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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 December 31, 2017
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o
Emerging growth 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
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate the number shares outstanding of each of the issuer’s classes of Common Stock, as of February 2, 2018.
35,377,044 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 Operations
  
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
(In thousands, except per share amounts)
Gross revenue:
 
 
 
 
 
 
 
 
Operating revenue from non-affiliates
 
$
328,944

 
$
305,789

 
$
991,655

 
$
969,779

Operating revenue from affiliates
 
16,584

 
18,564

 
51,594

 
54,420

Reimbursable revenue from non-affiliates
 
15,207

 
13,090

 
43,271

 
40,109

 
 
360,735

 
337,443

 
1,086,520

 
1,064,308

Operating expense:
 
 
 
 
 
 
 
 
Direct cost
 
271,864

 
260,343

 
842,128

 
831,516

Reimbursable expense
 
14,725

 
12,206

 
42,365

 
38,096

Depreciation and amortization
 
31,682

 
29,768

 
94,119

 
93,054

General and administrative
 
43,366

 
45,409

 
138,695

 
149,278

 
 
361,637

 
347,726

 
1,117,307

 
1,111,944

 
 
 
 
 
 
 
 
 
Loss on impairment
 

 
(8,706
)
 
(1,192
)
 
(16,278
)
Loss on disposal of assets
 
(4,591
)
 
(874
)
 
(12,418
)
 
(13,077
)
Earnings from unconsolidated affiliates, net of losses
 
1,996

 
766

 
3,394

 
4,777

Operating loss
 
(3,497
)
 
(19,097
)
 
(41,003
)
 
(72,214
)
 
 
 
 
 
 
 
 
 
Interest expense, net
 
(19,093
)
 
(12,179
)
 
(53,677
)
 
(34,533
)
Other income (expense), net
 
(766
)
 
1,668

 
147

 
(1,518
)
Loss before benefit for income taxes
 
(23,356
)
 
(29,608
)
 
(94,533
)
 
(108,265
)
Benefit (provision) for income taxes
 
13,419

 
3,560

 
(2,546
)
 
11,038

Net loss
 
(9,937
)
 
(26,048
)
 
(97,079
)
 
(97,227
)
Net loss attributable to noncontrolling interests
 
1,664

 
4,121

 
2,322

 
4,731

Net loss attributable to Bristow Group
 
$
(8,273
)
 
$
(21,927
)
 
$
(94,757
)
 
$
(92,496
)
 
 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.23
)
 
$
(0.62
)
 
$
(2.69
)
 
$
(2.64
)
Diluted
 
$
(0.23
)
 
$
(0.62
)
 
$
(2.69
)
 
$
(2.64
)
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$

 
$
0.07

 
$
0.07

 
$
0.21

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

1


BRISTOW GROUP INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
  
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
(In thousands)
Net loss
 
$
(9,937
)
 
$
(26,048
)
 
$
(97,079
)
 
$
(97,227
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
Currency translation adjustments
 
(57
)
 
(18,896
)
 
20,394

 
(31,470
)
Total comprehensive loss
 
(9,994
)
 
(44,944
)
 
(76,685
)
 
(128,697
)
 
 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests
 
1,664

 
4,121

 
2,322

 
4,731

Currency translation adjustments attributable to
   noncontrolling interests
 
(17
)
 
(687
)
 
530

 
(5,652
)
    Total comprehensive (income) loss attributable to
       noncontrolling interests
 
1,647

 
3,434

 
2,852

 
(921
)
Total comprehensive loss attributable to Bristow Group
 
$
(8,347
)
 
$
(41,510
)
 
$
(73,833
)
 
$
(129,618
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

2


BRISTOW GROUP INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
December 31, 
 2017
 
March 31,  
 2017
 
 
(Unaudited)
 
 
 
 
(In thousands)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
117,848

 
$
96,656

Accounts receivable from non-affiliates
 
202,141

 
198,129

Accounts receivable from affiliates
 
12,638

 
8,786

Inventories
 
133,993

 
124,911

Assets held for sale
 
31,038

 
38,246

Prepaid expenses and other current assets
 
43,668

 
41,143

Total current assets
 
541,326

 
507,871

Investment in unconsolidated affiliates
 
211,115

 
210,162

Property and equipment – at cost:
 
 
 
 
Land and buildings
 
241,792

 
231,448

Aircraft and equipment
 
2,511,322

 
2,622,701

 
 
2,753,114

 
2,854,149

Less – Accumulated depreciation and amortization
 
(673,930
)
 
(599,785
)
 
 
2,079,184

 
2,254,364

Goodwill
 
20,299

 
19,798

Other assets
 
115,233

 
121,652

Total assets
 
$
2,967,157

 
$
3,113,847

 
 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ INVESTMENT
Current liabilities:
 
 
 
 
Accounts payable
 
$
87,428

 
$
98,215

Accrued wages, benefits and related taxes
 
55,652

 
59,077

Income taxes payable
 
5,320

 
15,145

Other accrued taxes
 
6,095

 
9,611

Deferred revenue
 
17,922

 
19,911

Accrued maintenance and repairs
 
28,468

 
22,914

Accrued interest
 
6,292

 
12,909

Other accrued liabilities
 
72,292

 
46,679

Deferred taxes
 

 
830

Short-term borrowings and current maturities of long-term debt
 
93,136

 
131,063

Total current liabilities
 
372,605

 
416,354

Long-term debt, less current maturities
 
1,102,765

 
1,150,956

Accrued pension liabilities
 
54,291

 
61,647

Other liabilities and deferred credits
 
37,768

 
28,899

Deferred taxes
 
141,904

 
154,873

Commitments and contingencies (Note 5)
 


 

Redeemable noncontrolling interest
 
3,859

 
6,886

Stockholders’ investment:
 
 
 
 
Common stock, $.01 par value, authorized 90,000,000; outstanding: 35,375,380 as of December 31 and 35,213,991 as of March 31 (exclusive of 1,291,441 treasury shares)
 
381

 
379

Additional paid-in capital
 
844,825

 
809,995

Retained earnings
 
894,684

 
991,906

Accumulated other comprehensive loss
 
(307,353
)
 
(328,277
)
Treasury shares, at cost (2,756,419 shares)
 
(184,796
)
 
(184,796
)
Total Bristow Group stockholders’ investment
 
1,247,741

 
1,289,207

Noncontrolling interests
 
6,224

 
5,025

Total stockholders’ investment
 
1,253,965

 
1,294,232

Total liabilities, redeemable noncontrolling interest and stockholders’ investment
 
$
2,967,157

 
$
3,113,847

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
  
 
Nine Months Ended 
 December 31,
 
 
2017
 
2016
 
 
 
 
 
 
 
(Unaudited)
(In thousands)
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(97,079
)
 
$
(97,227
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
94,119

 
93,054

Deferred income taxes
 
(14,665
)
 
(20,991
)
Write-off of deferred financing fees
 
1,138

 

Discount amortization on long-term debt
 
343

 
1,314

Loss on disposal of assets
 
12,418

 
13,077

Loss on impairment
 
1,192

 
16,278

Deferral of lease payments
 
2,423

 

Stock-based compensation
 
8,776

 
9,508

Equity in earnings from unconsolidated affiliates in excess of dividends received
 
(3,185
)
 
(4,294
)
Increase (decrease) in cash resulting from changes in:
 
 
 
 
Accounts receivable
 
(3,785
)
 
15,787

Inventories
 
(4,618
)
 
(2,912
)
Prepaid expenses and other assets
 
10,250

 
(4,359
)
Accounts payable
 
(14,540
)
 
(7,395
)
Accrued liabilities
 
(5,528
)
 
(19,891
)
Other liabilities and deferred credits
 
3,434

 
(6,047
)
Net cash used in operating activities
 
(9,307
)
 
(14,098
)
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(36,441
)
 
(119,726
)
Proceeds from asset dispositions
 
48,547

 
14,344

Proceeds from OEM cost recoveries
 
94,463

 

Deposits received on aircraft held for sale
 

 
290

Net cash provided by (used in) investing activities
 
106,569

 
(105,092
)
Cash flows from financing activities:
 
 
 
 
Proceeds from borrowings
 
548,768

 
360,240

Debt issuance costs
 
(11,653
)
 
(3,883
)
Repayment of debt
 
(609,667
)
 
(243,677
)
Purchase of 4½% Convertible Senior Notes call option
 
(40,393
)
 

Proceeds from issuance of warrants
 
30,259

 

Partial prepayment of put/call obligation
 
(36
)
 
(38
)
Dividends paid to noncontrolling interest
 

 
(2,533
)
Payment of contingent consideration
 

 
(10,000
)
Common stock dividends paid
 
(2,465
)
 
(7,366
)
Repurchases for tax withholdings on vesting of equity awards
 
(591
)
 
(762
)
Net cash provided by (used in) financing activities
 
(85,778
)
 
91,981

Effect of exchange rate changes on cash and cash equivalents
 
9,708

 
(5,942
)
Net increase (decrease) in cash and cash equivalents
 
21,192

 
(33,151
)
Cash and cash equivalents at beginning of period
 
96,656

 
104,310

Cash and cash equivalents at end of period
 
$
117,848

 
$
71,159

Cash paid during the period for:
 
 
 
 
Interest
 
$
69,896

 
$
43,965

Income taxes
 
$
20,440

 
$
23,550

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

4


BRISTOW GROUP INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Equity and Redeemable Noncontrolling Interest
(Unaudited)
(In thousands, except share amounts)
 
 
 
Total Bristow Group Stockholders’ Investment
 
 
 
 
 
Redeemable Noncontrolling Interest
 
Common
Stock
 
Common
Stock
(Shares)
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Noncontrolling
Interests
 
Total
Stockholders’
Investment
March 31, 2017
$
6,886

 
$
379

 
35,213,991

 
$
809,995

 
$
991,906

 
$
(328,277
)
 
$
(184,796
)
 
$
5,025

 
$
1,294,232

Issuance of common stock

 
2

 
161,389

 
8,186

 

 

 

 

 
8,188

Equity component of 4½% Convertible Senior Notes issued

 

 

 
36,778

 

 

 

 

 
36,778

Purchase of 4½% Convertible Senior Notes
call option

 

 

 
(40,393
)
 

 

 

 

 
(40,393
)
Proceeds from issuance of warrants

 

 

 
30,259

 

 

 

 

 
30,259

Distributions paid to noncontrolling interests

 

 

 

 

 

 

 
(36
)
 
(36
)
Common stock dividends ($0.07 per share)

 

 

 

 
(2,465
)
 

 

 

 
(2,465
)
Currency translation adjustments
489

 

 

 

 

 

 

 
41

 
41

Net loss
(3,516
)
 

 

 

 
(94,757
)
 

 

 
1,194

 
(93,563
)
Other comprehensive income

 

 

 

 

 
20,924

 

 

 
20,924

December 31, 2017
$
3,859

 
$
381

 
35,375,380

 
$
844,825

 
$
894,684

 
$
(307,353
)
 
$
(184,796
)
 
$
6,224

 
$
1,253,965

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

5

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, 2018 is referred to as “fiscal year 2018”. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission, 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 2017 Annual Report (the “fiscal year 2017 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 balance sheet of the Company as of December 31, 2017, the consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2017 and 2016, the consolidated cash flows for the nine months ended December 31, 2017 and 2016, and the consolidated statements of changes in equity and redeemable noncontrolling interest for the nine months ended December 31, 2017.

6

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



Foreign Currency
During the three and nine months ended December 31, 2017 and 2016, our primary foreign currency exposure was to the British pound sterling, the euro, the Australian dollar, the Norwegian kroner 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 
 December 31,
 
Nine Months Ended 
 December 31,
 
 
2017
 
2016
 
2017
 
2016
One British pound sterling into U.S. dollars
 
 
 
 
 
 
 
 
High
 
1.35

 
1.30

 
1.36

 
1.48

Average
 
1.33

 
1.24

 
1.31

 
1.33

Low
 
1.31

 
1.21

 
1.24

 
1.21

At period-end
 
1.35

 
1.24

 
1.35

 
1.24

One euro into U.S. dollars
 
 
 
 
 
 
 
 
High
 
1.20

 
1.12

 
1.20

 
1.15

Average
 
1.18

 
1.08

 
1.15

 
1.11

Low
 
1.16

 
1.04

 
1.06

 
1.04

At period-end
 
1.20

 
1.05

 
1.20

 
1.05

One Australian dollar into U.S. dollars
 
 
 
 
 
 
 
 
High
 
0.79

 
0.77

 
0.81

 
0.78

Average
 
0.77

 
0.75

 
0.77

 
0.75

Low
 
0.75

 
0.72

 
0.74

 
0.72

At period-end
 
0.78

 
0.72

 
0.78

 
0.72

One Norwegian kroner into U.S. dollars
 
 
 
 
 
 
 
 
High
 
0.1269

 
0.1253

 
0.1294

 
0.1253

Average
 
0.1225

 
0.1193

 
0.1219

 
0.1202

Low
 
0.1193

 
0.1145

 
0.1152

 
0.1145

At period-end
 
0.1223

 
0.1162

 
0.1223

 
0.1162

One Nigerian naira into U.S. dollars
 
 
 
 
 
 
 
 
High
 
0.0028

 
0.0032

 
0.0033

 
0.0050

Average
 
0.0028

 
0.0032

 
0.0030

 
0.0037

Low
 
0.0028

 
0.0031

 
0.0027

 
0.0029

At period-end
 
0.0028

 
0.0032

 
0.0028

 
0.0032

_____________ 
Source: FactSet
Other income (expense), net, in our condensed consolidated statements of operations includes foreign currency transaction gains of $0.4 million and $1.6 million for the three months ended December 31, 2017 and 2016, respectively, and foreign currency transaction gains of $1.2 million and foreign currency transaction losses of $1.8 million for the nine months ended December 31, 2017 and 2016, respectively. Transaction gains and losses represent the revaluation of monetary assets and liabilities from the currency that will ultimately be settled into the functional currency of the legal entity holding the asset or liability. The most significant items revalued are denominated in U.S. dollars on entities with British pound sterling and Nigerian naira functional currencies and denominated in British pound sterling on entities with U.S. dollar functional currencies with transaction gains or losses primarily resulting from the strengthening or weakening of the U.S. dollar versus those other currencies.

7

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 December 31, 2017 and 2016, earnings from unconsolidated affiliates, net of losses, decreased by $0.8 million and $1.2 million, respectively, and during the nine months ended December 31, 2017 and 2016, earnings from unconsolidated affiliates, net of losses, decreased by $1.6 million and $2.5 million, respectively, as a result of the impact of changes in foreign currency exchange rates on the earnings of our unconsolidated affiliates, primarily the impact of changes in the Brazilian real to U.S. dollar exchange rate on earnings 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 
 December 31,
 
Nine Months Ended 
 December 31,
 
 
2017
 
2016
 
2017
 
2016
One Brazilian real into U.S. dollars
 
 
 
 
 
 
 
 
High
 
0.3198

 
0.3207

 
0.3244

 
0.3207

Average
 
0.3076

 
0.3032

 
0.3117

 
0.2988

Low
 
0.3004

 
0.2866

 
0.2995

 
0.2702

At period-end
 
0.3015

 
0.3073

 
0.3015

 
0.3073

_____________ 
Source: FactSet
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 
 December 31, 2017
 
Nine Months Ended 
 December 31, 2017
Revenue
 
$
10,826

 
$
(4,850
)
Operating expense
 
(9,028
)
 
593

Earnings from unconsolidated affiliates, net of losses
 
484

 
908

Non-operating expense
 
(1,270
)
 
2,977

Income before provision for income taxes
 
1,012

 
(372
)
Provision for income taxes
 
1,057

 
2,933

Net income
 
2,069

 
2,561

Cumulative translation adjustment
 
(74
)
 
20,924

Total stockholders’ investment
 
$
1,995

 
$
23,485

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 has occurred or is probable.
Revenue from helicopter services, including search and rescue (“SAR”) 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 operations.

8

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



Eastern Airways International Limited (“Eastern Airways”) and Capiteq Limited, operating under the name Airnorth, primarily earn revenue through charter and scheduled airline services and provision of airport services (Eastern Airways only). Both chartered and scheduled airline service 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 within deferred revenue in accordance with the above policy. Airport services revenue is recognized when earned.
Prior to the sale of our 100% interest in Bristow Academy, Inc. (“Bristow Academy”) on November 1, 2017, Bristow Academy, our helicopter training unit, primarily earned revenue from military training, flight training provided to individual students and ground school courses. We recognized revenue from these sources using the same revenue recognition principles described above as services are provided.
Interest Expense, Net
During the three and nine months ended December 31, 2017 and 2016, interest expense, net consisted of the following (in thousands):
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
 
2017
 
2016
 
2017
 
2016
Interest income
$
144

 
$
168

 
$
512

 
$
637

Interest expense
(19,237
)
 
(12,347
)
 
(54,189
)
 
(35,170
)
Interest expense, net
$
(19,093
)
 
$
(12,179
)
 
$
(53,677
)
 
$
(34,533
)
Accounts Receivable
As of December 31 and March 31, 2017, the allowance for doubtful accounts for non-affiliates was $3.8 million and $4.5 million, respectively. There were no allowances for doubtful accounts related to accounts receivable due from affiliates as of December 31 and March 31, 2017. The allowance for doubtful accounts for non-affiliates as of December 31, 2017 primarily relates to amounts due from clients in Nigeria for which we no longer believe collection is probable.
Inventories
As of December 31 and March 31, 2017, inventories were net of allowances of $22.1 million and $21.5 million, respectively. During the nine months ended December 31, 2017, as a result of changes in expected future utilization of aircraft within our training fleet we recorded a $1.2 million charge to impair inventory used on our training fleet, which is included in loss on impairment on our condensed consolidated statement of operations.
Prepaid Expenses and Other Current Assets
As of December 31 and March 31, 2017, prepaid expenses and other current assets included the short-term portion of contract acquisition and pre-operating costs totaling $10.7 million and $9.7 million, respectively, related to the SAR contracts in the U.K. and two client contracts in Norway, which are recoverable under the contracts and will be expensed over the terms of the contracts. For the three months ended December 31, 2017 and 2016, we expensed $2.8 million and $2.5 million, respectively, and for the nine months ended December 31, 2017 and 2016, we expensed $8.5 million and $8.2 million, respectively, related to these contracts.
Loss on Impairment
Loss on impairment included goodwill impairment charges of $8.7 million for the three and nine months ended December 31, 2016, and impairment charges for inventory of $1.2 million and $7.6 million for the nine months ended December 31, 2017 and December 31, 2016, respectively. The goodwill impairment charges related to Eastern Airways and resulted from an overall reduction in expected operating results due to the downturn in the oil and gas market driven by reduced crude oil prices (see discussion under “Goodwill” below). The inventory impairment for the nine months ended December 31, 2017 resulted from changes in expected future utilization of aircraft within our training fleet as discussed under “Inventories” above. The inventory impairment for the nine months ended December 31, 2016 resulted from a change in estimated consumption and the continued decline in the secondary market for certain inventory related to the decision to cease operating certain older model aircraft within our fleet in fiscal year 2018.

9

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



Goodwill
Goodwill is recorded when the cost of acquired businesses exceeds the fair value of the identifiable net assets acquired. Goodwill has an indefinite useful life and is not amortized, but is assessed for impairment annually or when events or changes in circumstances indicate that a potential impairment exists.
Goodwill of $20.3 million and $19.8 million as of December 31 and March 31, 2017, respectively, related to our Asia Pacific reporting unit was as follows (in thousands):
March 31, 2017
$
19,798

Foreign currency translation
501

December 31, 2017
$
20,299

Accumulated goodwill impairment of $50.9 million as of both December 31 and March 31, 2017 related to our reporting units were as follows (in thousands):
 
Europe Caspian
 
Africa
 
Americas
 
Corporate and other
 
Total
March 31, 2017
$
(33,883
)
 
$
(6,179
)
 
$
(576
)
 
$
(10,223
)
 
$
(50,861
)
Impairments

 

 

 

 

December 31, 2017
$
(33,883
)
 
$
(6,179
)
 
$
(576
)
 
$
(10,223
)
 
$
(50,861
)
We test goodwill for impairment on an annual basis as of March 31 or when events or changes in circumstances indicate that a potential impairment exists. For the purposes of performing an analysis of goodwill, we evaluate whether there are reporting units below the reporting segment we disclose for segment reporting purposes by assessing whether our regional management typically reviews results and whether discrete financial information exists at a lower level.
During the three months ended December 31, 2016, we noted an overall reduction in expected operating results for Eastern Airways from the downturn in the oil and gas market driven by reduced crude oil prices and performed an interim impairment test of goodwill for Eastern Airways. Based on this factor, we concluded that the fair value of our goodwill for Eastern Airways could have fallen below its carrying value and that an interim period analysis of goodwill was required. We performed the interim impairment test of goodwill for Eastern Airways as of December 31, 2016, noting that the estimated fair value of Eastern Airways was below its carrying value, resulting in an impairment of all of the remaining goodwill related to Eastern Airways and an impairment charge of $8.7 million reflected in our results for the three and nine months ended December 31, 2016.
We estimated the implied fair value of Eastern Airways using a variety of valuation methods, including the income and market approaches. The determination of estimated fair value required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of the reporting units, such as projected demand for our services and rates.
The income approach was based on a discounted cash flow model, which utilized present values of cash flows to estimate fair value. The future cash flows were projected based on our estimates of future rates for our services, utilization, operating costs, capital requirements, growth rates and terminal values. Forecasted rates and utilization take into account current market conditions and our anticipated business outlook, both of which have been impacted by the adverse changes in the offshore energy business environment from the downturn. Operating costs were forecasted using a combination of our historical average operating costs and expected future costs, including cost reduction initiatives. Capital requirements in the discounted cash flow model were based on management’s estimates of future capital costs driven by expected market demand in future periods. The estimated capital requirements included cash outflows for new aircraft, infrastructure and improvements. A terminal period was used to reflect our estimate of stable, perpetual growth. The future cash flows were discounted using a market-participant risk-adjusted weighted average cost of capital for each of the reporting units individually and in the aggregate. These assumptions were derived from unobservable inputs and reflect management’s judgments and assumptions.
The market approach was based upon the application of price-to-earnings multiples to management’s estimates of future earnings adjusted for a control premium. Management’s earnings estimates were derived from unobservable inputs that require significant estimates, judgments and assumptions as described in the income approach.
For purposes of the goodwill impairment test, we calculated Eastern Airways’ estimated fair value as the average of the values calculated under the income approach and the market approach.

10

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



Other Intangible Assets
Intangible assets with finite useful lives are amortized over their respective estimated useful lives to their estimated residual values. Intangible assets by type were as follows (in thousands):
 
Client
contracts
 
Client
relationships
 
Trade name and trademarks
 
Internally developed software
 
Licenses
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Carrying Amount
March 31, 2017
$
8,169

 
$
12,752

 
$
4,483

 
$
1,062

 
$
746

 
$
27,212

Foreign currency translation
1

 
46

 
272

 
32

 
4

 
355

December 31, 2017
$
8,170

 
$
12,798

 
$
4,755

 
$
1,094

 
$
750

 
$
27,567

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Amortization
March 31, 2017
$
(8,155
)
 
$
(11,071
)
 
$
(908
)
 
$
(685
)
 
$
(657
)
 
$
(21,476
)
Amortization expense
(13
)
 
(224
)
 
(221
)
 
(167
)
 
(44
)
 
(669
)
December 31, 2017
$
(8,168
)
 
$
(11,295
)
 
$
(1,129
)
 
$
(852
)
 
$
(701
)
 
$
(22,145
)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average remaining contractual life, in years
0.1

 
3.6

 
13.1

 
1.8

 
1.6

 
5.2

Future amortization expense of intangible assets for each of the years ending March 31 is as follows (in thousands):
                 
2018
$
220

2019
760

2020
469

2021
469

2022
470

Thereafter
3,034

 
$
5,422

The Bristow Norway AS and Eastern Airways acquisitions, included in our Europe Caspian region, resulted in intangible assets for client contracts, client relationships, trade names and trademarks, internally developed software and licenses. The Airnorth acquisition, included in our Asia Pacific region, resulted in intangible assets for client contracts, client relationships and trade name and trademarks.
Other Assets
In addition to the other intangible assets described above, other assets included the long-term portion of contract acquisition and pre-operating costs totaling $51.2 million and $51.1 million, respectively, as of December 31 and March 31, 2017, related to the SAR contracts in the U.K. and two client contracts in Norway, which are recoverable under the contracts and will be expensed over the terms of the contracts.

11

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



Property and Equipment and Assets Held for Sale
During the three and nine months ended December 31, 2017 and 2016, we took delivery of aircraft and made capital expenditures as follows:
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
 
2017

2016
 
2017

2016
Number of aircraft delivered:
 
 
 
 
 
 
 
Medium

 

 
5

 
5

SAR aircraft

 
1

 

 
2

Total aircraft

 
1

 
5

 
7

Capital expenditures (in thousands):
 
 
 
 
 
 
 
Aircraft and equipment (1)
$
10,311

 
$
17,196

 
$
26,800

 
$
112,770

Land and buildings
1,813

 
664

 
9,641

 
6,956

Total capital expenditures
$
12,124

 
$
17,860

 
$
36,441

 
$
119,726

_____________ 
(1)
During the nine months ended December 31, 2017 and 2016, we spent $2.3 million and $66.8 million, respectively, on progress payments for aircraft to be delivered in future periods.
The following table presents details on the aircraft sold or disposed of and impairments on assets held for sale during the three and nine months ended December 31, 2017 and 2016:
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(In thousands, except for number of aircraft)
Number of aircraft sold or disposed of
5

 
3

 
11

 
9
Proceeds from sale or disposal of assets
$
6,303

 
$
2,525

 
$
48,547

 
$
14,344

Loss from sale or disposal of assets (1)
$
3,031

 
$
674

 
$
1,111

 
$
1,717

 
 
 
 
 
 
 
 
Number of aircraft impaired
1

 
1

 
5

 
13

Impairment charges on assets held for sale (1)(2)
$
1,560

 
$
200

 
$
11,307

 
$
11,360

_____________ 
(1) 
Included in gain (loss) on disposal of assets on our condensed consolidated statements of operations.
(2) 
Includes a $6.5 million impairment of the Bristow Academy disposal group for the nine months ended December 31, 2017.
On November 1, 2017, we sold our 100% interest in Bristow Academy, including all of its aircraft, for a minimum of $1.5 million to be received over a maximum of four years with potential additional consideration based on Bristow Academy’s financial performance. As of September 30, 2017, we concluded the disposal group, comprised of the Bristow Academy assets and liabilities met the held for sale criteria under accounting standards, but did not meet the requirements for classification as discontinued operations. We evaluated the carrying value of the Bristow Academy disposal group and recorded an impairment of $6.5 million during the three months ended September 30, 2017, within loss on disposal of assets on our condensed consolidated statement of operations, to record the disposal group at fair value based on the terms of the sale. During the three months ended December 31, 2017, we recorded an additional loss on disposal of $0.7 million within loss on disposal of assets on our condensed consolidated statement of operations. The Bristow Academy disposal group is included in Corporate and other in Note 9 – Segment Information.
During the three and nine months ended December 31, 2016, we recorded accelerated depreciation of $1.1 million and $9.3 million on five and 11 aircraft, respectively, as our management decided to exit these model types earlier than originally anticipated.

12

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



During fiscal year 2018, we reached agreements with original equipment manufacturers (“OEM”) to recover approximately $130.0 million related to ongoing aircraft issues, of which $125.0 million was realized during the three months ended December 31, 2017 and resulted in an increase in cash. To reflect the amount realized from these OEM cost recoveries during the three months ended December 31, 2017, we recorded a $94.5 million decrease in the carrying value of certain aircraft in our fleet through a decrease in property and equipment – at cost, reduced rent expense by $12.0 million and recorded a deferred liability of $18.5 million, included in other accrued liabilities and other liabilities and deferred credits, related to a reduction in rent expense to be recorded in future periods, of which $1.1 million was recognized in December 2017. We determined the realized portion of the cost recoveries related to a long-term performance issue with the aircraft, requiring a reduction of carrying value for owned aircraft and a reduction in rent expense for leased aircraft. For the owned aircraft, we have allocated the $94.5 million as a reduction in carrying value by reducing the historical acquisition value of each affected aircraft on a pro-rata basis utilizing the historical acquisition value of the aircraft. We revised our salvage values for each affected aircraft by reducing the historical acquisition value by the applicable amount and applying our stated salvage value percentage for owned aircraft of 50%. In accordance with accounting standards, we will recognize the change in depreciation due to the reduction in carrying value and revision of salvage values on a prospective basis over the remaining life of the aircraft. This will result in a reduction of depreciation expense of $2.1 million during the remainder of fiscal year 2018, $8.5 million during fiscal year 2019, $8.4 million during fiscal year 2020, $5.6 million during fiscal year 2021 and $21.3 million during fiscal year 2022 and beyond. For the leased aircraft, we will recognize the remaining deferred liability of $17.4 million as a reduction in rent expense prospectively on a straight-line basis over the remaining lease terms. This will result in a reduction to rent expense of $3.5 million during the remainder of fiscal year 2018, $7.9 million during fiscal year 2019, $4.0 million during fiscal year 2020 and $2.0 million during fiscal year 2021. For certain leased aircraft, the leases expired prior to the realization of the settlements to which they were related recognized by the immediate reduction to rent expense of $12.0 million during the three and nine months ended December 31, 2017.
Other Accrued Liabilities
Other accrued liabilities of $72.3 million and $46.7 million as of December 31 and March 31, 2017, respectively, includes the following:
 
December 31, 
 2017
 
March 31,  
 2017
 
 
 
 
 
(In thousands)
Accrued lease costs
$
12,189

 
$
5,601

Deferred OEM cost recovery
10,413

 

Eastern overdraft liability
9,486

 
5,829

Accrued property and equipment
5,158

 
3,546

Deferred gain on sale leasebacks
1,305

 
1,655

Other operating accruals
33,741

 
30,048

 
$
72,292

 
$
46,679

Redeemable Noncontrolling Interest
In January 2018, we acquired the remaining 40% of the outstanding shares of Eastern Airways for no consideration.

13

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



Recent Accounting Pronouncements
We consider the applicability and impact of all accounting standard updates (“ASUs”). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance on revenue recognition for revenue from contracts with customers. This accounting 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. However, in July 2015, the FASB approved the deferral of the effective date of the revenue recognition standard permitting public entities to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Early application is permitted, but not before the original effective date of December 15, 2016. The standard is required to be adopted using either the full retrospective approach, with all prior periods presented adjusted, or the modified retrospective approach, with a cumulative adjustment to retained earnings on the balance sheet. We have not adopted this standard yet but expect to adopt the new revenue standard using the modified retrospective transition approach. We are continuing to evaluate the effect this accounting guidance will have on our financial statements and related disclosures and are still assessing the differences between the new revenue standard and current accounting practices.
In November 2015, the FASB issued accounting guidance that changed how deferred taxes are classified on an entity’s balance sheet. The accounting guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and early adoption is permitted. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively. If applied prospectively, entities are required to include a statement that prior periods were not retrospectively adjusted. If applied retrospectively, entities are also required to include quantitative information about the effects of the change on prior periods. We adopted this accounting guidance using the prospective adjustment option effective April 1, 2017 and prior periods were not retrospectively adjusted. As of March 31, 2017, we had $0.1 million in current deferred tax assets and $0.8 million in current deferred tax liabilities. As a result of this adoption, as of April 1, 2017 and going forward we will classify all current deferred taxes as non-current.
In February 2016, the FASB issued accounting guidance which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. This accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. Additionally, this accounting guidance requires a modified retrospective transition approach for all leases existing at, or entered into after the date of initial application, with an option to use certain transition relief. We have not yet adopted this standard and are currently evaluating the effect this standard will have on our financial statements.
In March 2016, the FASB issued accounting guidance related to accounting for employee share-based payments. The accounting guidance is intended to simplify several aspects of accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. This accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and early adoption is permitted. We adopted this standard effective April 1, 2017. The requirements related to the tax consequences of share-based payments were applied prospectively and resulted in $2.3 million recorded as an increase to the income tax provision during the nine months ended December 31, 2017. We elected to record forfeitures of share-based awards based on actual forfeitures which did not have a material effect on our financial statements. The provisions related to the presentation of excess tax benefits on the condensed consolidated statements of cash flows did not impact our financial statements as there was no excess tax benefit recorded for the periods presented. The provisions related to employee taxes paid for withheld shares are presented as a cash flow financing activity required us to revise our prior period condensed consolidated statement of cash flows by $0.8 million as a decrease in net cash used in operating activities and a corresponding decrease in net cash provided by financing activities for the nine months ended December 31, 2016. None of the other provisions of the pronouncement had a material effect on our consolidated financial statements.
In October 2016, the FASB issued accounting guidance related to current and deferred income taxes for intra-entity transfer of assets other than inventory. This accounting guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. We have not yet adopted this accounting guidance and are currently evaluating the effect this accounting guidance will have on our financial statements.

14

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



In January 2017, the FASB issued accounting guidance which clarifies the definition of a business with the objective of adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendment provides criteria for determining when a transaction involves the acquisition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the transaction does not involve the acquisition of a business. If the criteria are not met, then the amendment requires that to be considered a business, the operation must include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The guidance may reduce the number of transactions accounted for as business acquisitions. This accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The amendments should be applied prospectively, and no disclosures are required at the effective date. We have not yet adopted this accounting guidance and are currently evaluating the effect this accounting guidance will have on our financial statements.
In March 2017, the FASB issued accounting guidance related to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The accounting guidance requires employers to disaggregate the service cost component from the other components of net benefit cost and disclose the amount of net benefit cost that is included in the statement of operations or capitalized in assets, by line item. The accounting guidance requires employers to report the service cost component in the same line item(s) as other compensation costs and to report other pension-related costs (which include interest costs, amortization of pension-related costs from prior periods, and the gains or losses on plan assets) separately and exclude them from the subtotal of operating income. The accounting guidance also allows only the service cost component to be eligible for capitalization when applicable. This accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted as of the first interim period of an annual period for which interim or annual financial statements have not been issued. The accounting guidance requires application on a retrospective basis for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the statement of operations and on a prospective basis for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. We have not yet adopted this accounting guidance and are currently evaluating the effect this accounting guidance will have on our financial statements.
In May 2017, the FASB issued accounting guidance on determining which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted, and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. We have not yet adopted this accounting guidance and are currently evaluating the effect this accounting guidance will have on our financial statements.
In August 2017, the FASB issued new accounting guidance on derivatives and hedging, which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. This accounting guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and earlier adoption is permitted. We have not yet adopted this accounting guidance and are currently evaluating the effect this accounting guidance will have on our financial statements.
Note 2 — VARIABLE INTEREST ENTITIES
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. If we determine that we have operating power and the obligation to absorb losses or receive benefits, we consolidate the VIE as the primary beneficiary, and if not, we do not consolidate.
As of December 31, 2017, 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 2017 Financial Statements for a description of other investments in significant affiliates.

15

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



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 industrial aviation services to clients primarily in the U.K., Norway, Australia, Nigeria and Trinidad and fixed wing services primarily in the U.K. and Australia. 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 ($123.1 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 $2.1 billion as of December 31, 2017.
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, each have the right to require us to purchase such shares. Under current English law, we would be required, in order for Bristow Aviation to retain its operating license, to find a qualified E.U. investor to own any Bristow Aviation shares we have the right to acquire under the put/call agreement. The only restriction under the put/call agreement limiting our ability to exercise the put/call option is a requirement to consult with the Civil Aviation Authority (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.
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 December 31, 2017) 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 by Bristow Aviation. 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 operations, 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.

16

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



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 operations for Bristow Aviation and subsidiaries is presented in the aggregate, including intercompany amounts with other consolidated entities, as follows (in thousands):
 
 
 
December 31, 
 2017
 
March 31,  
 2017
 
Assets
 
 
 
 
 
Cash and cash equivalents
 
$
84,236

 
$
92,409

 
Accounts receivable
 
271,053

 
222,560

 
Inventories
 
102,370

 
90,190

 
Prepaid expenses and other current assets
 
48,016

 
50,016

 
Total current assets
 
505,675

 
455,175

 
Investment in unconsolidated affiliates
 
3,407

 
3,513

 
Property and equipment, net
 
318,879

 
306,831

 
Goodwill
 
20,299

 
19,798

 
Other assets
 
208,390

 
203,228

 
Total assets
 
$
1,056,650

 
$
988,545

 
Liabilities
 
 
 
 
 
Accounts payable
 
$
276,997

 
$
146,841

 
Accrued liabilities
 
142,180

 
122,130

 
Accrued interest
 
2,065,246

 
1,891,305

 
Current maturities of long-term debt
 
20,993

 
18,578

 
Total current liabilities
 
2,505,416

 
2,178,854

 
Long-term debt, less current maturities
 
465,699

 
501,782

 
Accrued pension liabilities
 
54,291

 
61,647

 
Other liabilities and deferred credits
 
2,495

 
8,138

 
Deferred taxes
 
16,777

 
20,264

 
Redeemable noncontrolling interest
 
3,859

 
6,886

 
Total liabilities
 
$
3,048,537

 
$
2,777,571

 
 
 
Three Months Ended 
 December 31,
 
Nine Months Ended 
 December 31,
 
 
2017
 
2016
 
2017
 
2016
Revenue
 
$
309,461

 
$
291,808

 
$
933,387

 
$
920,587

Operating loss
 
(17,463
)
 
(28,287
)
 
(40,095
)
 
(68,803
)
Net loss
 
(79,789
)
 
(44,999
)
 
(221,039
)
 
(214,336
)

17

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 48% interest, a Nigerian company owned 100% by Nigerian employees owned a 50% interest and an employee trust fund owned the remaining 2% interest as of December 31, 2017. BHNL provides industrial aviation 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”). 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”). In April 2015, Bristow Helicopters purchased an additional 8% interest in BHNL and the employee-owned Nigerian entity purchased an additional 2% interest with proceeds from a loan received from BHIL. 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 and 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 industrial aviation 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.


18

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



Note 3 — DEBT
Debt as of December 31 and March 31, 2017 consisted of the following (in thousands):
 
 
December 31, 
 2017
 
March 31,  
 2017
6¼% Senior Notes due 2022
 
$
401,535

 
$
401,535

4½% Convertible Senior Notes due 2023
 
106,124

 

Term Loan
 
52,546

 
261,907

Term Loan Credit Facility
 

 
45,900

Revolving Credit Facility
 

 
139,100

Lombard Debt
 
206,831

 
196,832

Macquarie Debt
 
188,528

 
200,000

PK Air Debt
 
230,000

 

Airnorth Debt
 
14,507

 
16,471

Eastern Airways Debt
 
12,772

 
15,326

Other Debt
 
2,423

 
16,293

Unamortized debt issuance costs
 
(19,365
)
 
(11,345
)
Total debt
 
1,195,901

 
1,282,019

Less short-term borrowings and current maturities of long-term debt
 
(93,136
)
 
(131,063
)
Total long-term debt
 
$
1,102,765

 
$
1,150,956

4½% Convertible Senior Notes due 2023 On December 18, 2017, we issued and sold $143.8 million of 4½% Convertible Senior Notes due 2023 (the “4½% Convertible Senior Notes”). The 4½% Convertible Senior Notes bear interest at a rate of 4.50% per year and interest is payable on June 1 and December 1 of each year, beginning on June 1, 2018. The 4½% Convertible Senior Notes mature on June 1, 2023 and may not be redeemed by us prior to maturity.
The 4½% Convertible Senior Notes were issued pursuant to an indenture dated as of June 17, 2008 (the “Base Indenture”), among the Company, the subsidiary guarantors named therein (the “Guarantors”) and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the sixth supplemental indenture thereto dated as of December 18, 2017 (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”) among us, the Guarantors and the Trustee.
The 4½% Convertible Senior Notes are convertible into cash, shares of our common stock or a combination of cash and shares of the our common stock, at our election. We have initially elected combination settlement. The initial conversion price of the 4½% Convertible Senior Notes is approximately $15.64 (subject to adjustment in certain circumstances), based on the initial conversion rate of 63.9488 Common Shares per $1,000 principal amount of 4½% Convertible Senior Notes. Prior to December 1, 2022, the 4½% Convertible Senior Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date. The 4½% Convertible Senior Notes are our senior unsecured obligations. As of December 31, 2017, the if-converted value of the 4½% Convertible Senior Notes did not exceed the principal balance.
The proceeds were used to repay $89.6 million of the $350 million term loan (the “Term Loan”) as discussed below and to pay the $10.1 million cost of the convertible note hedge transaction described below, with the remainder available for general corporate purposes.

19

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



Accounting standards require that convertible debt which may be settled in cash upon conversion (including partial cash settlement) be accounted for with a liability component based on the fair value of similar nonconvertible debt and an equity component based on the excess of the initial proceeds from the convertible debt over the liability component. Such excess represents proceeds related to the conversion option and is recorded as additional paid-in capital. The liability is recorded at a discount, which is then amortized as additional non-cash interest expense over the term of the 4½% Convertible Senior Notes. The balances of the debt and equity components of the 4½% Convertible Senior Notes as of December 31, 2017 is as follows (in thousands):
Equity component - net carrying value (1)
 
$
36,778

Debt component:
 
 
Face amount due at maturity
 
$
143,750

Unamortized discount
 
(37,626
)
Debt component - net carrying value
 
$
106,124

_____________ 
(1) Net of equity issuance costs of $1.0 million.
The remaining debt discount is being amortized to interest expense over the term of the 4½% Convertible Senior Notes using the effective interest rate. The effective interest rate for the three and nine months ended December 31, 2017 was 11.0%. Interest expense related to our 4½% Convertible Senior Notes for the three and nine months ended December 31, 2017 was as follows (in thousands):
Contractual coupon interest
 
$
234

 
Amortization of debt discount
 
181

 
Total interest expense
 
$
415

 
Convertible Note Call Spread Overlay Concurrent with the issuance of the 4½% Convertible Senior Notes, we entered into privately negotiated convertible note hedge transactions (the “Note Hedge Transactions”) and warrant transactions (the “Warrant Transactions”) with each of Credit Suisse Capital LLC, Barclays Bank PLC, Citibank, N.A. and JP Morgan Chase Bank, National Association (the “Option Counterparties”). These transactions represent a Call Spread Overlay, whereby the cost of the Note Hedge Transactions we purchased to cover the cash outlay upon conversion of the 4½% Convertible Senior Notes was reduced by the sales price of the Warrant Transactions. Each of these transactions is described below.
The Note Hedge Transactions cost an aggregate $40.4 million and are expected generally to reduce the potential dilution and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the 4½% Convertible Senior Notes in the event that the market price of our common stock is greater than the strike price of the Note Hedge Transactions, which is initially $15.64 (subject to adjustment), corresponding approximately to the initial conversion price of the 4½% Convertible Senior Notes. The Note Hedge Transactions have been accounted for by recording the cost as a reduction to additional paid-in capital.
We received proceeds of $30.3 million for the Warrant Transactions, in which we sold net-share-settled warrants to the Option Counterparties in an amount equal to the number of shares of the our common stock initially underlying the 4½% Convertible Senior Notes, subject to customary anti-dilution adjustments. The strike price of the warrants is $20.02 per share (subject to adjustment), which is 60% above the last reported sale price of our common stock on the New York Stock Exchange on December 13, 2017. The Warrant Transactions could have a dilutive effect to our stockholders to the extent the market price per share of our common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants. The Warrant Transactions have been accounted for by recording the proceeds received as additional paid-in capital.
The Note Hedge Transactions and the Warrant Transactions are separate transactions, in each case entered into by us with the Option Counterparties, and are not part of the terms of the 4½% Convertible Senior Notes and will not affect any holder’s rights under the 4½% Convertible Senior Notes.
Term Loan and Revolving Credit Facility — During the nine months ended December 31, 2017, we had borrowings of $174.8 million and made payments of $313.9 million under our $400 million revolving credit facility (the “Revolving Credit Facility”). Additionally, we paid $209.5 million to reduce our borrowings under the Term Loan. As of December 31, 2017, we had $12.4 million in letters of credit outstanding under the Revolving Credit Facility.
Term Loan Credit Facility — During the nine months ended December 31, 2017, we paid $45.9 million under our $200 million of term loan commitments (the “Term Loan Credit Facility”) and terminated the facility in October 2017.

20

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



PK Air Debt — On July 17, 2017, a wholly-owned subsidiary entered into a term loan credit agreement with PK AirFinance S.à r.l., as agent, and PK Transportation Finance Ireland Limited, as lender, and other lenders from time to time party thereto, which provided for commitments in an aggregate amount of up to $230 million to make up to 24 term loans, each of which shall be made in respect of an aircraft to be pledged as collateral for all of the term loans. The term loans are also secured by a pledge of all shares of the borrower and any other assets of the borrower, and will be guaranteed by the Company. The financing funded in two tranches in September 2017 and proceeds were used to repay $17.0 million of the Term Loan Credit Facility, $93.7 million of the Term Loan and $103.0 million of the Revolving Credit Facility.
Each term loan bears interest at an interest rate equal to, at the borrower’s option, a floating rate of one-month LIBOR plus a margin of 5% per annum (the “Margin”), subject to certain costs of funds adjustments, determined two business days before the borrowing date of each term loan, or a fixed rate based on a notional interest rate swap of twelve 30-day months in respect of such term loan with a floating rate of interest based on one-month LIBOR, plus the Margin.
The borrower is required to repay each term loan on an annuity basis, payable monthly in arrears starting on the seventh month following the date of the borrowing of such term loan, with a final payment of 53% of the initial amount of such term loan due on the 70th month following the date of the borrowing of such term loan.
In connection with the credit agreement, the borrower will guarantee certain of its direct parent’s obligations under existing aircraft operating leases up to a capped amount.
Other Debt — Other Debt as of March 31, 2017 primarily included amounts payable relating to the third year earn-out payment of $16.0 million for our investment in Cougar Helicopters Inc. (“Cougar”), which was paid in April 2017.
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 December 31, 2017, 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
December 31,
2017
 
Total
Loss for the
Three Months
Ended
December 31,
2017
 
Total
Loss for the
Nine Months
Ended
December 31,
2017
Inventories
 
$

 
$

 
$

 
$

 
$

 
$
(1,192
)
Assets held for sale
 

 

 
31,038

 
31,038

 
(1,560
)
 
(11,307
)
Total assets
 
$

 
$

 
$
31,038

 
$
31,038

 
$
(1,560
)
 
$
(12,499
)

21

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



The following table summarizes the assets as of December 31, 2016, 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
December 31,
2016
 
Total
Loss for the
Three Months
Ended
December 31,
2016
 
Total
Loss for the
Nine Months
Ended
December 31,
2016
Inventories
 
$

 
$
46,654

 
$

 
$
46,654

 
$

 
$
(7,572
)
Assets held for sale
 

 
37,635

 

 
37,635

 
(200
)
 
(11,360
)
Goodwill
 

 

 
18,793

 
18,793

 
(8,706
)
 
(8,706
)
Total assets
 
$

 
$
84,289

 
$
18,793

 
$
103,082

 
$
(8,906
)
 
$
(27,638
)
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 time frame 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 and nine months ended December 31, 2017 related to one and five aircraft held for sale, respectively, and the loss for the three and nine months ended December 31, 2016 related to one and 13 aircraft held for sale, respectively. Additionally, the loss for the nine months ended December 31, 2017 includes $6.5 million of impairment relating to the Bristow Academy disposal group. For further details on Bristow Academy disposal group, see Note 1.
The fair value of goodwill is estimated using a variety of valuation methods, including the income and market approaches. These estimates of fair value include unobservable inputs, representative of Level 3 fair value measurement, including assumptions related to future performance, such as projected demand for our services and rates. For further details on our goodwill, see Note 1.
Recurring Fair Value Measurements
The following table summarizes the financial instruments we had as of December 31, 2017, 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
December 31,
2017
 
Balance  Sheet
Classification
Rabbi Trust investments
 
$
2,847

 
$

 
$

 
$
2,847

 
Other assets
Total assets
 
$
2,847

 
$

 
$

 
$
2,847

 
 
The following table summarizes the financial instruments we had as of March 31, 2017, 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,
2017
 
Balance  Sheet
Classification
Rabbi Trust investments
 
$
3,075

 
$

 
$

 
$
3,075

 
Other assets
Total assets
 
$
3,075

 
$

 
$

 
$
3,075

 
 
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.

22

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



Fair Value of Debt
The fair value of our debt 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 and excluding unamortized debt issuance costs, are as follows (in thousands):
 
 
December 31, 2017
 
March 31, 2017
 
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
6¼% Senior Notes
 
$
401,535

 
$
328,777

 
$
401,535

 
$
323,236

4½% Convertible Senior Notes (1)
 
106,124

 
158,571

 

 

Term Loan
 
52,546

 
52,546

 
261,907

 
261,907

Term Loan Credit Facility
 

 

 
45,900

 
45,900

Revolving Credit Facility
 

 

 
139,100

 
139,100

Lombard Debt
 
206,831

 
206,831

 
196,832

 
196,832

Macquarie Debt
 
188,528

 
188,528

 
200,000

 
200,000

PK Air Debt
 
230,000

 
230,000

 

 

Airnorth Debt
 
14,507

 
14,507

 
16,471

 
16,471

Eastern Airways Debt
 
12,772

 
12,772

 
15,326

 
15,326

Other Debt
 
2,423

 
2,423

 
16,293

 
16,293

 
 
$
1,215,266

 
$
1,194,955

 
$
1,293,364

 
$
1,215,065

_____________ 
(1) 
Carrying value of the