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BRISTOW GROUP 10-K 2008 Documents found in this filing:UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
Commission
File Number 001-31617
Bristow
Group Inc.
(Exact
name of registrant as specified in its charter)
Registrant’s
telephone number, including area code: (713) 267-7600
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
YES þ NO o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES
o NO þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES
þ NO o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
(Do not check if a smaller
reporting
company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
o NO þ
The
aggregate market value of the voting Common Stock held by non-affiliates of the
registrant, based upon the closing price on the New York Stock Exchange, as of
September 28, 2007 was $963,382,038.
The
number of shares outstanding of the registrant’s Common Stock as of May 15, 2008
was 23,951,447.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
portions of the Registrant’s Definitive Proxy Statement, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the close of the Registrant’s fiscal year, are incorporated by
reference under Part III of this Form 10-K.
BRISTOW
GROUP INC.
INDEX—FORM
10-K
BRISTOW
GROUP INC.
ANNUAL REPORT (FORM
10-K)
INTRODUCTION
This
Annual Report on Form 10-K is filed by Bristow Group Inc., which we refer to as
Bristow Group or the Company.
We use
the pronouns “we,” “our” and “us” and the term “Bristow Group” to refer
collectively to Bristow Group and its consolidated subsidiaries and affiliates,
unless the context indicates otherwise. We also own interests in
other entities that we do not consolidate for financial reporting purposes,
which we refer to as unconsolidated affiliates, unless the context indicates
otherwise. Bristow Group, Bristow Aviation Holdings Limited (“Bristow
Aviation”), its consolidated subsidiaries and affiliates, and the unconsolidated
affiliates are each separate corporations, limited liability companies or other
legal entities, and our use of the terms “we,” “our” and “us” does not suggest
that we have abandoned their separate identities or the legal protections given
to them as separate legal entities. 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, 2008 is referred
to as “fiscal year 2008.”
We are a
Delaware corporation incorporated in 1969. Our executive offices are
located at 2000 W. Sam Houston Pkwy S., Suite 1700, Houston, Texas
77042. Our telephone number is (713) 267-7600.
Our
website address is http://www.bristowgroup.com. We
make our website content available for information purposes only. It
should not be relied upon for investment purposes, nor is it incorporated by
reference in this Annual Report. All of our periodic report filings
with the U.S. Securities and Exchange Commission (“SEC”) pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) for
fiscal periods ended on or after December 15, 2002 are made available, free of
charge, through our website, including our annual reports on Form 10-K,
quarterly reports on Form 10-Q, and current reports on Form 8-K, and any
amendments to these reports. These reports are available through our
website as soon as reasonably practicable after we electronically file or
furnish such material to the SEC. In addition, the public may read
and copy any materials we file with the SEC at the SEC’s Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549 or on their Internet website
located at http://www.sec.gov. The
public may obtain information on the operation of the Public Reference Room and
the SEC’s Internet website by calling the SEC at 1-800-SEC-0330. On
August 23, 2007, we submitted to the New York Stock Exchange (“NYSE”) the Annual
CEO Certification required by Section 303A.12(a) of the New York Stock Exchange
Listing Manual. We filed with the SEC the certifications required
under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to
this Annual Report on Form 10-K for the fiscal year ended March 31,
2008.
FORWARD-LOOKING
STATEMENTS
This
Annual Report contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange
Act. Forward-looking statements are statements about our future
business, strategy, operations, capabilities and results; financial projections;
plans and objectives of our management; expected actions by us and by third
parties, including our customers, competitors, vendors and regulators; and other
matters. Some of the forward-looking statements can be identified by
the use of words such as “believes”, “belief”, “expects”, “plans”,
“anticipates”, “intends”, “projects”, “estimates”, “may”, “might”, “would”,
“could” or other similar words; however, all statements in this Annual Report,
other than statements of historical fact or historical financial results are
forward-looking statements.
Our
forward-looking statements reflect our views and assumptions on the date we are
filing this Annual Report regarding future events and operating
performance. We believe that they are reasonable, but they involve
known and unknown risks, uncertainties and other factors, many of which may be
beyond our control, that may cause actual results to differ materially from any
future results, performance or achievements expressed or implied by the
forward-looking statements. Accordingly, you should not put undue
reliance on any forward-looking statements. Factors that could cause
our forward-looking statements to be incorrect and actual events or our actual
results to differ from those that are anticipated include all of the
following:
1
All
forward-looking statements in this Annual Report are qualified by these
cautionary statements and are only made as of the date of this Annual
Report. We do not undertake any obligation, other than as required by
law, to update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
2
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. We are one of two
helicopter service providers to the offshore energy industry with global
operations. We have major operations in most of the major offshore
oil and gas producing regions of the world, including in the North Sea, the U.S.
Gulf of Mexico, Nigeria and Australia, and we generated 76% of our revenues from
international operations in fiscal year 2008. 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.
As of
March 31, 2008, we conduct our business in one segment: Helicopter
Services. The Helicopter Services segment operations are conducted
through three divisions, Western Hemisphere, Eastern Hemisphere and Global
Training, and through eight business units within those divisions:
We
provide helicopter services to a broad base of major, independent, international
and national energy companies. Customers charter our helicopters to
transport personnel between onshore bases and offshore platforms, drilling rigs
and installations. A majority of our helicopter revenue is
attributable to oil and gas production activities, which have historically
provided a more stable source of revenue than exploration and development
related activities. As of March 31, 2008, we operated 406 aircraft
(including 373 aircraft owned, 25 leased aircraft and 8 aircraft operated for
one of our customers; 4 of the owned aircraft are held for sale) and our
unconsolidated affiliates operated 142 aircraft in addition to those aircraft
leased from us. Additionally, our Global Training division is
approved to provide helicopter flight training to the commercial pilot and
flight instructor level by both the U.S. Federal Aviation Administration
(“FAA”) and the European Joint Aviation Authority. Bristow Academy, which forms
the central core of our Global Training division, operates 69 aircraft
(including 59 owned and 10 leased aircraft) and employs 165 people, including 74
flight instructors. The Global Training division supports, coordinates,
standardizes, and in the case of the Bristow Academy schools, directly manages
our flight training activities.
We
previously provided production management services, contract personnel and
medical support services in the U.S. Gulf of Mexico to the domestic oil and gas
industry under the Grasso Production Management (“Grasso”) name. On
November 2, 2007, we sold our Grasso business, which comprised our entire
Production Management Services segment. The financial results for our
Production Management Services segment are classified as discontinued
operations. In conjunction with this sale, we agreed to continue to
provide helicopter services to Grasso through December 31, 2010.
For
additional information about our business units, see Note 10 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. “Risk Factors” included elsewhere in this Annual
Report.
3
Helicopter
Services
Our
customers charter our helicopters to transport personnel from onshore bases to
offshore drilling rigs, platforms and other installations. To a
lesser extent, customers also charter our helicopters to transport
time-sensitive equipment to these offshore locations. Helicopters are
generally classified as small (four to eight passengers), medium (12 to 16
passengers) and large helicopters (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
and over longer distances and carry larger payloads than small helicopters, are
most commonly used for crew changes on large offshore production facilities and
drilling rigs. With their ability to carry greater payloads, travel
greater distances and move at higher speeds, medium and large helicopters are
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. Small helicopters are generally
used for daytime flights on shorter routes and to reach production facilities
that cannot accommodate medium and large helicopters. Our small
helicopters operate primarily in the shallow waters of the U.S. Gulf of Mexico
and Nigeria. Worldwide there are more than 8,800 production platforms
and 660 rigs. As a result of the greater distances offshore, demand
for medium and large helicopters is also driven by drilling, development and
production activity levels in deepwater locations throughout the
world. Additionally, some local governmental regulations in certain
international markets require us to operate twin-engine medium and large
aircraft in those markets.
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 our excess aircraft
during times of reduced demand in the offshore energy industry.
We also
have technical services operations that provide helicopter repair services,
engineering and design services, technical manpower support and transmission
testing from facilities located in the U.S. and U.K. While most of
this work is performed on our own aircraft, some of these services are performed
for third parties.
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 operations. 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 refer to the entities in
which we do not own a majority of the equity, maintain voting control or have
the ability to control their policies, management or affairs as unconsolidated
affiliates. We lease some of our aircraft to a number of these
unconsolidated affiliates which in turn provide helicopter services to
customers.
4
As of
March 31, 2008, 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:
5
The
following table shows the distribution of our aircraft among our business units
as of March 31, 2008.
Fleet
Expansion
We expect
to incur additional capital expenditures over the next three to five years to
replace certain of our aircraft and upgrade strategic base
facilities. Our capital commitments in future periods related to this
fleet expansion are discussed under Item 7. “Management’s Discussion and
Analysis of Financial Condition — Liquidity and Capital Resources — Future Cash
Requirements — Capital Commitments” included elsewhere in this Annual Report and
are detailed in the table provided in that section.
North
America
As of
March 31, 2008, we conducted our North America operations primarily
from ten operating facilities along the U.S. Gulf of Mexico, with
additional operations in Alaska. Among our strengths in the U.S. Gulf of Mexico
region are our ten operating facilities, our advanced flight-following
systems and our widespread and strategically located offshore fuel
stations. As of March 31, 2008, we operated 139 aircraft in the U.S.
Gulf of Mexico and 17 aircraft in Alaska. During fiscal year 2008,
our North America business unit contributed 23% of our gross
revenue. We are one of the two largest suppliers of helicopter
services in the U.S. Gulf of Mexico and a major supplier in Alaska, where
we fly the entire length of the TransAlaska pipeline. The
U.S. Gulf of Mexico is a major offshore oil and gas producing region with
approximately 4,000 production platforms. The shallow water platforms
are typically unmanned and are serviced by our small aircraft. The
deep water platforms are serviced by our medium and large
aircraft. The North America business unit includes our Western
Hemisphere (“WH”) Centralized Operations, which performs major maintenance on
aircraft operated by our Western Hemisphere business units. Beginning
in fiscal year 2009, the North America business unit will be segregated into
three separate business units: Gulf of Mexico, Arctic and WH
Centralized Operations.
South
and Central America
As of
March 31, 2008, we conducted our South and Central America operations in Brazil,
Colombia, Mexico, Peru and Trinidad. As of March 31, 2008, we
operated 33 helicopters, most of which are medium sized, in South and Central
America (2 in Brazil, 4 in Colombia, 13 in Mexico, 2 in Peru and 12 in Trinidad)
and our unconsolidated affiliates operated 17 helicopters. In
Trinidad, Bristow Caribbean Limited (“BCL”), a joint venture, is the largest
helicopter services provider. In Mexico, we are the largest provider
of helicopter services through our joint venture partners, conducting diverse
operations ranging from seismic support to offshore crew
transfers. In Brazil, Colombia and Peru,we provide dry lease and
technical support services, typically to the local operators. During
fiscal year 2008, our South and Central America business unit contributed 6% of
our gross revenue. Beginning in fiscal year 2009, the South and
Central America business unit will be referred to as the Latin America business
unit.
6
Brazil
We own a
50% interest in Helicopter Leasing Associates (“HLA”), a Louisiana limited
liability company. HLA leases two aircraft from a third party, which
it leases to the former joint venture of ours in Brazil as mentioned
below. We currently provide dry lease and technical support to two
Brazilian operators. Our aircraft are located at the operators’ base
locations of Macae, Victoria and Uracu.
In March
2007, we sold our ownership interest in a joint venture that operates in Brazil
to our partners in the joint venture while we and HLA continued to lease
aircraft already in country to this entity. We sold six of our owned
aircraft in Brazil in fiscal year 2008.
We have
contracted to provide two new medium aircraft to another customer in Brazil
beginning in June and September 2008.
Mexico
We own a
49% interest in Hemisco Helicopters International, Inc. and Heliservicio
Campeche S.A. de C.V. (collectively, “HC”) which provide onshore helicopter
services to the Mexican Federal Electric Commission and offshore helicopter
transportation to Petróleos Mexicanos
("PEMEX") and other companies on a contract and ad hoc basis. HC owns
3 aircraft and leases 7 aircraft from us, 13 aircraft from another affiliate of
ours (discussed below) and 5 aircraft from a third party to provide helicopter
services to its customers. HC services customers from the primary
bases located in Mexico City, Cuidad del Carmen, Poza Rica, Tampico, Reynosa and
Monterrey.
We own a
49% interest in Rotorwing Leasing Resources, LLC. (“RLR”), which owns seven
aircraft and leases six aircraft from us, all of which it leases to
HC.
Trinidad
We own a
40% interest in BCL, a joint venture in Trinidad with a local partner that holds
the remaining 60% interest. BCL, the largest helicopter services
provider in Trinidad, provides offshore helicopter services to customers of ours
in Trinidad. BCL has 12 medium aircraft used to service our customers
which are primarily engaged in oil and gas activities. Because we
control the significant management decisions of this entity, including the
payment of dividends to our partner, we account for this entity as a
consolidated subsidiary. We have one base located at Trinidad’s
airport at the Port of Spain where we constructed five helipads during fiscal
year 2008.
Europe
As of
March 31, 2008, we operated 49 aircraft in Europe. We operate from
four bases in the U.K. and one base in Holland. Our Europe operations
are managed out of our facilities in Aberdeen, Scotland. Based on the
number of aircraft operating, we are the second largest provider of helicopter
services in the North Sea, where there are harsh weather conditions and
geographically concentrated offshore facilities. The offshore
facilities in the North Sea are large and require frequent crew change flight
services. We deploy the majority of the large aircraft in our
consolidated fleet in this region. 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. We also have an ownership interest in and lease aircraft
to our 49% owned Norwegian affiliate, Norsk Helikopter AS (“Norsk”), for use in
its North Sea operations (see discussion below). During fiscal year
2008, our Europe business unit contributed 36% of our gross
revenue.
During
the period from July 1, 2007 to April 3, 2008, we provided search and rescue
services using seven S-61 aircraft and operated four helicopter bases for the
U.K. Maritime Coastguard Agency (“MCA”) under a contract that was transitioned
to another operator. The conclusion of this contract ended a 24-year
association of providing critical search and rescue services to the
MCA. We are in a partnership with FB Heliservices Limited (“FBH”), an
unconsolidated affiliate of ours, and two third parties, Serco Limited and
Agusta Westland, through which we are seeking to obtain the future U.K.-wide
search and rescue contract that will require the provision of approximately 30
aircraft and is anticipated to start in 2012. We submitted a first
round bid in January 2008 and expect final selection in 2009. See
further discussion under Item 7. “Management’s Discussion and Analysis of
Financial Condition — Business Unit Operating Results — Fiscal Year 2008
Compared to Fiscal Year 2007 — Europe” included elsewhere in this Annual
Report.
7
The U.K.,
as do other countries in which we operate, limits foreign ownership of aviation
companies. To comply with these restrictions, we own only 49% of the
common stock of Bristow Aviation. In addition, we have a put/call
agreement with the other two stockholders of Bristow Aviation which grants us
the right to buy all of their shares of Bristow Aviation common stock (and
grants them the right to require us to buy all of their
shares). Under U.K. regulations, to maintain Bristow Aviation’s
operating license, we would be required to find a qualified European Union owner
to acquire any of the Bristow Aviation shares that we have the right or
obligation to acquire under the put/call agreement. In addition to
our equity investment in Bristow Aviation, we own subordinated debt issued by
Bristow Aviation.
We own a
49% interest in Norsk, a Norwegian corporation that provides helicopter services
in the Norwegian sector of the North Sea. Norsk operates 12 aircraft, 6 of which
are leased from us. Norsk owns 100% of Lufttransport AS, a Norwegian
company, which operates 20 aircraft and is engaged in providing air ambulance
services in Scandinavia. As of March 31, 2008, Norsk and its
subsidiary operated a total of 32 aircraft.
West
Africa
As of
March 31, 2008, we operated 50 aircraft in West Africa (all of which were
operating in Nigeria). We have the largest helicopter fleet and are the largest
provider of helicopter services to the oil and gas industry in the
area. In Nigeria, we deploy a combination of small, medium and large
aircraft and operate and service a diverse oil and gas customer base from nine
operational bases with the largest being our bases in Escravos, Warri, Port
Harcourt and Lagos. The marketplace for such 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 deep water exploration. During fiscal year
2008, our West Africa business unit contributed 17% of our gross
revenue.
Southeast
Asia
We
conduct our Southeast Asia operations predominantly in Australia and
Malaysia. As of March 31, 2008, we operated 27 helicopters in our
Southeast Asia business unit (23 of which were operating in
Australia). We have nine operational bases in Australia: six are
located in Western Australia and Victoria, Queensland and the Solomon Islands
each have one base. These operations are managed from our Australian head
office facility in Perth, Western Australia. During fiscal year 2008,
our Southeast Asia business unit contributed 11% of our gross
revenue.
We are
the largest provider of helicopter services to the oil and gas industry in
Australia. Our client base is largely derived from large oil and gas
operators. 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 where the fleet provides
helicopter services solely to offshore oil and gas operators. These
platforms are largely serviced by medium and large aircraft. We
provide engineering services to the Republic of Singapore Air Force from their
base in Oakey, Queensland and in January 2008 began providing helicopter
services to offshore oil and gas producers in the Gippsland Basin off the coast
of Victoria.
Operations
commenced in Malaysia in August 2007, and we currently have four medium aircraft
in Malaysia. The Malaysian operations are serviced from bases in
Kerteh and Bintulu with large oil and gas companies as customers.
Other
International
We
conduct our Other International operations in Egypt, India, Ireland, Kazakhstan,
Mauritania, Morocco, Russia and Turkmenistan. As of March 31, 2008,
we and our unconsolidated affiliates operated 63 aircraft (including 1 aircraft
held for sale as of March 31, 2008) in our Other International business unit
comprising a mixture of medium, large and fixed wing aircraft. During
fiscal year 2008, our Other International business unit contributed 5% of our
gross revenue. The following is a description of operations in our
Other International business unit:
8
EH
Centralized Operations
Our EH
Centralized Operations business unit is comprised of our technical services
business, other non-flight services business (e.g., provision of spare parts as
well as maintenance and supply chain services to other Eastern Hemisphere
business units) in the Eastern Hemisphere and division level expenses for our
Eastern Hemisphere businesses. These operations are not included
within any other business unit as they are managed separate and apart from these
other operations. During fiscal year 2008, our EH Centralized
Operations business unit contributed 1% of our gross revenue.
Our
technical services portion of this business unit provides helicopter repair
services from facilities located in 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.
We own a
50% interest in each of FBS Limited (“FBS”), FBH and FB Leasing Limited (“FBL”)
(collectively, the “FB Entities”), U.K. corporations which principally provide
pilot training, maintenance and support services. Most of the FB
Entities’ revenue is earned under an agreement with the British military that
runs through March 31, 2012. The FB Entities provide services to
military organizations in other countries as well. FBS and FBL own
and operate a total of 59 aircraft.
Global
Training
On April
2, 2007, we acquired all of the common equity of HAI, a leading flight training
provider with operations in Titusville, Florida, and Concord,
California. Upon purchase, HAI was renamed Bristow
Academy, which, when combined with our existing training facilities
in Norwich, England, forms a central core of our new Global Training
division. Additionally, we acquired Vortex, a flight training school
in New Iberia, Louisiana in November 2007.
We have
made the strategic decision to expand our existing training operations based
upon the anticipated long-term demand for skilled pilot and aircraft maintenance
personnel in the rotorwing aviation services business. This view is based upon
internal analysis of our existing pilot and aircraft maintenance personnel
compared to requirements to meet growing demand and from public comments made by
other participants in the rotorwing aviation services industry (both relating to
offshore energy services and other sectors) regarding general shortages in
qualified, experienced personnel. We believe that entry into the ab initio (“beginning”)
aviation training business provides us with a strategic advantage over
competitors. Bristow Academy represented 1% of consolidated revenue
for fiscal year 2008. We expect profitability of Bristow Academy to
improve in future periods, although the primary value of this business is the
supply of pilots for use in our global operations. During fiscal year
2008, approximately 200 pilots graduated from Bristow Academy, and we hired 47
pilots into our other business units who are recent graduates of Bristow
Academy.
9
Bristow
Academy is a leading provider of aviation training services with over 20 years
experience. Bristow Academy trains students from around the world to
become helicopter pilots. Our ab initio flight training
program typically lasts nine to twelve months and culminates with a
student completing approximately 200 hours of flight instruction, passing
written and flight exams and obtaining a commercial pilot license with
instrument rating and flight instructor qualifications. Later, with
500 to 1,000 hours of flight experience, these employees then become qualified
for offshore flight operations and have the opportunity to join Bristow’s
Helicopter Services operations. Alternatively, graduates of Bristow
Academy may pursue aviation careers in any number of flight services
sectors. Currently, Bristow Academy has approximately 200 students
enrolled in ab initio
flight training. Additionally, Bristow has historically provided
continuing education to its own staff of pilots and aircraft maintenance
personnel worldwide.
Customers
and Contracts
The
principal customers for our Helicopter Services are national and international
oil and gas companies. During fiscal years 2006, 2007 and 2008,
respectively, the Shell Companies accounted for 10%, 18% and 21%, respectively,
of our gross revenue. No other customer accounted for 10% or more of
our gross revenue during those periods. During fiscal year 2008, our
top ten customers accounted for 57% of our gross revenue.
Our
helicopter 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. We also provide services to customers on an “ad hoc” basis,
which usually entails a shorter notice period and shorter
duration. Our charges for ad hoc services are generally based on an
hourly rate, or a daily or monthly fixed fee plus additional fees for each hour
flown. Generally, our ad hoc services have a higher margin than our
other helicopter contracts due to supply and demand dynamics. 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 charged to the customer. We also derive
revenue from reimbursements for third party out of pocket cost such as certain
landing and navigation costs, consultant salaries, travel and accommodation
costs, and dispatcher charges. The costs incurred that are rebilled
to our customers are presented as reimbursable expense and the related revenue
is presented as reimbursable revenue in our consolidated statements of
income.
Our
helicopter contracts are for varying periods and in certain cases permit the
customer to cancel the charter before the end of the contract
term. These contracts provide that the customer will reimburse us for
cost increases associated with the contract and are cancelable by the customer
with notice of generally 30 days in the U.S. Gulf of Mexico, 90 to
180 days in Europe and 90 days in West Africa. In North America, we
generally enter into short-term contracts for twelve months or less, although we
occasionally enter into longer-term contracts. In Europe, contracts
are longer term, generally between two and five years. In South and Central
America, West Africa, Southeast Asia and Other International, contract length
generally ranges from three to five years. At the expiration of a
contract, our customers often negotiate renewal terms with us for the next
contract period. In other instances, customers solicit new bids at
the expiration of a contract. Contracts are generally awarded based
on a number of factors, including price, quality of service, operational
experience, record of safety, quality and type of equipment, customer
relationship and professional reputation. Incumbent operators
typically have a competitive advantage in the bidding process based on their
relationship with the customer, knowledge of the site characteristics and
understanding of the cost structure of the operations.
Competition
The
helicopter transportation business is highly competitive throughout the
world. We compete against several providers in almost all of our
regions of operation. We have several significant competitors in the
U.S. Gulf of Mexico, two significant competitors in the North Sea and one
significant competitor in Nigeria. We believe that it is difficult
for additional significant competitors to enter our industry because it requires
considerable capital investment, working capital, a complex system of onshore
and offshore bases, personnel and operating experience. However,
these requirements can be overcome with the appropriate level of customer
support and commitment. In addition, while not the predominant
practice, certain of our customers and potential customers in the offshore
energy industry perform their own helicopter services on a limited
basis.
Generally,
customers charter helicopters on the basis of competitive bidding. In some
situations, our customers may renew or extend existing contracts without
employing a competitive bid process. Contracts in our North America
business unit are generally renewable on an annual or shorter
basis. For our operations in the North Sea and other international
locations, contracts tend to be of longer duration. While price is a
key determinant in the award of a contract to a successful bidder, quality of
service, operational experience, record of safety, quality and type of
equipment, customer relationship and professional reputation are also factors
taken into consideration. Since certain of our customers in the
offshore energy industry have the capability to perform their own helicopter
services, our ability to increase charter rates may be limited under certain
circumstances.
10
Safety,
Industry Hazards and Insurance
Hazards,
such as harsh weather and marine conditions, mechanical failures, crashes and
collisions are inherent in the offshore transportation industry and may cause
losses of equipment and revenue, and death or injury to personnel. We
have an industry leading safety record. Our air accident rate per
100,000 flight hours is substantially less than that of both the U.S. civil
turbine engine helicopter average and the global oil and gas production
helicopter average over the past four years for which data is
published.
In fiscal
year 2008, we had two helicopter crashes resulting in fatalities, both of which
are still under investigation, and one other helicopter accident which resulted
in no fatalities. In fiscal year 2007, we had no accidents resulting
in fatalities. In fiscal year 2006, we had one helicopter accident in
the U.S. Gulf of Mexico that resulted in two fatalities. Our accident rates
have typically been significantly lower than the industry average.
During
the fourth quarter of fiscal year 2007, we launched a global safety campaign to
further improve and enhance safety. It is called ‘Target Zero’, as
our common safety vision is to have zero accidents, zero harm to people, and
zero harm to the environment. In conjunction with this initiative, we
completed a global safety culture survey across most of our operations,
providing us insight regarding our employees’ views about
safety. Safety leadership workshops commenced in late April 2007 and
have been delivered to over 550 managers and supervisors throughout fiscal year
2008. In early fiscal year 2009, we have extended the Target Zero
program to ten additional seminars in which we are training champions (line
pilots, maintenance staff and supervisors) who will continue to cascade the
safety training to all line employees.
We
maintain hull and liability insurance, which generally insures us against damage
to our aircraft, as well as certain legal liabilities to others. We
also carry workers’ compensation, employers’ liability, auto liability, property
and casualty coverages for most of our U.S. and U.K. operations. We
believe that our insurance coverage will be adequate to cover any claims
ultimately paid related to accidents which have occurred in the
past. It is also our policy to carry insurance for, or require our
customers to indemnify us against, expropriation, war risk and confiscation of
the helicopters we use in our operations internationally.
Terrorist
attacks, the continuing threat of terrorist activity and economic and political
uncertainties (including, but not limited to, our operations in Nigeria), may
significantly affect our premiums for much of our insurance
program. There is no assurance that in the future we will be able to
maintain our existing coverage or that we will not experience substantial
increases in premiums, nor is there any assurance that our liability coverage
will be adequate to cover all potential claims that may arise.
Employees
As of
March 31, 2008, we employed 3,644 employees. The following table
shows the number of employees by business unit at March 31, 2008:
We employ
approximately 330 pilots in our North America business unit who are represented
by the Office and Professional Employees International Union (“OPEIU”) under a
collective bargaining agreement. We and the pilots represented by the
OPEIU ratified an amended collective bargaining agreement on April 4,
2005. The terms under the amended agreement are fixed until
October 3, 2008 and include wage increases for the pilot group and
improvements to several benefit plans. We do not believe that these
increases place us at a competitive, financial or operational
disadvantage.
11
Additionally,
as of March 31, 2008, substantially all of our employees in the U.K.,
Nigeria and Australia are represented by collective bargaining or union
agreements which are ongoing. With respect to the U.K., these
agreements have no specific termination dates. The collective
bargaining agreements in Nigeria renew annually, typically on a retroactive
basis.
We are
currently involved in negotiations with unions representing our pilots and
engineers in the U.K. As a result of the negotiations complete to
date, labor rates under our existing contracts increased 4-5% starting in July
2007, and the new labor rates will continue through June 2008.
During
the three months ended December 31, 2007, we completed annual contract
negotiations with the unions in Nigeria, which resulted in increased labor
costs.
As part
of a strategic review and reorganization that commenced in 2007, our West Africa
business unit embarked upon a plan to indigenize the local work force in line
with the federal government targets for national development and content. A
large scale training program was embarked upon in collaboration with air schools
in South Africa and Bristow Academy in the U.S. to train Nigerian pilots. In
addition to the pilot training, an initiative was put in place to foster and
develop a partnership with the Nigeria College of Aviation Technology to train
Nigerian engineers for the Nigerian Civil Aviation Authority
examinations.
In April
2008, an agreement was successfully negotiated with the pilot’s union in
Australia. The agreement extends to June 30, 2010 and we do not anticipate any
industrial action by pilots prior to the expiration of the agreement. The
agreement was lodged with the relevant authorities to become binding on all
parties at the beginning of May 2008. As a result of this agreement,
labor rates increased 20.4%, portions of which were retroactive to May 2007 and
January 2008. Additional increases of 5% will become effective in September 2008
and July 2009.
Many of
the employees of our affiliates are represented by collective bargaining
agreements. Periodically, certain groups of our employees who are not
covered by a collective bargaining agreement consider entering into such an
agreement. We believe that our relations with our employees are
generally satisfactory. We do not expect increased labor rates to
result in a decline in our operating margins over the long-term.
Government
Regulation
United
States
As a
commercial operator of aircraft, our U.S. operations are subject to
regulations under the Federal Aviation Act of 1958, as amended, and other
laws. We carry persons and property in our helicopters under an Air
Taxi Certificate granted by the FAA. The FAA regulates our
U.S. flight operations and, in this respect, exercises jurisdiction over
personnel, aircraft, ground facilities and certain technical aspects of our
operations. The National Transportation Safety Board is authorized to
investigate aircraft accidents and to recommend improved safety standards. Our
U.S. operations are also subject to the Federal Communications Act of 1934
because we use radio facilities in our operations.
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 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 at
least 75% of its voting interests are owned or controlled by U.S. citizens, the
president of our company is a U.S. citizen, two-thirds or more of our directors
are U.S. citizens and our company is under the actual control of 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 of the other requirements
were 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 outstanding
voting capital 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, 2008, approximately 1,970,000 shares of
our common stock, par value $.01 per share (“Common Stock”), were held by
persons with foreign addresses. These shares represented approximately 8.2% of
our total outstanding Common Stock as of March 31, 2008. Our
foreign ownership may fluctuate on each trading day because a substantial
portion of our Common Stock and our 5.50% Mandatory Convertible Preferred
Stock (“Preferred Stock”) is publicly traded.
12
United
Kingdom
Our
operations in the U.K. are subject to the Civil Aviation Act 1982 and other
similar English and European statutes and regulations. We carry persons and
property in our helicopters pursuant to an operating license issued by the Civil
Aviation Authority (“CAA”). The holder of an operating license must
meet the ownership and control requirements of Council
Regulation 2407/92. To operate under this license, the company
through which we conduct operations in the U.K., Bristow Helicopters Ltd., must
be owned directly or through majority ownership by European Union nationals, and
must at all times be effectively controlled by them. Bristow
Helicopters Ltd. is a wholly owned subsidiary of Bristow Aviation. We
own 49% and hold certain put/call rights over additional shares of common stock
of Bristow Aviation.
The CAA
regulates our U.K. flight operations and exercises jurisdiction over personnel,
aircraft, ground facilities and certain technical aspects of those
operations. The CAA often imposes improved safety
standards. Under the Licensing of Air Carriers Regulations 1992, it
is unlawful to operate certain aircraft for hire within the U.K. unless such
aircraft are approved by the CAA. Changes in U.K. or European Union
statutes or regulations, administrative requirements or their interpretation may
have a material adverse effect on our business or financial condition or on our
ability to continue operations in these areas.
Other
Our
operations in areas other than the U.S. and the U.K. also are subject to local
governmental regulations that may limit foreign ownership of aviation
companies. Because of these local regulations, we conduct some of our
operations through entities in which local citizens own a majority interest and
we hold only a minority interest, or under contracts that provide for us to
operate assets for the local companies or to conduct their flight
operations. This includes our operations in Kazakhstan, Russia and
Turkmenistan. Changes in local laws, regulations or administrative
requirements or their interpretation may have a material adverse effect on our
business or financial condition or on our ability to continue operations in
these areas.
Environmental
All of
our operations are subject to laws and regulations controlling the discharge of
materials into the environment or otherwise relating to the protection of the
environment. If we fail to comply with these environmental laws and
regulations, administrative, civil and criminal penalties may be imposed, and we
may become subject to regulatory enforcement actions in the form of injunctions
and cease and desist orders. We may also be subject to civil claims
arising out of a pollution event. These laws and regulations may
expose us to strict, joint and several liability for the conduct of or
conditions caused by others or for our own acts even though these actions were
in compliance with all applicable laws at the time they were
performed. To date, such laws and regulations have not had a material
adverse effect on our business, results of operations or financial
condition.
Increased
public awareness and concern over the environment, however, may result in future
changes in the regulation of the offshore energy industry, which in turn could
adversely affect us. The trend in environmental regulation is to
place more restrictions and limitations on activities that may affect the
environment, and thus there can be no assurance as to the effect of such
regulation on our operations or on the operations of our
customers. We try to anticipate future regulatory requirements that
might be imposed and plan accordingly to remain in compliance with changing
environmental laws and regulations and to minimize the costs of such
compliance. We do not believe that compliance with federal, state or
local environmental laws and regulations will have a material adverse effect on
our business, financial position or results of operations. We cannot
assure you, however, that future events, such as changes in existing laws, the
promulgation of new laws, or the development or discovery of new facts or
conditions will not cause us to incur significant costs. Below is a
discussion of the material U.S. environmental laws and regulations that relate
to our business. We believe that we are in substantial compliance
with all of these environmental laws and regulations.
Under the
Comprehensive Environmental Response, Compensation and Liability Act, referred
to as CERCLA or the Superfund law, and related state laws and regulations,
strict, joint and several liability can be imposed without regard to fault or
the legality of the original conduct on certain classes of persons that
contributed to the release of a hazardous substance into the
environment. These persons include the owner and operator of a
contaminated site where a hazardous substance release occurred and any company
that transported, disposed of or arranged for the transport or disposal of
hazardous substances, even from inactive operations or closed facilities, that
have been released into the environment. In addition, neighboring
landowners or other third parties may file claims for personal injury, property
damage and recovery of response cost. We currently own, lease, or
13
operate
properties and facilities that, in some cases, have been used for industrial
activities for many years. Hazardous substances, wastes, or
hydrocarbons may have been released on or under the properties owned or leased
by us, or on or under other locations where such substances have been taken for
disposal. In addition, some of these properties have been operated by third
parties or by previous owners whose treatment and disposal or release of
hazardous substances, wastes, or hydrocarbons was not under our
control. These properties and the substances disposed or released on
them may be subject to CERCLA and analogous state statutes. Under
such laws, we could be required to remove previously disposed substances and
wastes, remediate contaminated property, or perform remedial activities to
prevent future contamination. These laws and regulations may also
expose us to liability for our acts that were in compliance with applicable laws
at the time the acts were performed. We have been named as a
potentially responsible party in connection with certain sites. See further
discussion under Item 3. “Legal Proceedings” included elsewhere in this Annual
Report.
In
addition, since our operations generate wastes, including some hazardous wastes,
we may be subject to the provisions of the Resource, Conservation and Recovery
Act, or RCRA, and analogous state laws that limit the approved methods of
disposal for some types of hazardous and nonhazardous wastes and require owners
and operators of facilities that treat, store or dispose of hazardous waste and
to clean up releases of hazardous waste constituents into the environment
associated with their operations. Some wastes handled by us in our
field service activities that currently are exempt from treatment as hazardous
wastes may in the future be designated as “hazardous wastes” under RCRA or other
applicable statutes. If this were to occur, we would become subject
to more rigorous and costly operating and disposal requirements.
The
Federal Water Pollution Control Act, also known as the Clean Water Act, and
analogous state laws impose restrictions and strict controls regarding the
discharge of pollutants into state waters or waters of the U.S. The
discharge of pollutants into jurisdictional waters is prohibited unless the
discharge is permitted by the U.S. Environmental Protection Agency, also
referred to as the EPA, or applicable state agencies. Some of our
properties and operations require permits for discharges of wastewater and/or
stormwater, and we have a system in place for securing and maintaining these
permits. In addition, the Oil Pollution Act of 1990 imposes a variety
of requirements on responsible parties related to the prevention of oil spills
and liability for damages, including natural resource damages, resulting from
such spills in the waters of the U.S. A responsible party includes
the owner or operator of a facility. The Clean Water Act and
analogous state laws provide for administrative, civil and criminal penalties
for unauthorized discharges and, together with the Oil Pollution Act, impose
rigorous requirements for spill prevention and response planning, as well as
substantial potential liability for the costs of removal, remediation, and
damages in connection with any unauthorized discharges.
Some of
our operations also result in emissions of regulated air
pollutants. The Federal Clean Air Act and analogous state laws
require permits for facilities that have the potential to emit substances into
the atmosphere that could adversely affect environmental
quality. Failure to obtain a permit or to comply with permit
requirements could result in the imposition of substantial administrative, civil
and even criminal penalties.
Our
facilities and operations are also governed by laws and regulations relating to
worker health and workplace safety, including the Federal Occupational Safety
and Health Act, or OSHA. We believe that appropriate precautions are
taken to protect our employees and others from harmful exposure to potentially
hazardous materials handled and managed at our facilities, and that we operate
in substantial compliance with all OSHA or similar regulations.
Our
operations outside of the U.S. are subject to similar foreign governmental
controls relating to protection of the environment. We believe that,
to date, our operations outside of the U.S. have been in substantial compliance
with existing requirements of these foreign governmental bodies and that such
compliance has not had a material adverse effect on our
operations. There is no assurance, however, that future expenditures
to maintain compliance will not become material.
14
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 Customers 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
implementation by our customers 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. As part of these measures, these companies are
attempting 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 alternative
transportation methods. 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.
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 dramatic 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.
15
We
depend on a small number of large offshore energy industry customers for a
significant portion of our revenue.
We derive
a significant amount of our revenue from a small number of national oil
companies and major and independent oil and gas companies. Our loss
of one of these significant customers, if not offset by sales to new or other
existing customers, could have a material adverse effect on our business,
financial condition and results of operations. Additionally, a change
in policy by national oil companies could adversely affect us. See
Item 1. “Business — Customers and Contracts” included elsewhere in this
Annual Report.
Our
contracts generally can be terminated or downsized by our customers without
penalty.
Many of
our fixed-term contracts contain provisions permitting early termination by the
customer for any reason and generally without penalty, and with limited notice
requirements. In addition, many of our contracts permit our customers
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 customer contracts or the terms of those
contracts.
We
may not be able to obtain customer 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
customer 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 customer
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 customers may
request new helicopters in lieu of our existing helicopters, which could
adversely affect the utilization of our existing fleet.
Risks
Relating to Our Internal Review and Governmental Investigations
The
DOJ investigation relating to the Internal Review, any proceedings related to
the Internal Review including proceedings in other countries and the
consequences of the activities identified in the Internal Review could result in
civil or criminal proceedings, the imposition of fines and penalties, the
commencement of third-party litigation, the incurrence of expenses, the loss of
business and other adverse effects on our Company.
In
February 2005, we voluntarily advised the staff of the SEC that the Audit
Committee of our board of directors had engaged special outside counsel to
undertake a review of certain payments made by two of our affiliated entities in
a foreign country. The review of these payments, which initially
focused on Foreign Corrupt Practices Act matters, was subsequently expanded by
the Audit Committee to cover operations in other countries and other issues (the
“Internal Review”). As a result of the findings of the Internal
Review (which was completed in late 2005), our quarter ended December 31, 2004
and prior financial statements were restated. We also provided the
SEC with documentation resulting from the Internal Review which eventually
resulted in a formal SEC investigation. In September 2007, we
consented to the issuance of an administrative cease-and-desist order by the
SEC, in final settlement of the SEC investigation. The SEC did not impose any
fine or other monetary sanction upon the Company. Without admitting
or denying the SEC's findings, we consented to be ordered not to engage in
future violations of certain provisions of the federal securities laws involving
improper foreign payments, internal controls and books and
records. For further information on the restatements, see our Annual
Report on Form 10-K for the fiscal year ended March 31, 2005.
Following
the previously disclosed settlement with the SEC regarding improper payments
made by foreign affiliates of the Company in Nigeria, outside counsel to the
Company was contacted by the DOJ and was asked to provide certain information
regarding the Audit Committee’s related Internal Review. We previously provided
disclosure regarding the Internal Review in our Annual Report on Form 10-K for
the fiscal year ended March 31, 2005. We have entered into an
agreement with the DOJ that tolls the statute of limitations relating to these
matters. We intend to continue to be responsive to the DOJ’s requests. At this
time, it is not possible to predict what the outcome of the DOJ’s investigation
into these matters will be for the Company.
As a
result of the disclosure and remediation of a number of activities identified in
the Internal Review, we may encounter difficulties conducting business in
certain foreign countries and retaining and attracting additional business with
certain customers. We cannot predict the extent of these
difficulties; however, our ability to continue conducting
16
business
in these countries and with these customers and through agents may be
significantly impacted. We could still face legal and administrative
proceedings, the institution of administrative, civil injunctive or criminal
proceedings involving us and/or current or former employees, officers and/or
directors who are within the jurisdictions of such authorities, the imposition
of fines and other penalties, remedies and/or sanctions, including precluding us
from participating in business operations in their countries. It is
also possible that we may become subject to claims by third parties, possibly
resulting in litigation. The matters identified in the Internal
Review and their effects could have a material adverse effect on our business,
financial condition and results of operations.
In
addition, we face legal actions relating to remedial actions which we have taken
as a result of the Internal Review, and may face further legal action of this
type in the future. 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 have responded to this claim and are continuing to
investigate this matter.
As we
continue to operate our compliance program, other situations involving foreign
operations, similar to those matters disclosed to the SEC in February 2005 and
described above, could arise that warrant further investigation and subsequent
disclosures. As a result, new issues may be identified that may impact our
financial statements and lead us to take other remedial actions or otherwise
adversely impact us.
During
fiscal years 2006 and 2007, we incurred approximately $10.5 million and $3.1
million in professional fees related to the Internal Review and related
matters. During fiscal year 2008, we reversed $1.0 million of
previously accrued settlement costs due to the fact that we settled the SEC
investigation and incurred $0.6 million for legal fees related to the DOJ
investigation relating to the Internal Review.
The
disclosure and remediation of activities identified in the Internal Review could
result in the loss of business relationships and adversely affect our
business.
As a
result of the disclosure and remediation of a number of activities identified in
the Internal Review, we may encounter difficulties conducting business in
certain foreign countries and retaining and attracting additional business with
certain customers. We cannot predict the extent of these
difficulties; however, our ability to continue conducting business in these
countries and with these customers and through agents may be significantly
impacted. In addition, applicable governmental authorities may
preclude us from bidding on contracts to provide services in the countries where
improper activities took place.
The
DOJ antitrust investigation or any related proceedings in other countries could
result in criminal proceedings and the imposition of fines and penalties, the
commencement of third-party litigation, the incurrence of expenses, the loss of
business and other adverse effects on our Company.
In June
2005, one of our subsidiaries received a document subpoena from the DOJ. The
subpoena related to a grand jury investigation of potential antitrust violations
among providers of helicopter transportation services in the U.S. Gulf of
Mexico. The subpoena focused on activities during the period from
January 1, 2000 to June 13, 2005. We believe we have
submitted to the DOJ substantially all documents responsive to the
subpoena. We have had discussions with the DOJ and provided documents
related to our operations in the U.S. as well as internationally. We
intend to continue to provide additional information as required by the DOJ in
connection with the investigation. There is no assurance that, after
review of any information furnished by us or by third parties, the DOJ will not
ultimately conclude that violations of U.S. antitrust laws have
occurred. The period of time necessary to resolve the DOJ antitrust
investigation is uncertain, and this matter could require significant management
and financial resources that could otherwise be devoted to the operation of our
business.
The
outcome of the DOJ antitrust investigation and any related legal proceedings in
other countries could include civil injunctive or criminal proceedings involving
us or our current or former officers, directors or employees, the imposition of
fines and other penalties, remedies and/or sanctions, including potential
disbarments, and referrals to other governmental agencies. In
addition, in cases where anti-competitive conduct is found by the government,
there is a greater likelihood for civil litigation to be brought by third
parties seeking recovery. Any such civil litigation could have
serious consequences for our Company, including the costs of the litigation and
potential orders to pay restitution or other damages or penalties, including
potentially treble damages, to any parties that were determined to be injured as
a result of any impermissible anti-competitive conduct. Any of these
adverse consequences could have a material adverse effect on our business,
financial condition and results of operations. The DOJ antitrust
investigation, any related
17
proceedings
in other countries and any third-party litigation, as well as any negative
outcome that may result from the investigation, proceedings or litigation, could
also negatively impact our relationships with customers and our ability to
generate revenue.
In
connection with this matter, we incurred $2.6 million, $1.9 million and
$0.7 million in legal and other professional fees in fiscal years 2006, 2007 and
2008, respectively, and significant expenditures may continue to be incurred in
the future.
Risks
Relating to Our Business
We
are highly dependent upon the level of activity in the U.S. Gulf of Mexico and
the North Sea.
In fiscal
years 2006, 2007, and 2008 approximately 55%, 55% and 53%, respectively, of our
gross revenue was derived from helicopter services provided to customers
operating in the U.S. Gulf of Mexico and the North Sea. The
U.S. Gulf of Mexico and the North Sea are mature exploration and production
regions that have experienced substantial seismic survey and exploration
activity for many years. Because a large number of oil and gas
prospects in these regions have already been drilled, additional prospects of
sufficient size and quality could be more difficult to identify. 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 U.S. Gulf of Mexico or the
North Sea 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.
Our
future growth depends on the level of international oil and gas activity and our
ability to operate outside of the U.S. Gulf of Mexico and the North
Sea.
Our
future growth will depend significantly on our ability to expand into
international markets outside of the U.S. Gulf of Mexico and the North
Sea. Expansion of our business depends on our ability to operate in
these regions.
Expansion
of our business outside of the U.S. Gulf of Mexico and the North Sea may be
adversely affected by:
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 U.S. Gulf of Mexico and the North Sea, our
future business, financial condition and results of operations may be adversely
affected, and our operations outside of the U.S. Gulf of Mexico and the North
Sea 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 — Capital Commitments” included elsewhere in this Annual
Report.
Our
operations outside of the U.S. Gulf of Mexico and the North Sea are subject to
additional risks.
During
fiscal years 2006, 2007 and 2008, approximately 45%, 45% and 47%, respectively,
of our gross revenue was attributable to helicopter services provided to oil and
gas customers operating outside of the U.S. Gulf of Mexico and the North
Sea. Operations in most of these areas are subject to various risks
inherent in conducting business in international locations,
including:
18
For
example, there has been continuing unrest in Nigeria, where we derived 15%, 16%
and 17% of our gross revenue in fiscal years 2006, 2007 and 2008,
respectively. This unrest adversely affected our results of
operations in Nigeria in fiscal year 2007, and any 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 the future in
Nigeria or occur in the future elsewhere.
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 currency fluctuations and
exchange rate risks. The majority of both our revenue and expenses
from our Europe business unit is denominated in British pound
sterling. Our foreign exchange rate risk is even greater when our
revenue is denominated in a currency different from that associated with the
corresponding expenses. In addition, some of our contracts provide
for payment in currencies other than British pound sterling or
U.S. dollars. We attempt to minimize our exposure to foreign
exchange rate risk by contracting the majority of our services, other than in
our Europe business unit, in U.S. dollars. 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. 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). In the past three fiscal years, our
stockholders’ investment has decreased by as much as $20.7 million and
increased by as much as $27.1 million, as a result of translation
adjustments. In addition, during this period our results of
operations have included foreign currency gains or losses ranging from a loss of
$9.8 million to a gain of $5.4 million. 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, Kazakhstan, 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.
We
operate in many international areas through entities that we do not
control.
We
conduct many of our international operations through entities in which we have a
minority 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
Egypt, Mexico, Norway, the U.K., Kazakhstan and Turkmenistan. We
provide engineering and administrative support to certain of these
entities. We derive significant amounts of lease revenue, service
revenue and dividend income from these entities. In fiscal years
2006, 2007 and 2008, we received approximately $56.2 million,
$54.1 million and $56.5 million, respectively, of revenue from the
provision of aircraft and other services to unconsolidated
affiliates. Because we do not own a majority 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.
19
Labor
problems could adversely affect us.
Approximately
330 pilots in our North America business unit and approximately 2,200 of our
employees in the U.K., Nigeria and Australia (collectively, about 69% of our
employees) are represented under collective bargaining or union
agreements. Periodically, certain groups of our employees who are not
covered by a collective bargaining agreement consider entering into such an
agreement. In addition, many of the employees of our affiliates are
represented by collective bargaining 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.
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 customers 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.S. or U.K. 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 expansion program
will require us to retain additional pilots, mechanics and other flight-related
personnel. Finally, as a result of the disclosure and remediation of activities
identified in the Internal Review, we may have difficulty attracting and
retaining qualified personnel, and we may incur increased expenses. 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 or may
increase our operating costs.
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.
We
are subject to government regulation that limits foreign ownership of aircraft
companies.
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
20
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.
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 customers. 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.
We
face substantial competition.
The
helicopter business is highly competitive. Chartering of helicopters
is usually 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, reliability, safety, professional reputation, availability, equipment and
quality of service.
In our
North America business unit, we face competition from a number of providers,
including one U.S. competitor with a comparable number of helicopters servicing
the U.S. Gulf of Mexico. We have two significant competitors in the
North Sea and one significant competitor in Nigeria.
Certain
of our customers have the capability to perform their own helicopter operations
should they elect to do so, which has a limiting effect on our
rates. The loss of a significant number of our customers or
termination of a significant number of our contracts could have a material
adverse effect on our business, financial condition and results of
operations.
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. The loss of a significant number of our customers or
termination of a significant number of our contracts could have a material
adverse effect on our business, financial condition and results of
operations.
See
further discussion in Item 1. “Business — Competition” included elsewhere in
this Annual Report.
Our
operations are subject to weather-related and seasonal
fluctuations.
Generally,
our operations can be impaired by harsh weather conditions. Poor
visibility, high wind, heavy precipitation and sand storms 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 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
21
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.
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
impact 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:
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 and the limited
availability of aircraft 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 faced 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. Currently, helicopter manufacturers are
indicating very limited availability for large- and medium-sized aircraft during
the next two years, and we have limited alternative sources of new
aircraft. As a result, 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 customers, and execute our growth
strategy. Additionally, lack of availability of new aircraft
resulting from a backlog in orders has resulted in an increase in prices for
certain types of used helicopters.
22
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. Currently those vendors are
working at or near full capacity supporting the aircraft production lines and
the maintenance requirements of the aircraft operators who are also operating at
near capacity in certain industries, including operators such as us who support
the energy industry. These vendors are therefore experiencing backlogs in
manufacturing schedules and some parts are in limited supply from time to
time. Lead times for ordering certain critical components are
extending into longer time periods, and this 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
customers 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 Our Level of Indebtedness
Our
substantial indebtedness could adversely affect our financial condition and
impair our ability to fulfill our obligations under our
indebtedness.
We have
substantial debt and substantial debt service requirements. As of March 31,
2008, we had approximately $606.2 million of outstanding
indebtedness.
Our level
of indebtedness may have important consequences to our business and to you,
including:
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. We cannot assure you 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.
23
Despite
our and our subsidiaries’ current levels of indebtedness, we may incur
substantially more debt, which could further exacerbate the risks associated
with our substantial indebtedness.
We had
$100 million of availability for borrowings under our Credit Facilities as of
March 31, 2008, subject to our maintenance of covenants and other conditions.
Although the agreements governing our credit facilities and the indentures
governing our 6⅛% Senior Notes due 2013 (the “6⅛% Senior Notes”) and the 7½%
Senior Notes due 2017 (the “7½% Senior Notes” and, together with the 6⅛% Senior
Notes, the “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 indentures governing the Senior Notes also allow 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, 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.
Restrictive
covenants in our debt agreements may restrict the manner in which we can operate
our business.
Our
Credit Facilities and the indentures governing the Senior Notes limit, among
other things, our ability and the ability of our restricted subsidiaries
to:
If we
fail to comply with these covenants, we would be in default under our Credit
Facilities and the indentures governing the 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 of these covenants, 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. 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 that indebtedness and our other
indebtedness.
24
The
instruments governing certain of our indebtedness, including our Credit
Facilities and the indentures governing the 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 that contain cross-default provisions.
Item
1B. Unresolved
Staff Comments
None.
Item
2. Properties
The
number and types of aircraft we operate are described in Item 1. “Business —
Helicopter Services” above. In addition, we lease the significant properties
listed below for use in our operations.
In
addition to these facilities, we lease various office and operating facilities
worldwide, including facilities along the U.S. Gulf of Mexico which support
our North America operations and numerous residential locations near our
operating bases in the U.K., Australia, Russia, Nigeria and Trinidad primarily
for housing pilots and staff supporting those areas of
operation. 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 6 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, 2007 and 2008 can be found in Note 10 in the “Notes to Consolidated
Financial Statements” included elsewhere in this Annual Report.
Item
3. Legal
Proceedings
Internal
Review
In
February 2005, we voluntarily advised the staff of the SEC that the Audit
Committee of our board of directors had engaged special outside counsel to
undertake a review of certain payments made by two of our affiliated entities in
a foreign country. The review of these payments, which initially
focused on Foreign Corrupt Practices Act matters, was subsequently expanded by
the Audit Committee to cover operations in other countries and other issues (the
“Internal Review”). As a result of the findings of the Internal
Review (which was completed in late 2005), our quarter ended December 31, 2004
and prior financial statements were restated. We also provided the
SEC with documentation resulting from the Internal Review which eventually
resulted in a formal SEC investigation. In September 2007, we
consented to the issuance of an administrative cease-and-desist order by the
SEC, in final settlement of the SEC investigation. The SEC did not impose any
fine or other monetary sanction upon the Company. Without admitting
or denying the SEC's findings, we consented to be ordered not to engage in
future violations of certain provisions of the federal securities laws involving
improper foreign payments, internal controls and books and
records. For further information on the restatements, see our Annual
Report on Form 10-K for the fiscal year ended March 31, 2005.
25
Following
the previously disclosed settlement with the SEC regarding improper payments
made by foreign affiliates of the Company in Nigeria, outside counsel to the
Company was contacted by the DOJ and was asked to provide certain information
regarding the Audit Committee’s related Internal Review. We previously provided
disclosure regarding the Internal Review in our Annual Report on Form 10-K for
the fiscal year ended March 31, 2005. We have entered into an
agreement with the DOJ that tolls the statute of limitations relating to these
matters. We intend to continue to be responsive to the DOJ’s requests. At this
time, it is not possible to predict what the outcome of the DOJ’s investigation
into these matters will be for the Company.
As a
result of the disclosure and remediation of a number of activities identified in
the Internal Review, we may encounter difficulties conducting business in
certain foreign countries and retaining and attracting additional business with
certain customers. We cannot predict the extent of these
difficulties; however, our ability to continue conducting business in these
countries and with these customers and through agents may be significantly
impacted. We could still face legal and administrative proceedings, the
institution of administrative, civil injunctive or criminal proceedings
involving us and/or current or former employees, officers and/or directors who
are within the jurisdictions of such authorities, the imposition of fines and
other penalties, remedies and/or sanctions, including precluding us from
participating in business operations in their countries. It is also
possible that we may become subject to claims by third parties, possibly
resulting in litigation. The matters identified in the Internal
Review and their effects could have a material adverse effect on our business,
financial condition and results of operations.
In
addition, we face legal actions relating to remedial actions which we have taken
as a result of the Internal Review, and may face further legal action of this
type in the future. 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 have responded to this claim and are continuing to
investigate this matter.
As we
continue to operate our compliance program, other situations involving foreign
operations, similar to those matters disclosed to the SEC in February 2005 and
described above, could arise that warrant further investigation and subsequent
disclosures. As a result, new issues may be identified that may impact our
financial statements and lead us to take other remedial actions or otherwise
adversely impact us.
During
fiscal years 2006 and 2007, we incurred approximately $10.5 million and $3.1
million in professional fees related to the Internal Review and related
matters. During fiscal year 2008, we reversed $1.0 million of
previously accrued settlement costs due to the fact that we settled the SEC
investigation and incurred $0.6 million for legal fees related to the DOJ
investigation relating to the Internal Review.
Document
Subpoena Relating to DOJ Antitrust Investigation
In June
2005, one of our subsidiaries received a document subpoena from the DOJ. The
subpoena related to a grand jury investigation of potential antitrust violations
among providers of helicopter transportation services in the U.S. Gulf of
Mexico. The subpoena focused on activities during the period from
January 1, 2000 to June 13, 2005. We believe we have
submitted to the DOJ substantially all documents responsive to the
subpoena. We have had discussions with the DOJ and provided documents
related to our operations in the U.S. as well as internationally. We
intend to continue to provide additional information as required by the DOJ in
connection with the investigation. There is no assurance that, after
review of any information furnished by us or by third parties, the DOJ will not
ultimately conclude that violations of U.S. antitrust laws have
occurred. The period of time necessary to resolve the DOJ antitrust
investigation is uncertain, and this matter could require significant management
and financial resources that could otherwise be devoted to the operation of our
business.
The
outcome of the DOJ antitrust investigation and any related legal proceedings in
other countries could include civil injunctive or criminal proceedings involving
us or our current or former officers, directors or employees, the imposition of
fines and other penalties, remedies and/or sanctions, including potential
disbarments, and referrals to other governmental agencies. In
addition, in cases where anti-competitive conduct is found by the government,
there is a greater likelihood for civil litigation to be brought by third
parties seeking recovery. Any such civil litigation could have
serious consequences for our Company, including the costs of the litigation and
potential orders to pay restitution or other damages or penalties, including
potentially treble damages, to any parties that were determined to be injured as
a result of any impermissible anti-competitive conduct. Any of these
adverse consequences could have a material adverse effect on our business,
financial condition and results of operations. The DOJ antitrust
investigation, any related
26
proceedings
in other countries and any third-party litigation, as well as any negative
outcome that may result from the investigation, proceedings or litigation, could
also negatively impact our relationships with customers and our ability to
generate revenue.
In
connection with this matter, we incurred $2.6 million, $1.9 million and
$0.7 million in legal and other professional fees in fiscal years 2006, 2007 and
2008, respectively, and significant expenditures may continue to be incurred in
the future.
Environmental
Contingencies
The EPA
has in the past notified us that we are a potential responsible party, or PRP,
at four former waste disposal facilities that are on the National Priorities
List of contaminated sites. Under CERCLA 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. We were identified by
the EPA as a PRP at the Western Sand and Gravel Superfund site in Rhode Island
in 1984, at the Sheridan Disposal Services Superfund site in Waller County,
Texas, in 1989, at the Gulf Coast Vacuum Services Superfund site near Abbeville,
Louisiana, in 1989, and at the Operating Industries, Inc. Superfund site in
Monterey Park, California, in 2003. We have not received any
correspondence from the EPA with respect to the Western Sand and Gravel
Superfund site since February 1991, nor with respect to the Sheridan Disposal
Services Superfund site since 1989. Remedial activities at the Gulf
Coast Vacuum Services Superfund site were completed in September 1999, and the
site was removed from the National Priorities List in July 2001. The
EPA has offered to submit a settlement offer to us in return for which we would
be recognized as a de minimis party in regard to the Operating Industries
Superfund site, but we have not yet received this settlement
proposal. Although we have not obtained a formal release of liability
from the EPA with respect to any of these 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 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. Submission of
Matters to a Vote of Security Holders
Not
applicable.
27
PART
II
Item
5. Market for the
Registrant’s Common Equity and Related Stockholder Matters
Our
Common Stock is listed on the NYSE under the symbol “BRS.” Prior to
becoming listed on the NYSE in 2003, our Common Stock had been quoted on the
NASDAQ National Market system since 1984.
The
following table shows the range of closing prices for our Common Stock during
each quarter of our last two fiscal years.
On May
15, 2008, the last reported sale price of our Common Stock on the NYSE was
$58.03 per share. As of May 15, 2008, there were 639 holders of
record of our Common Stock.
We have
not paid dividends on our Common Stock since January 1984. We do not
intend to declare or pay regular dividends on our Common Stock in the
foreseeable future. Instead, we generally intend to invest any future
earnings in our business. Subject to Delaware law, our board of
directors will determine the payment of future dividends on our Common Stock, if
any, and the amount of any dividends in light of:
In
addition, the terms of our Senior Notes and Credit Facilities restrict our
payment of cash dividends and other distributions to
stockholders. For descriptions of our Senior Notes and Credit
Facilities, see Note 5 in the “Notes to Consolidated Financial Statements”
included elsewhere in this Annual Report.
Please
refer to Item 12 of this Annual Report for information concerning securities
authorized under our equity compensation plans.
28
Item
6. Selected
Financial Data
The
following table contains our selected historical consolidated financial
data. You should read this table along with Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements” and “Notes to Consolidated Financial
Statements” that are included elsewhere in this Annual Report.
_________
29
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 2006, 2007
and 2008, 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 bearing on 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 advance our position as the leading helicopter services provider to the
offshore energy industry. We intend to employ the following
strategies to achieve this goal:
30
Consistent
with our desire to maintain a conservative use of leverage to fund growth, we
raised $222.6 million of capital through the sale of Preferred Stock completed
in September and October 2006. Additionally, we raised $344.7 million
through the sale of 7 ½% Senior Notes completed in June and November
2007. As of March 31, 2008, we had commitments to purchase 16 large,
9 medium and 10 training aircraft and options to purchase an additional 17 large
and 33 medium aircraft. Depending on market conditions, we expect to
exercise some or all of these options to purchase aircraft and may elect to
expand our business through the purchase of other aircraft not currently under
option and acquisition or investment in other helicopter operations, including
acquisitions currently under consideration.
As part
of our global fleet management program, prior to an aircraft coming off of a
customer contract we evaluate our alternatives for use of the aircraft,
including factors such as the cost and timing of future major maintenance,
potential contracts in existing or other markets and potential sale of the
aircraft.
Market
Outlook
We are
currently experiencing significant demand for our helicopter
services. Based on our current contract level and discussions with
our customers about their needs for aircraft related to their oil and gas
production and exploration plans, we anticipate the demand for helicopter
services will continue at a very high level for the near term. In
addition, this high level of demand has allowed us to increase the rates we
charge for our services over the past several years.
We expect
to see growth in demand for additional helicopter services, particularly in
North and South America, West Africa and Southeast Asia. We also
expect that the relative importance of our other business units will continue to
increase as oil and gas producers increasingly focus on prospects outside of
North America and the North Sea. This growth will provide us with
opportunities to add new aircraft to our fleet, as well as opportunities to
redeploy aircraft into markets that will sustain higher rates for our
services. Currently, helicopter manufacturers are indicating very
limited supply availability for medium and large aircraft during the next two to
three years. We expect that this tightness in aircraft availability
from the manufacturers and the lack of suitable aircraft in the secondary
market, coupled with the increase in demand for helicopter services, will result
in upward pressure on the rates we charge for our services. We
believe that our recent aircraft acquisitions and commitments position us to
benefit from the current market conditions and to deploy new aircraft on order
or under option at these favorable rates and contract terms.
31
Overview
of Operating Results
The
following table presents our operating results and other income statement
information for the applicable periods:
Fiscal
Year 2008 Compared to Fiscal Year 2007
Our gross
revenue increased to $1.0 billion for fiscal year 2008 from $843.6 million for
fiscal year 2007, an increase of 20.1%. The increase in gross revenue is due
primarily to improvements in our Europe, West Africa, Southeast Asia and South
and Central America business units as a result of increases in rates for
helicopter services, increased demand for helicopter services from our existing
customers and the addition of new aircraft, as well as the impact of the
acquisitions of the Bristow Academy entities which generated $14.8 million in
revenue in fiscal year 2008. Our operating expense increased to
$864.0 million for fiscal year 2008 from $732.5 million for fiscal year 2007, an
increase of 18.0%. The increase primarily resulted from higher costs
associated with higher activity levels, maintenance costs, and salaries and
benefits (associated with the addition of personnel and salary increases),
across a majority of our business units, as well as the impact of the
acquisitions of the Bristow Academy entities which incurred $15.6 million in
expense in fiscal year 2008. Primarily as a result of the improvement
in rates, our operating income and operating margin for fiscal year 2008
increased to $148.7 million and 14.7%, respectively, compared to $111.1 million
and 13.2%, respectively, for fiscal year 2007. Fiscal year 2008
included the following significant items:
32
For
further discussion of these items, see discussion of our business units under “—
Business Unit Operating Results — Fiscal Year 2008 Compared to Fiscal Year 2007”
included elsewhere in this Annual Report.
Income
from continuing operations for fiscal year 2008 of $107.8 million represents a
$36.5 million increase from fiscal year 2007. This increase was
driven by the improvement in operating income discussed above and foreign
currency exchange gains of $1.5 million in fiscal year 2008 compared to foreign
currency exchange losses of $9.8 million in fiscal year 2007, partially offset
by an increase in interest expense and our provision for income taxes (which
resulted from an increase in pre-tax earnings, partially offset by the
tax items discussed above).
Fiscal
Year 2007 Compared to Fiscal Year 2006
Our gross
revenue increased to $843.6 million for fiscal year 2007 from $709.9 million for
fiscal year 2006, an increase of 18.8%. The increase in gross revenue
relates to an increase in gross revenue across all of our business units, most
significantly for North America (primarily resulting from increases in rates for
certain contracts and an increase in utilization of our small aircraft in this
market), Europe (primarily resulting from new aircraft added to the market
during fiscal year 2006) and West Africa (primarily resulting from an increase
in rates under certain contracts and three new contracts). The
increase in gross revenue was also attributable to an increase in out-of-pocket
expenses rebilled to our customers (reimbursable revenue) of $23.2
million. Our operating expense increased to $732.5 million for fiscal
year 2007 from $641.4 million for fiscal year 2006, an increase of
14.2%. Operating expense increased as a result of the increase in
operating activity and the increase in out-of-pocket expense associated with
reimbursable revenue, but also as a result of a higher level of maintenance
activity on our aircraft and compensation costs driven by higher labor rates and
additional personnel. These additional operating expense items
resulted in a decline in operating income for our North America business unit
and a decline in operating margin for our North America and Europe business
units. However, improved margins for most of our other business units
and significant gains on asset dispositions in fiscal year 2007 (compared to
only a small gain on asset dispositions in fiscal year 2006) resulted in
increases in our operating income and operating margin to $111.1 million and
13.2%, respectively, for fiscal year 2007 from $68.5 million and 9.6%,
respectively, for fiscal year 2006.
Income
from continuing operations for fiscal year 2007 of $71.3 million represents a
$17.0 million increase from fiscal year 2006. This increase in income
was driven by the increase in operating income discussed above, increased
earnings from unconsolidated affiliates, an increase in interest income and a
decrease in interest expense, which was partially offset by foreign exchange
losses of $9.8 million in fiscal year 2007 compared to foreign exchange gains of
$5.4 million in fiscal year 2006, and an increase in the provision for income
taxes due to the additional tax expense related to the Turbo asset sale (see “—
Business Unit Operating Results — Fiscal Year 2007 Compared to Fiscal Year 2006
— North America” below), the increase in income during fiscal year 2007 and
from an increase in the overall effective tax rate.
33
Business
Unit Operating Results
The
following tables set forth certain operating information for the eight business
units comprising our Helicopter Services segment. Intercompany lease
revenue and expense are eliminated from our segment reporting, and depreciation
expense of aircraft is presented in the segment that operates the
aircraft.
34
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