UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

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

Commission file number: 0-9827

PHI, Inc.

(Exact name of registrant as specified in its charter)

Louisiana		72-0395707
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
2001 SE Evangeline Thruway
Lafayette, Louisiana		70508
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (337) 235-2452

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes: þ No: o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes: þ No: o

     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.

Large accelerated filer: o		Accelerated filer: þ		Non-accelerated filer: o (Do not check if a smaller reporting company)		Smaller reporting company: o

     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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at October 28, 2011
Voting Common Stock		2,852,616 shares
Non-Voting Common Stock		12,458,992 shares

 

 

PHI, INC.

Index — Form 10-Q

Part I — Financial Information
Item 1. Financial Statements — Unaudited
Condensed Consolidated Balance Sheets — September 30, 2011 and December 31, 2010			3
Condensed Consolidated Statements of Operations — Quarter and Nine Months ended September 30, 2011 and 2010			4
Condensed Consolidated Statements of Shareholders’ Equity — Nine Months ended September 30, 2011 and 2010			5
Condensed Consolidated Statements of Cash Flows — Nine Months ended September 30, 2011 and 2010			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			34
Item 4. Controls and Procedures			35
Part II — Other Information
Item 1. Legal Proceedings			36
Item 1.A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3. Defaults Upon Senior Securities			36
Item 4. (Removed and Reserved)			36
Item 5. Other Information			36
Item 6. Exhibits			37
Signatures			38
EX-4.4
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PHI, INC. AND SUBSIDIARIES

(Thousand of dollers)

		September 30,				December 31,
		2011				2010
ASSETS
Current Assets:
Cash		$	3,462			$	3,628
Short-term investments			99,896				150,072
Accounts receivable — net
Trade			107,326				84,768
Other			761				4,891
Inventories of spare parts — net			57,139				59,336
Other current assets			12,968				16,233
Income taxes receivable			926				558
Total current assets			282,478				319,486
Other			33,128				29,120
Property and equipment — net			665,219				596,533
Total assets		$	980,825			$	945,139
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	20,757			$	22,404
Accrued liabilities			37,206				28,319
Other current liabilities			22,900				—
Total current liabilities			80,863				50,723
Long-term debt			335,368				331,074
Deferred income taxes			83,110				81,988
Other long-term liabilities			7,383				8,938
Total liabilities			506,724				472,723
Commitments and contingencies (Note 3)
Shareholders’ Equity:
Voting common stock — par value of $0.10: 12,500,000 shares authorized, 2,852,616 issued and outstanding			285				285
Non-voting common stock — par value of $0.10: 25,000,000 shares authorized, 12,458,992 issued and outstanding			1,246				1,246
Additional paid-in capital			291,403				291,403
Accumulated other comprehensive loss			(111	)			(162	)
Retained earnings			181,278				179,644
Total shareholders’ equity			474,101				472,416
Total liabilities and equity		$	980,825			$	945,139

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

PHI, INC. AND SUBSIDIARIES

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Operating revenues, net		$	145,576			$	135,669			$	401,192			$	396,875
Gain (loss) on dispositions of assets, net			(638	)			98				(415	)			221
Other, principally interest income			50				22				686				58
			144,988				135,789				401,463				397,154
Expenses:
Direct expenses			123,622				115,812				352,271				336,120
Selling, general and administrative expenses			8,400				7,688				25,679				22,091
Interest expense			6,997				4,208				20,790				12,387
Loss on debt restructuring			—				9,521				—				9,521
			139,019				137,229				398,740				380,119
Earnings (loss) before income taxes			5,969				(1,440	)			2,723				17,035
Income tax expense			2,387				1,003				1,089				8,393
Net earnings (loss)		$	3,582			$	(2,443	)		$	1,634			$	8,642
Weighted average shares
outstanding:
Basic			15,312				15,312				15,312				15,312
Diluted			15,474				15,312				15,474				15,312
Net earnings (loss) per share:
Basic		$	0.23			$	(0.16	)		$	0.11			$	0.56
Diluted		$	0.23			$	(0.16	)		$	0.11			$	0.56

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

PHI, INC. AND SUBSIDIARIES

																						Accumulated								Total
		Voting								Non-Voting								Additional				Other Com-								Share-
		Common Stock								Common Stock								Paid-in				prehensive				Retained				Holders’
		Shares				Amount				Shares				Amount				Capital				Income (Loss)				Earnings				Equity
Balance at December 31, 2010			2,853			$	285				12,459			$	1,246			$	291,403			$	(162	)		$	179,644			$	472,416
Net earnings			—				—				—				—				—				—				1,634				1,634
Unrealized gain on short-term investments			—				—				—				—				—				61				—				61
Changes in pension plan assets and benefit obligations			—				—				—				—				—				(10	)			—				(10	)
Total comprehensive income																															1,685
Balance at September 30, 2011			2,853			$	285				12,459			$	1,246			$	291,403			$	(111	)		$	181,278			$	474,101

																						Accumulated								Total
		Voting								Non-Voting								Additional				Other Com-								Share-
		Common Stock								Common Stock								Paid-in				prehensive				Retained				Holders’
		Shares				Amount				Shares				Amount				Capital				Income (Loss)				Earnings				Equity
Balance at December 31, 2009			2,853			$	285				12,459			$	1,246			$	291,403			$	(13	)		$	172,527			$	465,448
Net earnings			—				—				—				—				—				—				8,642				8,642
Changes in pension plan assets and benefit obligations			—				—				—				—				—				(7	)			—				(7	)
Total comprehensive income, net of income taxes																															8,635
Balance at September 30, 2010			2,853			$	285				12,459			$	1,246			$	291,403			$	(20	)		$	181,169			$	474,083

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

PHI, INC. AND SUBSIDIARIES

		Nine Months Ended
		September 30,
		2011				2010
Operating activities:
Net earnings		$	1,634			$	8,642
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			23,186				20,587
Deferred income taxes			1,122				8,058
Gain (loss) on asset dispositions, net			415				(221	)
Other			832				747
Loss on debt restructuring			—				9,521
Changes in operating assets and liabilities			(5,129	)			4,169
Net cash provided by operating activities			22,060				51,503
Investing activities:
Purchase of property and equipment			(66,747	)			(39,739	)
Proceeds from asset dispositions			3,804				1,171
Purchase of short-term investments			(193,557	)			(102,710	)
Proceeds from sale of short-term investments			241,989				24,260
Payment on deposits on aircraft			(13,009	)			(3,660	)
Refund on deposits on aircraft			1,000				—
Net cash used in investing activities			(26,520	)			(120,678	)
Financing activities:
Proceeds from issuance of Senior Notes due 2018			—				300,000
Premium and costs to retire debt early			—				(7,293	)
Repayment of Senior Notes due 2013			—				(189,490	)
Debt issuance costs			—				(4,982	)
Payments on line of credit			(40,323	)			(37,518	)
Proceeds from line of credit			44,617				37,500
Net cash provided by financing activities			4,294				98,217
(Decrease) increase in cash			(166	)			29,042
Cash, beginning of period			3,628				2,501
Cash, end of period		$	3,462			$	31,543
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest		$	15,186			$	13,863
Income taxes		$	508			$	614
Non-cash investing activities:
Other current liabilities and accrued payables related topurchase of property and equipment		$	326			$	1,065

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General

The accompanying unaudited condensed consolidated financial statements include the accounts of PHI, Inc. and subsidiaries (“PHI” or the “Company” or “we” or “our”). In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly the financial results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and the accompanying notes.

The Company’s financial results, particularly as they relate to the Company’s Oil and Gas operations, are influenced by seasonal fluctuations as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Therefore, the results of operations for interim periods are not necessarily indicative of the operating results that may be expected for a full fiscal year.

2. Segment Information

PHI is primarily a provider of helicopter services, including helicopter maintenance and repair services. We use a combination of factors to identify reportable segments as required by Accounting Standards Codification 280, “Segment Reporting.” The overriding determination of our segments is based on how the chief operating decision maker of our Company evaluates our results of operations. The underlying factors include customer bases, types of service, operational management, physical locations, and underlying economic characteristics of the types of work we perform.

A segment’s operating profit is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has a portion of selling, general and administrative expenses that are charged directly to the segment and a portion that is allocated. Direct charges represent the vast majority of the segment’s selling, general and administrative expenses. Allocated selling, general and administrative expenses are based primarily on total segment direct expenses as a percentage of total direct expenses. Unallocated overhead consists primarily of corporate selling, general, and administrative expenses that we do not allocate to the reportable segments.

Effective June 30, 2011, the Company made changes to the presentation of reportable segments to reflect changes in the way its chief operating decision maker evaluates the performance of its operations, develops strategy and allocates capital resources. These changes resulted from how our chief operating decision maker views the roles of certain corporate departments whose duties had previously been considered company-wide but now are considered to focus solely on our Oil & Gas segment’s operations. The change resulted in the reclassification of certain selling, general and administrative expenses from within the Company’s unallocated selling, general and administrative expenses to the Oil & Gas segment’s selling, general, and administrative expenses. The total amount of the reclassification was $0.7 million for the three months ended September 30, 2010, and $2.9 million for the nine months ended September 30, 2010. The Company’s historical segment disclosures have been recast to be consistent with the current presentation.

Oil and Gas Segment. Our Oil and Gas segment, headquartered in Lafayette, Louisiana, provides helicopter services primarily for the major integrated and independent oil and gas production companies transporting personnel and/or equipment to offshore platforms in the Gulf of Mexico. Our customers include Shell Oil Company, BP America Production Company and ConocoPhillips Company, with whom we have worked for 30 or more years, and ExxonMobil Production Co. and ENI Petroleum, with whom we have worked for more than 15 years. We currently operate 164 aircraft in this segment.

Operating revenue from the Oil and Gas segment is derived mainly from contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable rate for flight time. Operating costs for the Oil and Gas operations are primarily aircraft operations costs, including costs for pilots and maintenance personnel. Total fuel cost is included in direct expense and reimbursement of a portion of these costs above a contracted per-gallon amount is included in revenue. Our Oil and Gas operations generated approximately 66% of our total operating revenue for the quarters ended September 30, 2011 and 2010, and approximately 66% and 68% of our total operating revenue for the nine months ended September 30, 2011 and 2010, respectively.

Air Medical Segment. Air Medical operations are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment.

We provide air medical transportation services for hospitals and emergency service agencies in 17 states using approximately 88 aircraft at 64 separate locations. Our Air Medical segment operates primarily under the independent provider model and, to a lesser extent, under the hospital-based model. Under the independent provider model, we have no contracts and no fixed revenue stream, and compete for transport referrals on a daily basis with other independent operators in the area. Under the hospital-based model, we contract directly with the hospital to provide their transportation services, with the contracts typically awarded on a competitive bid basis. For the quarters ended September 30, 2011 and 2010, approximately 32% and 33% of our total operating revenues were generated by our Air Medical operations, respectively. For the nine months ended September 30, 2011 and 2010, approximately 32% and 30% of our total operating revenues were generated by our Air Medical operations, respectively.

As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per loaded mile, regardless of aircraft model. Revenues are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when the services are provided. Contractual allowances and uncompensated care are estimated based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, Insurance, and Self-Pay. Payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute a historical payment analysis of accounts fully closed, by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. The allowance for contractual discounts was $43.6 million and $42.2 million as of September 30, 2011 and September 30, 2010, respectively. The allowance for uncompensated care was $38.4 million and $36.0 million as of September 30, 2011 and September 30, 2010, respectively.

Provisions for contractual discounts and estimated uncompensated care for Air Medical operations as a percentage of gross billings are as follows:

		Revenue
		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Gross billings			100	%			100	%			100	%			100	%
Provision for contractual discounts			54	%			50	%			54	%			52	%
Provision for uncompensated care			13	%			13	%			10	%			11	%

Net reimbursement per transport from commercial payors generally increases when a rate increase is implemented. Net reimbursement from certain commercial payors, as well as Medicare and Medicaid, does not increase proportionately with rate increases.

Net revenue attributable to Medicaid, Medicare, Insurance, and Self-Pay as a percentage of net Air Medical revenues are as follows:

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Medicaid			15	%			15	%			15	%			16	%
Medicare			24	%			22	%			24	%			21	%
Insurance			60	%			62	%			60	%			62	%
Self-Pay			1	%			1	%			1	%			1	%

We also have a limited number of contracts with hospitals under which we receive a fixed monthly rate for aircraft availability and an hourly rate for flight time. Those contracts generated approximately 19% and 14% of the segment’s revenues for the quarters ended September 30, 2011 and 2010, respectively, and approximately 19% and 16% of the segment’s revenues for the nine months ended September 30, 2011 and 2010, respectively

Technical Services Segment. The Technical Services segment provides helicopter repair and overhaul services for customer owned aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above cost. We currently operate five aircraft for the National Science Foundation in Antarctica under this segment.

Approximately 1% of our total operating revenues were generated by our Technical Services operations for the quarters ended September 30, 2011 and September 30, 2010. Approximately 2% of our total operating revenues were generated by our Technical Services operations for the nine months ended September 30, 2011 and September 30, 2010.

Summarized financial information concerning our reportable operating segments for the quarters and nine months ended September 30, 2011 and 2010 is as follows:

Certain reclassifications have been made to prior fiscal year amounts to conform with the current fiscal year presentation, as discussed above. These changes had no impact on consolidated net sales or operating income.

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(Thousands of dollars)								(Thousands of dollars)
Segment operating revenues
Oil and Gas		$	96,611			$	89,797			$	264,292			$	269,471
Air Medical			46,894				44,254				129,490				120,924
Technical Services			2,071				1,618				7,410				6,480
Total operating revenues			145,576				135,669				401,192				396,875
Segment direct expenses (1)
Oil and Gas			82,196				75,679				231,573				221,777
Air Medical			39,673				38,689				115,093				108,700
Technical Services			1,753				1,444				5,605				5,643
Total direct expenses			123,622				115,812				352,271				336,120
Segment selling, general and administrative expenses
Oil and Gas			905				814				2,670				3,410
Air Medical			1,109				954				2,896				3,253
Technical Services			8				5				27				19
Total selling, general and administrative expenses			2,022				1,773				5,593				6,682
Total direct and selling, general and administrative expenses			125,644				117,585				357,864				342,802
Net segment profit
Oil and Gas			13,510				13,304				30,049				44,284
Air Medical			6,112				4,611				11,501				8,971
Technical Services			310				169				1,778				818
Total			19,932				18,084				43,328				54,073
Other, net (2)			(588	)			120				271				279
Unallocated selling, general and administrative costs (1)			(6,378	)			(5,915	)			(20,086	)			(15,409	)
Interest expense			(6,997	)			(4,208	)			(20,790	)			(12,387	)
Loss on debt restructuring			—				(9,521	)			—				(9,521	)
Earnings before income taxes		$	5,969			$	(1,440	)		$	2,723			$	17,035

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Oil and Gas		$	5,473			$	4,814			$	15,798			$	13,521
Air Medical			2,095				1,990				6,354				5,941
Technical Services			(1	)			8				95				153
Total		$	7,567			$	6,812			$	22,247			$	19,615
Unallocated SG&A		$	303			$	333			$	940			$	972

3. Commitments and Contingencies

Commitments — In 2010, we executed a contract to acquire ten new medium aircraft related to our new contract with a major customer. Four of these aircraft have been delivered. The remaining six are scheduled for delivery in late 2011 and through late 2012, with an aggregate acquisition cost of approximately $73.6 million. We have traded in two aircraft in exchange for a credit of approximately $20.3 million towards these acquisition costs, of which a credit of $13.5 million remained as of September 30, 2011.

During the second quarter of 2011, we entered into a contract to acquire six new heavy transport aircraft for an aggregate purchase price of approximately $148.0 million. In June 2011, we took initial delivery of the first two baseline aircraft and title passed to PHI. The aircraft will be finally delivered in November 2011 when completion services are finished. In conjunction with the initial delivery of the baseline aircraft, we obtained short-term financing for the $45.8 million initial delivery payment, which was recorded in other current liabilities. In September, we obtained an operating lease for one aircraft for $22.9 million. We intend to fund the second aircraft with an operating lease with a commercial bank at final delivery in November. Two of the remaining aircraft have an initial delivery date in late 2011, and the balance of the deliveries will occur in 2012. These aircraft will be utilized in our Oil and Gas segment.

Due to anticipated increases in accelerated tax depreciation from our planned purchases of aircraft, net operating losses for tax purposes will increase in future years. Because of the net operating loss increases, certain foreign tax credits and certain net operating losses available in three states will not be used and will expire due to the time limit on the carry-forward of those credits. This resulted in a charge to tax expense of $1.5 million during the quarter ended September 30, 2010. The $1.5 million charge resulted in a variation in the customary relationship between the Company’s loss before income taxes and income tax expense for that period. For the quarter and nine months ended September 30, 2011, our income tax expense was computed at our estimated annual effective tax rate of forty percent.

Total aircraft deposits of $24.2 million are included in Other Assets. This amount represents deposits for the medium and heavy transport aircraft contracts.

Environmental Matters — We have recorded an aggregate estimated probable liability of $0.2 million as of September 30, 2011 for environmental response costs. The Company has conducted environmental surveys of its former Lafayette facility located at the Lafayette Regional Airport, which it vacated in 2001, and has determined that limited soil and groundwater contamination exists at the facility. The Company has installed groundwater monitoring wells at the facility and periodically monitors and reports on the contamination to the Louisiana Department of Environmental Quality (“LDEQ”). The Company previously submitted a Risk Evaluation Corrective Action Plan (RECAP) Standard Site Assessment Report to the LDEQ fully delineating the extent and type of contamination and updated the Report to include additional analytical data in April 2006. LDEQ reviewed the Assessment Report and requested a Corrective Action Plan from the Company. LDEQ approved the Corrective Action Plan (“CAP”) for the remediation of the former PHI Plant I location on August 23, 2010. All Louisiana Department of Natural Resources (“DNR”) approvals were received and the project began on May 16, 2011. Sampling will be performed on a quarterly basis over the next year to evaluate the effectiveness of remedial actions. Based upon the May 2003 Site Assessment Report, the April 2006 update, ongoing monitoring, and the August 2010 CAP, the Company believes the ultimate remediation costs for the former Lafayette facility will not be material to its consolidated financial position, results of operations, or cash flows.

Legal Matters — The Company is named as a defendant in various legal actions that have arisen in the ordinary course of business and have not been finally adjudicated. In the opinion of management, the amount of the liability with respect to these actions will not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

Superior Offshore International Inc. v. Bristow Group Inc., ERA Helicopters, LLC, Seacor Holdings Inc., ERA Group Inc., ERA Aviation, Inc., and PHI, Inc., Civil Action No. 1:09-cv-00438 on the docket of the United States District Court for the District of Delaware. This purported class action was filed on June 12, 2009, on behalf of a class defined to include all direct purchasers of offshore helicopter services in the Gulf of Mexico from the defendants at any time from January 1, 2001 through December 31, 2005. The suit alleged that the defendants acted jointly to fix, maintain, or stabilize prices for offshore helicopter services during the above time frame in violation of the federal antitrust laws. The plaintiff sought unspecified treble damages, injunctive relief, costs, and attorneys’ fees. On September 14, 2010, the Court granted defendants’ motion to dismiss (filed on September 4, 2009) and dismissed the complaint. On November 30, 2010, the court granted plaintiff leave to amend the complaint, limited discovery to the new allegations, and established a schedule for briefing dispositive motions. The defendants filed a motion for summary judgment on February 11, 2011. On June 23, 2011, the court granted the defendants’ motion for summary judgment, entered final judgment in favor of the defendants, and dismissed all of the plaintiff’s claims. On July 22, 2011, the plaintiff filed a notice of appeal with the U.S. Court of Appeals, Third Circuit, and on October 11, 2011 filed its appeal brief. Given that plaintiff has not succeeded in advancing its claim beyond dispositive motions, management currently believes that the likelihood of loss to the Company from the litigation is remote.

As previously reported, the Company has been involved in Federal Court litigation in the Western District of Louisiana and the Fifth Circuit Court of Appeals with the Office and Professional Employees International Union (“OPEIU”), the union representing the Company’s domestic pilots. This litigation involves claims of bad faith bargaining, compensation of striking pilots both at the time of the strike and upon their return to work under both the Railway Labor Act (“RLA”) and Louisiana state law, and the terms of employment for the Company’s pilots since the strike ended including non-payment of retention bonuses. After approximately two years of bargaining between the Company and OPEIU for a second collective bargaining agreement, including negotiations mediated by the National Mediation Board, both parties entered a self-help period as defined by the applicable labor law, the RLA. At that time the pilots commenced a strike in September 2006 and immediately prior to that strike the Company implemented its own terms and conditions of employment for the pilots. The strike ended in November 2006 and a court-approved return to work process began in January 2007 for those pilots who had not already returned to work or left the Company’s employment. This process was essentially completed in April 2007. The Company’s pilots continue to work under the terms and conditions of employment determined by the Company since the strike began. By Order dated July 9, 2010, the Court dismissed both the Company’s and OPEIU’s claims that the other had violated the RLA by bargaining in bad faith before exercising self-help. By Order dated July 30, 2010, the Court dismissed all claims that the Company violated the RLA in the manner in which it returned pilots to work following the strike. Also, the Court dismissed all but claims by 47 pilots under Louisiana state law. On August 27, 2010, the OPEIU and the individual pilot plaintiffs filed a notice of appeal with the Fifth Circuit Court of Appeals. Then, by Order entered September 27, 2010, the district court dismissed the Louisiana-law claims of the remaining 47 individual pilots. On October 22, 2010, the unions and the individual pilots filed a second notice of appeal to the Fifth Circuit Court of Appeals, by which they appeal the district court’s dismissal of all their RLA and Louisiana-law wage payment claims against PHI. On November 5, 2010, PHI filed a cross-appeal of the district court’s dismissal of PHI’s bad-faith bargaining claim against the unions. By orders dated September 12, 2011, the Fifth Circuit Court of Appeals affirmed the dismissal of all claims brought against PHI by the OPEIU and the individual pilots, whether under the RLA or Louisiana law. That Court also remanded the Return-to-Work case to the district court for the sole purpose of calculating court costs payable to PHI. The OPEIU and individual pilots did not seek rehearing of the Fifth Circuit’s judgment within the time permitted by the rules of appellate procedure. However, they have until approximately December 2, 2011 to file a petition for a writ of certiorari from the United States Supreme Court.

On December 31, 2009, the OPEIU filed another case against the Company in the Western District of Louisiana in which the OPEIU asserts that its acceptance in 2009 of the terms and conditions of employment for the Company’s pilots initially implemented by the Company prior to the strike has created a binding collective bargaining agreement and that the Company has inappropriately made unilateral revisions to those terms including failing to pay a retention bonus. The Court administratively stayed this case pending the completion of appellate briefing in the consolidated cases, which briefing concluded on April 15, 2011. The Court further administratively stayed this case pending the appellate court’s decision in the consolidated cases described above, which cases have now been resolved by the September 12 judgments of the Fifth Circuit Court of Appeals described above. We therefore expect the district court to lift the administrative stay of this case at any time (the Court has not yet done so) and for discovery and/or motion practice to commence in this case. Management does not expect the outcome of this litigation to have a material effect on our consolidated financial position, results of operations or cash flows.

Operating Leases — We lease certain aircraft, facilities, and equipment used in our operations. The related lease agreements, which include both non-cancelable and month-to-month terms, generally provide for fixed monthly rentals, and certain real estate leases also include renewal options. We generally pay all insurance, taxes, and maintenance expenses associated with these leases. Some of the facility leases contain renewal options. Aircraft leases contain purchase options exercisable at certain dates in the lease agreements.

At September 30, 2011, we had approximately $156.9 million in aggregate commitments under operating leases of which approximately $7.2 million is payable through December 31, 2011, and a total of $28.3 million is payable over the twelve months ending September 30, 2012. The total lease commitments include $142.3 million for aircraft and $14.6 million for facility lease commitments.

As of September 30, 2011, we had options to purchase aircraft under lease becoming exercisable in 2012 through 2014 for the following aggregate purchase prices, respectively: $45.0 million, $38.8 million and $114.4 million. Subject to market conditions, we intend to exercise these options as they become exercisable. There are no other lease purchase options in 2011.

4. Long-term Debt

As of September 30, 2011, our total long-term indebtedness was $335.4 million, consisting of $300 million of our 8.625% Senior Notes due 2018 (the “8.625% Senior Notes”), and $35.4 million borrowed under our revolving credit facility.

On September 23, 2010, we issued $300 million of 8.625% Senior Notes that mature in 2018. Interest is payable semi-annually in arrears on April 15 and October 15 of each year. Net proceeds of $295.5 million were used to repurchase $189.5 million of our $200 million outstanding 7.125% Senior Notes due 2013 (the “7.125% Senior Notes”) pursuant to a tender offer and consent solicitation that also settled on September 23, 2010. Our total cost to repurchase those notes was $9.5 million, including the tender offer premium of $7.6 million and $1.9 million of unamortized issuance costs. We called for redemption on October 25, 2010 the remaining $10.5 million of 7.125% Senior Notes outstanding, at a redemption price of 103.563% of their face amount plus accrued interest.

Mr. Al A. Gonsoulin, our Chairman and CEO and the Matzke Family Trust, of which Richard Matzke, one of our directors, is trustee, purchased $2 million and $1 million of the 8.625% Senior Notes, respectively.

The 8.625% Senior Notes are unconditionally guaranteed on a senior basis by our domestic subsidiaries, and are general, unsecured obligations of ours and the subsidiary guarantors. We have the option to redeem some or all of the notes at any time on or after October 15, 2014 at specified redemption prices, and prior to that time pursuant to certain make-whole provisions.

The 8.625% Senior Notes contain restrictive covenants, including limitations on incurring indebtedness, creating liens, selling assets and entering into certain transactions with affiliates. The covenants limit our ability to pay cash dividends on common stock, repurchase or redeem common or preferred equity, prepay subordinated debt and make certain investments. There are no restrictions on dividends from a subsidiary to the parent company, nor any restrictions on contributions from the parent company to a subsidiary. Upon the occurrence of a “Change in Control” (as defined in the indenture governing the notes), each holder of the notes will have the right to require us purchase that holder’s notes for a cash price equal to 101% of their principal amount. Upon the occurrence of an “Event of Default” (as defined in the indenture), the trustee or the holders of the notes may declare all of the outstanding notes to be due and payable immediately. We were in compliance with the covenants applicable to the notes as of September 30, 2011.

On September 26, 2011, we amended our senior secured revolving credit facility to extend the maturity date from September 1, 2012 to September 1, 2013. The facility permits borrowings up to $75 million, contains a borrowing base of 80% of eligible receivables (as defined in the credit agreement) and 50% of the value of parts. The interest rate is the prime rate plus 100 basis points. We may prepay the revolving credit facility at any time in whole or in part without premium or penalty. All obligations under the revolving credit facility are secured by a perfected first priority security interest in all of our eligible receivables and parts, and are guaranteed by certain of our domestic subsidiaries.

As of September 30, 2011, we had $35.4 million in borrowings under the facility. As of December 31, 2010, we had $31.1 million in borrowings under the facility. We maintain a separate letter of credit facility that had $5.5 million in letters of credit outstanding as of September 30, 2011 and December 31, 2010. During the nine months ended September 30, 2011 and 2010, the weighted average effective interest rate on amounts borrowed under the revolving credit facility was 4.25%. We reviewed interest expense for the quarters ended September 30, 2011 and 2010 that could be capitalized for certain projects and any such amounts were immaterial.

The revolving credit facility includes financial covenants related to working capital, funded debt to consolidated net worth, and consolidated net worth, and other covenants including restrictions on additional debt, liens and a change of control. Events of default include a change of control, a default in any other material credit agreement, including the 8.625% Senior Notes, and customary events of default. As of September 30, 2011, we were in compliance with all of the covenants under the revolving credit facility.

Our $300 million outstanding 8.625% Senior Notes bear interest at a fixed rate of 8.625% and therefore changes in market interest rates do not affect our interest payment obligations on the notes. The fair market value of our 8.625% Senior Notes will vary as changes occur to general market interest rates, the remaining maturity of the notes, and our credit worthiness. At September 30, 2011, the market value of the notes was approximately $300.3 million, based on quoted market indications.

5. Valuation Accounts

We have established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, current market conditions, and other information. The allowance for doubtful accounts was approximately $0.1 million at September 30, 2011 and December 31, 2010.

Revenues related to emergency flights generated by the Company’s Air Medical segment are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when the services are provided. The allowance for contractual discounts was $43.6 million and $34.7 million as of September 30, 2011 and December 31, 2010, respectively. The allowance for uncompensated care was $38.4 million and $39.3 million as of September 30, 2011 and December 31, 2010, respectively.

The allowance for contractual discounts and estimated uncompensated care as a percentage of gross accounts receivable are as follows:

		September 30,				December 31,
		2011				2010
Gross Accounts Receivable			100	%			100	%
Allowance for Contractual Discounts			37	%			33	%
Allowance for Uncompensated Care			33	%			37	%

We have also established valuation reserves related to obsolete and excess inventory. The inventory valuation reserves were $12.4 million at September 30, 2011 and $11.4 million at December 31, 2010.

6. Employee Compensation

Employee Incentive Compensation — Pursuant to our incentive compensation plans, we accrued $0.5 million for the quarter and nine months ended September 30, 2011. We accrued $1.0 million and $2.3 million incentive compensation expense for the quarter and nine months ended September 30, 2010, respectively.

We also have a Safety Incentive Plan related to Occupational Safety and Health Administration recordable incidents, for which we expensed $0.1 million and $0.5 million for the quarter and nine months ended September 30, 2011, respectively. For the quarter and nine months ended September 30, 2010, we expensed $0.2 million and $0.5 million, respectively.

7. Fair Value Measurements

Accounting standards require that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.

The following table summarizes the valuation of our short-term investments and financial instruments by the above pricing levels as of the valuation dates listed:

						September 30, 2011
		Total				(Level 1)				(Level 2)
		(Thousands of dollars)
Short-term investments:
Money Market Mutual Funds		$	59,695			$	59,695			$	—
Commercial Paper			2,989				—				2,989
Corporate bonds and notes			37,212				—				37,212
			99,896				59,695				40,201
Investments in other assets			2,699				2,699				—
Total		$	102,595			$	62,394			$	40,201

						December 31, 2010
		Total				(Level 1)				(Level 2)
		(Thousands of dollars)
Short-term investments:
Money Market Mutual Funds		$	33,968			$	33,968			$	—
Commercial Paper			42,455				—				42,455
U.S. Government Agencies			8,013				—				8,013
Corporate bonds and notes			65,636				—				65,636
			150,072				33,968				116,104
Investments in other assets			3,547				3,547				—
Total		$	153,619			$	37,515			$	116,104

The Company holds its short-term investments in an investment fund consisting of high quality money market instruments of governmental and private issuers, which is classified as short-term investments. Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets. These items are traded with sufficient frequency and volume to provide pricing on an ongoing basis. The fair values of the shares of these funds are based on observable market prices, and therefore, have been categorized in Level 1 in the fair value hierarchy. Level 2 inputs reflect quoted prices for identical assets or liabilities that are not active. These items may not be traded daily; examples include corporate bonds and U.S. government agencies. Assets are valued based on prices derived by independent third parties that use inputs such as benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. Prices are reviewed and can be challenged with the independent parties and/or overridden by the Company, if it is believed such would be more reflective of fair value. Investments included in other assets, which relate to the liability for the Officers’ Deferred Compensation Plan, consist mainly of multiple investment funds that are highly liquid and diversified.

Cash, accounts receivable, accounts payable and accrued liabilities all had fair values approximating their carrying amounts at September 30, 2011 and December 31, 2010.

8. Investments

We classify all of our short-term investments as available-for-sale. We carry these at fair value and report unrealized gains and losses, net of taxes, in other comprehensive income until realized. These gains and losses are reflected as a separate component of shareholders’ equity in our consolidated balance sheets and our consolidated statements of shareholders’ equity. Cost, gains, and losses are determined using the specific identification method.

     Investments consisted of the following as of September 30, 2011:

						Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(Thousands of dollars)
Short-term investments:
Money Market Mutual Funds		$	59,695			$	—			$	—			$	59,695
Commercial Paper			2,996				—				(7	)			2,989
Corporate bonds and notes			37,340				14				(142	)			37,212
Subtotal			100,031				14				(149	)			99,896
Investments in other assets			2,699				—				—				2,699
Total		$	102,730			$	14			$	(149	)		$	102,595

     Investments consisted of the following as of December 31, 2010:

						Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(Thousands of dollars)
Short-term investments:
Money Market Mutual Funds		$	33,968			$	—			$	—			$	33,968
Commercial Paper			42,471				—				(16	)			42,455
U.S. Government Agencies			8,022				—				(10	)			8,012
Corporate bonds and notes			65,847				4				(214	)			65,637
Subtotal			150,308				4				(240	)			150,072
Investments in other assets			3,547				—				—				3,547
Total		$	153,855			$	4			$	(240	)		$	153,619

The following table presents the cost and fair value of our debt investments based on maturities as of September 30, 2011.

		Amortized				Fair
		Cost				Value
		(Thousands of dollars)
Due in one year or less		$	28,589			$	28,493
Due within two years			11,747				11,708
Total		$	40,336			$	40,201

The following table presents the cost and fair value of our debt investments based on maturities as of December 31, 2010.

		Amortized				Fair
		Cost				Value
		(Thousands of dollars)
Due in one year or less		$	58,740			$	58,704
Due within two years			57,600				57,400
Total		$	116,340			$	116,104

The following table presents the average coupon rate percentage and the average days to maturity of our debt investments as of September 30, 2011.

		Average				Average
		Coupon				Days To
		Rate (%)				Maturity
Commercial Paper			0.260				172
Corporate bonds and notes			5.215				273

The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for less than twelve months as of September 30, 2011.

						Unrealized
		Fair Value				Losses
		(Thousands of dollars)
Commercial Paper		$	2,996			$	(7	)
Corporate bonds and notes			31,420				(142	)
		$	34,416			$	(149	)

The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for less than twelve months as of December 31, 2010.

						Unrealized
		Fair Value				Losses
		(Thousands of dollars)
Commercial Paper		$	42,471			$	(16	)
U.S. Government Agencies			3,993				(10	)
Corporate bonds and notes			60,501				(214	)
		$	106,965			$	(240	)

As of September 30, 2011 and December 31, 2010, we had no investments in a continuous unrealized loss position for more than twelve months.

We consider the decline in market value to be due to market conditions, and we do not plan to sell these investments prior to a recovery of cost. For these reasons, we do not consider any of our investments to be other than temporarily impaired at September 30, 2011. The assessment of whether an investment in a debt security has suffered an other-than-temporary impairment is based on whether the Company has the intent to sell or more likely than not will be required to sell the debt security before recovery of its amortized costs. Further, if the Company does not expect to recover the entire amortized cost basis of the debt security, an other-than-temporary impairment is considered to have occurred and it is measured by the present value of cash flows expected to be collected less the amortized cost basis (credit loss). The Company did not have any other-than-temporary impairments relating to credit losses on debt securities for the nine months ended September 30, 2011.

9. Shareholders’ Equity

We had an average of 15.3 million common shares outstanding for the quarters ended September 30, 2011 and 2010.

Accumulated other comprehensive loss is included in the shareholder’s equity section of the condensed consolidated balance sheets of the Company. Accumulated other comprehensive loss in the condensed consolidated balance sheets included the following components:

		September 30,				December 31,
		2011				2010
Unrealized gain (loss) on short-term investments		$	(81	)		$	(142	)
Changes in pension plan assets and benefit obligations			(30	)			(20	)
		$	(111	)		$	(162	)

10. Condensed Consolidating Financial Information

PHI, Inc. issued 8.625% Senior Notes that are fully and unconditionally guaranteed on a joint and several, senior basis by all of our domestic subsidiaries. All of our domestic subsidiaries are 100% owned.

The following supplemental condensed financial information sets forth, on a consolidated basis, the balance sheet, statement of operations, and statement of cash flows information for PHI, Inc. (“Parent Company Only”) and the guarantor subsidiaries. The eliminating entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenues and expenses. The condensed consolidating financial statements have been prepared on the same basis as the consolidated financial statements of PHI, Inc. The equity method is followed by the parent company within these financials.

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
(Unaudited)

		September 30, 2011
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
ASSETS
Current Assets:
Cash		$	2,799			$	663			$	—			$	3,462
Short-term investments			99,896				—				—				99,896
Accounts receivable — net			97,968				10,119				—				108,087
Intercompany receivable			—				90,245				(90,245	)			—
Inventories of spare parts — net			57,139				—				—				57,139
Other current assets			12,958				10				—				12,968
Income taxes receivable			926				—				—				926
Total current assets			271,686				101,037				(90,245	)			282,478
Investment in subsidiaries and other			79,798				—				(79,798	)			—
Other assets			33,106				22				—				33,128
Property and equipment — net			654,497				10,722				—				665,219
Total assets		$	1,039,087			$	111,781			$	(170,043	)		$	980,825
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	19,134			$	1,623			$	—			$	20,757
Accrued liabilities			29,553				7,653				—				37,206
Other current liabilities			22,900				—				—				22,900
Intercompany payable			90,245				—				(90,245	)			—
Total current liabilities			161,832				9,276				(90,245	)			80,863
Long-term debt			335,368				—				—				335,368
Deferred income taxes and other long-term liabilities			67,786				22,707				—				90,493
Shareholders’ Equity:
Common stock and paid-in capital			292,934				2,674				(2,674	)			292,934
Accumulated other comprehensive loss			(111	)			—				—				(111	)
Retained earnings			181,278				77,124				(77,124	)			181,278
Total shareholders’ equity			474,101				79,798				(79,798	)			474,101
Total liabilities and shareholders’ equity		$	1,039,087			$	111,781			$	(170,043	)		$	980,825

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)

		December 31, 2010
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
ASSETS
Current Assets:
Cash		$	2,957			$	671			$	—			$	3,628
Short-term investments			150,072				—				—				150,072
Accounts receivable — net			81,393				8,266				—				89,659
Intercompany receivable			—				79,810				(79,810	)			—
Inventories of spare parts — net			59,336				—				—				59,336
Other current assets			16,224				9				—				16,233
Income taxes receivable			558				—				—				558
Total current assets			310,540				88,756				(79,810	)			319,486
Investment in subsidiaries and others			75,114				—				(75,114	)			—
Other assets			29,099				21				—				29,120
Property and equipment, net			583,091				13,442				—				596,533
Total assets		$	997,844			$	102,219			$	(154,924	)		$	945,139
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	22,191			$	213			$	—			$	22,404
Accrued liabilities			23,482				4,837				—				28,319
Intercompany payable			79,810				—				(79,810	)			—
Total current liabilities			125,483				5,050				(79,810	)			50,723
Long-term debt			331,074				—				—				331,074
Deferred income taxes and other long-term liabilities			68,871				22,055				—				90,926
Shareholders’ Equity:
Common stock and paid-in capital			292,934				2,674				(2,674	)			292,934
Accumulated other comprehensive loss			(162	)			—				—				(162	)
Retained earnings			179,644				72,440				(72,440	)			179,644
Total shareholders’ equity			472,416				75,114				(75,114	)			472,416
Total liabilities and shareholders’ equity		$	997,844			$	102,219			$	(154,924	)		$	945,139

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)

		For the quarter ended September 30, 2011
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
Operating revenues, net		$	130,180			$	15,396			$	—			$	145,576
Management fees			616				—				(616	)			—
Gain on dispositions of assets, net			(638	)			—				—				(638	)
Other, principally interest income			50				—				—				50
			130,208				15,396				(616	)			144,988
Expenses:
Direct expenses			111,133				12,489				—				123,622
Management fees			—				616				(616	)			—
Selling, general and administrative expenses			8,076				324				—				8,400
Equity in net income of consolidated subsidiaries			(1,181	)			—				1,181				—
Interest expense			6,997				—				—				6,997
			125,025				13,429				565				139,019
Earnings before income taxes			5,183				1,967				(1,181	)			5,969
Income tax expense			1,601				786				—				2,387
Net earnings		$	3,582			$	1,181			$	(1,181	)		$	3,582