previously reserved accounts receivable due from Heliservicio. The Equity Agreement also provides for our release from the guarantees. We were fully released from these guarantees on March 31, 2011. We will continue to lease aircraft from RLR and other consolidated subsidiaries to Heliservicio under revised lease agreements. We currently have approximately $22.3 million of inventory supporting the fleet of aircraft operated by Heliservicio in Mexico, of which approximately $10.3 million is in Mexico with the remainder in transit to Mexico or at our maintenance facilities in the U.S. We expect to recover the value of this inventory either through use in Heliservicio’s operations, consumption elsewhere in the Bristow Group fleet, in support of other operator’s fleets or through sale of the inventory to third parties. However, if certain events do not occur as expected, it is possible that a partial impairment of the inventory may be necessary. We estimate the range of potential loss to be $5 million to $10 million.
Note 3 - VARIABLE INTEREST ENTITIES AND OTHER INVESTMENTS IN SIGNIFICANT AFFILIATES
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. If we determine that we have operating power and the obligation to absorb losses or receive benefits, we consolidate the VIE as the primary beneficiary, and if not, we do not consolidate.
As of March 31, 2011, we have three VIEs of which we are the primary beneficiary and were involved in one VIE of which we are not the primary beneficiary.
VIEs of which we are the primary beneficiary
Bristow Aviation Holdings Limited - We own 49% of Bristow Aviation Holdings Limited’s (“Bristow Aviation”) common stock and a significant amount of its subordinated debt. Bristow Aviation is incorporated in England and holds all of the outstanding shares in Bristow Helicopter Group Limited (“Bristow Helicopters”). Its subsidiaries provide helicopter services to clients primarily in the U.K, Norway, Australia and Nigeria. Bristow Aviation is organized with three different classes of ordinary shares having disproportionate voting rights. The Company, Caledonia Investments plc and its subsidiary, Caledonia Industrial & Services Limited (collectively, “Caledonia”) and a European Union investor (the “E.U. Investor”) own 49%, 46% and 5%, respectively, of Bristow Aviation’s total outstanding ordinary shares, although Caledonia has voting control over the E.U. Investor’s shares.
In addition to our ownership of 49% of Bristow Aviation’s outstanding ordinary shares, in May 2004, we acquired eight million shares of deferred stock, essentially a subordinated class of stock with no voting rights, from Bristow Aviation for £1 per share ($14.4 million in total). We also have £91.0 million ($145.9 million) principal amount of subordinated unsecured loan stock (debt) of Bristow Aviation bearing interest at an annual rate of 13.5% and payable semi-annually. Payment of interest on such debt has been deferred since its incurrence in 1996. Deferred interest accrues at an annual rate of 13.5% and aggregated $843.7 million as of March 31, 2011.
The Company, Caledonia, the E.U. Investor and Bristow Aviation have entered into a shareholder agreement respecting, among other things, the composition of the board of directors of Bristow Aviation. On matters coming before Bristow Aviation’s board, Caledonia’s representatives have a total of three votes and the two other directors have one vote each. In addition, Caledonia has the right to nominate two persons to our board of directors and to replace any such directors so nominated.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Caledonia, the Company and the E.U. Investor also have entered into a put/call agreement under which, upon giving specified prior notice, we have the right to buy all the Bristow Aviation shares held by Caledonia and the E.U. Investor, who, in turn, each have the right to require us to purchase such shares. Under current English law, we would be required, in order for Bristow Aviation to retain its operating license, to find a qualified E.U. investor to own any Bristow Aviation shares we have the right to acquire under the put/call agreement. The only restriction under the put/call agreement limiting our ability to exercise the put/call option is a requirement to consult with the Civil Aviation Authority (“CAA”) in the U.K. regarding the suitability of the new holder of the Bristow Aviation shares. The put/call agreement does not contain any provisions should the CAA not approve the new E.U. investor. However, we would work diligently to find a E.U. investor suitable to the CAA. The amount by which we could purchase the shares of the other investors holding 51% of the equity of Bristow Aviation is fixed under the terms of the call option, and we have reflected this amount on our consolidated balance sheets as noncontrolling interest.
Furthermore, the call option provides a mechanism whereby the economic risk for the other investors is limited should the financial condition of Bristow Aviation deteriorate. The call option price is the nominal value of the ordinary shares held by the noncontrolling shareholders (£1.0 million as of March 31, 2011) plus an annual guaranteed rate of return less any prepayments of such call option price and any dividends paid on the shares concerned. We can elect to pre-pay the guaranteed return element of the call option price wholly or in part without exercising the call option. No dividends have been paid. We have accrued the annual return due to the other shareholders at a rate of sterling LIBOR plus 3% (prior to May 2004, the rate was fixed at 12%) by recognizing noncontrolling interest expense in our consolidated statements of income, with a corresponding increase in noncontrolling interest on our consolidated balance sheets. Prepayments of the guaranteed return element of the call option are reflected as a reduction in noncontrolling interest on our consolidated balance sheets. The other investors have an option to put their shares in Bristow Aviation to us. The put option price is calculated in the same way as the call option price except that the guaranteed rate for the period to April 2004 was 10% per annum. If the put option is exercised, any pre-payments of the call option price are set off against the put option price.
Changes in the balance for the noncontrolling interest associated with Bristow Aviation are as follows (in thousands):
Bristow Aviation and its subsidiaries are exposed to similar operational risks and are therefore monitored and evaluated on a similar basis by management. Accordingly, the financial information reflected on our consolidated balance sheets and statements of income for Bristow Aviation and subsidiaries is presented in the aggregate, including intercompany amounts with other consolidated entities, as follows (in thousands):
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Bristow Helicopters Nigeria Ltd. - Bristow Helicopters Nigeria Ltd. (“BHNL”) is a joint venture in Nigeria with local partners, in which we own an interest of 40%. BHNL provides helicopter services to clients in Nigeria.
In order to have a presence in the Nigerian market, we were required to identify local citizens to participate in the ownership of entities domiciled in the region. However, these owners do not have extensive knowledge of the aviation industry and have historically deferred to our expertise in the overall management and day-to-day operation of BHNL. Thus, because we have the power to direct the most significant activities affecting the ongoing success of BHNL and hold a variable interest in the entity in the form of its equity investment, we consolidate BHNL as the primary beneficiary.
BHNL is an indirect subsidiary of Bristow Aviation; therefore, financial information for this entity is included within the amounts for Bristow Aviation and its subsidiaries presented above.
Pan African Airlines Nigeria Ltd. - Pan African Airlines Nigeria Ltd. (“PAAN”) is a joint venture in Nigeria with local partners, in which we own an interest of 50.17%. PAAN provides helicopter services to clients in Nigeria.
The activities that most significantly impact PAAN’s economic performance relate to the day-to-day operation of the company (including identifying and contracting with clients), setting the operating and capital budgets, and strategic decisions regarding the potential expansion of the company’s operations. Throughout the history of the PAAN, through its board seats and managing director, we have directed the key operational decisions of PAAN (without objection from the other board members). As we have the power to direct the significant activities of PAAN, we consolidate the entity as the primary beneficiary. However, as we own a majority interest in PAAN, the separate presentation of financial information for PAAN is not required.
VIEs of which we are not the primary beneficiary
Heliservicio - As of March 31, 2011, we owned a 24% interest in Heliservicio, a Mexican corporation, which provides onshore helicopter services to the Mexican Federal Electric Commission and offshore helicopter transportation services to Petróleos Mexicanos and other companies on a contract and ad hoc basis. Heliservicio leases 21 aircraft from us and leases 13 aircraft from third parties to provide helicopter services to its clients. See Note 2 for discussion of the pending sale of our interest in Heliservicio.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The activities that most significantly impact Heliservicio’s economic performance relate to (a) the day-to-day operation of the company, including decisions relating to hiring/firing personnel, where and when to fly, and what clients to fly for and extend credit to; and (b) strategic decisions regarding the potential expansion of the company’s operations. The other partner in Heliservicio has the ability to control these decisions through its majority board representation. As such, we have determined that we would not be the primary beneficiary of Heliservicio as we do not have the power to direct the most significant activities which affect the economic success of the entity. Accordingly, we have accounted for our 24% interest in Heliservicio as an equity method investment.
The following table summarizes the amounts recorded for this nonconsolidated VIE and the related off-balance sheet guarantees as of March 31, 2011 and 2010 (in thousands):
(1) Amounts presented herein include unbilled accounts receivable of $2.0 million and $3.8 million as of March 31, 2011 and 2010, respectively. The carrying amounts presented are net of allowances for doubtful accounts of zero and $4.6 million as of March 31, 2011 and 2010, respectively.
(2) As previously discussed, we anticipate the sale of our interest in Heliservicio to close by June 30, 2011. This transaction will result in us having no ownership in Heliservicio. Our ownership interest in Heliservicio will transfer to CICSA for no proceeds, resulting in the impairment of our investment of $2.4 million which we have recognized as of March 31, 2011.
(3) We had received a counter-guarantee from our partner in Heliservicio for 76% ($20.0 million as of March 31, 2010) of these amounts, which is not reflected in the table above. This guarantee was transferred in full to our partner in Heliservicio, CICSA, on March 31, 2011.
We anticipate the sale of our interest in Heliservicio to close by June 30, 2011. This transaction will result in us having no ownership of Heliservicio. See discussion of this transaction in Note 2.
Other Significant Affiliates - Consolidated
In addition to the VIEs discussed above, we consolidate the following less than 100% owned entities:
Aviashelf Aviation Co. - On July 15, 2004, Bristow Aviation, through certain wholly-owned subsidiaries, acquired an interest in an operation in Russia in an arm’s-length transaction with previously unrelated parties. This transaction included the purchase of a 48.5% interest in Aviashelf Aviation Co. (“Aviashelf”), a Russian helicopter company that owns five large twin-engine helicopters. Simultaneously, through two newly formed 51%-owned U.K. joint venture companies, Bristow Helicopters Leasing Ltd. (“BHLL”) and Sakhalin Bristow Air Services Ltd. (“SBAS”), Bristow Aviation purchased two large twin-engine helicopters and two fixed-wing aircraft (which have subsequently been sold). These two U.K. companies lease aircraft to Aviashelf who holds the contracts for our Russian operations. The acquisition was accounted for under the purchase method, and we have consolidated the results of Aviashelf from the date of acquisition. Aviashelf has been consolidated based on the ability of certain consolidated subsidiaries of Bristow Aviation to control the vote on a majority of the shares of Aviashelf, rights to manage the day to day operations of the company which were granted under a shareholders’ agreement, and our ability to acquire an additional 8.5% interest in Aviashelf under a put/call option agreement.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On May 25, 2007, we acquired an additional 9% interest in each of BHLL and SBAS for $300,000 in accordance with a put/call option agreement. In addition, on May 25, 2007, we entered into an agreement for grant of a new call option under which we can acquire an additional 8.5% interest in Aviashelf. This agreement replaces the previous put/call option agreement.
RLR - As of March 31, 2011, we owned a 99% interest in RLR, a Louisiana limited liability company. RLR owns seven aircraft and leases three aircraft from our other consolidated affiliates, all of which it leases to Heliservicio. We consolidated RLR effective April 1, 2008 and previously accounted for our investment in this entity as an equity method investment. See Note 2 for discussion of the Mexico Reorganization.
During September 2007, we and the other RLR shareholder each contributed additional capital of approximately $2.0 million to RLR, and we loaned RLR $4.1 million under a three-year term loan arrangement. The funds were used by RLR to purchase an aircraft delivered in September 2007, which was leased to Heliservicio. During fiscal year 2009, we contributed the $4.1 million note receivable to RLR in connection with the Mexico Reorganization.
We will acquire the remaining 1% interest in RLR for $0.3 million. See further discussion of this transaction in Note 2.
Other Significant Affiliates - Unconsolidated
We also have an investment in Petroleum Air Services (“PAS”), an unconsolidated affiliate that is accounted for under the cost method as we are unable to exert significant influence over its operations. We also have investments in several unconsolidated affiliates that we account for under the equity method which are FBS Limited (“FBS”), FB Heliservices Limited (“FBH”), FB Leasing Limited (“FBL”), collectively referred to as the FB Entities, Líder and Heliservicio. Heliservicio, Líder and PAS are principally involved in the provision of helicopter transportation services to the offshore oil and gas industry, and the FB Entities’ activities are described in further detail below. Heliservicio is a VIE of which we are not the primary beneficiary and as such is described above.
PAS - In Egypt, we operate through our 25% interest in PAS, an Egyptian corporation. PAS provides helicopter and fixed wing transportation to the offshore energy industry. Additionally, spare fixed-wing capacity is chartered to tourism operators. PAS owns 45 aircraft.
FB Entities - We own a 50% interest in each of the FB Entities, U.K. corporations which principally provide pilot training, maintenance and support services to the British military under an agreement that runs through March 31, 2012. FBS and FBL own and operate a total of 63 aircraft.
The FB Entities originated in 1996 when Bristow Aviation was awarded a contract to provide pilot training and maintenance services to the Defence Helicopter Flying School, a then newly established training school for all branches of the British military, under a fifteen-year contract valued at approximately £500 million over the full term. FBS purchased and specially modified 47 aircraft dedicated to conducting these training activities, which began in May 1997. Bristow Aviation and its partner have given joint and several guarantees of up to £15 million ($24.0 million) related to the performance of this contract. Bristow Aviation has also guaranteed repayment of up to £10 million ($16.0 million) of FBS’s outstanding debt obligation, which is primarily collateralized by the 47 aircraft discussed above.
Líder - In Brazil, we own a 42.5% interest in Líder, a provider of helicopter and executive aviation services. Líder’s fleet has 47 helicopters and 28 fixed wing aircraft. Líder also leases six aircraft from us and one aircraft from a third party to provide helicopter services to its clients.
Other - Historically, in addition to the expansion of our business through purchases of new and used aircraft, we have also established new joint ventures with local partners or purchased significant ownership interests in companies with ongoing helicopter operations, particularly in countries where we have no operations or our operations are limited in scope, and we continue to evaluate similar opportunities which could enhance our operations.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our percentage ownership and investment balances for the unconsolidated affiliates are as follows:
Earnings from unconsolidated affiliates were as follows (in thousands):
(1) As discussed in Note 2, we obtained majority ownership of Norsk and RLR in fiscal year 2009 and began consolidating these entities. Prior to that date, we owned 49% of both Norsk and RLR and accounted for these investments under the equity method.
We received $11.5 million, $11.3 million and $16.5 million of dividends from our investments accounted for on the equity method for fiscal years 2011, 2010 and 2009, respectively.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of combined financial information of our unconsolidated affiliates accounted for under the equity method is set forth below (in thousands):
Note 4 - PROPERTY AND EQUIPMENT
During fiscal year 2011, we received proceeds of $20.1 million from the disposal of 16 aircraft and certain other equipment, which together resulted in a net gain of $10.2 million. Additionally, we received proceeds from insurance recoveries of $7.3 million. A gain of $4.2 million relating to this insurance recovery was recorded in fiscal year 2010. We recorded an impairment charge during fiscal year 2011 of $5.3 million included in depreciation and amortization expense related to expenditures made primarily in fiscal years 2010 and 2009 to upgrade an internal software system, as it is no longer probable that this system upgrade will be completed. These expenditures had been included in construction in progress. Additionally, we received $4.0 million in deposit for aircraft and inventory held for sale as of March 31, 2011 and will recognize a gain of $1.4 million during the three months ended June 30, 2011 upon completion of the sale of these assets.
During fiscal year 2010, we received proceeds of $78.7 million from the disposal of 22 aircraft and certain other equipment, which together resulted in a net gain of $14.5 million, and recorded a $4.2 million gain related to insurance recoveries as discussed above.
In addition to the proceeds from the GOM Asset Sale discussed in Note 2, during fiscal year 2009, we received proceeds of $36.9 million from the disposal of 13 aircraft and certain other equipment, resulting in a net gain of $9.5 million. Also during fiscal year 2009, we recorded a $0.4 million loss related to non-recoverable deductibles under our insurance policies for hurricane damage.
As of March 31, 2011 and 2010, prepaid expense and other current assets included $31.6 million and $16.5 million, respectively, associated with 16 and 15 aircraft, respectively, classified as held for sale. We recorded an impairment charge of $1.5 million included in depreciation and amortization expense to reduce the carrying value of three aircraft held for sale in fiscal year 2011. No impairment charges were recorded in fiscal years 2010 and 2009 to reduce the carrying value of aircraft to their fair values in those periods.
Note 5 - DEBT
Debt as of March 31, 2011 and 2010 consisted of the following (in thousands):
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7 1/2% Senior Notes due 2017 - On June 13 and November 13, 2007, we completed offerings totaling $350 million of 7 1/2% Senior Notes due 2017 (the “7 1/2% Senior Notes”). $50 million of the notes were issued for a premium of $0.6 million, which is being amortized over the life of the notes as a reduction of interest expense. These notes are unsecured senior obligations and rank effectively junior in right of payment to all of the Company’s existing and future secured indebtedness, rank equal in right of payment with our existing and future senior unsecured indebtedness and rank senior in right of payment to any of our existing and future subordinated indebtedness. The 7 1/2% Senior Notes are guaranteed by certain of our U.S. subsidiaries (the “Guarantor Subsidiaries”), which are the same subsidiaries that guaranteed the 6 1/8% Senior Notes due 2013 and are guarantors of the 3% Convertible Senior Notes (discussed below). The indenture for the 7 1/2% Senior Notes includes restrictive covenants which limit, among other things, our ability to incur additional debt, issue disqualified stock, pay dividends, repurchase stock, invest in other entities, sell assets, incur additional liens or security, merge or consolidate the Company and enter into transactions with affiliates. Interest on the 7 1/2% Senior Notes is paid on March 15 and September 15 of each year, beginning on September 15, 2007, and the 7 1/2% Senior Notes mature on September 15, 2017. The 7 1/2% Senior Notes are redeemable at our option; however, any payment or re-financing of these notes prior to September 15, 2012 is subject to a make-whole premium, and any payment or re-financing is subject to a prepayment premium of 103.75%, 102.50% and 101.25% if redeemed during the twelve-month period beginning on September 15 of 2012, 2013 and 2014, respectively, after which the 7 1/2% Senior Notes are redeemable at par.
Pursuant to a registration rights agreement with the holders of our 7 1/2% Senior Notes, we exchanged their notes for publicly registered notes with identical terms on March 3, 2008.
Revolving Credit Facility and Term Loan - In November 2010, we entered into a $375 million amended and restated revolving credit and term loan agreement (“Amended and Restated Credit Agreement”), which includes a five-year, $175 million revolving credit facility (with a subfacility of $30 million for letters of credit) (“Revolving Credit Facility”) and a five-year, $200 million term loan (“$200 Million Term Loan”) (together referred to as our “Credit Facilities”). The Credit Facilities replace our syndicated senior secured credit facilities which consisted of a $100 million revolving credit facility (with a subfacility of $25 million for letters of credit) and a $25 million letter of credit facility (our “Old Credit Facilities). Proceeds from the $200 Million Term Loan and the borrowings under the Revolving Credit Facility were used primarily to redeem the 6 1/8% Senior Notes as described below. Borrowings under the Revolving Credit Facility are due on November 22, 2015. Borrowings under the $200 Million Term Loan are payable in quarterly installments commencing on December 31, 2011, with the aggregate unpaid principal balance of $130 million due on November 22, 2015. We incurred $3.3 million of deferred financing costs which are included in other assets as of March 31, 2011 and will be amortized to interest expense over five years.
Borrowings under the Revolving Credit Facility and $200 Million Term Loan bear interest at a rate equal to, at our option, Base Rate or LIBOR plus a borrowing margin ranging from 0.625% to 2.875% based on our leverage ratio. “Base Rate” means the higher of the per annum rate the administrative agent publicly announces as its prime lending rate in effect from time to time or the Federal Funds rate plus 0.50% per annum. The borrowing margin is the greater of 2.50% per annum or the appropriate percentage based on the leverage ratio until delivery of the financial statements for the three months ended June 30, 2011. The interest rate was 2.75% as of March 31, 2011.
Obligations under the Amended and Restated Credit Agreement are guaranteed the Guarantor Subsidiaries and secured by the U.S. cash and cash equivalents, accounts receivable, inventories, non-aircraft equipment, prepaid expenses and other current assets, intangible assets and intercompany promissory notes held by Bristow Group Inc. and the Guarantor Subsidiaries, and 100% and 65% of the capital stock of certain of our principal domestic and foreign subsidiaries, respectively. In addition, the Amended and Restated Credit Agreement includes customary covenants, including certain financial covenants and restrictions on our ability to enter into certain transactions, including those that could result in the incurrence of additional indebtedness and liens; the making of loans, guarantees or investments; sale of assets; payments of dividends or repurchases of our capital stock; and entering into transactions with affiliates.
As of March 31, 2011, we had $0.6 million in letters of credit and $30.0 million in loans outstanding under the Revolving Credit Facility.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6 1/8% Senior Notes due 2013 - On June 20, 2003, we completed an offering of $230 million 6 1/8% Senior Notes due 2013 (the “6 1/8% Senior Notes”). These notes were unsecured senior obligations and ranked effectively junior in right of payment to all the Company’s existing and future secured indebtedness, ranked equal in right of payment with our existing and future senior unsecured indebtedness and ranked senior in right of payment to any of our existing and future subordinated indebtedness. The 6 1/8% Senior Notes were guaranteed by the Guarantor Subsidiaries and scheduled to mature on June 15, 2013. On December 23, 2010, we redeemed the 6 1/8% Senior Notes and incurred a $2.3 million redemption premium, which is included in other income (expense), net for fiscal year 2011. Additionally, we recorded non-cash expense of $2.4 million for unamortized debt issuance cost, which is included in interest expense for fiscal year 2011.
3% Convertible Senior Notes due 2038 - In June 2008, we completed the sale of $115 million of 3% Convertible Senior Notes. These notes are unsecured senior obligations and rank effectively junior in right of payment to all the Company’s existing and future secured indebtedness, rank equal in right of payment to all of the Company’s existing and future unsecured senior debt and rank senior in right of payment to any of our existing and future subordinated indebtedness. The 3% Convertible Senior Notes are guaranteed by the Guarantor Subsidiaries. Interest is paid on the 3% Convertible Senior Notes on June 15 and December 15 of each year, beginning on December 15, 2008. The notes are convertible, under certain circumstances, using a net share settlement process, into a combination of cash and our common stock (“Common Stock”). In general, upon conversion of a note, the holder will receive cash equal to the principal amount of the note and Common Stock to the extent of the note’s conversion value in excess of such principal amount. The following table sets forth the stock price and additional shares by which the applicable conversion rate will be increased upon conversion, subject to the terms discussed above.
The notes will mature on June 15, 2038 and may not be redeemed by us prior to June 15, 2015, after which they may be redeemed at 100% of principal amount plus accrued and unpaid interest. Holders of the 3% Convertible Senior Notes may require us to repurchase any or all of their notes for cash on June 15, 2015, 2020, 2025, 2030 and 2035, or in the event of a fundamental change, as defined in the indenture for the 3% Convertible Senior Notes (including the delisting of our Common Stock and certain change of control transactions), at a price equal to 100% of the principal amount plus accrued and unpaid interest. If a holder elects to convert its notes in connection with certain fundamental changes occurring prior to June 15, 2015, we will increase the applicable conversion rate by a specified number of additional shares of Common Stock. As of March 31, 2011, the if-converted value of the 3% Convertible Senior Notes did not exceed the principal balance.
Accounting standards require that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be accounted for with a liability component based on the fair value of a similar nonconvertible debt instrument and an equity component based on the excess of the initial proceeds from the convertible debt instrument over the liability component. Such excess represents proceeds related to the conversion option and is recorded as additional paid-in capital. The liability is recorded at a discount, which is then amortized as additional non-cash interest expense over the convertible debt instrument’s remaining life. The balances of the debt and equity components as of each period presented are as follows (in thousands):
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The remaining debt discount is being amortized into interest expense over the expected four year remaining life of the 3% Convertible Senior Notes using the effective interest rate. The effective interest rate for fiscal years 2011 and 2010 was 6.9%. Interest expense related to our 3% Convertible Senior Notes for fiscal years 2011 and 2010 was as follows (in thousands):
Bristow Norway Debt and Overdraft Facility - Bristow Norway had two term loans with a Norwegian bank that were used to purchase two helicopters. In August 2009, these two term loans were repaid in the amounts of Norwegian kroner (“NOK”) 9.5 million ($1.6 million) and NOK 26.0 million ($4.3 million). A third term loan was used to purchase a third helicopter and was denominated in U.S. dollars prior to converting to NOK in August 2009. In October 2010, this third term loan was refinanced for three years at a fixed rate of approximately 5% per annum, payable in quarterly installments of NOK 1.7 million ($0.3 million as of March 31, 2011), with the balloon payment of NOK 47.9 million ($8.7 million as of March 31, 2011) due at maturity. As of March 31, 2011, this term loan had a balance of NOK 63.4 million ($11.5 million). This outstanding term loan is secured by the helicopter and certain receivables. Additionally, Bristow Norway has an overdraft facility of NOK 5 million ($0.9 million) with a Norwegian bank. No borrowings were outstanding under this overdraft facility at March 31, 2011. Borrowings under the overdraft facility bear interest at a reference rate plus a margin and this overdraft facility can be terminated by either party upon ten banking days’ written notice.
RLR Note - In July 2003, RLR financed 90% of the purchase price of six aircraft with a five-year $31.8 million 5.5% fixed interest rate term loan (the “RLR Note”) with a bank. The loan was originally payable in 59 equal monthly payments of principal and interest of $0.3 million beginning August 11, 2003, with the entire unpaid balance of principal and interest being payable on July 11, 2008, and was secured by the six aircraft. We refinanced the outstanding balance of the note ($17.9 million) in July 2008 through a five-year term loan at a fixed interest rate of 5.5% and monthly payments of $0.2 million. As part of the refinancing, the security interest in one of the six aircraft was released, but remains on the other five aircraft.
Term Loans - In May 2007, a consolidated subsidiary completed an $18.7 million term loan financing, the proceeds of which were used to purchase two aircraft in May and July 2007. This financing and aircraft purchase did not involve the transfer of cash. The term loan was repayable in quarterly installments with the first payment of $0.3 million in June 2007, followed by thirty-two consecutive quarterly principal payments of $0.6 million, the first of which was paid in September 2007. Interest was payable on the term loan at LIBOR plus a margin of 1.25% (about 1.54% as of March 31, 2010). The term loan was secured by the two aircraft, and we provided a parent guarantee of the loan.
In May 2010, we repaid $5.9 million of the term loan early. The quarterly principal payments of $0.6 million were reduced to $0.3 million, with the final principal payment remaining due on June 30, 2015. On January 21, 2011, the balance outstanding of the term loan was repaid in full.
Other debt - On July 15, 2010, we borrowed $8.1 million from Whitney National Bank, which was secured by one aircraft, and was subsequently repaid on December 15, 2010.
In April 2010, Aviashelf entered into a short-term loan with Bank Iturup for 60 million Russian rubles ($2.0 million) at a 19% interest rate that matures on September 30, 2011.
Other Matters - Aggregate annual maturities (which excludes unamortized premium of $0.4 million and unamortized discount of $15.8 million) for all debt for the next five fiscal years and thereafter are as follows (in thousands):
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest paid in fiscal years 2011, 2010, and 2009 was $47.7 million, $45.3 million and $44.1 million, respectively. Capitalized interest was $6.0 million, $8.0 million and $14.5 million in fiscal years 2011, 2010, and 2009, respectively.
Note 6 - FAIR VALUE DISCLOSURES
Assets and liabilities subject to fair value measurement are categorized into one of three different levels depending on the observability of the inputs employed in the measurement, as follows:
•
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following table summarizes the financial instruments we had as of March 31, 2011, which are valued at fair value on a recurring basis (in thousands):
The rabbi trust investments consist of money market and mutual funds whose fair value is based on quoted prices in active markets for identical assets, and are designated as Level 1 within the valuation hierarchy. The rabbi trust holds investments related to our non-qualified deferred compensation plan for our senior executives as discussed in Note 10. The methods and assumptions used to estimate the fair values of the derivative liabilities in the table above include the mark-to-market statements from the counterparties, which can be validated using modeling techniques that include market inputs, such as publicly available forward market rates, and are designated as Level 2 within the valuation hierarchy.
The fair value of our financial instruments has been estimated in accordance with the accounting standard regarding fair value. The fair value of our fixed rate long-term debt is estimated based on quoted market prices. The carrying and fair value of our long-term debt, including the current portion, are as follows (in thousands):
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair values of our cash and cash equivalents, accounts receivable and accounts payable approximate their carrying value due to the short-term nature of these items.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
From time to time we enter into forward exchange contracts as a hedge against foreign currency asset and liability commitments and anticipated transaction exposures, including intercompany purchases. All derivatives are recognized as assets or liabilities and measured at fair value. Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding effect on earnings. We do not use financial instruments for trading or speculative purposes.
The designation of a derivative instrument as a hedge and its ability to meet relevant hedge accounting criteria determines how the change in fair value of the derivative instrument will be reflected in the consolidated financial statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the hedge’s underlying cash flows or fair value and the documentation requirements of the accounting standard for derivative instruments and hedging activities are fulfilled at the time we enter into the derivative contract. A hedge is designated as a cash flow hedge, fair value hedge, or a net investment in foreign operations hedge based on the exposure being hedged. The asset or liability value of the derivative will change in tandem with its fair value. Changes in fair value, for the effective portion of qualifying hedges, are recorded in accumulated other comprehensive loss. The derivative’s gain or loss is released from accumulated other comprehensive loss to match the timing of the effect on earnings of the hedge’s underlying cash flows.
We review the effectiveness of our hedging instruments on a quarterly basis. We recognize current period hedge ineffectiveness immediately in earnings, and we discontinue hedge accounting for any hedge that we no longer consider to be highly effective. Changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting are recognized in current period earnings. Upon termination of cash flow hedges, we release gains and losses from accumulated other comprehensive loss based on the timing of the underlying cash flows, unless the termination results from the failure of the intended transaction to occur in the expected timeframe. Such an untimely occurrence requires us to immediately recognize in earnings gains and losses previously recorded in accumulated other comprehensive loss.
None of our derivative instruments contain credit-risk-related contingent features. Counterparties to our derivative contracts are high credit quality financial institutions.
We entered into forward contracts during fiscal years 2011, 2010 and 2009 to mitigate our exposure to exchange rate fluctuations on our euro-denominated aircraft purchase commitments, which have been designated as cash flow hedges for accounting purposes. We had no open forward contracts relating to euro-denominated aircraft purchase commitments as of March 31, 2010. We had six open forward contracts as of March 31, 2011, which had rates ranging from 1.3153 U.S. dollars per euro to 1.3267 U.S. dollars per euro. These contracts had an underlying nominal value of between 5,000,000 and 7,000,000, for a total of 34,300,871, with the first contract expiring in May 2011 and the last in June 2011. As of March 31, 2011, the fair value of these contracts was an asset of $3.3 million. As of March 31, 2011, an unrecognized gain of $2.1 million, net of tax, on these contracts is included as a component of accumulated other comprehensive loss. The derivative asset is included in prepaid expenses and other current assets in our consolidated balance sheets. No gains or losses relating to forward contracts are recognized in our consolidated statements of income for fiscal year 2011; however, we recognized gains of $3.9 million for fiscal year 2010 in our consolidated statements of income as a component of other income (expense), net relating to hedges as a result of early termination of forward contracts on euro-denominated aircraft purchase commitments.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the fiscal year 2010, we entered into participating forward derivative contracts to mitigate our exposure to exchange rate fluctuations on our euro-denominated third party maintenance contracts. As of March 31, 2010, the fair value of the three open contracts was a liability of $0.1 million with strike/call prices ranging from 0.9183 British pound sterling per euro to 0.9249 British pound sterling per euro and underlying notional values totaling 2,850,000, expiring in June 2010. The related strike/put prices and the expiration dates were the same as the calls but have underlying notional values totaling 1,425,000. These contracts were designated as hedges for accounting purposes, and as such, changes to the fair value of the derivative instruments were recorded in accumulated other comprehensive loss as if the hedge was deemed to be effective.
Information on the location and amounts of derivative gains and losses in the consolidated statement of income for the year ended March 31, 2011 is as follows (in thousands):
Information on the location and amounts of derivative gains and losses in the consolidated statement of income for the year ended March 31, 2010 is as follows (in thousands):
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Information on the location and amounts of derivative gains and losses in the consolidated statement of income for the year ended March 31, 2009 is as follows (in thousands):
Note 8 - COMMITMENTS AND CONTINGENCIES
Aircraft Purchase Contracts - As shown in the table below, we expect to make additional capital expenditures over the next five fiscal years to purchase additional aircraft. As of March 31, 2011 we had six aircraft on order and options to acquire an additional 31 aircraft. Although a similar number of our existing aircraft may be sold during the same period, the additional aircraft on order will provide incremental fleet capacity in terms of revenue and operating income.
(1) Signed client contracts are currently in place for all of these aircraft.
(2) Includes progress payments on aircraft scheduled to be delivered in future periods.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following chart presents an analysis of our aircraft orders and options during fiscal years 2011, 2010 and 2009:
(1) Includes one and ten training aircraft delivered during fiscal years 2010 and 2009, respectively. There were no training aircraft delivered in fiscal year 2011.
Sale and Leaseback Financing - On December 30, 2005, we sold nine aircraft for $68.6 million in aggregate to a subsidiary of General Electric Capital Corporation (“GECC”), and then leased back each of the nine aircraft under separate operating leases with a base term of ten years expiring in January 2016. On September 1, 2008, we refinanced the nine leases with GECC, which had the effect of extending the lease term through August 2023. Each “net” lease agreement requires us to be responsible for all operating costs. Rent payments under each lease are payable monthly and total $4.2 million and $4.8 million annually during the first 120 months and next 60 months, respectively, for all nine leases in aggregate. Each lease has a purchase option upon expiration and an early purchase option at 120 months (August 2018). The early purchase option price for the nine aircraft at 120 months is approximately $49 million in aggregate. There was a deferred gain on the sale of the aircraft in 2005 in the amount of $10.8 million in aggregate. The deferred gain was originally being amortized as a reduction in lease expense over the original 10 year lease term in proportion to the rent payments. As a result of the refinancing, the unamortized deferred gain of $7.9 million is being recognized over an additional 7 years and 8 months. The leases contain terms customary in transactions of this type, including provisions that allow the lessor to repossess the aircraft and require the lessee to pay a stipulated amount if the lessee defaults on its obligations under the leases. The approximate net present value of the lease payments as of March 31, 2011 is $39.6 million.
Operating Leases - We have noncancelable operating leases in connection with the lease of certain equipment, land and facilities, including the leases with a subsidiary of GECC discussed above. Rental expense incurred under all operating leases, except for those with terms of a month or less that were not renewed, was $28.6 million, $27.3 million and $22.5 million in fiscal years 2011, 2010 and 2009, respectively. As of March 31, 2011, aggregate future payments under all noncancelable operating leases that have initial or remaining terms in excess of one year are as follows (in thousands):
Employee Agreements - Approximately 56% of our employees are represented by collective bargaining agreements and/or unions. These agreements generally include annual escalations of up to 6%. Periodically, certain groups of our employees who are not covered by a collective bargaining agreement consider entering into such an agreement.
During the fiscal year 2010, we recognized approximately $8.3 million in compensation expense (inclusive of the expenses recorded for the acceleration of unvested stock options and restricted stock) related to the work force reductions and the separation between the Company and five officers.
Nigerian Litigation - In November 2005, two of our consolidated foreign affiliates were named in a lawsuit filed with the High Court of Lagos State, Nigeria by Mr. Benneth Osita Onwubalili and his affiliated company, Kensit Nigeria Limited, which allegedly acted as agents of our affiliates in Nigeria. The claimants allege that an agreement between the parties was terminated without justification and seek damages of $16.3 million. We responded to this claim in early 2006. There has been minimal activity on this claim since then.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Civil Class Action Lawsuit - On June 12, 2009, Superior Offshore International, Inc. v. Bristow Group Inc., et al, Case No. 1:09-cv-00438, was filed in the U.S. District Court for the District of Delaware. The purported class action complaint, which also named other providers of offshore helicopter services in the Gulf of Mexico as defendants, alleged violations of Section 1 of the Sherman Act. Among other things, the complaint alleged that the defendants unlawfully conspired to raise and maintain the price of offshore helicopter services between January 1, 2001 and December 31, 2005. The plaintiff was seeking to represent a purported class of direct purchasers of offshore helicopter services and was asking for, among other things, unspecified treble monetary damages and injunctive relief. In September 2010, the court granted our and the other defendants’ motion to dismiss the case on several grounds. The plaintiff then filed a motion seeking a rehearing and seeking leave to amend its original complaint which was partially granted to permit limited discovery. Such limited discovery has now been completed and we and the other defendants have again filed motions to dismiss the lawsuit. We intend to defend against this lawsuit vigorously. We are currently unable to determine whether it could have a material effect on our business, financial condition or results of operations.
Environmental Contingencies - The U.S. Environmental Protection Agency, also referred to as the EPA, has in the past notified us that we are a potential responsible party, or PRP, at three former waste disposal facilities that are on the National Priorities List of contaminated sites. Under the federal Comprehensive Environmental Response, Compensation and Liability Act, also known as the Superfund law, persons who are identified as PRPs may be subject to strict, joint and several liability for the costs of cleaning up environmental contamination resulting from releases of hazardous substances at National Priorities List sites. Although we have not yet obtained a formal release of liability from the EPA with respect to any of the sites, we believe that our potential liability in connection with the sites is not likely to have a material adverse affect on our business, financial condition or results of operations.
Guarantees - We have guaranteed the repayment of up to £10 million ($16.0 million) of the debt of FBS, an unconsolidated affiliate. See discussion of this commitment in Note 3. Additionally, we previously provided an indemnity agreement to Afianzadora Sofimex, S.A. to support issuance of surety bonds on behalf of Heliservicio from time to time. As discussed in Note 2, as of March 31, 2011, we were released from the indemnity agreement to Afianzadora Sofimex, S.A.
The following table summarizes our commitments under these guarantees as of March 31, 2011 (in thousands):
Other Matters - Although infrequent, aircraft accidents have occurred in the past, and the related losses and liability claims have been covered by insurance subject to a deductible. We are a defendant in certain claims and litigation arising out of operations in the normal course of business. In the opinion of management, uninsured losses, if any, will not be material to our financial position, results of operations or cash flows.
Note 9 - TAXES
The components of deferred tax assets and liabilities are as follows (in thousands):
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Companies may use foreign tax credits to offset the U.S. income taxes due on income earned from foreign sources. However, the credit that may be claimed for a particular taxable year is limited by the total income tax on the U.S. income tax return as well as by the ratio of foreign source net income in each statutory category to total net income. The amount of creditable foreign taxes available for the taxable year that exceeds the limitation (i.e.; “excess foreign tax credits”) may be carried back one year and forward ten years. As of March 31, 2011 and 2010, we did not believe it was more likely than not that we would generate sufficient foreign sourced income within the appropriate period to utilize all of our excess foreign tax credits. Therefore, the valuation allowance was established for the deferred tax asset related to foreign tax credits. During fiscal year 2011, we estimated that we would not utilize our U.S. foreign tax credits generated during the fiscal year and elected to deduct the foreign taxes in lieu of a foreign tax credit for the fiscal year. Therefore, no foreign tax credit carryover into the subsequent fiscal year exists as of March 31, 2011 and we removed the deferred tax asset and related valuation allowance. We continue to monitor our foreign tax credit position.
The components of income from continuing operations before provision for income taxes for fiscal years 2011, 2010 and 2009 are as follows (in thousands):
The provision for income taxes from continuing operations for fiscal years 2011, 2010 and 2009 consisted of the following (in thousands):
The reconciliation of the U.S. Federal statutory tax rate to the effective income tax rate for the provision for income taxes from continuing operations is shown below:
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The U.S. Internal Revenue Service has examined our U.S. Federal income tax returns for all years through 2006. All tax years through 2006 have been closed, either through settlement or expiration of the statute of limitations.
Effective April 1, 2010, the corporation income tax rate in the U.K. decreased from 28% to 27%. As such, the portion of our deferred tax assets and liabilities related to the U.K. were revalued based on the 27% rate to be effective in prospective periods, resulting in a tax benefit of $1.5 million in our tax provision for fiscal year 2011.
On April 1, 2008, we completed an internal reorganization that restructured our holdings in Bristow Aviation in an effort to simplify our legal entity structure and reduce administrative costs associated with our ownership in Bristow Aviation. In late March 2008, we completed part of this overall restructuring that resulted in the need to release $3.5 million of previously provided U.S. deferred tax on the assets subject to the restructuring. The additional transactions completed on April 1, 2008 resulted in a charge to other comprehensive income as a result of a reduction of $9.4 million in deferred tax assets associated with our net pension liability; however, these transactions did not result in a material impact on net income.
In August 2008, certain existing and newly created subsidiaries of the Company completed intercompany leasing transactions involving eleven aircraft. The tax benefit of this transaction is being recognized over the remaining useful life of the assets, which is approximately 13 years. During fiscal years 2011, 2010 and 2009, this transaction resulted in a $2.9 million, $3.0 million and $1.6 million, respectively, reduction in our consolidated provision for income taxes.
Effective November 1, 2010, we completed a restructuring that more closely aligns our legal structure with our global operational structure. As a result of this restructuring, which was effective November 1, 2010, most U.S. tax on offshore profits will be deferred until the profits are repatriated.
Our operations are subject to the jurisdiction of multiple tax authorities, which impose various types of taxes on us, including income, value added, sales and payroll taxes. Determination of taxes owed in any jurisdiction requires the interpretation of related tax laws, regulations, judicial decisions and administrative interpretations of the local tax authority. As a result, we are subject to tax assessments in such jurisdictions including the re-determination of taxable amounts by tax authorities that may not agree with our interpretations and positions taken. The following table summarizes the years open by jurisdiction as of March 31, 2011:
The effects of a tax position are recognized in the period in which we determine that it is more-likely-than-not (defined as a more than 50% likelihood) that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that is greater than 50% likely of being recognized upon ultimate settlement.
We have analyzed filing positions in the federal, state and foreign jurisdictions where we are required to file income tax returns for all open tax years. We believe that the settlement of any tax contingencies would not have a significant impact on our consolidated financial position, results of operations and/or liquidity. In fiscal years 2011, 2010 and 2009, we had a net provision of $2.2 million, $4.1 million and $3.3 million, respectively, of reserves for tax contingencies
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
primarily related to non-U.S. income tax on foreign leasing operations. Our policy is to accrue interest and penalties associated with uncertain tax positions in our provision for income taxes. In fiscal years 2011, 2010 and 2009, $0.7 million, $0.4 million and $0.4 million, respectively, in interest and penalties were accrued in connection with uncertain tax positions.
As of March 31, 2011 and 2010, we had $11.7 million and $8.8 million, respectively, of unrecognized tax benefits, all of which would have an impact on our effective tax rate, if recognized.
The activity associated with our unrecognized tax benefit during fiscal years 2011 and 2010 is as follows (in thousands):
Unremitted foreign earnings reinvested abroad upon which U.S. income taxes have not been provided aggregated approximately $407.5 million and $300.5 million as of March 31, 2011 and 2010, respectively. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts. Therefore, no accrual of income tax has been made for fiscal years 2011 and 2010 related to these indefinitely reinvested earnings as there was no plan in place to repatriate any of these foreign earnings to the U.S. as of the end of the fiscal year. Withholding taxes, if any, upon repatriation would not be significant.
We receive a tax benefit that is generated by certain employee stock benefit plan transactions. This benefit is recorded directly to additional paid-in-capital on our consolidated balance sheets and does not reduce our effective income tax rate. The tax benefit for fiscal years 2011, 2010 and 2009 totaled approximately $0.5 million, zero and $0.2 million, respectively.
The Company has a $36.9 million U.S. Federal net operating loss that will expire in fiscal year 2031. Income taxes paid during fiscal years 2011, 2010 and 2009 were $12.8 million, $12.6 million and $35.4 million, respectively.
Other Taxes
During fiscal year 2010, we reversed $2.0 million in accruals recorded in prior fiscal years for employee taxes and tax penalties in Australia, which was included as a reduction in direct costs ($1.1 million) and general and administrative expenses ($0.9 million) in our consolidated statement of income.
Note 10 - EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Bristow Group Inc. Employee Savings and Retirement Plan (“Bristow Plan”) covers Bristow Group Inc., Bristow U.S. LLC, Bristow Panama Inc. and Bristow Alaska Inc. employees. Under the Bristow Plan, we match each participant’s contributions up to 3% of the employee’s compensation. In addition, under the Bristow Plan, we contribute an additional 3% of the employee’s compensation at the end of each calendar year.
Bristow Helicopters (a wholly owned subsidiary of Bristow Aviation) and Bristow International Aviation (Guernsey) Limited (“BIAGL”) have a defined contribution plan. This defined contribution plan replaced the defined benefit pension plans described below for future accrual.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our contributions to our defined contribution plans were $11.4 million, $10.4 million and $9.6 million for fiscal years 2011, 2010 and 2009, respectively.
Defined Benefit Plans
The defined benefit pension plans of Bristow Helicopters and BIAGL were replaced by the defined contribution plans described above. These plans covered all full-time employees of Bristow Aviation and BIAGL employed on or before December 31, 1997, are closed to future accrual and any deficits are funded by contributions by Bristow Helicopters and BIAGL. The defined benefits were based on the employee’s annualized average last three years’ pensionable salaries up to the date of closure for future accrual. Plan assets are held in separate funds administered by the trustees (the “Trustees”), which are primarily invested in equities and bonds in the U.K. This plan limits the rate of annual increases in pensionable salary to the lesser of annual increases in U.K. price inflation or 5%. For members of the two closed defined benefit pension plans, since January 2005, Bristow Helicopters contributes a maximum of 7% of a participant’s non-variable salary, and since April 2006, the maximum employer contribution into the plan has been 7.35% for pilots. Each member is required to contribute a minimum of 5% of non-variable salary for Bristow Helicopters to match the contribution. In addition, there are three defined contribution plans for staff who were not members of the original benefit plans, two of which are closed to new members.
Bristow Norway has a final salary defined benefit pension plan. Pilots may retire from age 58 and other employees from age 67. Bristow Norway also participates in the standard Norwegian Avtalefestet pension (contractual pension or “AFP”) early retirement system, which is only applicable for non-pilots due to the higher retirement age. The pension benefit is a percentage of final salary in excess of a deductible. The maximum pension is available to those with 30 or more years of service as of the date of retirement. Additionally, there are associated death and disability benefits. Plan assets are held in an insurance policy with an insurance company and contributions follow Norwegian rules, which are based on an individual actuarial calculation for each plan member.
The following tables provide a rollforward of the projected benefit obligation and the fair value of plan assets, set forth the defined benefit retirement plans’ funded status and provide a detail of the components of net periodic pension cost calculated. The measurement date adopted is March 31. For the purposes of amortizing gains and losses, the 10% corridor approach has been adopted and assets are taken at fair market value. Any such gains or losses are amortized over the average remaining life expectancy of the plan members.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The amount in accumulated other comprehensive loss as of March 31, 2011 expected to be recognized as a component of net periodic pension cost in fiscal year 2012 is $3.8 million, net of tax, and represents amortization of the net actuarial losses.
Actuarial assumptions used to develop the components of the U.K. plans were as follows:
Actuarial assumptions used to develop the components of the Norway plan were as follows:
The expected rate of return assumptions have been determined following consultation with our actuarial advisors. In the case of bond investments, the rates assumed have been directly based on market redemption yields at the measurement date, and those on other asset classes represent forward-looking rates that have typically been based on other independent research by investment specialists.
Under U.K. and Guernsey legislation, it is the Trustees who are responsible for the investment strategy of the plans, although day-to-day management of the assets is delegated to a team of regulated investment fund managers. The Trustees of the Bristow Staff Pension Scheme (the “Scheme”) have the following three stated primary objectives when determining investment strategy:
(i) “funding objective” - to ensure that the Scheme is fully funded using assumptions that contain a modest margin for prudence. Where an actuarial valuation reveals a deficit, a recovery plan will be put in place which will take into account the financial covenant to the employer;
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(ii) “stability objective” - to have due regard to the likely level and volatility of required contributions when setting the Scheme’s investment strategy; and
(iii) “security objective” - to ensure that the solvency position of the Scheme (as assessed on a gilt basis) is expected to improve. The Trustee will take into account the strength of the employer’s covenant when determining the expected improvement in the solvency position of the Scheme.
The types of investment are held, and the relative allocation of assets to investments is selected, in light of the liability profile of the Scheme, its cash flow requirements and the funding level. In addition, in order to avoid an undue concentration of risk, a spread of assets is held, this diversification being within and across asset classes.
In determining the overall investment strategy for the plans, the Trustees undertake regular asset and liability modeling (“ALM”) with the assistance of their U.K. actuary. The ALM looks at a number of different investment scenarios and projects both a range and a best estimate of likely return from each one. Based on these analyses, and following consultation with us, the Trustees determine the benchmark allocation for the plans’ assets.
The market value of the plan assets as of March 31, 2011 and 2010 was allocated between asset classes as follows. Details of target allocation percentages under the Trustees’ investment strategies as of the same dates are also included.
The following table summarizes, by level within the fair value hierarchy, the plan assets we had as of March 31, 2011, which are valued at fair value (in thousands):
The investments’ fair value measurement level within the fair value hierarchy is classified in its entirety based on the lowest level of input that is significant to the measurement.
The following table summarizes the changes in the Level 3 plan assets for the year ended March 31, 2011 (in thousands):
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Estimated future benefit payments over each of the next five fiscal years from March 31, 2011 and in aggregate for the following five fiscal years after fiscal year 2016, including life assurance premiums, are as follows (in thousands):
We expect to fund these payments with our cash contributions to the plans, plan assets and earnings on plan assets. We pre-funded our contributions of $16.0 million to the main U.K. plan for the fiscal year ending March 31, 2012 in February and March 2011. Our contributions to the Norwegian plan and the BIAGL plan for the fiscal year ending March 31, 2012 are expected to be $6.0 million and $0.4 million, respectively.
Incentive Compensation
Incentive and Stock Option Plans - Stock-based awards are currently made under the Bristow Group Inc. 2007 Long-Term Incentive Plan (“2007 Plan”). As of March 31, 2011, a maximum of 2,400,000 shares of Common Stock are reserved, including 1,252,341 shares available for incentive awards under the 2007 Plan. Awards granted under the 2007 Plan may be in the form of stock options, stock appreciation rights, shares of restricted stock, other stock-based awards (payable in cash or Common Stock) or performance awards, or any combination thereof, and may be made to outside directors, employees or consultants.
In addition, the Company has the following incentive and stock plans which have awards outstanding as of March 31, 2011 but under which we no longer make grants:
•
The 2004 Stock Incentive Plan (“2004 Plan”), which provided for awards to officers and key employees in the form of stock options, stock appreciation rights, restricted stock, other stock-based awards or any combination thereof. Options become exercisable at such time or times as determined at the date of grant and expire no more than ten years after the date of grant.
•
The 2003 Non-qualified Stock Option Plan for Non-employee Directors (“2003 Director Plan”), which provided for a maximum of 250,000 shares of Common Stock to be issued pursuant to such plan. As of the date of each annual meeting, each non-employee director who met certain attendance criteria was automatically granted an option to purchase 5,000 shares of our Common Stock. The exercise price of the options granted was equal to the fair market value of the Common Stock on the date of grant, and the options were exercisable not earlier than six months after the date of grant and expire no more than ten years after the date of grant.
•
The 1994 Long-Term Management Incentive Plan, as amended (“1994 Plan”), which provided for awards to officers and key employees in the form of stock options, stock appreciation rights, restricted stock, deferred stock, other stock-based awards or any combination thereof. Options become exercisable at such time or times as determined at the date of grant and expire no more than ten years after the date of grant.
In June 2010, 2009 and 2008, the Compensation Committee of our board of directors authorized the grant of stock options, time vested restricted stock and long-term performance cash awards to participating employees. Each of the stock options has a ten-year term and has an exercise price equal to the fair market value (as defined in the 2007 Plan) of the Common Stock on the grant date of $30.16, $32.90 and $50.25 per share for June 2010, 2009 and 2008, respectively. The options will vest in annual installments of one-third each beginning on the first anniversary of the grant date. Restricted stock grants vest at the end of three years. Performance cash awards allow the recipient to receive from -0- to 200% of the target amount at the end of three years depending on whether the Company’s total shareholder return meets the minimum return requirements and how the Company’s total shareholder return ranks among the Company’s
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
compensation peer group over the performance period. The value of the performance cash awards is calculated on a quarterly basis by comparing the performance of our stock including any dividends paid since the award date (none have been paid through March 31, 2011) against the peer group and has a maximum potential payout of $7.0 million and $7.5 million for the fiscal year 2011 and 2010 awards, respectively. The fiscal year 2009 awards did not meet the minimum return requirements to be paid out. The total value of the awards is recognized as compensation expense over a three-year vesting period with the recognition amount being adjusted quarterly. Compensation expense related to the performance cash awards during fiscal years 2011 and 2010 were $0.2 million and $1.4 million, respectively. No compensation expense was recorded related to the performance cash awards during fiscal year 2009.
On December 5, 2007, our board of directors established a new program to allow vesting of outstanding stock options and restricted stock grants and to waive forfeitures of outstanding performance restricted stock units upon retirement if the employee has achieved no less than five consecutive years of employment with the Company, voluntarily terminates employment after the age of 62 and enters into a noncompetition/nonsolicitation agreement in the form approved and provided by the Company. Subsequently, on February 3, 2010, our board of directors authorized an amendment to allow vesting of outstanding stock options and restricted stock grants, to continue the right to vest in performance cash awards and to waive forfeitures of outstanding performance restricted stock units upon retirement if the employee has accumulated a combined total of age and years of service of 80 with the Company, voluntarily terminates employment and enters into a noncompetition/nonsolicitation agreement in the form approved and provided by the Company. This change affected 18 employees and resulted in additional compensation expense of $0.9 million for fiscal year 2010. Upon retirement, any unexercised options to purchase Common Stock and shares of restricted stock under the 1994, 2004 and 2007 Plans will automatically vest and options will remain exercisable for the remainder of the term specified in the applicable award document and any outstanding performance restricted stock units granted under the 2004 or 2007 Plans will not be forfeited solely due to termination of employment so that the right remains to receive shares of Common Stock if the applicable performance measures are achieved in accordance with the 2004 or 2007 Plans.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Total share-based compensation expense, which includes stock options, restricted stock and restricted stock units, was $12.6 million, $13.9 million and $10.2 million for fiscal years 2011, 2010 and 2009, respectively. Stock-based compensation expense has been allocated to our various business units.
Under our incentive and stock option plans there are 3,151,766 shares of Common Stock reserved for issuance as of March 31, 2011, of which 1,252,341 shares are available for future grants.
A summary of our stock option activity for fiscal year 2011 is presented below:
Stock options granted to employees under the 1994, 2004 and 2007 Plans vest ratably over three years on each anniversary from the date of grant and expire ten years from the date of grant. Stock options granted to non-employee directors under the 2003 Director Plans vest after six months.
We use a Black-Scholes option pricing model to estimate the fair value of share-based awards. The Black-Scholes option pricing model incorporates various assumptions, including the risk-free interest rate, volatility, dividend yield and the expected term of the options.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equal to the expected term of the option. Expected volatilities are based on the historical volatility of shares of our Common Stock, which has not been adjusted for any expectation of future volatility given uncertainty related to the future performance of our Common Stock at this time. We also use historical data to estimate the expected term of the options within the option pricing model; groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of the options represents the period of time that the options granted are expected to be outstanding. Additionally, we estimate pre-vesting option forfeitures at the time of grant and periodically revise those estimates in subsequent periods if actual pre-vesting forfeitures differ from those estimates. We record stock-based compensation expense only for those awards expected to vest using an estimated forfeiture rate based on our historical forfeiture data.
The following table shows the assumptions we used to compute the stock-based compensation expense for stock option grants issued during fiscal years 2011, 2010 and 2009.
Unrecognized stock-based compensation expense related to nonvested stock options was approximately $3.2 million as of March 31, 2011, relating to a total of 405,523 unvested stock options under our stock option plans. We expect to recognize this stock-based compensation expense over a weighted average period of approximately 1.8 years. The total fair value of options vested during fiscal years 2011, 2010 and 2009 was approximately $4.7 million, $2.9 million and $2.5 million, respectively.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The total intrinsic value, determined as of the date of exercise, of options exercised during fiscal years 2011, 2010 and 2009 was $0.4 million, $1.2 million and $0.7 million, respectively. The total amount of cash we received from option exercises during fiscal years 2011, 2010 and 2009 was $2.0 million, $2.4 million and $1.1 million, respectively. The total tax benefit attributable to options exercised during fiscal years 2011, 2010 and 2009 was $0.1 million, $0.4 million and $0.2 million, respectively.
The excess tax benefits from stock-based compensation for fiscal years 2011, 2010 and 2009 of $0.5 million, zero and $0.2 million, respectively, are reported on our consolidated statements of cash flows in financing activities. This represents the reduction in the provision for income taxes otherwise payable during the period attributable to the actual gross tax benefits in excess of the expected tax benefits for options exercised in current and prior periods.
We have two forms of restricted stock units that vest under different conditions. The first form of restricted stock units fully vest on the third anniversary from the date of grant if the “Cumulative Annual Shareholder Return” as defined in the restricted stock unit agreement (“CASR”) equals or exceeds 15%, or partially vests if the CASR is less than 15% but greater than or equal to 10%. Any unvested restricted stock units will vest on the fourth anniversary from the date of grant under the same conditions as outline above, or on the fifth anniversary from the date of grant if the CASR equals or exceeds 3%. Any restricted stock units that do not vest on the fifth anniversary from the date of grant will expire.
The second form of restricted stock units fully vest on the third anniversary from the date of grant if the CASR equals or exceeds 3%. Any unvested restricted stock units will vest on the fifth anniversary date from the date of grant if the CASR equals or exceeds 3%. Any restricted stock units that do not vest on the fifth anniversary from the date of grant will expire.
Additionally, we have restricted stock awards that cliff vest on the third anniversary from the date of grant provided the grantee is still employed by the Company, subject to the Company’s retirement policy.
We record compensation expense for restricted stock units based on an estimate of the service period related to the awards, which is tied to the future performance of our stock over certain time periods under the terms of the award agreements. The estimated service period is reassessed quarterly. Changes in this estimate may cause the timing of expense recognized in future periods to accelerate. Compensation expense related to awards of restricted stock and restricted stock units for fiscal years 2011, 2010 and 2009 was $8.0 million, $9.1 million and $7.0 million, respectively.
The following is a summary of non-vested restricted stock and restricted stock units as of March 31, 2011 and 2010 and changes during fiscal year 2011:
Unrecognized stock-based compensation expense related to non-vested restricted stock and restricted stock units was approximately $6.7 million as of March 31, 2011, relating to a total of 713,387 unvested restricted stock and restricted stock units. We expect to recognize this stock-based compensation expense over a weighted average period of approximately 1.9 years.
The Annual Incentive Compensation Plan provides for an annual award of cash bonuses to key employees based primarily on pre-established objective measures of Company and subsidiary performance. The bonuses related to this plan were $6.6 million, $8.2 million and $9.0 million for fiscal years 2011, 2010 and 2009, respectively.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In January 2004, we instituted a new non-qualified deferred compensation plan for our senior executives. Under the terms of the plan, participants can elect to defer a portion of their compensation for distribution at a later date. In addition, we have the discretion to make annual tax deferred contributions to the plan on the participants’ behalf. We contributed $0.7 million to this plan in each of fiscal years 2011, 2010 and 2009. The assets of the plan are held in a rabbi trust and are subject to our general creditors. As of March 31, 2011, the amount held in trust was $4.1 million.
Note 11 - STOCKHOLDERS’ INVESTMENT, COMPREHENSIVE INCOME AND EARNINGS PER SHARE
Stockholders’ Investment
Preferred Stock - In September and October 2006, we issued 4,600,000 shares of 5.50% Mandatory Convertible Preferred Stock (“Preferred Stock”), in a public offering, for net proceeds of $222.6 million. We used the net proceeds from this offering to acquire aircraft and for working capital and other general corporate purposes, including acquisitions.
Prior to conversion, annual cumulative cash dividends of $2.75 per share of Preferred Stock were payable quarterly on the fifteenth day of each March, June, September and December. On September 15, 2009 each outstanding share of Preferred Stock was converted into 1.418 shares of Common Stock. There were 4,600,000 shares of Preferred Stock outstanding on the conversion date, and we issued 6,522,800 shares of Common Stock upon conversion of such Preferred Stock.
Common Stock - In June 2008, we issued 4,715,000 shares of Common Stock at $46.87 per share through a public offering. Net proceeds from the sale of the Common Stock were $211.0 million. Additionally, we issued 281,900 shares of Common Stock through a concurrent private placement to Caledonia, one of our largest shareholders. The shares sold to Caledonia were also at a price of $46.87 per share and generated proceeds of $13.2 million.
The total number of authorized shares of Common Stock reserved as of March 31, 2011 was 2,846,276. These shares are reserved in connection with our stock-based compensation plans.
The following is a summary of changes in outstanding shares of Common Stock for the years ended March 31, 2011 and 2010:
Restrictions on Foreign Ownership of Common Stock - Under the Federal Aviation Act, it is unlawful to operate certain aircraft for hire within the U.S. unless such aircraft are registered with the Federal Aviation Administration (the “FAA”) and the FAA has issued an operating certificate to the operator. As a general rule, aircraft may be registered under the Federal Aviation Act only if the aircraft are owned or controlled by one or more citizens of the U.S. and an operating certificate may be granted only to a citizen of the U.S. For purposes of these requirements, a corporation is deemed to be a citizen of the U.S. only if, among other things, at least 75% of its voting interests are owned or controlled
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
by U.S. citizens. If persons other than U.S. citizens should come to own or control more than 25% of our voting interest or if any other requirements are not met, we have been advised that our aircraft may be subject to deregistration under the Federal Aviation Act, and we may lose our ability to operate within the U.S. Deregistration of our aircraft for any reason, including foreign ownership in excess of permitted levels, would have a material adverse effect on our ability to conduct operations within our North America business unit. Therefore, our organizational documents currently provide for the automatic suspension of voting rights of shares of our Common Stock owned or controlled by non-U.S. citizens, and our right to redeem those shares, to the extent necessary to comply with these requirements. As of March 31, 2011, approximately 2,618,000 shares of our Common Stock were held by persons with foreign addresses. These shares represented approximately 7% of our total outstanding common shares as of March 31, 2011. Our foreign ownership may fluctuate on each trading day because a substantial portion of our Common Stock is publicly traded.
Dividends - On May 4, 2011, the board of directors of the Company declared a first quarter cash dividend of $0.15 per share of our Common Stock. The dividend will be paid on June 10, 2011 to shareholders of record on May 20, 2011. Based on shares outstanding at May 13, 2011, total dividend payments to be made during the three months ended June 30, 2011 will be approximately $5.4 million. The declaration of future dividends is at the discretion of our board of directors and subject to our results of operations, financial condition, cash requirements and other factors and restrictions under applicable law and our debt instruments.
Comprehensive Income
Comprehensive income during fiscal years 2011, 2010 and 2009 is as follows (in thousands):
(1) Net of tax provision (benefit) of $1.2 million, ($13.2) million and $0.5 million for fiscal years 2011, 2010 and 2009, respectively.
(2) Net of tax provision (benefit) of $2.4 million, $4.4 million and ($3.0) million for fiscal years 2011, 2010 and 2009, respectively.
(3) As of March 31, 2010 we corrected our prior accounting for the acquisition of an additional 51% interest in Bristow Norway, which resulted in certain changes including reclassification of the change of interest gain from other comprehensive income (loss) to additional paid-in-capital.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Earnings Per Share
Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per common share for fiscal years 2011, 2010 and 2009 excluded options to purchase 248,821, 191,867 and 359,548 shares, respectively, at weighted average exercise prices of $32.94, $50.41 and $47.71, respectively; 84,898, 238,917 and 407,869 restricted stock units, respectively, at weighted average prices of, $46.80, $39.87 and $37.32, respectively; and eight, 734 and 425 restricted stock awards, respectively, at weighted average prices of $44.79, $20.22 and $53.36, respectively, which were outstanding during the period but were anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share:
(1) Diluted earnings per common share for fiscal years 2011, 2010 and 2009 excludes approximately 1.5 million potentially dilutive shares initially issuable upon the conversion of our 3% Convertible Senior Notes. The 3% Convertible Senior Notes will be convertible, under certain circumstances, using a net share settlement process, into a combination of cash and our Common Stock. The initial base conversion price of the notes is approximately $77.34 (subject to adjustment in certain circumstances), based on the initial base conversion rate of 12.9307 shares of Common Stock per $1,000 principal amount of convertible notes. Such shares did not impact our calculation of diluted earnings per share for fiscal years ending March 31, 2011, 2010 and 2009 as our stock price did not meet or exceed $77.34 per share. See Note 5 for further details.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) Diluted earnings per common share included weighted average shares resulting from the assumed conversion of our Preferred Stock at the conversion rate that results in the most dilution: 1.4180 shares of Common Stock for each share of Preferred Stock. On September 15, 2009, we converted our Preferred Stock into 6,522,800 shares of Common Stock at this conversion rate as previously discussed.
Note 12 - SEGMENT INFORMATION
We conduct our business in one segment: Helicopter Services. The Helicopter Services segment operations are conducted primarily through five business units: Europe, West Africa, North America, Australia, and Other International. Additionally, we also operate a training business unit, Bristow Academy, and provide technical services to clients in the U.S. and U.K.
The following shows reportable segment information for fiscal years 2011, 2010 and 2009, reconciled to consolidated totals, and prepared on the same basis as our consolidated financial statements (in thousands):
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(1) Includes $64.9 million, $97.6 million and $197.8 million of construction in progress payments that were not allocated to business units in fiscal years 2011, 2010 and 2009, respectively.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) Includes $112.4 million and $152.8 million, respectively of construction in progress within property and equipment on our consolidated balance sheets as of March 31, 2011 and 2010, respectively, which primarily represents progress payments on aircraft to be delivered in future periods.
We attribute revenue to various countries based on the location where helicopter services are actually performed. Long-lived assets consist primarily of helicopters and are attributed to various countries based on the physical location of the asset at a given fiscal year end. Entity-wide information by geographic area is as follows (in thousands):
(1) These costs have been disclosed separately as the physical location where the aircraft will ultimately be operated is subject to change.
During fiscal year 2011, we conducted operations in over 20 countries. Due to the nature of our principal assets, aircraft are regularly and routinely moved between operating areas (both domestic and foreign) to meet changes in market and operating conditions. During fiscal years 2011, 2010 and 2009, the aggregate activities of one major integrated oil and gas company client accounted for 9%, 12% and 18%, respectively, of consolidated gross revenue. Also, during fiscal years 2011, 2010 and 2009 another client accounted for 11%, 12% and 11%, respectively, of our consolidated gross revenue. No other client accounted for 10% or more of our consolidated gross revenue during those periods. During fiscal year 2011, our top ten clients accounted for 53% of consolidated gross revenue.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 13 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
(1) Due to an increase in severance costs primarily driven by the departure of an executive officer, operating income, net income and diluted earnings per share for the fiscal quarter ended June 30, 2009 were negatively impacted by $4.2 million, $3.0 million and $0.08, respectively.
(2) Net income and diluted earnings per share for the fiscal quarter ended December 31, 2010 included an increase of $17.7 million and $0.48, respectively, due to a reduction in tax expense related to adjustments to deferred tax liabilities that were no longer required as a result of a global restructuring. Additionally, operating income, net income and diluted earnings per share were increased by $3.5 million, $2.9 million and $0.08, respectively, due to a reduction in maintenance expense associated with a credit resulting from the renegotiation of a “power-by-the-hour” contract for aircraft maintenance with a third-party provider. Also, net income and diluted earnings per share for the fiscal quarter ended December 31, 2010 were decreased by $3.9 million and $0.08, respectively, from the early retirement of the 6 1/8% Senior Notes resulting in a $2.3 million early redemption premium (included in other income (expense), net) and the write-off of $2.4 million of unamortized debt issuance costs (included in interest expense). For the fiscal quarter ended December 31, 2009, there was an increase in compensation expense in connection with the departure of two officers that decreased operating income by $1.7 million, net income by $1.4 million and diluted earnings per share by $0.04. Net income and diluted earnings per share also increased by $2.3 million and $0.06, respectively, due to hedging gains resulting from the termination of forward contracts on euro-denominated aircraft purchase commitments.
(3) Operating income, net income and diluted earnings per share for the fiscal quarter ended March 31, 2011 included dividend income received from an unconsolidated affiliate of $2.5 million, $1.6 million and $0.04, respectively. Operating income, net income and diluted earnings per share for the fiscal quarter ended March 31, 2011 included an increase in depreciation expense of $5.3 million, $3.4 million and $0.09, respectively, for an impairment of previously capitalized internal software costs as the related project was abandoned. Additionally, operating income, net income and diluted earnings per share for the fiscal quarter ended March 31, 2011 included an increase in depreciation expense of $1.5 million, $1.1 million and $0.03, respectively, for an impairment of three aircraft held for sale. Net income and diluted earnings per share for the fiscal quarter ended March 31, 2011 included an impairment of our investment in Heliservicio recorded as a reduction in other income (expense), net of $1.6 million and $0.04, respectively.
(4) Operating income, net income and diluted earnings per share for the fiscal quarter ended March 31, 2010 included dividend income received from an unconsolidated affiliate of $2.5 million, $1.6 million and $0.04, respectively. Operating income, net income and diluted earnings per share for the fiscal quarter ended March 31, 2010 included: (i) a reduction in depreciation expense of $3.9 million, $2.5 million and $0.07, respectively, recorded for errors in calculation of depreciation on certain aircraft in prior quarters, (ii) an allowance of $3.6 million, $2.3 million and $0.06, respectively, recorded for accounts receivable due from our unconsolidated affiliate in Mexico, which we determined were not probable of collection, (iii) $1.4 million, $0.9 million, and $0.02, respectively, from a reduction in a bad debt allowance for accounts receivable due from a client in Nigeria and (iv) $1.2 million, $0.8 million and $0.02, respectively, for a reduction in expense in Australia upon resolution of local tax matters.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(5) The fiscal quarters ended June 30, September 30 and December 31, 2010 and March 31, 2011 included $1.7 million, $1.9 million, zero and $6.6 million, respectively, in gains (losses) on disposal of other assets included in operating income which also increased net income by $1.2 million, $1.7 million, zero and $6.1 million, respectively, and diluted earnings per share by $0.03, $0.05, zero and $0.16, respectively. The fiscal quarters ended June 30, September 30 and December 31, 2009 and March 31, 2010 included $6.0 million, $4.9 million, $2.4 million and $5.3 million, respectively, in gains (losses) on disposal of other assets included in operating income which also increased net income by $3.9 million, $3.2 million, $1.6 million and $3.5 million, respectively, and diluted earnings per share by $0.11, $0.09, $0.04 and $0.10, respectively.
Note 14 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In connection with the sale of the 7 1/2% Senior Notes, the 6 1/8% Senior Notes and the 3% Convertible Senior Notes, the Guarantor Subsidiaries fully, unconditionally, jointly and severally guaranteed the payment obligations under these notes. The following supplemental financial information sets forth, on a consolidating basis, the balance sheet, statement of income and cash flow information for Bristow Group Inc. (“Parent Company Only”), for the Guarantor Subsidiaries and for our other subsidiaries (the “Non-Guarantor Subsidiaries”). We have not presented separate financial statements and other disclosures concerning the Guarantor Subsidiaries because management has determined that such information is not material to investors.
The supplemental condensed consolidating financial information has been prepared pursuant to the rules and regulations for condensed financial information and does not include all disclosures included in annual financial statements, although we believe that the disclosures made are adequate to make the information presented not misleading. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenue and expense.
The allocation of the consolidated income tax provision was made using the with and without allocation method.
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental Condensed Consolidating Statement of Income
Fiscal Year Ended March 31, 2011
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental Condensed Consolidating Balance Sheet
As of March 31, 2011
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended March 31, 2011
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental Condensed Consolidating Statement of Income
Fiscal Year Ended March 31, 2010
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental Condensed Consolidating Balance Sheet
As of March 31, 2010
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended March 31, 2010
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental Condensed Consolidating Statement of Income
Fiscal Year Ended March 31, 2009
BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended March 31, 2009
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation under the supervision of and with the participation of our management, including William E. Chiles, our Chief Executive Officer (“CEO”), and Jonathan E. Baliff, our Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of March 31, 2011. Based on that evaluation, our CEO and CFO concluded that such disclosure controls and procedures were effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and such information is accumulated and communicated to our management as appropriate to allow for timely decisions regarding required disclosure under the Exchange Act.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2011. The assessment was based on criteria established in the framework Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of March 31, 2011.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 2011 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report included herein.
MATERIAL CHANGES IN INTERNAL CONTROL
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Bristow Group Inc.:
We have audited Bristow Group Inc.’s (“the Company”) internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Bristow Group Inc. and subsidiaries as of March 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ investment and cash flows for each of the years in the three-year period ended March 31, 2011, and our report dated May 20, 2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Houston, Texas
May 20, 2011
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information called for by this item will be contained in our definitive proxy statement to be distributed in connection with our fiscal year 2011 annual meeting of stockholders under the captions “Corporate Governance,” “Committees of the Board of Directors,” and “Executive Officers of the Registrant” and is incorporated into this document by reference.
Code of Ethics
We have adopted a code of business conduct and ethics applicable to our directors, officers (including our principal executive officer, principal financial officer and chief accounting officer) and employees, known as the Code of Business Integrity. The Code of Business Integrity is available on our website at http://www.bristowgroup.com. In the event that we amend or waive any of the provisions of the Code of Business Integrity with respect to our senior officers, we intend to disclose the amendment or waiver on our website.
Item 11.
Item 11. Executive Compensation
The information called for by this item will be contained in our definitive proxy statement to be distributed in connection with our fiscal year 2011 annual meeting of stockholders under the caption “Director and Executive Officer Compensation” and, except as specified in the following sentence, is incorporated into this document by reference. Information in our fiscal year 2011 proxy statement not deemed to be “soliciting material” or “filed” with the SEC under its rules, including the Report of the Compensation Committee on Executive Compensation and the Report of the Audit Committee is not and shall not be deemed to be incorporated by reference into this report.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by this item will be contained in our definitive proxy statement to be distributed in connection with our fiscal year 2011 annual meeting of stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated into this document by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 appears in Items 11 and 12 of this report.
Item 14.
Item 14. Principal Accounting Fees and Services
The information called for by this item will be contained in our definitive proxy statement to be distributed in connection with our fiscal year 2011 annual meeting of stockholders under the caption “Relationship with Independent Public Accountants” and is incorporated into this document by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements -
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Income for fiscal years 2011, 2010 and 2009.
Consolidated Balance Sheets as of March 31, 2011 and 2010.
Consolidated Statements of Cash Flows for fiscal years 2011, 2010 and 2009.
Consolidated Statements of Stockholders’ Investment for fiscal years 2011, 2010 and 2009.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
All schedules have been omitted because the information required is included in the financial statements or notes or have been omitted because they are not applicable or not required.
(a)(3) Exhibits
* Compensatory Plan or Arrangement
 Furnished herewith
+ Confidential information has been omitted from this exhibit and filed separately with the SEC pursuant to a confidential treatment request under Rule 24(b)-2.
± Furnished herewith. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
Agreements with respect to certain of the registrant’s long-term debt are not filed as Exhibits hereto inasmuch as the debt authorized under any such Agreement does not exceed 10% of the registrant’s total assets. The registrant agrees to furnish a copy of each such Agreement to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Houston, State of Texas on the 20th day of May 2011.
BRISTOW GROUP INC.
By:
/s/ JONATHAN E. BALIFF
Jonathan E. Baliff
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the listed capacities on the 20th day of May 2011.
/s/ WILLIAM E. CHILES
William E. Chiles
President, Chief Executive Officer and Director
/s/ JONATHAN E. BALIFF
Jonathan E. Baliff
Senior Vice President and Chief Financial Officer
/s/ BRIAN J. ALLMAN
Brian J. Allman
Vice President, Chief Accounting Officer
*
Thomas N. Amonett
Director
*
Stephen J. Cannon
Director
*
Michael A. Flick
Director
*
Ian A. Godden
Director
*
Stephen A. King
Director
*
Thomas C. Knudson
Chairman of the Board and Director
John M. May
Director
*
Bruce H. Stover
Director
*
Ken C. Tamblyn
Director
/s/ RANDALL A. STAFFORD
* By: Randall A. Stafford (Attorney-in-Fact)