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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
 
For the quarterly period ended June 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to      
 
Commission File Number 001-31617
 
 
Bristow Group Inc.
 
 
(Exact name of registrant as specified in its charter)
 

Delaware
 
72-0679819
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
2103 City West Blvd.,
4th Floor
Houston, Texas
 
77042
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code:
(713) 267-7600
 
 
None 
 
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
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  ¨
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 Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
 
(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).
 
o  Yes    þ  No
 
Indicate the number shares outstanding of each of the issuer’s classes of Common Stock, as of July 31, 2014.
35,563,623 shares of Common Stock, $.01 par value
 




BRISTOW GROUP INC.
INDEX — FORM 10-Q
 



PART I — FINANCIAL INFORMATION
 
Item 1.     Financial Statements.
BRISTOW GROUP INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
 
  
 
Three Months Ended 
 June 30,
 
 
 
2014
 
2013
 
 
 
(Unaudited)
(In thousands, except per share amounts)
Gross revenue:
 
 
 
 
 
Operating revenue from non-affiliates
 
$
415,905

 
$
336,248

 
Operating revenue from affiliates
 
21,430

 
23,299

 
Reimbursable revenue from non-affiliates
 
35,203

 
39,382

 
Reimbursable revenue from affiliates
 

 
65

 
 
 
472,538

 
398,994

 
Operating expense:
 
 
 
 
 
Direct cost
 
293,863

 
255,256

 
Reimbursable expense
 
32,608

 
36,743

 
Depreciation and amortization
 
25,334

 
22,819

 
General and administrative
 
60,432

 
40,308

 
 
 
412,237

 
355,126

 
 
 
 
 
 
 
Gain (loss) on disposal of assets
 
610

 
(1,721
)
 
Earnings from unconsolidated affiliates, net of losses
 
4,281

 
13,972

 
Operating income
 
65,192

 
56,119

 
 
 
 
 
 
 
Interest expense, net
 
(7,127
)
 
(20,251
)
 
Other income (expense), net
 
(1,239
)
 
(1,366
)
 
Income before provision for income taxes
 
56,826

 
34,502

 
Provision for income taxes
 
(11,823
)
 
(7,590
)
 
Net income
 
45,003

 
26,912

 
Net income attributable to noncontrolling interests
 
(894
)
 
(26
)
 
Net income attributable to Bristow Group
 
$
44,109

 
$
26,886

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
 
$
1.24

 
$
0.74

 
Diluted
 
$
1.23

 
$
0.74

 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
0.32

 
$
0.25

 

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

1


BRISTOW GROUP INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
 
  
 
Three Months Ended 
 June 30,
 
 
2014
 
2013
 
 
(Unaudited)
(In thousands)
Net income
 
$
45,003

 
$
26,912

Other comprehensive income:
 
 
 
 
Currency translation adjustments
 
8,991

 
(4,429
)
Other comprehensive income
 
53,994

 
22,483

 
 
 
 
 
Net income attributable to noncontrolling interests
 
(894
)
 
(26
)
Currency translation adjustments attributable to noncontrolling interests
 
217

 
(130
)
Total comprehensive income attributable to noncontrolling interests
 
(677
)
 
(156
)
Total comprehensive income attributable to Bristow Group
 
$
53,317

 
$
22,327

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

2


BRISTOW GROUP INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
June 30, 
 2014
 
March 31,  
 2014
 
 
(Unaudited)
 
 
 
 
(In thousands)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
133,804

 
$
204,341

Accounts receivable from non-affiliates
 
303,580

 
292,650

Accounts receivable from affiliates
 
7,018

 
4,793

Inventories
 
150,913

 
137,463

Assets held for sale
 
30,293

 
29,276

Prepaid expenses and other current assets
 
54,787

 
53,084

Total current assets
 
680,395

 
721,607

Investment in unconsolidated affiliates
 
265,955

 
262,615

Property and equipment – at cost:
 
 
 
 
Land and buildings
 
149,829

 
145,973

Aircraft and equipment
 
2,828,915

 
2,646,150

 
 
2,978,744

 
2,792,123

Less – Accumulated depreciation and amortization
 
(536,362
)
 
(523,372
)
 
 
2,442,382

 
2,268,751

Goodwill
 
57,771

 
56,680

Other assets
 
94,215

 
88,604

Total assets
 
$
3,540,718

 
$
3,398,257

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current liabilities:
 
 
 
 
Accounts payable
 
$
102,278

 
$
89,818

Accrued wages, benefits and related taxes
 
68,430

 
71,192

Income taxes payable
 
62

 
13,588

Other accrued taxes
 
7,681

 
9,302

Deferred revenue
 
30,224

 
31,157

Accrued maintenance and repairs
 
18,493

 
17,249

Accrued interest
 
8,145

 
16,157

Other accrued liabilities
 
54,755

 
45,853

Deferred taxes
 
14,090

 
12,372

Short-term borrowings and current maturities of long-term debt
 
13,851

 
14,207

Deferred sale leaseback advance
 
152,347

 
136,930

Total current liabilities
 
470,356

 
457,825

Long-term debt, less current maturities
 
941,257

 
827,095

Accrued pension liabilities
 
82,365

 
86,823

Other liabilities and deferred credits
 
59,876

 
78,126

Deferred taxes
 
179,232

 
169,519

Commitments and contingencies (Note 5)
 


 

Temporary equity
 
24,245

 
22,283

Stockholders’ investment:
 
 
 
 
Common stock, $.01 par value, authorized 90,000,000; outstanding: 35,558,273 as of June 30 and 35,708,469 as of March 31 (exclusive of 1,291,441 treasury shares)
 
374

 
373

Additional paid-in capital
 
767,918

 
762,813

Retained earnings
 
1,277,976

 
1,245,220

Accumulated other comprehensive loss
 
(147,298
)
 
(156,506
)
Treasury shares, at cost (1,866,077 and 1,595,479 shares, respectively)
 
(124,122
)
 
(103,965
)
Total Bristow Group stockholders’ investment
 
1,774,848

 
1,747,935

Noncontrolling interests
 
8,539

 
8,651

Total stockholders’ investment
 
1,783,387

 
1,756,586

Total liabilities and stockholders’ investment
 
$
3,540,718

 
$
3,398,257

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

3


BRISTOW GROUP INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
  
 
Three Months Ended 
 June 30,
 
 
2014
 
2013
 
 
(Unaudited)
(In thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
45,003

 
$
26,912

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
25,334

 
22,819

Deferred income taxes
 
8,406

 
11,768

Write-off of deferred financing fees
 
164

 
12,733

Discount amortization on long-term debt
 
1,055

 
921

(Gain) loss on disposal of assets
 
(610
)
 
1,721

Stock-based compensation
 
4,187

 
2,869

Equity in earnings from unconsolidated affiliates in excess of dividends received
 
(4,281
)
 
(4,974
)
Tax benefit related to stock-based compensation
 
(166
)
 
(2,522
)
Increase (decrease) in cash resulting from changes in:
 
 
 
 
Accounts receivable
 
(972
)
 
(6,949
)
Inventories
 
(11,033
)
 
(4,112
)
Prepaid expenses and other assets
 
(1,850
)
 
(791
)
Accounts payable
 
7,511

 
4,339

Accrued liabilities
 
(23,027
)
 
(18,782
)
Other liabilities and deferred credits
 
(12,376
)
 
(9,539
)
Net cash provided by operating activities
 
37,345

 
36,413

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(200,447
)
 
(179,532
)
Proceeds from asset dispositions
 
6,643

 
1,893

Net cash used in investing activities
 
(193,804
)
 
(177,639
)
Cash flows from financing activities:
 
 
 
 
Proceeds from borrowings
 
148,044

 
103,357

Debt issuance costs
 

 
(12,733
)
Repayment of debt
 
(35,848
)
 
(1,733
)
Partial prepayment of put/call obligation
 
(15
)
 
(14
)
Repurchase of common stock
 
(20,157
)
 

Common stock dividends paid
 
(11,353
)
 
(9,045
)
Issuance of common stock
 
975

 
3,004

Tax benefit related to stock-based compensation
 
166

 
2,522

Net cash provided by financing activities
 
81,812

 
85,358

Effect of exchange rate changes on cash and cash equivalents
 
4,110

 
237

Net decrease in cash and cash equivalents
 
(70,537
)
 
(55,631
)
Cash and cash equivalents at beginning of period
 
204,341

 
215,623

Cash and cash equivalents at end of period
 
$
133,804

 
$
159,992

Cash paid during the period for:
 
 
 
 
Interest
 
$
14,927

 
$
17,348

Income taxes
 
$
8,767

 
$
10,081

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

4

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 — BASIS OF PRESENTATION, CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements include the accounts of Bristow Group Inc. and its consolidated entities (“Bristow Group,” the “Company,” “we,” “us,” or “our”) after elimination of all significant intercompany accounts and transactions. Our fiscal year ends March 31, and we refer to fiscal years based on the end of such period. Therefore, the fiscal year ending March 31, 2015 is referred to as “fiscal year 2015.” Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), the information contained in the following notes to condensed consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and related notes thereto contained in our fiscal year 2014 Annual Report (the “fiscal year 2014 Financial Statements”). Operating results for the interim period presented are not necessarily indicative of the results that may be expected for the entire fiscal year.
The condensed consolidated financial statements included herein are unaudited; however, they include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position of the Company as of June 30, 2014 and the consolidated results of operations and cash flows for the three months ended June 30, 2014 and 2013.

5

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Foreign Currency
See “Foreign Currency” in Note 1 to the fiscal year 2014 Financial Statements for a discussion of the related accounting policies. During the three months ended June 30, 2014 and 2013, our primary foreign currency exposure was to the British pound sterling, the euro, the Australian dollar and the Nigerian naira. The value of these currencies has fluctuated relative to the U.S. dollar as indicated in the following table:
 
 
 
Three Months Ended 
 June 30,
 
 
 
 
2014
 
2013
 
 
One British pound sterling into U.S. dollars
 
 
 
 
 
 
High
 
1.71

 
1.57

 
 
Average
 
1.68

 
1.54

 
 
Low
 
1.66

 
1.50

 
 
At period-end
 
1.71

 
1.52

 
 
One euro into U.S. dollars
 
 
 
 
 
 
High
 
1.39

 
1.34

 
 
Average
 
1.37

 
1.31

 
 
Low
 
1.35

 
1.28

 
 
At period-end
 
1.37

 
1.30

 
 
One Australian dollar into U.S. dollars
 
 
 
 
 
 
High
 
0.94

 
1.07

 
 
Average
 
0.93

 
1.00

 
 
Low
 
0.92

 
0.92

 
 
At period-end
 
0.94

 
0.92

 
 
One Nigerian naira into U.S. dollars
 
 
 
 
 
 
High
 
0.0063

 
0.0065

 
 
Average
 
0.0062

 
0.0064

 
 
Low
 
0.0061

 
0.0062

 
 
At period-end
 
0.0062

 
0.0062

 
______
Source: Bank of England and Oanda.com
Other income (expense), net, in our condensed consolidated statements of income includes foreign currency transaction losses of $0.4 million and $1.4 million for the three months ended June 30, 2014 and 2013, respectively.

6

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Our earnings from unconsolidated affiliates, net of losses, are also affected by the impact of changes in foreign currency exchange rates on the reported results of our unconsolidated affiliates. During the three months ended June 30, 2014 and 2013, earnings from unconsolidated affiliates, net of losses, were increased by $0.4 million and decreased by $0.4 million, respectively, as a result of the impact of changes in foreign currency exchange rates on the results of our unconsolidated affiliates, primarily the impact of changes in the Brazilian real and U.S. dollar exchange rate on results for our affiliate in Brazil. The value of the Brazilian real has fluctuated relative to the U.S. dollar as indicated in the following table:
 
 
 
Three Months Ended 
 June 30,
 
 
 
 
2014
 
2013
 
 
One Brazilian real into U.S. dollars
 
 
 
 
 
 
High
 
0.4572

 
0.5123

 
 
Average
 
0.4493

 
0.4857

 
 
Low
 
0.4391

 
0.4434

 
 
At period-end
 
0.4538

 
0.4492

 
______
Source: Oanda.com
We estimate that the fluctuation of currencies versus the same period in the prior fiscal year had the following effect on our financial condition and results of operations (in thousands):
 
 
 
Three Months Ended 
 June 30, 2014
 
 
Revenue
 
$
10,345

 
 
Operating expense
 
(6,082
)
 
 
Earnings from unconsolidated affiliates, net of losses
 
722

 
 
Non-operating expense
 
949

 
 
Income before provision for income taxes
 
5,934

 
 
Provision for income taxes
 
(1,365
)
 
 
Net income
 
4,569

 
 
Cumulative translation adjustment
 
9,208

 
 
Total stockholders’ investment
 
$
13,777

 
Revenue Recognition
In general, we recognize revenue when it is both realized or realizable and earned. We consider revenue to be realized or realizable and earned when the following conditions exist: there is persuasive evidence of an arrangement, generally a client contract exists; the services or products have been performed or delivered to the client; the sales price is fixed or determinable; and collection is probable. More specifically, revenue from helicopter services is recognized based on contractual rates as the related services are performed. The charges under these contracts are generally based on a two-tier rate structure consisting of a daily or monthly fixed fee plus additional fees for each hour flown. These contracts are for varying periods and generally permit the client to cancel the contract before the end of the term. We also provide services to clients on an “ad hoc” basis, which usually entails a shorter contract notice period and duration. The charges for ad hoc services are based on an hourly rate or a daily or monthly fixed fee plus additional fees for each hour flown. In order to offset potential increases in operating costs, our long-term contracts may provide for periodic increases in the contractual rates charged for our services. We recognize the impact of these rate increases when the criteria outlined above have been met. This generally includes written recognition from the clients that they are in agreement with the amount of the rate escalation. Cost reimbursements from clients are recorded as reimbursable revenue with the related reimbursed costs recorded as reimbursable expense on our condensed consolidated statements of income.
Bristow Academy, our helicopter training business unit, primarily earns revenue from military training, flight training provided to individual students and ground school courses. We recognize revenue from these sources using the same revenue recognition principles described above as services are provided. We consider revenue to be realized or realizable and earned when the following conditions exist: there is persuasive evidence of an arrangement, generally a contract exists; the services have been performed or delivered to the client or student; the sales price is fixed and determinable; and collection has occurred or is probable.

7

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Eastern Airways International Limited ("Eastern Airways") primarily earns revenue through charter and scheduled airline services and provision of airport services. Both chartered and scheduled revenue is recognized net of passenger taxes and discounts. Revenue is recognized at the earlier of the period in which the service is provided or the period in which the right to travel expires, which is determined by the terms and conditions of the ticket. Ticket sales are recorded in a forward sales account within deferred income until recognized as revenue in accordance with the above policy. Airport services revenue is recognized when earned.
Interest Expense, Net
Interest expense, net includes $0.2 million and $0.1 million of interest income and $7.4 million and $20.4 million of interest expense for the three months ended June 30, 2014 and 2013, respectively. Interest expense for the three months ended June 30, 2014 includes the write-off of deferred financing fees of $0.2 million related to the repurchase of $11.3 million of our 6 ¼% Senior Notes due 2022 (the "6 ¼% Senior Notes"). Interest expense for the three months ended June 30, 2013 includes the write-off of $12.7 million of deferred financing fees related to a potential financing that was cancelled in a prior period. For further details on the repurchase of the 6 ¼% Senior Notes, see Note 3.
Other Income (Expense), Net
Other income (expense), net includes $0.9 million in premiums as a result of the repurchase of a portion of the 6 ¼% Senior Notes during the three months ended June 30, 2014.
Accounts Receivable
As of June 30 and March 31, 2014, the allowance for doubtful accounts for non-affiliates was $0.4 million and $5.0 million, respectively. The allowance as of March 31, 2014 primarily related to amounts due from ATP Oil and Gas Corporation, a client in the U.S. Gulf of Mexico, as a result of its filing for bankruptcy. During the three months ended June 30, 2014, the allowance recorded for ATP was reversed as we settled outstanding matters related to ongoing bankruptcy proceedings, which resulted in a $4.4 million reduction in bad debt expense, included within direct cost. The remaining amount of $0.5 million related to ATP was written off as no further settlement is expected. As of June 30 and March 31, 2014, there were no allowances for doubtful accounts related to accounts receivable due from affiliates.
Inventories
As of June 30 and March 31, 2014, inventories were net of allowances of $47.3 million and $46.0 million, respectively. During the three months ended June 30, 2013, we increased our inventory allowance by $0.8 million as a result of our review of excess inventory on aircraft model types we ceased ownership of or classified all or a significant portion of as held for sale. A majority of this allowance recorded during the three months ended June 30, 2013 related to small aircraft types operating primarily in our North America business unit related to a move toward operating a fleet of mostly large and medium aircraft in this market.
Prepaid Expenses and Other Current Assets
As of June 30 and March 31, 2014, prepaid expenses and other current assets included the short-term portion of contract acquisition and pre-operating costs totaling $8.3 million and $5.5 million, respectively, related to the search and rescue (“SAR”) contracts in the U.K. and a client contract in Norway, which are recoverable under the contracts and will be expensed over the terms of the contract.
Other Assets
As of June 30 and March 31, 2014, other assets included the long-term portion of contract acquisition and pre-operating costs totaling $18.4 million and $15.2 million, respectively, related to the SAR contracts in the U.K. and a client contract in Norway and these amounts will be expensed over the term of the contracts.

8

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Property and Equipment and Assets Held for Sale

During the three months ended June 30, 2014 and 2013, we made capital expenditures as follows:
 
 
Three Months Ended 
 June 30,
 
 
2014

2013
 
Number of aircraft delivered:
 
 
 
 
Medium
3

 
3

 
Large
6

 
3

 
Total aircraft
9

 
6

 
Capital expenditures (in thousands):
 
 
 
 
Aircraft and related equipment (1)
$
172,098

 
$
167,227

 
Other
28,349

 
12,305

 
Total capital expenditures
$
200,447

 
$
179,532

_____________ 
(1)
During the three months ended June 30, 2014 and 2013, we spent $161.0 million and $161.6 million, respectively, on construction in progress, which primarily represents progress payments on aircraft to be delivered in future periods.
Additionally, the following table presents details on the aircraft sold or disposed of and impairments on assets held for sale during the three months ended June 30, 2014 and 2013:
 
 
Three Months Ended 
 June 30,
 
 
2014
 
2013
 
 
(In thousands, except for number of aircraft)
 
 
 
 
 
Number of aircraft sold or disposed of
4

 
4

Proceeds from sale or disposal of assets
$
6,643

 
$
1,893

Gain (loss) from sale or disposal of assets
$
3,189

 
$
(491
)
 
 
 
 
 
Number of aircraft impaired
4

 
2

Impairment charges on aircraft held for sale
$
(2,579
)
 
$
(1,230
)
Effective April 1, 2014, we changed the useful lives of certain non-aircraft assets. These changes impact our depreciation on the assets and were driven by our annual review of useful lives. During the three months ended June 30, 2014, we recorded a $1.0 million reduction in depreciation expense as a result of this change in useful lives.
Deferred Sale Leaseback Advance
As of June 30 and March 31, 2014, we had a total deferred sale leaseback advance asset of $167.1 million and $166.3 million, respectively, of which the current portion is included in deferred sale leaseback advance ($152.3 million and $136.9 million) and the long-term portion is included in other liabilities and deferred credits ($14.8 million and $29.4 million) on our condensed consolidated balance sheets. During fiscal year 2014, we received payment of approximately $106.1 million for progress payments we had made on seven aircraft under construction, and we assigned any future payments due on these construction agreements to the purchaser. As we have the obligation and intent to lease the aircraft back from the purchaser upon completion, we recorded a liability equal to the cash received and additional payments made by the purchaser thus far totaling $60.2 million, with a corresponding increase to construction in progress. We will continue to increase both construction in progress and deferred sale leaseback advance, current or long-term, until we lease the aircraft, at which time the construction in progress and the liabilities will be removed from our condensed consolidated balance sheet.

9

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Recent Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance on revenue recognition for revenue from contracts with customers. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance when it becomes effective. This new standard is effective for annual reporting periods beginning after December 15, 2016. Early application is not permitted and the standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this standard will have on our financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
Note 2 — VARIABLE INTEREST ENTITIES AND INVESTMENTS IN OTHER SIGNIFICANT AFFILIATES
VIEs
A Variable Interest Entity (“VIE”) is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. If we determine that we have operating power and the obligation to absorb losses or receive benefits, we consolidate the VIE as the primary beneficiary, and if not, we do not consolidate.
As of June 30, 2014, we had interests in four VIEs of which we were the primary beneficiary, which are described below, and had no interests in VIEs of which we were not the primary beneficiary. See Note 3 to the fiscal year 2014 Financial Statements for a description of other investments in significant affiliates.
Bristow Aviation Holdings Limited — We own 49% of Bristow Aviation Holdings Limited’s (“Bristow Aviation”) common stock and a significant amount of its subordinated debt. Bristow Aviation is incorporated in England and holds all of the outstanding shares in Bristow Helicopters Limited (“Bristow Helicopters”). Bristow Aviation's subsidiaries provide helicopter services to clients primarily in the U.K, Norway, Australia, Nigeria and Trinidad. Bristow Aviation is organized with three different classes of ordinary shares having disproportionate voting rights. The Company, Caledonia Investments plc (“Caledonia”) and a European Union investor (the “E.U. Investor”) own 49%, 46% and 5%, respectively, of Bristow Aviation’s total outstanding ordinary shares, although Caledonia has voting control over the E.U. Investor’s shares.
In addition to our ownership of 49% of Bristow Aviation’s outstanding ordinary shares, in May 2004, we acquired eight million shares of deferred stock, essentially a subordinated class of stock with no voting rights, from Bristow Aviation for £1 per share ($14.4 million in total). We also have £91.0 million ($155.6 million) principal amount of subordinated unsecured loan stock (debt) of Bristow Aviation bearing interest at an annual rate of 13.5% and payable semi-annually. Payment of interest on such debt has been deferred since its incurrence in 1996. Deferred interest accrues at an annual rate of 13.5% and aggregated $1.3 billion as of June 30, 2014.
The Company, Caledonia, the E.U. Investor and Bristow Aviation have entered into a shareholder agreement respecting, among other things, the composition of the board of directors of Bristow Aviation. On matters coming before Bristow Aviation’s board, Caledonia’s representatives have a total of three votes and the two other directors have one vote each. In addition, Caledonia has the right to nominate two persons to our board of directors and to replace any such directors so nominated.
Caledonia, the Company and the E.U. Investor also have entered into a put/call agreement under which, upon giving specified prior notice, we have the right to buy all the Bristow Aviation shares held by Caledonia and the E.U. Investor, who, in turn, have the right to require us to purchase such shares. Under current English law, we would be required, in order for Bristow Aviation to retain its operating license, to find a qualified E.U. investor to own any Bristow Aviation shares we have the right to acquire under the put/call agreement. The only restriction under the put/call agreement limiting our ability to exercise the put/call option is a requirement to consult with the Civil Aviation Authority (the “CAA”) in the U.K. regarding the suitability of the new holder of the Bristow Aviation shares. The put/call agreement does not contain any provisions should the CAA not approve the new E.U. investor. However, we would work diligently to find an E.U. investor suitable to the CAA. The amount by which we could purchase the shares of the other investors holding 51% of the equity of Bristow Aviation is fixed under the terms of the call option, and we have reflected this amount on our condensed consolidated balance sheets as noncontrolling interest.

10

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Furthermore, the call option provides a mechanism whereby the economic risk for the other investors is limited should the financial condition of Bristow Aviation deteriorate. The call option price is the nominal value of the ordinary shares held by the noncontrolling shareholders (£1.0 million as of June 30, 2014) plus an annual guaranteed rate of return less any prepayments of such call option price and any dividends paid on the shares concerned. We can elect to pre-pay the guaranteed return element of the call option price wholly or in part without exercising the call option. No dividends have been paid. We have accrued the annual return due to the other shareholders at a rate of sterling LIBOR plus 3% (prior to May 2004, the rate was fixed at 12%) by recognizing noncontrolling interest expense on our condensed consolidated statements of income, with a corresponding increase in noncontrolling interest on our condensed consolidated balance sheets. Prepayments of the guaranteed return element of the call option are reflected as a reduction in noncontrolling interest on our condensed consolidated balance sheets. The other investors have an option to put their shares in Bristow Aviation to us. The put option price is calculated in the same way as the call option price except that the guaranteed rate for the period to April 2004 was 10% per annum. If the put option is exercised, any pre-payments of the call option price are set off against the put option price.
Bristow Aviation and its subsidiaries are exposed to similar operational risks and are therefore monitored and evaluated on a similar basis by management. Accordingly, the financial information reflected on our condensed consolidated balance sheets and statements of income for Bristow Aviation and subsidiaries is presented in the aggregate, including intercompany amounts with other consolidated entities, as follows (in thousands):
 
 
 
June 30, 
 2014
 
March 31,  
 2014
 
 
Assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
103,927

 
$
173,490

 
 
Accounts receivable
 
358,920

 
311,641

 
 
Inventories
 
105,382

 
94,288

 
 
Prepaid expenses and other current assets
 
98,992

 
45,791

 
 
Total current assets
 
667,221

 
625,210

 
 
Investment in unconsolidated affiliates
 
845

 
1,414

 
 
Property and equipment, net
 
233,078

 
217,969

 
 
Goodwill
 
42,288

 
41,218

 
 
Other assets
 
48,416

 
45,477

 
 
Total assets
 
$
991,848

 
$
931,288

 
 
Liabilities
 
 
 
 
 
 
Accounts payable
 
$
214,142

 
$
182,892

 
 
Accrued liabilities
 
1,468,520

 
1,405,401

 
 
Deferred taxes
 
2,455

 
3,588

 
 
Current maturities of long-term debt
 
8,172

 
9,664

 
 
Total current liabilities
 
1,693,289

 
1,601,545

 
 
Long-term debt, less current maturities
 
175,346

 
172,391

 
 
Accrued pension liabilities
 
82,365

 
86,824

 
 
Other liabilities and deferred credits
 
2,290

 
2,252

 
 
Deferred taxes
 
13,913

 
13,062

 
 
Temporary equity
 
24,245

 
22,283

 
 
Total liabilities
 
$
1,991,448

 
$
1,898,357

 
 
 
 
 
Three Months Ended 
 June 30,
 
 
 
 
2014
 
2013
 
 
Revenue
 
$
383,817

 
$
311,801

 
 
Operating income
 
16,700

 
9,131

 
 
Net loss
 
(37,581
)
 
(32,350
)
 

11

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Bristow Helicopters Nigeria Ltd. — Bristow Helicopters Nigeria Ltd. (“BHNL”) is a joint venture in Nigeria in which Bristow Helicopters owned a 40% interest, unrelated local Nigerian partners together owned a 39% interest, a Nigerian company owned 100% by Nigerian employees owned a 19% interest and an employee trust fund owned the remaining 2% interest as of June 30, 2014. BHNL provides helicopter services to clients in Nigeria.
In order to be able to bid competitively for our services in the Nigerian market, we were required to identify local citizens to participate in the ownership of entities domiciled in the region. However, these owners do not have extensive knowledge of the aviation industry and have historically deferred to our expertise in the overall management and day-to-day operation of BHNL (including the establishment of operating and capital budgets and strategic decisions regarding the potential expansion of BHNL’s operations). We have also historically provided subordinated financial support to BHNL and will need to continue to do so unless and until BHNL acquires sufficient equity to permit itself to finance its activities without that additional support from us. As we have the power to direct the most significant activities affecting the economic performance and ongoing success of BHNL and hold a variable interest in the entity in the form of our equity investment and working capital infusions, we consolidate BHNL as the primary beneficiary. The employee-owned Nigerian entity referenced above purchased a 19% interest in BHNL in December 2013 with proceeds from a loan received from BGI Aviation Technical Services Nigeria Limited ("BATS"). Subsequently, in July 2014, the employee-owned Nigerian entity purchased an additional 29% interest with proceeds from a loan received from Bristow Helicopters (International Limited) ("BHIL"). After this transaction, Bristow Helicopters owns a 40% interest, unrelated local Nigerian partners together own a 10% interest, the employee-owned Nigerian entity owns a 48% interest and an employee trust fund owns the remaining 2% interest. Both BATS and BHIL are wholly-owned subsidiaries of Bristow Aviation. The employee-owned Nigerian entity is also a VIE that we consolidate as the primary beneficiary; we eliminate the loans discussed above in consolidation.
BHNL is an indirect subsidiary of Bristow Aviation; therefore, financial information for this entity is included within the amounts for Bristow Aviation and its subsidiaries presented above.
Pan African Airlines Nigeria Ltd. — Pan African Airlines Nigeria Ltd. (“PAAN”) is a joint venture in Nigeria with local partners, in which we own a 50.17% interest. PAAN provides helicopter services to clients in Nigeria.
The activities that most significantly impact PAAN’s economic performance relate to the day-to-day operation of PAAN, setting the operating and capital budgets, and strategic decisions regarding the potential expansion of PAAN’s operations. Throughout the history of PAAN, our representation on the board and our secondment to PAAN of its managing director has enabled us to direct the key operational decisions of PAAN (without objection from the other board members). We have also historically provided subordinated financial support to PAAN. As we have the power to direct the most significant activities affecting the economic performance and ongoing success of PAAN and hold a variable interest in the form of our equity investment and working capital infusions, we consolidate PAAN as the primary beneficiary. However, as long as we own a majority interest in PAAN, the separate presentation of financial information in a tabular format for PAAN is not required.
Investments in Other Significant Affiliates
Effective May 28, 2014, our ownership interest in Líder in Brazil was reduced from 42.5% to 41.9% as a result of Líder's issuance of additional shares to improve tax and cost-saving efficiencies. This transaction resulted in no material impact to our condensed consolidated financial statements.

12

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 3 — DEBT
Debt as of June 30 and March 31, 2014 consisted of the following (in thousands):
 
 
 
June 30, 
 2014
 
March 31,  
 2014
 
 
6¼% Senior Notes due 2022
 
$
438,745

 
$
450,000

 
 
Term Loan
 
225,505

 
226,604

 
 
3% Convertible Senior Notes due 2038, including $4.1 million and $5.1 million of unamortized discount, respectively
 
110,923

 
109,904

 
 
Revolving Credit Facility
 
152,000

 
24,000

 
 
Eastern Airways debt
 
27,271

 
29,911

 
 
Other
 
664

 
883

 
 
Total debt
 
955,108

 
841,302

 
 
Less short-term borrowings and current maturities of long-term debt
 
(13,851
)
 
(14,207
)
 
 
Total long-term debt
 
$
941,257

 
$
827,095

 
6 ¼% Senior Notes due 2022 — During the three months ended June 30, 2014, we repurchased $11.3 million principal amount of the 6 ¼% Senior Notes in the open market at 107.75% plus accrued interest for a total of $12.2 million. In connection with this repurchase of our 6 ¼% Senior Notes, we incurred $0.9 million in premium and fees, which is included in other income (expense), net on our condensed consolidated statements of income, and wrote-off $0.2 million of unamortized deferred financing fees, which is included in interest expense, net on our condensed consolidated statements of income.
3% Convertible Senior Notes due 2038 —The balances of the debt and equity components of the 3% Convertible Senior Notes due 2038 (the “3% Convertible Senior Notes”) as of each period presented are as follows (in thousands):
 
 
 
 
June 30, 
 2014
 
March 31,  
 2014
 
 
Equity component – net carrying value
 
$
14,905

 
$
14,905

 
 
Debt component:
 
 
 
 
 
 
Face amount due at maturity
 
$
115,000

 
$
115,000

 
 
Unamortized discount
 
(4,077
)
 
(5,096
)
 
 
Debt component – net carrying value
 
$
110,923

 
$
109,904

 
The remaining debt discount is being amortized into interest expense over the expected remaining life of the 3% Convertible Senior Notes to June 2015 (the first put date) using the effective interest rate. The effective interest rate for the three months ended June 30, 2014 and 2013 was 6.9%. Interest expense related to our 3% Convertible Senior Notes for the three months ended June 30, 2014 and 2013 was as follows (in thousands):
 
 
 
Three Months Ended 
 June 30,
 
 
 
 
 
2014
 
2013
 
 
 
Contractual coupon interest
 
$
863

 
$
863

 
 
 
Amortization of debt discount
 
1,019

 
921

 
 
 
Total interest expense
 
$
1,882

 
$
1,784

 
 
Term Loan and Revolving Credit Facility — During the three months ended June 30, 2014, we had borrowings of $147.5 million and made payments of $19.5 million under the Revolving Credit Facility. Additionally, we paid $1.1 million to reduce our borrowings under the Term Loan. As of June 30, 2014, we had $0.5 million in letters of credit outstanding under the Revolving Credit Facility.

13

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 4 — FAIR VALUE DISCLOSURES
Assets and liabilities subject to fair value measurement are categorized into one of three different levels depending on the observability of the inputs employed in the measurement, as follows:
Level 1 – observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs that reflect quoted prices for identical assets or liabilities in markets which are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
Non-recurring Fair Value Measurements
The majority of our non-financial assets, which include inventories, property and equipment, assets held for sale, goodwill and other intangible assets, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur such that a non-financial asset is required to be evaluated for impairment and deemed to be impaired, the impaired non-financial asset is recorded at its fair value.
The following table summarizes the assets as of June 30, 2014, valued at fair value on a non-recurring basis (in thousands): 
 
 
Quoted Prices in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance as of
June 30,
2014
 
Total
Loss for the
Three Months
Ended
June 30,
2014
Assets held for sale
 
$

 
$
6,400

 
$

 
$
6,400

 
$
(2,579
)
Total assets
 
$

 
$
6,400

 
$

 
$
6,400

 
$
(2,579
)
The following table summarizes the assets as of June 30, 2013, valued at fair value on a non-recurring basis (in thousands): 
 
 
Quoted Prices in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance as of
June 30,
2013
 
Total
Loss for the
Three Months
Ended
June 30,
2013
Inventories
 
$

 
$
1,100

 
$

 
$
1,100

 
$
(825
)
Assets held for sale
 

 
2,300

 

 
2,300

 
(1,230
)
Total assets
 
$

 
$
3,400

 
$

 
$
3,400

 
$
(2,055
)
The fair value of inventories using Level 2 inputs is determined by evaluating the current economic conditions for sale and disposal of spare parts, which includes estimates as to the recoverability of the carrying value of the parts based on historical experience with sales and disposal of similar spare parts, the expected timeframe of sales or disposals, the location of the spare parts to be sold and the condition of the spare parts to be sold or otherwise disposed of. The fair value of assets held for sale using Level 2 inputs is determined through evaluation of expected sales proceeds for aircraft. This analysis includes estimates based on historical experience with sales, recent transactions involving similar assets, quoted market prices for similar assets and condition and location of aircraft to be sold or otherwise disposed of. The loss for the three months ended June 30, 2014 related to four aircraft held for sale and the loss for the three months ended June 30, 2013 related to two aircraft held for sale.

14

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Recurring Fair Value Measurements
The following table summarizes the financial instruments we had as of June 30, 2014, valued at fair value on a recurring basis (in thousands):
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance as of
June 30,
2014
 
Balance  Sheet
Classification
Rabbi Trust investments
 
$
6,491

 
$

 
$

 
$
6,491

 
Other assets
Total assets
 
$
6,491

 
$

 
$

 
$
6,491

 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration: (1)
 
 
 
 
 
 
 
 
 
 
      Current
 
$

 
$

 
$
7,710

 
$
7,710

 
Other accrued liabilities
      Long-term
 

 

 
23,805

 
23,805

 
Other liabilities and deferred credits
Total liabilities
 
$

 
$

 
$
31,515

 
$
31,515

 
 
______________

(1) 
Relates to our investment in Cougar Helicopters Inc. (“Cougar”). For further details on the Cougar investment, see Note 3 to the fiscal year 2014 Financial Statements.
The following table summarizes the financial instruments we had as of March 31, 2014, valued at fair value on a recurring basis (in thousands):
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance as of
March 31,
2014
 
Balance  Sheet
Classification
Rabbi Trust investments
 
$
6,599

 
$

 
$

 
$
6,599

 
Other assets
Total assets
 
$
6,599

 
$

 
$

 
$
6,599

 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration: (1)
 
 
 
 
 
 
 
 
 
 
      Current
 
$

 
$

 
$
7,652

 
$
7,652

 
Other accrued liabilities
      Long-term
 

 

 
23,670

 
23,670

 
Other liabilities and deferred credits
Total liabilities
 
$

 
$

 
$
31,322

 
$
31,322

 
 
______________

(1) 
Relates to our investment in Cougar. For further details on the Cougar investment, see Note 3 to the fiscal year 2014 Financial Statements.
The rabbi trust investments consist of cash and mutual funds whose fair value are based on quoted prices in active markets for identical assets, and are designated as Level 1 within the valuation hierarchy. The rabbi trust holds investments related to our non-qualified deferred compensation plan for our senior executives.

15

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The following table provides a rollforward of the contingent consideration liability Level 3 fair value measurements during the three months ended June 30, 2014 (in thousands):
 
 
Significant
Unobservable
Inputs (Level 3)
    Balance as of March 31, 2014
 
$
31,322
 
        Change in fair value of contingent consideration
 
193
 
    Balance as of June 30, 2014
 
$
31,515
 
We assess the estimated fair value of the contractual obligation to pay the contingent consideration on a quarterly basis and any changes in estimated fair value are recorded as accretion expense included in depreciation and amortization on our condensed consolidated statements of income. Fluctuations in the fair value of contingent consideration are impacted by two unobservable inputs, management's estimate of the probability of Cougar achieving certain agreed performance targets and the estimated discount rate. As of June 30 and March 31, 2014, the discount rate approximated 4%.
Fair Value of Financial Instruments
The fair value of our financial instruments has been estimated in accordance with the accounting standard regarding fair value. The fair value of our fixed rate long-term debt is estimated based on quoted market prices. The carrying and fair value of our long-term debt, including the current portion, are as follows (in thousands):
 
 
June 30, 2014
 
March 31, 2014
 
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
6¼% Senior Notes
 
$
438,745

 
$
483,750

 
$
450,000

 
$
477,000

Term Loan
 
225,505

 
225,505

 
226,604

 
226,604

3% Convertible Senior Notes
 
110,923

 
145,694

 
109,904

 
142,382

Revolving Credit Facility
 
152,000

 
152,000

 
24,000

 
24,000

Eastern Airways debt
 
27,271

 
27,271

 
29,911

 
29,911

Other
 
664

 
664

 
883

 
883

 
 
$
955,108

 
$
1,034,884

 
$
841,302

 
$
900,780

Other
The fair values of our cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values due to the short-term nature of these items.

16

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 5 — COMMITMENTS AND CONTINGENCIES
Aircraft Purchase Contracts — As shown in the table below, we expect to make additional capital expenditures over the next five fiscal years to purchase additional aircraft. As of June 30, 2014, we had 37 aircraft on order and options to acquire an additional 51 aircraft. Although a similar number of our existing aircraft may be sold during the same period, the additional aircraft on order will provide incremental fleet capacity in terms of revenue and operating income. As discussed in the fiscal year 2014 Financial Statements, we were awarded a contract to provide civilian SAR services for all of the U.K. The SAR configured aircraft on order in the table below are intended to service this contract and other SAR contracts.
 
 
Nine Months Ending March 31, 2015
 
Fiscal Year Ending March 31,
 
 
 
 
2016
 
2017
 
2018
 
2019 and thereafter
 
Total
Commitments as of June 30, 2014: (1)
 
 
 
 
 
 
 
 
 
 
 
 
Number of aircraft:
 
 
 
 
 
 
 
 
 
 
 
 
Medium
 
7

 

 

 

 

 
7

Large (2)
 
5

 
7

 
4

 

 

 
16

SAR configured
 
5

 
9

 

 

 

 
14

 
 
17

 
16

 
4

 

 

 
37

Related expenditures (in thousands)(3)
 
 
 
 
 
 
 
 
 
 
 
 
Medium and large
 
$
205,553

 
$
126,293

 
$
49,234

 
$

 
$

 
$
381,080

SAR configured
 
167,887

 
109,050

 

 

 

 
276,937

 
 
$
373,440

 
$
235,343

 
$
49,234

 
$

 
$

 
$
658,017

Options as of June 30, 2014: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Number of aircraft:
 
 
 
 
 
 
 
 
 
 
 
 
Medium
 

 
6

 
7

 
7

 

 
20

Large (2)
 

 
4

 
14

 
12

 
1

 
31

 
 

 
10

 
21

 
19

 
1

 
51

 
 
 
 
 
 
 
 
 
 
 
 
 
Related expenditures (in thousands)(3)
 
$
46,014

 
$
263,627

 
$
440,060

 
$
265,346

 
$
12,108

 
$
1,027,155

 ______ 

(1) 
Signed client contracts are currently in place that will utilize 19 of these aircraft.

(2) 
Five large aircraft on order and seven large aircraft under options expected to enter service between fiscal years 2016 and 2019 are subject to the successful development and certification of the aircraft.
(3) 
Includes progress payments on aircraft scheduled to be delivered in future periods.
The following chart presents an analysis of our aircraft orders and options during the three months ended June 30, 2014:
     
 
 
 
Orders
 
Options
 
Beginning of period
 
43

 
55

 
Aircraft delivered
 
(9
)
 

 
Exercised options
 
3

 
(3
)
 
Expired options
 

 
(1
)
 
End of period
 
37

 
51

We periodically purchase aircraft for which we have no orders.

17

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Operating Leases — We have non-cancelable operating leases in connection with the lease of certain equipment, land and facilities, including leases for aircraft. Rental expense incurred under all operating leases, except for those with terms of a month or less that were not renewed, was $33.1 million and $23.1 million for the three months ended June 30, 2014 and 2013, respectively, which includes rental expense incurred under operating leases for aircraft of $26.4 million and $18.1 million, respectively.
We did not enter into any sale leasebacks during the three months ended June 30, 2014 and 2013.
The aircraft leases range from base terms of five to 84 months with renewal options of up to 108 months in some cases, include purchase options upon expiration and some include early purchase options. The leases contain terms customary in transactions of this type, including provisions that allow the lessor to repossess the aircraft and require us to pay a stipulated amount if we default on our obligations under the agreements. The following is a summary of the terms related to aircraft leased under operating leases with original or remaining terms in excess of one year as of June 30, 2014:
 
End of Lease Term
 
Number of Aircraft
 
Monthly Lease Payments
(in thousands)
 
Nine months ending March 31, 2015 to fiscal year 2016
 
6

 
$
1,001

 
Fiscal year 2017 to fiscal year 2019
 
27

 
4,297

 
Fiscal year 2020 to fiscal year 2024
 
26

 
2,751

 
 
 
59

 
$
8,049

 
Employee Agreements — Approximately 48% of our employees are represented by collective bargaining agreements and/or unions. These agreements generally include annual escalations of up to 8%. Periodically, certain groups of our employees who are not covered by a collective bargaining agreement consider entering into such an agreement.
During the three months ended June 30, 2014, we recognized $1.0 million in severance expense included in direct costs and general administrative expense in our North America business unit primarily as a result of our planned closure of our Alaska operations. Additionally, we have employee agreements with members of senior management. For further details on the retirement of our President and Chief Executive Officer, see Note 7.
Environmental Contingencies — The U.S. Environmental Protection Agency, also referred to as the EPA, has in the past notified us that we are a potential responsible party, or PRP, at three former waste disposal facilities that are on the National Priorities List of contaminated sites. Under the federal Comprehensive Environmental Response, Compensation and Liability Act, also known as the Superfund law, persons who are identified as PRPs may be subject to strict, joint and several liability for the costs of cleaning up environmental contamination resulting from releases of hazardous substances at National Priorities List sites. Although we have not yet obtained a formal release of liability from the EPA with respect to any of the sites, we believe that our potential liability in connection with the sites is not likely to have a material adverse effect on our business, financial condition or results of operations.
Other Purchase Obligations — As of June 30, 2014, we had $87.7 million of other purchase obligations representing unfilled purchase orders for aircraft parts, commitments associated with upgrading facilities at our bases and non-cancelable power-by-the-hour maintenance commitments.
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 deductible, self-insured retention and loss sensitive factors.
On October 22, 2012, an incident occurred with an Airbus Helicopters EC225 Super Puma helicopter operated by another helicopter company, which resulted in a controlled ditching on the North Sea, south of the Shetland Isles, U.K. Following the ditching, all 19 passengers and crew were recovered safely and without injuries.
This incident resulted in the CAAs in the U.K. and Norway issuing safety directives in October 2012, requiring operators to suspend operations of the affected aircraft and our cessation of operations a total of 16 large Airbus Helicopters aircraft for a period of time pending determination of the root cause of the gear shaft failure that resulted in the incident. However, in July 2013 the European Aviation Safety Authority (the “EASA”) issued an airworthiness directive providing for interim solutions involving minor aircraft modifications and new maintenance/operating procedures for mitigating shaft failure and enhancing early detection which allows the EC225 to safely fly without the new shaft. We commenced return to operational service of our EC225 fleet in the third quarter of fiscal year 2014. The gear shaft has been redesigned and, in April 2014, Airbus Helicopters advised us that the EASA has certified the new shaft with the expectation that the global oil and gas fleet will have the new shaft installed in the next twelve to twenty four months. All but one of these aircraft are available for revenue service. Until the fleet is again fully operational

18

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

and under commercial arrangements similar to before the operational suspension, this situation could have a material adverse effect on our future business, financial condition and results of operations.
On February 20, 2014, the U.K. CAA issued a report detailing the findings and recommendations from its review of helicopter transport operations serving offshore installations in the U.K. The report, commonly referred to as CAP 1145, contains more than 60 safety actions and recommendations to improve the safety of offshore helicopter transport. Ten of the recommendations are designed to improve the survivability of passengers and crew following a ditching or impact in water.
One safety directive, which will go into effect on September 1, 2014, will restrict seating capacity on some aircraft in the North Sea until new passenger emergency breathing systems are available or side floats are installed. Operational restrictions when sea states are above a certain prescribed level were effective on June 1, 2014 and further requirements will be implemented over the next 12 months, including flight prohibition of individuals whose size exceeds the dimensions of emergency egress windows. Training of the North Sea offshore workforce on the new breathing systems has commenced and roll-out of the new passenger life jackets incorporating this system will commence mid-August. We expect most locations to have these in place by the September 1, 2014 deadline, but there is a possibility that some passenger capacity restrictions may be necessary which could lead to additional flights being required by our clients.
We are a defendant in certain claims and litigation arising out of operations in the normal course of business. In the opinion of management, uninsured losses, if any, will not be material to our financial position, results of operations or cash flows.
Note 6 — TAXES
Our effective income tax rates were 20.8% and 22.0% for the three months ended June 30, 2014 and 2013, respectively. Our effective tax rate was impacted by the permanent reinvestment outside the U.S. of foreign earnings, upon which no U.S. tax has been provided, and by the amount of our foreign source income and our ability to realize foreign tax credits. As of June 30, 2014, there were $4.3 million of unrecognized tax benefits, all of which would have an impact on our effective tax rate, if recognized. The uncertain tax benefits relate to pre-acquisition tax matters for the February 2014 acquisition of a 60% interest in Eastern Airways and are the subject of an indemnity, for which a corresponding indemnity asset has been established in the amount of $4.2 million.
Note 7 — EMPLOYEE BENEFIT PLANS
Pension Plans
The following table provides a detail of the components of net periodic pension cost (in thousands):
 
 
 
Three Months Ended 
 June 30,
 
 
 
 
 
2014
 
2013
 
 
 
Service cost for benefits earned during the period
 
$
2,246

 
$
2,051

 
 
 
Interest cost on pension benefit obligation
 
6,929

 
6,538

 
 
 
Expected return on assets
 
(8,223
)
 
(7,102
)
 
 
 
Amortization of unrecognized losses
 
1,768

 
1,877

 
 
 
Net periodic pension cost
 
$
2,720

 
$
3,364

 
 
We pre-funded our contributions of £12.5 million ($20.8 million) to our U.K. Staff pension plan for fiscal year 2015 in the last quarter of fiscal year 2014. The current estimates of our cash contributions to our U.K. pension plans and Norwegian pension plan for fiscal year 2015 are $21.2 million and $7.9 million, respectively, of which $5.1 million and $3.2 million, respectively, were paid during the three months ended June 30, 2014.
Incentive Compensation
Stock–based awards are currently made under the Bristow Group Inc. 2007 Long-Term Incentive Plan (the “2007 Plan”). A maximum of 5,400,000 shares of common stock, par value $.01 per share (“Common Stock”), are reserved. Awards granted under the 2007 Plan may be in the form of stock options, stock appreciation rights, shares of restricted stock, other stock-based awards (payable in cash or Common Stock) or performance awards, or any combination thereof, and may be made to outside directors, employees or consultants. As of June 30, 2014, 2,395,125 shares remained available for grant under the 2007 Plan.

19

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

We have a number of other incentive and stock option plans which are described in Note 10 to our fiscal year 2014 Financial Statements.
Total stock-based compensation expense, which includes stock options and restricted stock, totaled $4.2 million and $2.9 million for the three months ended June 30, 2014 and 2013, respectively. Stock-based compensation expense has been allocated to our various business units.
During the three months ended June 30, 2014, we awarded 152,924 shares of restricted stock at an average grant date fair value of $74.48 per share. Also during the three months ended June 30, 2014, 445,453 stock options were granted. The following table shows the assumptions used to compute the stock-based compensation expense for stock options granted during the three months ended June 30, 2014:
 
Risk free interest rate
1.65
%
 
 
Expected life (years)
6

 
 
Volatility
30.1
%
 
 
Dividend yield
2.06
%
 
 
Weighted average exercise price of options granted
$74.52 per option

 
 
Weighted average grant-date fair value of options granted
$17.21 per option

 
Performance cash awards vest and pay out in cash three years after the date of grant at varying levels depending on our performance in Total Shareholder Return against a peer group of companies. These awards were designed to tie a significant portion of total compensation to performance. One of the effects of this type of compensation is that it requires liability accounting which can result in volatility in earnings. The liability recorded for these awards as of June 30 and March 31, 2014 was $10.8 million and $16.7 million, respectively, and represents an accrual based on the fair value of the awards on those dates. The decrease in the liability during the three months ended June 30, 2014 resulted from the payout in June 2014 of the awards granted in June 2011, partially offset by the value of the new awards granted in June 2014. Any changes in fair value of the awards in future quarters will increase or decrease the liability and impact results in those periods. The effect, either positive or negative, on future period earnings can vary based on factors including changes in our stock price or the stock prices of the peer group companies, as well as changes in other market and company-specific assumptions that are factored into the calculation of fair value of the performance cash awards.
Compensation expense related to the performance cash awards recorded during the three months ended June 30, 2014 and 2013 was $2.1 million and $1.8 million, respectively.
Retirement of President and Chief Executive Officer
On February 3, 2014, the Company announced that William E. Chiles would resign as President and Chief Executive Officer of the Company effective upon the conclusion of the 2014 annual meeting of the stockholders of the Company that was held on July 31, 2014. On June 9, 2014, Jonathan E. Baliff began serving as President and on July 31, 2014 assumed the additional role of Chief Executive Officer of the Company. Mr. Baliff also became a member of the Board of Directors of the Company effective July 31, 2014. Mr. Chiles will remain an employee of the Company and will provide consulting services to the Company.
Mr. Chiles and the Company have entered into a Retirement and Consulting Agreement, dated January 30, 2014 (the “Agreement”) to specify the terms of his continued employment with the Company. Upon his resignation as an officer, Mr. Chiles will be entitled to a lump sum cash payment of $3.8 million, which is equivalent to the amount that would be payable as severance under the employment agreement that was in effect prior to the execution of the Agreement. In addition, all outstanding long-term incentive awards other than awards granted in 2014 will fully vest. Under the terms of the Agreement, following his resignation as an officer and ending July 31, 2016, Mr. Chiles will provide consulting services to us relating to the achievement of certain business objectives and matters of strategy. Mr. Chiles is not eligible to receive grants of equity awards following the effective date of his resignation as an officer. The Agreement contains certain restrictive covenants and confidentiality provisions, including non-compete and non-solicitation obligations continuing for 18 months after Mr. Chiles terminates all employment and consulting services with us, and a mutual non-disparagement provision. We recorded compensation expense, included in general and administrative expense, of $3.7 million during the three months ended June 30, 2014 related to the Agreement.

20

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 8 — DIVIDENDS, SHARE REPURCHASES, EARNINGS PER SHARE AND ACCUMULATED OTHER COMPREHENSIVE INCOME
Dividends
On July 31, 2014, our board of directors approved a dividend of $0.32 per share of Common Stock, payable on September 15, 2014 to shareholders of record on August 29, 2014. See discussion of our dividends in Note 11 to our fiscal year 2014 Financial Statements. The declaration of future dividends is at the discretion of our board of directors and subject to our results of operations, financial condition, cash requirements and other factors and restrictions under applicable law and our debt instruments.
Share Repurchases
During the three months ended June 30, 2014, we spent $20.2 million to repurchase 270,598 shares of our Common Stock. Subsequently, from July 1, 2014 through July 31, 2014, we spent $3.8 million to repurchase 52,428 additional shares of our Common Stock. As of July 31, 2014, we had $31.7 million of repurchase authority remaining from $133.4 million that was authorized for share repurchases between November 5, 2013 and November 5, 2014. For additional information on our repurchases of Common Stock, see “Share Repurchases” in Note 11 to the fiscal year 2014 Financial Statements. The timing and method of any repurchases under the program will depend on a variety of factors, is subject to our results of operations, financial condition, cash requirements, and other factors and restrictions under applicable law and our debt instruments, and may be suspended or discontinued at any time.
Earnings per Share
Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per common share excludes options to purchase shares and restricted stock awards, which were outstanding during the period but were anti-dilutive, as follows:
 
 
 
Three Months Ended 
 June 30,
 
 
 
 
 
2014
 
2013
 
 
 
Options:
 
 
 
 
 
 
 
Outstanding
 
302,447

 
396,801

 
 
 
Weighted average exercise price
 
$
62.17

 
$
47.40

 
 
 
Restricted stock awards:
 
 
 
 
 
 
 
Outstanding
 
43,391

 
43,077

 
 
 
Weighted average price
 
$
74.46

 
$
62.65

 
 


21

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The following table sets forth the computation of basic and diluted earnings per share:
 
 
 
Three Months Ended 
 June 30,
 
 
 
 
2014
 
2013
 
 
Net income available to common stockholders (in thousands):
 
 
 
 
 
 
Income available to common stockholders – basic
 
$
44,109

 
$
26,886

 
 
Interest expense on assumed conversion of 3% Convertible Senior Notes, net of tax (1)
 

 

 
 
Income available to common stockholders – diluted
 
$
44,109

 
$
26,886

 
 
Shares:
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic
 
35,564,328

 
36,182,708

 
 
Assumed conversion of 3% Convertible Senior Notes outstanding during the period (1)
 

 

 
 
Net effect of dilutive stock options and restricted stock awards based on the treasury stock method
 
301,578

 
393,577

 
 
Weighted average number of common shares outstanding – diluted
 
35,865,906

 
36,576,285

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
1.24

 
$
0.74

 
 
Diluted earnings per common share
 
$
1.23

 
$
0.74

 
_____________ 
(1) 
Diluted earnings per common share for the three months ended June 30, 2014 and 2013 excludes a number of potentially dilutive shares determined pursuant to a specified formula initially issuable upon the conversion of our 3% Convertible Senior Notes. The 3% Convertible Senior Notes will be convertible, under certain circumstances, using a net share settlement process, into a combination of cash and our Common Stock. As of June 30, 2014, the base conversion price of the notes was approximately $74.05, based on the base conversion rate of 13.5048 shares of Common Stock per $1,000 principal amount of convertible notes (subject to adjustment in certain circumstances, including the payment of dividends). In general, upon conversion of a note, the holder will receive cash equal to the principal amount of the note and Common Stock to the extent of the note’s conversion value in excess of such principal amount. In addition, if at the time of conversion the applicable price of our Common Stock exceeds the base conversion price, holders will receive up to an additional 8.7781 shares of our Common Stock per $1,000 principal amount of notes, as determined pursuant to a specified formula. Such shares did not impact our calculation of diluted earnings per share for the three months ended June 30, 2014 and 2013 as our average stock price during these periods did not meet or exceed the conversion requirements.
 
Accumulated Other Comprehensive Income
The following table sets forth the changes in the balances of each component of accumulated other comprehensive income:
 
 
Currency Translation Adjustments
 
Pension Liability Adjustments (1)
 
Total
Balance as of March 31, 2014
 
$
57,812

 
$
(214,318
)
 
$
(156,506
)
Other comprehensive income before reclassification
 
9,208

 

 
9,208

Reclassified from accumulated other comprehensive income
 

 

 

Net current period other comprehensive income
 
9,208

 

 
9,208

Foreign exchange rate impact
 
5,717

 
(5,717
)
 

Balance at June 30, 2014
 
$
72,737

 
$
(220,035
)
 
$
(147,298
)
_____________ 
(1) 
Reclassification of amounts related to pension liability adjustments are included as a component of net periodic pension cost.


22

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 9 — SEGMENT INFORMATION
We conduct our business in one segment: Helicopter Services. The Helicopter Services segment operations are conducted primarily through five business units: Europe, West Africa, North America, Australia, and Other International. Additionally, we operate a training business unit, Bristow Academy, and provide technical services to clients in the U.S. and U.K., which are included in Corporate and other.
The following shows business unit information for the three months ended June 30, 2014 and 2013 and as of June 30 and March 31, 2014, where applicable, reconciled to consolidated totals, and prepared on the same basis as our condensed consolidated financial statements (in thousands):
 
 
 
Three Months Ended 
 June 30,
 
 
 
 
 
2014
 
2013
 
 
 
Business unit gross revenue from external clients:
 
 
 
 
 
 
 
Europe
 
$
228,405

 
$
166,709

 
 
 
West Africa
 
82,856

 
79,381

 
 
 
North America
 
57,642

 
58,582

 
 
 
Australia
 
51,603

 
43,998

 
 
 
Other International
 
35,526

 
32,975

 
 
 
Corporate and other
 
16,506

 
17,349

 
 
 
Total business unit gross revenue
 
$
472,538

 
$
398,994

 
 
 
Intra-business unit gross revenue:
 
 
 
 
 
 
 
Europe
 
$
161

 
$

 
 
 
West Africa
 

 

 
 
 
North America
 

 
(16
)
 
 
 
Australia
 

 

 
 
 
Other International
 
8

 

 
 
 
Corporate and other
 
771

 
863

 
 
 
Total intra-business unit gross revenue
 
$
940

 
$
847

 
 
 
Consolidated gross revenue reconciliation:
 
 
 
 
 
 
 
Europe
 
$
228,566

 
$
166,709

 
 
 
West Africa
 
82,856

 
79,381

 
 
 
North America
 
57,642

 
58,566

 
 
 
Australia
 
51,603

 
43,998

 
 
 
Other International
 
35,534

 
32,975

 
 
 
Corporate and other
 
17,277

 
18,212

 
 
 
Intra-business unit eliminations
 
(940
)
 
(847
)
 
 
 
Total consolidated gross revenue
 
$
472,538

 
$
398,994

 
 



23

BRISTOW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

 
 
 
Three Months Ended 
 June 30,
 
 
 
 
 
2014
 
2013
 
 
 
Earnings from unconsolidated affiliates, net of losses – equity method investments:
 
 
 
 
 
 
 
Europe
 
$
374

 
$
3,040

 
 
 
North America
 
(466
)
 
(8
)
 
 
 
Other International
 
4,373

 
8,940

 
 
 
Total earnings from unconsolidated affiliates, net of losses – equity method investments
 
$
4,281

 
$
11,972

 
 
 
 
 
 
 
 
 
 
 
Consolidated operating income (loss) reconciliation:
 
 
 
 
 
 
 
Europe
 
$
40,369

 
$
20,021

 
 
 
West Africa
 
16,662

 
19,253

 
 
 
North America
 
12,546

 
8,123

 
 
 
Australia
 
2,253

 
3,280

 
 
 
Other International
 
10,402

 
18,442

 
 
 
Corporate and other
 
(17,650
)
 
(11,279
)
 
 
 
Gain (loss) on disposal of assets
 
610