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EX-32.2 - EXHIBIT 32.2 - Bristow Group Incfy2019q110-q06302018ex322.htm
EX-32.1 - EXHIBIT 32.1 - Bristow Group Incfy2019q110-q06302018ex321.htm
EX-31.2 - EXHIBIT 31.2 - Bristow Group Incfy2019q110-q06302018ex312.htm
EX-31.1 - EXHIBIT 31.1 - Bristow Group Incfy2019q110-q06302018ex311.htm
EX-15.1 - EXHIBIT 15.1 - Bristow Group Incfy2019q110-q06302018ex151.htm


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, 2018
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 every Interactive Data File required to be submitted 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 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
 
 
 
 
 
 
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 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 27, 2018.
35,765,275 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 
 June 30,
 
 
2018
 
2017
 
 
 
 
 
 
 
(Unaudited)
(In thousands, except per share amounts)
Revenue:
 
 
 
 
Operating revenue from non-affiliates
 
$
338,466

 
$
322,118

Operating revenue from affiliates
 
12,521

 
17,611

Reimbursable revenue from non-affiliates
 
16,907

 
12,380

 
 
367,894

 
352,109

Operating expense:
 
 
 
 
Direct cost
 
280,051

 
285,580

Reimbursable expense
 
15,904

 
12,226

Depreciation and amortization
 
30,941

 
31,056

General and administrative
 
40,101

 
46,707

 
 
366,997

 
375,569

 
 
 
 
 
Loss on impairment
 

 
(1,192
)
Gain (loss) on disposal of assets
 
(1,678
)
 
699

Earnings from unconsolidated affiliates, net of losses
 
(3,017
)
 
(665
)
Operating loss
 
(3,798
)
 
(24,618
)
 
 
 
 
 
Interest expense, net
 
(27,144
)
 
(16,021
)
Other income (expense), net
 
(3,950
)
 
(1,616
)
Loss before benefit (provision) for income taxes
 
(34,892
)
 
(42,255
)
Benefit (provision) for income taxes
 
2,851

 
(13,491
)
Net loss
 
(32,041
)
 
(55,746
)
Net (income) loss attributable to noncontrolling interests
 
(67
)
 
471

Net loss attributable to Bristow Group
 
$
(32,108
)
 
$
(55,275
)
 
 
 
 
 
Loss per common share:
 
 
 
 
Basic
 
$
(0.90
)
 
$
(1.57
)
Diluted
 
$
(0.90
)
 
$
(1.57
)
 
 
 
 
 
Cash dividends declared per common share
 
$

 
$
0.07

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 
 June 30,
 
 
2018
 
2017
 
 
 
 
 
 
 
(Unaudited)
(In thousands)
Net loss
 
$
(32,041
)
 
$
(55,746
)
Other comprehensive loss:
 
 
 
 
Currency translation adjustments
 
(29,033
)
 
9,760

Unrealized gain on cash flow hedges, net of tax benefit of $0.3 million and zero, respectively
 
1,348

 

Total comprehensive loss
 
(59,726
)
 
(45,986
)
 
 
 
 
 
Net (income) loss attributable to noncontrolling interests
 
(67
)
 
471

Currency translation adjustments attributable to noncontrolling interests
 
(139
)
 
310

Total comprehensive (income) loss attributable to noncontrolling interests
 
(206
)
 
781

Total comprehensive loss attributable to Bristow Group
 
$
(59,932
)
 
$
(45,205
)
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, 
 2018
 
March 31,  
 2018
 
 
(Unaudited)
 
 
(In thousands)
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
316,550

 
$
380,223

Accounts receivable from non-affiliates
 
246,886

 
233,386

Accounts receivable from affiliates
 
12,914

 
13,594

Inventories
 
125,681

 
129,614

Assets held for sale
 
23,502

 
30,348

Prepaid expenses and other current assets
 
49,584

 
47,234

Total current assets
 
775,117

 
834,399

Investment in unconsolidated affiliates
 
114,609

 
126,170

Property and equipment – at cost:
 
 
 
 
Land and buildings
 
242,068

 
250,040

Aircraft and equipment
 
2,493,370

 
2,511,131

 
 
2,735,438

 
2,761,171

Less – Accumulated depreciation and amortization
 
(715,496
)
 
(693,151
)
 
 
2,019,942

 
2,068,020

Goodwill
 
19,175

 
19,907

Other assets
 
118,955

 
116,506

Total assets
 
$
3,047,798

 
$
3,165,002

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current liabilities:
 
 
 
 
Accounts payable
 
$
100,299

 
$
101,270

Accrued wages, benefits and related taxes
 
49,030

 
62,385

Income taxes payable
 
6,142

 
8,453

Other accrued taxes
 
8,573

 
7,378

Deferred revenue
 
18,729

 
15,833

Accrued maintenance and repairs
 
30,440

 
28,555

Accrued interest
 
16,388

 
16,345

Other accrued liabilities
 
51,325

 
65,978

Short-term borrowings and current maturities of long-term debt
 
53,723

 
56,700

Total current liabilities
 
334,649

 
362,897

Long-term debt, less current maturities
 
1,410,083

 
1,429,834

Accrued pension liabilities
 
30,526

 
37,034

Other liabilities and deferred credits
 
32,302

 
36,952

Deferred taxes
 
114,645

 
115,192

Commitments and contingencies (Note 7)
 


 

Stockholders’ investment:
 
 
 
 
Common stock, $.01 par value, authorized 90,000,000; outstanding: 35,765,275 as of June 30 and 35,526,625 as of March 31 (exclusive of 1,291,441 treasury shares)
 
385

 
382

Additional paid-in capital
 
856,826

 
852,565

Retained earnings
 
759,929

 
793,783

Accumulated other comprehensive loss
 
(313,918
)
 
(286,094
)
Treasury shares, at cost (2,756,419 shares)
 
(184,796
)
 
(184,796
)
Total Bristow Group stockholders’ investment
 
1,118,426

 
1,175,840

Noncontrolling interests
 
7,167

 
7,253

Total stockholders’ investment
 
1,125,593

 
1,183,093

Total liabilities and stockholders’ investment
 
$
3,047,798

 
$
3,165,002

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,
 
 
2018
 
2017
 
 
 
 
 
 
 
(Unaudited)
(In thousands)
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(32,041
)
 
$
(55,746
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
30,941

 
31,056

Deferred income taxes
 
(6,776
)
 
6,651

Discount amortization on long-term debt
 
1,510

 
23

Loss (gain) on disposal of assets
 
1,678

 
(699
)
Loss on impairment
 

 
1,192

Deferral of lease payments
 
1,568

 

Stock-based compensation
 
1,692

 
4,136

Equity in earnings from unconsolidated affiliates less than dividends received
 
3,201

 
665

Increase (decrease) in cash resulting from changes in:
 
 
 
 
Accounts receivable
 
(19,833
)
 
(21,541
)
Inventories
 
(1,496
)
 
(3,551
)
Prepaid expenses and other assets
 
(1,729
)
 
5,106

Accounts payable
 
3,385

 
(3,288
)
Accrued liabilities
 
(21,845
)
 
(8,807
)
Other liabilities and deferred credits
 
(4,374
)
 
(6,376
)
Net cash used in operating activities
 
(44,119
)
 
(51,179
)
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(8,895
)
 
(12,553
)
Proceeds from asset dispositions
 
7,774

 
41,975

Net cash provided by (used in) investing activities
 
(1,121
)
 
29,422

Cash flows from financing activities:
 
 
 
 
Proceeds from borrowings
 
387

 
69,018

Debt issuance costs
 
(2,378
)
 
(493
)
Repayment of debt
 
(14,194
)
 
(66,947
)
Partial prepayment of put/call obligation
 
(14
)
 
(12
)
Common stock dividends paid
 

 
(2,465
)
Issuance of common stock
 
2,830

 

Repurchases for tax withholdings on vesting of equity awards
 
(1,484
)
 
(274
)
Net cash used in financing activities
 
(14,853
)
 
(1,173
)
Effect of exchange rate changes on cash and cash equivalents
 
(3,580
)
 
5,153

Net decrease in cash and cash equivalents
 
(63,673
)
 
(17,777
)
Cash and cash equivalents at beginning of period
 
380,223

 
96,656

Cash and cash equivalents at end of period
 
$
316,550

 
$
78,879

Cash paid during the period for:
 
 
 
 
Interest
 
$
24,628

 
$
22,093

Income taxes
 
$
5,648

 
$
4,543

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 Stockholders’ Investment
(Unaudited)
(In thousands, except share amounts)
 
Total Bristow Group Stockholders’ Investment
 
 
 
 
 
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, 2018
$
382

 
35,526,625

 
$
852,565

 
$
793,783

 
$
(286,094
)
 
$
(184,796
)
 
$
7,253

 
$
1,183,093

Adoption of new accounting guidance (1)

 

 

 
(1,746
)
 

 

 

 
(1,746
)
Issuance of common stock
3

 
238,650

 
4,261

 

 

 

 

 
4,264

Distributions paid to noncontrolling interests

 

 

 

 

 

 
(14
)
 
(14
)
Currency translation adjustments

 

 

 

 

 

 
(139
)
 
(139
)
Net income (loss)

 

 

 
(32,108
)
 

 

 
67

 
(32,041
)
Other comprehensive loss

 

 

 

 
(27,824
)
 

 

 
(27,824
)
June 30, 2018
$
385

 
35,765,275

 
$
856,826

 
$
759,929

 
$
(313,918
)
 
$
(184,796
)
 
$
7,167

 
$
1,125,593

_____________ 
(1) 
Cumulative-effect adjustment upon the adoption of new accounting guidance related to current and deferred income taxes for intra-entity transfer of assets other than inventory. For further details, see Note 1.
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, 2019 is referred to as “fiscal year 2019”. 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 2018 Annual Report (the “fiscal year 2018 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 June 30, 2018, the consolidated statements of operations and comprehensive loss for the three months ended June 30, 2018 and 2017, the consolidated cash flows for the three months ended June 30, 2018 and 2017, and the consolidated statements of changes in stockholders’ investment for the three months ended June 30, 2018.
Foreign Currency
During the three months ended June 30, 2018 and 2017, 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 
 June 30,
 
 
2018
 
2017
One British pound sterling into U.S. dollars
 
 
 
 
High
 
1.43

 
1.30

Average
 
1.36

 
1.28

Low
 
1.31

 
1.24

At period-end
 
1.32

 
1.30

One euro into U.S. dollars
 
 
 
 
High
 
1.24

 
1.14

Average
 
1.19

 
1.10

Low
 
1.16

 
1.06

At period-end
 
1.17

 
1.14

One Australian dollar into U.S. dollars
 
 
 
 
High
 
0.78

 
0.77

Average
 
0.76

 
0.75

Low
 
0.73

 
0.74

At period-end
 
0.74

 
0.77

One Norwegian kroner into U.S. dollars
 
 
 
 
High
 
0.1290

 
0.1199

Average
 
0.1247

 
0.1174

Low
 
0.1209

 
0.1152

At period-end
 
0.1227

 
0.1194

One Nigerian naira into U.S. dollars
 
 
 
 
High
 
0.0028

 
0.0033

Average
 
0.0028

 
0.0032

Low
 
0.0028

 
0.0032

At period-end
 
0.0028

 
0.0032

_____________ 
Source: FactSet

6

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


Other income (expense), net, in our condensed consolidated statements of operations includes foreign currency transaction losses of $3.0 million and $1.7 million for the three months ended June 30, 2018 and 2017, 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.
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, 2018 and 2017, earnings from unconsolidated affiliates, net of losses, decreased by $2.6 million and $1.1 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 
 June 30,
 
 
2018
 
2017
One Brazilian real into U.S. dollars
 
 
 
 
High
 
0.3020

 
0.3233

Average
 
0.2778

 
0.3113

Low
 
0.2571

 
0.2995

At period-end
 
0.2599

 
0.3018

_____________ 
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 
 June 30, 2018
Revenue
 
$
10,450

Operating expense
 
(5,301
)
Earnings from unconsolidated affiliates, net of losses
 
(1,454
)
Non-operating expense
 
(1,351
)
Income before provision for income taxes
 
2,344

Provision for income taxes
 
445

Net income
 
2,789

Cumulative translation adjustment
 
(29,172
)
Total stockholders’ investment
 
$
(26,383
)
Interest Expense, Net
During the three months ended June 30, 2018 and 2017, interest expense, net consisted of the following (in thousands):
 
 
Three Months Ended 
 June 30,
 
 
2018
 
2017
Interest income
 
$
179

 
$
214

Interest expense
 
(27,323
)
 
(16,235
)
Interest expense, net
 
$
(27,144
)
 
$
(16,021
)
Accounts Receivable
As of June 30 and March 31, 2018, the allowance for doubtful accounts for non-affiliates was $3.2 million and $3.3 million, respectively. There were no allowances for doubtful accounts related to accounts receivable due from affiliates as of June 30 and March 31, 2018. The allowance for doubtful accounts for non-affiliates as of June 30 and March 31, 2018 primarily relates to amounts due from a customer in Nigeria for which we no longer believe collection is probable.

7

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


Inventories
As of June 30 and March 31, 2018, inventories were net of allowances of $24.6 million and $26.0 million, respectively. During the three months ended June 30, 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 June 30 and March 31, 2018, prepaid expenses and other current assets included the short-term portion of contract acquisition and pre-operating costs totaling $10.1 million and $10.8 million, respectively, related to the search and rescue (“SAR”) contracts in the U.K. and two customer contracts in Norway, which are recoverable under the contracts and will be expensed over the terms of the contracts. For the three months ended June 30, 2018 and 2017, we expensed $2.7 million and $2.9 million, respectively, related to these contracts.
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 $19.2 million and $19.9 million as of June 30 and March 31, 2018, respectively, related to our Asia Pacific reporting unit was as follows (in thousands):
March 31, 2018
$
19,907

Foreign currency translation
(732
)
June 30, 2018
$
19,175

Accumulated goodwill impairment of $50.9 million as of both June 30 and March 31, 2018 related to our reporting units were as follows (in thousands):
Europe Caspian
$
(33,883
)
Africa
(6,179
)
Americas
(576
)
Corporate and other
(10,223
)
Total accumulated goodwill impairment
$
(50,861
)

8

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):
 
Customer
contracts
 
Customer
relationships
 
Trade name and trademarks
 
Internally developed software
 
Licenses
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Carrying Amount
March 31, 2018
$
8,169

 
$
12,777

 
$
4,878

 
$
1,107

 
$
755

 
$
27,686

Foreign currency translation

 
(52
)
 
(208
)
 
(11
)
 
(1
)
 
(272
)
June 30, 2018
$
8,169

 
$
12,725

 
$
4,670

 
$
1,096

 
$
754

 
$
27,414

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Amortization
March 31, 2018
$
(8,169
)
 
$
(11,372
)
 
$
(1,213
)
 
$
(915
)
 
$
(719
)
 
$
(22,388
)
Amortization expense

 
(72
)
 
(72
)
 
(54
)
 
(15
)
 
(213
)
June 30, 2018
$
(8,169
)
 
$
(11,444
)
 
$
(1,285
)
 
$
(969
)
 
$
(734
)
 
$
(22,601
)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average remaining contractual life, in years
0.0

 
4.4

 
11.8

 
0.6

 
0.3

 
5.6

Future amortization expense of intangible assets for each of the years ending March 31 is as follows (in thousands):
                 
2019
$
527

2020
452

2021
452

2022
452

2023
452

Thereafter
2,478

 
$
4,813

The Bristow Norway AS and Eastern Airways International Limited (“Eastern Airways”) acquisitions, included in our Europe Caspian region, resulted in intangible assets for customer contracts, customer relationships, trade names and trademarks, internally developed software and licenses. The Capiteq Limited, operating under the name Airnorth, acquisition included in our Asia Pacific region, resulted in intangible assets for customer contracts, customer 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 $45.2 million and $50.6 million, respectively, as of June 30 and March 31, 2018, related to the SAR contracts in the U.K. and two customer contracts in Norway, which are recoverable under the contracts and will be expensed over the terms of the contracts.

9

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


Property and Equipment, Assets Held for Sale and OEM Cost Recoveries
During the three months ended June 30, 2018 and 2017, we took delivery of aircraft and made capital expenditures as follows:
 
 
Three Months Ended 
 June 30,
 
 
2018

2017
 
 
 
Number of aircraft delivered:
 
 
 
 
Medium
 

 
3

Total aircraft
 

 
3

Capital expenditures (in thousands):
 
 
 
 
Aircraft and equipment (1)
 
$
8,337

 
$
10,810

Land and buildings
 
558

 
1,743

Total capital expenditures
 
$
8,895

 
$
12,553

_____________ 
(1)
During the three months ended June 30, 2017, we spent $1.3 million on progress payments for aircraft to be delivered in future periods. During the three months ended June 30, 2018, we made no progress payments.
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, 2018 and 2017:
 
 
Three Months Ended 
 June 30,
 
 
2018
 
2017
 
 
 
 
 
 
 
(In thousands, except for
 number of aircraft)
Number of aircraft sold or disposed of
 
3

 
6
Proceeds from sale or disposal of assets
 
$
7,774

 
$
41,975

Gain (loss) from sale or disposal of assets (1)
 
$
(1,678
)
 
$
2,263

 
 
 
 
 
Number of aircraft impaired
 

 
2

Impairment charges on assets held for sale (1)
 
$

 
$
1,564

_____________ 
(1) 
Included in gain (loss) on disposal of assets on our condensed consolidated statements of operations.

10

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 $136.0 million related to ongoing aircraft issues, of which $125.0 million was realized during fiscal year 2018 and $11.0 million was recovered during the three months ended June 30, 2018. To reflect the amount realized from these OEM cost recoveries during fiscal year 2018, 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 $16.6 million and recorded a deferred liability of $13.9 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 $3.5 million was recognized during the three months ended June 30, 2018. 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 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 $6.4 million during the remainder of 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 $10.4 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 $4.4 million during the remainder of fiscal year 2019, $4.0 million during fiscal year 2020 and $2.0 million during fiscal year 2021.
During the three months ended June 30, 2018, we recovered the remaining $11.0 million in OEM cost recoveries by agreeing to net certain amounts previously accrued for aircraft leases and capital expenditures against those recoveries. During the three months ended June 30, 2018, we recorded a $7.6 million increase in revenue and a $1.1 million decrease in direct cost. We expect to realize the remaining $2.3 million recovery during fiscal year 2019 as follows: $1.0 million decrease in direct cost in the three months ended September 30, 2018, $1.0 million decrease in direct cost in the three months ended December 31, 2018 and $0.3 million decrease in direct cost in the three months ended March 31, 2019. The increase in revenue relates to compensation for lost revenue in prior periods from the late delivery of aircraft and the decreases in direct cost over fiscal year 2019 relate to prior costs we have incurred and future costs we expect to incur.
Other Accrued Liabilities
Other accrued liabilities of $51.3 million and $66.0 million as of June 30 and March 31, 2018, respectively, includes the following:
 
June 30, 
 2018
 
March 31,  
 2018
 
 
 
 
 
(In thousands)
Accrued lease costs
$
7,079

 
$
11,708

Deferred OEM cost recovery
5,378

 
8,082

Eastern overdraft liability
6,230

 
8,989

Accrued property and equipment
468

 
4,874

Deferred gain on sale leasebacks
1,305

 
1,305

Other operating accruals
30,865

 
31,020

 
$
51,325

 
$
65,978


11

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 replacing the existing accounting standard and industry-specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the new standard is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. This new standard is effective for annual reporting periods beginning after December 15, 2017. We adopted the standard as of April 1, 2018 using the modified retrospective method applied to open contracts and only to the version of the contracts in effect as of April 1, 2018. Prior period amounts have not been adjusted and continue to be reflected in accordance with our historical accounting policy. There was no impact on our condensed consolidated financial statements and no cumulative effect adjustment was recognized. For further details, see Note 2.
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 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 adopted this accounting guidance effective April 1, 2018 using the modified retrospective method, through a cumulative-effect adjustment directly to retained earnings. Upon adoption, we increased deferred tax liabilities by approximately $1.7 million and recognized an offsetting decrease to retained earnings.
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 adopted this accounting guidance effective April 1, 2018. This accounting guidance has had no impact on our financial statements since adoption as we have not entered into any transactions during this period.
In March 2017, the FASB issued accounting guidance related to the presentation of net periodic pension cost and net periodic post-retirement 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 post-retirement 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 post-retirement benefit in assets. We adopted this accounting guidance effective April 1, 2018 and our statement of operations was retrospectively adjusted by $0.1 million with an increase in direct cost and a corresponding credit in other income (expense), net for the three months ended June 30, 2017.

12

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


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 adopted this accounting guidance effective April 1, 2018 with no impact on our financial statements as there were no changes to the terms or conditions of share-based payment awards.
In February 2018, the FASB issued new accounting guidance on income statement reporting of comprehensive income, specifically pertaining to reclassification of certain tax effects from accumulated other comprehensive income. This pronouncement is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2018, 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.

13

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

Note 2 — REVENUE RECOGNITION
Revenue Recognition
In general, we recognize revenue when a service is provided or a good is sold to a customer and there is a contract. At contract inception, we assess the goods and services promised in our contracts with customers and identify all performance obligations for each distinct promise that transfers a good or service (or bundle of goods or services) to the customer. To identify the performance obligations, we consider all goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. Revenue is recognized when control of the identified distinct goods or services have been transferred to the customer, the transaction price is determined and allocated to the performed performance obligations and we have determined that collection has occurred or is probable of occurring.
A majority of our revenue from contracts with customers is currently generated through two types of contracts: helicopter services and fixed wing services. Each contract type has a single distinct performance obligation as described below.
Helicopter services Our customers major integrated, national and independent offshore energy companies charter our helicopters primarily to transport personnel between onshore bases and offshore production platforms, drilling rigs and other installations. To a lesser extent, our customers also charter our helicopters to transport time-sensitive equipment to these offshore locations. The customers for SAR services include both the oil and gas industry and governmental agencies. Revenue from helicopter services is recognized when the performance obligation is satisfied over time based on contractual rates as the related services are performed.
A performance obligation arises under contracts with customers to render services and is the unit of account under the new accounting guidance for revenue. Operating revenue from our oil and gas segment is derived mainly from fixed-term contracts with our customers, a substantial portion of which is competitively bid. A small portion of our oil and gas customer revenue is derived from providing services on an "ad-hoc" basis. Our fixed-term contracts typically have original terms of one year to seven years (subject to provisions permitting early termination by our customers). We account for services rendered separately if they are distinct and the service is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered on its own or with other resources that are readily available to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Within this contract type for helicopter services, we determined that each contract has a single distinct performance obligation. These services include a fixed monthly rate for a particular model of aircraft, and flight hour services, which represents the variable component of a typical contract with a customer. Rates for these services vary depending on the type of services provided and can be based on a per flight hour, per day, or per month basis. Variable charges within our flight services contracts are not effective until a customer-initiated flight order is received and the actual hours flown are determined; therefore, the associated flight revenue generally cannot be reasonably and reliably estimated beforehand. A contract’s standalone selling prices are determined based upon the prices that we charge for our services rendered. Revenue is recognized as performance obligations are satisfied over time, by measuring progress towards satisfying the contracted services in a manner that best depicts the transfer of services to the customer, which is generally represented by a period of 30 days or less. We typically invoice customers on a monthly basis and the term between invoicing and when the payment is due is typically between 30 and 60 days. 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 rates when estimable and applicable, which generally includes written acknowledgment from the customers that they are in agreement with the amount of the rate escalation. Cost reimbursements from customers are recorded as reimbursable revenue with the related reimbursed costs recorded as reimbursable expense on our condensed consolidated statements of operations.
Taxes collected from customers and remitted to governmental authorities and revenue are reported on a net basis in our financial statements. Thus, we exclude taxes imposed on the customer and collected on behalf of governmental agencies to be remitted to these agencies from the transaction price in determining the revenue related to contracts with a customer.
Fixed wing services Eastern Airways and Airnorth provide fixed wing transportation services through regular passenger transport (scheduled airline service with individual ticket sales) and charter services. A performance obligation arises under contracts with customers to render services and is the unit of account under the new accounting guidance for revenue. Within fixed wing services, we determined that each contract has a single distinct performance obligation. Revenue is recognized over time 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. Both chartered and scheduled airline service revenue is recognized net of passenger taxes and discounts.

14

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

Contract Assets, Liabilities and Receivables
We generally satisfy performance of contract obligations by providing helicopter and fixed wing services to our customers in exchange for consideration. The timing of performance may differ from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. A contract asset exists when we have a contract with a customer for which revenue has been recognized (i.e. services have been performed), but customer payment is contingent on a future event (i.e. satisfaction of additional performance obligations). These contract assets are transferred to receivables when the right to consideration becomes unconditional. Contract liabilities relate to deferred revenue in which advance consideration is received from customers for contracts where revenue is recognized on future performance of services.
As of June 30 and March 31, 2018, receivables related to services performed under contracts with customers were $195.6 million and $176.5 million, respectively. All receivables from non-affiliates and affiliates are broken out further in our condensed consolidated balance sheets. During the three months ended June 30, 2018, we recognized $9.1 million of revenue from outstanding contract liabilities as of March 31, 2018. Contract liabilities related to services performed under contracts with customers was $13.3 million as of June 30 and March 31, 2018. Contract liabilities are primarily generated by our fixed wing services where customers pay for tickets in advance of receiving our services and advanced payments from helicopter services customers. There were no contract assets as of June 30 and March 31, 2018.
For the three months ended June 30, 2018, there was $1.0 million of revenue recognized from satisfied performance obligations related to prior periods (for example, due to changes in transaction price).
Adoption Impact
In accordance with the new revenue standard requirements discussed in Note 1, the disclosure of the impact of adoption on our condensed consolidated financial statements for the three months ended June 30, 2018 follows (in thousands):
 
 
Three Months Ended 
 June 30, 2018
 
 
Balances After Adoption
 
Balances without Adoption
 
Effect of change
Revenue:
 
 
 
 
 
 
Operating revenue from non-affiliates
 
$
325,356

 
$
338,466

 
$
(13,110
)
Operating revenue from affiliates
 
5,794

 
12,521

 
(6,727
)
Reimbursable revenue from non-affiliates
 
16,907

 
16,907

 

Revenue from Contracts with Customers
 
348,057

 
367,894

 
(19,837
)
Other revenue from non-affiliates
 
13,110

 

 
13,110

Other revenue from affiliates
 
6,727

 

 
6,727

Total Revenue
 
$
367,894

 
$
367,894

 
$

No cumulative effect adjustment to retained earnings was required upon adoption on April 1, 2018.

15

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

Remaining Performance Obligations
Remaining performance obligations represent firm contracts for which work has not been performed and future revenue recognition is expected. The table below discloses (1) the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period and (2) the expected timing to recognize this revenue (in thousands).
 
 
Remaining Performance Obligations
 
 
Nine Months Ending March 31, 2019
 
Fiscal Year Ending March 31,
 
Total
 
 
 
2020
 
2021
 
2022
 
2023 and thereafter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding Service Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Helicopter contracts
 
$
295,833

 
$
234,757

 
$
197,321

 
$
191,449

 
485,857

 
$
1,405,217

Fixed-wing contracts
 
3,476

 

 

 

 

 
3,476

Total remaining performance obligation revenue
 
$
299,309

 
$
234,757

 
$
197,321

 
$
191,449

 
485,857

 
$
1,408,693

Although substantially all of our revenue is under contract, due to the nature of our business we do not have significant remaining performance obligations as our contracts typically include unilateral termination clauses that allow our customers to terminate existing contracts with a notice period of 30 to 180 days. The table above includes performance obligations up to the point where the parties can cancel existing contracts. Any applicable cancellation penalties have been excluded. As such, our actual remaining performance obligation revenue is expected to be greater than what is reflected above. In addition, the remaining performance obligation disclosure does not include expected consideration related to performance obligations of a variable nature (i.e., flight services) as they cannot be reasonably and reliably estimated.
Other Considerations and Practical Expedients
We were awarded a government contract to provide SAR services for all of the U.K., which commenced in April 2015. We previously incurred costs related to this contract that generate or enhance the resources used to fulfill the performance obligation within the contract and the costs are expected to be recoverable. These contract acquisition and pre-operating costs qualify for capitalization. We amortize these capitalized contract acquisition and pre-operating costs related to the UK SAR contract and two customer contracts in Norway. We determined that an amortization method that allocates the capitalized costs on a relative basis to the revenue recognized is a reasonable and systematic basis for the amortization of the pre-operating costs asset. For further details on the short and long-term pre-operating cost balances, see Note 1.
We incur incremental direct costs for obtaining contracts through sales commissions paid to ticket agents to sell seats on regular public transportation flights for our fixed-wing services only. We will utilize the practical expedient allowed by the FASB that permits us to expense the incremental costs of obtaining a contract when incurred, if the amortization period of the contract asset that we otherwise would have recognized is one year or less.
In addition, we have applied the tax practical expedient to exclude all taxes in the scope of the election from the transaction price and the invoice practical expedient that allows us to recognize revenue in the amount to which we have the right to invoice the customer and corresponds directly with the value to the customer of our performance completed to date.
Note 3 — 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 June 30, 2018, 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 2 to the fiscal year 2018 Financial Statements for a description of other investments in significant affiliates.

16

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 customers 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 ($120.1 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 $2.2 billion as of June 30, 2018.
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, provided that Caledonia owned (1) at least 1,000,000 shares of common stock of the Company or (2) at least 49% of the total outstanding shares of Bristow Aviation. According to Caledonia’s most recent Form 13F filed with the SEC on July 10, 2018, Caledonia was no longer the direct beneficial owner of any shares of our common stock as of June 30, 2018. Accordingly, pursuant to the terms of the Master Agreement dated December 12, 1996 among Caledonia and the Company, Caledonia does not currently satisfy the requirements to designate directors for nomination to our board of directors.
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 June 30, 2018) 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.

17

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):
 
 
 
June 30, 
 2018
 
March 31,  
 2018
 
Assets
 
 
 
 
 
Cash and cash equivalents
 
$
68,947

 
$
90,788

 
Accounts receivable
 
319,251

 
256,735

 
Inventories
 
92,663

 
98,314

 
Prepaid expenses and other current assets
 
39,342

 
38,665

 
Total current assets
 
520,203

 
484,502

 
Investment in unconsolidated affiliates
 
3,268

 
3,608

 
Property and equipment, net
 
309,618

 
327,440

 
Goodwill
 
19,175

 
19,907

 
Other assets
 
230,748

 
231,884

 
Total assets
 
$
1,083,012

 
$
1,067,341

 
Liabilities
 
 
 
 
 
Accounts payable
 
$
348,588

 
$
292,893

 
Accrued liabilities
 
139,480

 
140,733

 
Accrued interest
 
2,196,334

 
2,130,433

 
Current maturities of long-term debt
 
20,024

 
23,125

 
Total current liabilities
 
2,704,426

 
2,587,184

 
Long-term debt, less current maturities
 
467,437

 
479,571

 
Accrued pension liabilities
 
30,526

 
37,034

 
Other liabilities and deferred credits
 
6,184

 
7,342

 
Deferred taxes
 
26,625

 
26,252

 
Total liabilities
 
$
3,235,198

 
$
3,137,383

 
 
 
Three Months Ended 
 June 30,
 
 
2018
 
2017
Revenue
 
$
331,469

 
$
301,970

Operating income (loss)
 
7,364

 
(19,654
)
Net loss
 
(69,021
)
 
(79,169
)

18

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 owns a 48% interest, a Nigerian company owned 100% by Nigerian employees owns a 50% interest and an employee trust fund owns the remaining 2% interest as of June 30, 2018. BHNL provides industrial aviation services to customers 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 customers 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.


19

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


Note 4 — DEBT
Debt as of June 30 and March 31, 2018 consisted of the following (in thousands):
 
 
June 30, 
 2018
 
March 31,  
 2018
8.75% Senior Secured Notes due 2023
 
$
346,807

 
$
346,610

4½% Convertible Senior Notes due 2023
 
108,710

 
107,397

6¼% Senior Notes due 2022
 
401,535

 
401,535

Lombard Debt
 
195,467

 
211,087

Macquarie Debt
 
181,528

 
185,028

PK Air Debt
 
225,615

 
230,000

Airnorth Debt
 
13,126

 
13,832

Eastern Airways Debt
 
11,556

 
14,519

Other Debt
 
5,716

 
3,991

Unamortized debt issuance costs
 
(26,254
)
 
(27,465
)
Total debt
 
1,463,806

 
1,486,534

Less short-term borrowings and current maturities of long-term debt
 
(53,723
)
 
(56,700
)
Total long-term debt
 
$
1,410,083

 
$
1,429,834

ABL Facility — On April 17, 2018, two of our subsidiaries entered into a new asset-backed revolving credit facility (the “ABL Facility”), which provides for commitments in an aggregate amount of $75 million, with a portion allocated to each borrower subsidiary, subject to an availability block of $15 million and a borrowing base calculated by reference to eligible accounts receivable. The maximum amount of the ABL Facility may be increased from time to time to a total of as much as $100 million, subject to the satisfaction of certain conditions, and any such increase would be allocated among the borrower subsidiaries. The ABL Facility matures in five years, subject to certain early maturity triggers related to maturity of other material debt or a change of control of the Company. Amounts borrowed under the ABL Facility are secured by certain accounts receivable owing to the borrower subsidiaries and the deposit accounts into which payments on such accounts receivable are deposited. As of June 30, 2018, there were no outstanding borrowings under the ABL Facility nor had we made any draws during the three months ended June 30, 2018.
4½% Convertible Senior Notes due 2023 The balances of the debt and equity components of our 4½% Convertible Senior Notes due 2023 (the “4½% Convertible Senior Notes”) as of June 30 and March 31, 2018 is as follows (in thousands):
 
 
June 30, 
 2018
 
March 31,  
 2018
 
 
 
 
 
Equity component - net carrying value (1)
 
$
36,778

 
$
36,778

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

 
$
143,750

Unamortized discount
 
(35,040
)
 
(36,353
)
Debt component - net carrying value
 
$
108,710

 
$
107,397

_____________ 
(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 months ended June 30, 2018 was 11.0%. Interest expense related to our 4½% Convertible Senior Notes for the three months ended June 30, 2018 was as follows (in thousands):
Contractual coupon interest
 
$
1,611

 
Amortization of debt discount
 
1,313

 
Total interest expense
 
$
2,924

 


20

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


Note 5 — 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.
We did not have any items valued at fair value on a non-recurring basis as of June 30, 2018
The following table summarizes the assets as of June 30, 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  
 June 30, 
 2017
 
Total
Loss for the
Three Months
Ended
June 30, 2017
Inventories
 
$

 
$
1,252

 
$

 
$
1,252

 
$
(1,192
)
Assets held for sale
 

 
34,585

 

 
34,585

 
(1,564
)
Total assets
 
$

 
$
35,837

 
$

 
$
35,837

 
$
(2,756
)
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 months ended June 30, 2017 related to two aircraft held for sale.

21

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, 2018, 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, 
 2018
 
Balance  Sheet
Classification
Derivative financial instruments
 
$

 
$
3,333

 
$

 
$
3,333

 
Prepaid expenses and other current assets
Rabbi Trust investments
 
2,020

 

 

 
2,020

 
Other assets
Total assets
 
$
2,020

 
$
3,333

 
$

 
$
5,353

 
 
The following table summarizes the financial instruments we had as of March 31, 2018, 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,  
 2018
 
Balance  Sheet
Classification
Derivative financial instruments
 
$

 
$
718

 
$

 
$
718

 
Prepaid expenses and other current assets
Rabbi Trust investments
 
2,296

 

 

 
2,296

 
Other assets
Total assets
 
$
2,296

 
$
718

 
$

 
$
3,014

 
 
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. The derivative financial instruments consist of foreign currency put option contracts whose fair value is determined by quoted market prices of the same or similar instruments, adjusted for counterparty risk. See Note 6 for a discussion of our derivative financial instruments.
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 debt, excluding unamortized debt issuance costs, are as follows (in thousands):
 
 
June 30, 2018
 
March 31, 2018
 
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
8.75% Senior Secured Notes due 2023 (1)
 
$
346,807

 
$
340,830

 
$
346,610

 
$
353,500

4½% Convertible Senior Notes due 2023 (2)
 
108,710

 
164,349

 
107,397

 
158,772

6¼% Senior Notes due 2022
 
401,535

 
312,193

 
401,535

 
325,243

Lombard Debt
 
195,467

 
195,467

 
211,087

 
211,087

Macquarie Debt
 
181,528

 
181,528

 
185,028

 
185,028

PK Air Debt
 
225,615

 
225,615

 
230,000

 
230,000

Airnorth Debt
 
13,126

 
13,126

 
13,832

 
13,832

Eastern Airways Debt
 
11,556

 
11,556

 
14,519

 
14,519

Other Debt
 
5,716

 
5,716

 
3,991

 
3,991

 
 
$
1,490,060

 
$
1,450,380

 
$
1,513,999

 
$
1,495,972

_____________ 
(1) 
The carrying value is net of unamortized discount of $3.2 million and $3.4 million as of June 30, 2018 and March 31, 2018, respectively.
(2) 
The carrying value is net of unamortized discount of $35.0 million and $36.4 million as of June 30, 2018 and March 31, 2018, respectively.

22

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


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.
Note 6 — DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
From time to time, we enter into forward exchange contracts as a hedge against foreign currency asset and liability commitments and anticipated transaction exposures, including intercompany purchases. All derivatives are recognized as assets or liabilities and measured at fair value. We do not use financial instruments for trading or speculative purposes.
During fiscal year 2018 and the three months ended June 30, 2018, we entered into foreign currency put option contracts of £5 million per month through May 2019 to mitigate a portion of our foreign currency exposure. These derivatives were designated as cash flow hedges.
The designation of a derivative instrument as a hedge and its ability to meet relevant hedge accounting criteria determines how the change in fair value of the derivative instrument will be reflected in the consolidated financial statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the hedged item’s underlying cash flows or fair value and the documentation requirements of the accounting standard for derivative instruments and hedging activities are fulfilled at the time we enter into the derivative contract. A hedge is designated as a cash flow hedge, fair value hedge, or a net investment in foreign operations hedge based on the exposure being hedged. The asset or liability value of the derivative will change in tandem with its fair value. For derivatives designated as cash flow hedges, the changes in fair value are recorded in accumulated other comprehensive income (loss). The derivative’s gain or loss is released from accumulated other comprehensive income (loss) to match the timing of the effect on earnings of the hedged item’s underlying cash flows.
We review the effectiveness of our hedging instruments on a quarterly basis. We discontinue hedge accounting for any hedge that we no longer consider to be highly effective. Changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting are recognized in current period earnings.
None of our derivative instruments contain credit-risk-related contingent features. Counterparties to our derivative contracts are high credit quality financial institutions.
The following table presents the balance sheet location and fair value of the portions of our derivative instruments that were designated as hedging instruments as of June 30, 2018 (in thousands):
 
 
Derivatives designated as hedging instruments
 
Derivatives not designated as hedging instruments
 
Gross amounts of recognized assets and liabilities
 
Gross amounts offset in the Balance Sheet
 
Net amounts of assets and liabilities presented in the Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
3,333

 
$

 
$
3,333

 
$

 
$
3,333

Net
 
$
3,333

 
$

 
$
3,333

 
$

 
$
3,333

The following table presents the balance sheet location and fair value of the portions of our derivative instruments that were designated as hedging instruments as of March 31, 2018 (in thousands):
 
 
Derivatives designated as hedging instruments
 
Derivatives not designated as hedging instruments
 
Gross amounts of recognized assets and liabilities
 
Gross amounts offset in the Balance Sheet
 
Net amounts of assets and liabilities presented in the Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
718

 
$

 
$
718

 
$

 
$
718

Net
 
$
718

 
$

 
$
718

 
$

 
$
718


23

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


The following table presents the impact that derivative instruments, designated as cash flow hedges, had on our accumulated other comprehensive loss (net of tax) and our consolidated statements of operations for the three months ended June 30, 2018 (in thousands):
 
 
 
 
Financial statement location
 
 
 
 
 
Amount of gain recognized in accumulated other comprehensive loss
 
$
2,962

 
Accumulated other comprehensive loss
Amount of gain reclassified from accumulated other comprehensive loss into earnings
 
$
1,614

 
Statement of operations
We estimate that $1.3 million of net gain in accumulated other comprehensive loss associated with our derivative instruments is expected to be reclassified into earnings within the next twelve months.


24

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


Note 7 — COMMITMENTS AND CONTINGENCIES
Aircraft Purchase Contracts — As shown in the table below, we expect to make additional capital expenditures over the next seven fiscal years to purchase additional aircraft. As of June 30, 2018, we had 27 aircraft on order and options to acquire an additional four 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.
 
 
Nine Months Ending March 31, 2019
 
Fiscal Year Ending March 31,
 
 
 
 
2020
 
2021
 
2022
 
2023 and thereafter(1)
 
Total
Commitments as of June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Number of aircraft:
 
 
 
 
 
 
 
 
 
 
 
 
Large
 
1

 

 
4

 
5

 
13

 
23

U.K. SAR
 

 
4

 

 

 

 
4

 
 
1

 
4

 
4

 
5

 
13

 
27

Related commitment expenditures (in thousands) (2)
 
 
 
 
 
 
 
 
 
 
 
 
Large
 
$
19,792

 
$
24,829

 
$
76,547

 
$
84,972

 
$
192,426

 
$
398,566

U.K. SAR
 

 
61,226

 

 

 

 
61,226

 
 
$
19,792

 
$
86,055

 
$
76,547

 
$
84,972

 
$
192,426

 
$
459,792

Options as of June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Number of aircraft:
 
 
 
 
 
 
 
 
 
 
 
 
Large
 
2

 
2

 

 

 

 
4

 
 
2

 
2

 

 

 

 
4

 
 
 
 
 
 
 
 
 
 
 
 
 
Related option expenditures (in thousands) (2)
 
$
44,181

 
$
31,536

 
$

 
$

 
$

 
$
75,717

_____________ 
(1) 
Includes $93.0 million for five aircraft orders that can be cancelled prior to delivery dates. We made non-refundable deposits of $4.5 million related to these aircraft.
(2) 
Includes progress payments on aircraft scheduled to be delivered in future periods only if options are exercised.
We periodically purchase aircraft for which we have no orders.
Operating Leases — We have non-cancelable operating leases in connection with the lease of certain equipment, including leases for aircraft, and land and facilities. Rent expense incurred under all operating leases was $50.1 million and $58.7 million for the three months ended June 30, 2018 and 2017, respectively. Rent expense incurred under operating leases for aircraft was $44.1 million and $51.7 million for the three months ended June 30, 2018 and 2017, respectively.

25

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


The aircraft leases range from base terms of up to 180 months with renewal options of up to 240 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, 2018:
 
End of Lease Term
 
Number of Aircraft
 
Nine months ending March 31, 2019 to fiscal year 2020
 
43

 
Fiscal year 2021 to fiscal year 2023
 
32

 
Fiscal year 2024 to fiscal year 2025
 
11

 
 
 
86

 
We lease six S-92 model aircraft and one AW139 model aircraft from VIH Aviation Group, which is a related party due to common ownership of Cougar Helicopters Inc. (“Cougar”) and paid lease fees of $5.0 million and $4.5 million during the three months ended June 30, 2018 and 2017, respectively. Additionally, we lease a facility in Galliano, Louisiana from VIH Helicopters USA, Inc., another related party due to common ownership of Cougar, and paid $0.1 million and $0.1 million in lease fees during the three months ended June 30, 2018 and 2017, respectively.
Separation Programs — Beginning in March 2015, we initiated involuntary separation programs (“ISPs”) in certain regions. The expense related to the ISPs for the three months ended June 30, 2018 and 2017 is as follows (in thousands):
 
 
Three Months Ended 
 June 30,
 
 
2018
 
2017
Direct cost
 
$
1,501

 
$
1,070

General and administrative
 
218

 
7,609

Total
 
$
1,719

 
$
8,679

Environmental Contingencies — The U.S. Environmental Protection Agency (the “EPA”), has in the past notified us that we are a potential responsible party (“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, 2018, we had $43.0 million of other purchase obligations representing unfilled purchase orders for aircraft parts 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.
As previously reported, on April 29, 2016, another company’s EC 225LP (also known as a H225LP) model helicopter crashed near Turøy outside of Bergen, Norway resulting in the European Aviation Safety Agency (“EASA”) issuing airworthiness directives prohibiting flight of H225LP and AS332L2 model aircraft. On July 20, 2017, the U.K. CAA and NCAA issued safety and operational directives which detail the conditions to apply for safe return to service of H225LP and AS332L2 model aircraft, where operators wish to do so. On July 5, 2018, the Accident Investigation Board Norway issued its final investigation report on the accident. The report cited a fatigue fracture within the epicyclic module of the main gear box as the cause of the accident, and issued safety recommendations in a number of areas, including gearbox design and certification requirements, failure tolerance, and continued airworthiness of the AS332L2 and the EC 225LP helicopters. We continue not to operate for commercial purposes our 23 H225LP model aircraft, and we are carefully evaluating next steps and demand for the H225LP model aircraft in our oil and gas and SAR operations worldwide, with the safety of passengers and crews remaining our highest priority.

26

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


We operate in jurisdictions internationally where we are subject to risks that include government action to obtain additional tax revenue. In a number of these jurisdictions, political unrest, the lack of well-developed legal systems and legislation that is not clear enough in its wording to determine the ultimate application, can make it difficult to determine whether legislation may impact our earnings until such time as a clear court or other ruling exists. We operate in jurisdictions currently where amounts may be due to governmental bodies that we are not currently recording liabilities for as it is unclear how broad or narrow legislation may ultimately be interpreted. We believe that payment of amounts in these instances is not probable at this time, but is reasonably possible.
A loss contingency is reasonably possible if the contingency has a more than remote but less than probable chance of occurring. Although management believes that there is no clear requirement to pay amounts at this time and that positions exist suggesting that no further amounts are currently due, it is reasonably possible that a loss could occur for which we have estimated a maximum loss at June 30, 2018 to be approximately $5 million to $6 million.
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.

27

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


Note 8 — TAXES
We estimate the full-year effective tax rate from continuing operations and apply this rate to our year-to-date income from continuing operations. In addition, we separately calculate the tax impact of unusual or infrequent items, if any. The tax impacts of such unusual or infrequent items are treated discretely in the quarter in which they occur. During the three months ended June 30, 2018 and 2017, our effective tax rate was 8.2% and (31.9)%, respectively. The effective tax rate for the three months ended June 30, 2018 and 2017 were impacted by valuation allowances against future realization of foreign tax credits and net operating losses in certain foreign jurisdictions.
The relationship between our provision for or benefit from income taxes and our pre-tax book income can vary significantly from period to period considering, among other factors, (a) the overall level of pre-tax book income, (b) changes in the blend of income that is taxed based on gross revenues or at high effective tax rates versus pre-tax book income or at low effective tax rates and (c) our geographical blend of pre-tax book income. Consequently, our income tax expense or benefit does not change proportionally with our pre-tax book income or loss. Significant decreases in our pre-tax book income typically result in higher effective tax rates, while significant increases in pre-tax book income can lead to lower effective tax rates, subject to the other factors impacting income tax expense noted above. The change in our effective tax rate excluding discrete items for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 primarily related to changes in the blend of earnings taxed in relatively high taxed jurisdictions versus low taxed jurisdictions. Additionally, we increased our valuation allowance by $1.0 million and $11.2 million for the three months ended June 30, 2018 and 2017, respectively, which also impacted our effective tax rate.
As of June 30, 2018, there were $6.7 million of unrecognized tax benefits, all of which would have an impact on our effective tax rate if recognized.
On December 22, 2017, the United States Congress enacted tax legislation commonly known as the Tax Cuts and Jobs Act (the “Act”). The Act includes numerous changes in existing U.S. tax law, including a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018. Further, the Act provides for a one-time “deemed repatriation” of accumulated foreign earnings of certain foreign corporations. Under U.S. generally accepted accounting principles, our net deferred tax liabilities are required to be revalued during the period in which the new tax legislation is enacted. We have made reasonable estimates for the change in the U.S. federal corporate income tax rate and one-time “deemed repatriation” of accumulated foreign earnings. For the year ended March 31, 2018, our provision for income tax included provisional amounts for the revaluation of U.S. net deferred tax liabilities and the impact of the “deemed repatriation” of foreign earnings. The provisional amounts associated with the one-time “deemed repatriation” and the re-measurement of deferred tax assets and liabilities due to the reduction in the corporate income tax rate will be adjusted over time as more guidance becomes available.
Certain provisions under the Act became applicable to us on April 1, 2018 and our income tax provision for the three months ended June 30, 2018 includes the tax implications of these provisions. These provisions include Global Intangible Low-Taxed Income (“GILTI”), Base Erosion and Anti-Avoidance Tax (“BEAT”), Foreign Derived Intangible Income (“FDII”), and certain limitations on the deduction of interest expense and utilization of net operating losses.


28

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


Note 9 — EMPLOYEE BENEFIT PLANS
Pension Plans
The components of net periodic pension cost other than the service cost component are included in other income (expense), net on our condensed consolidated statement of operations. As discussed in Note 1, on April 1, 2018, we adopted new accounting guidance related to the presentation of net periodic pension cost. The following table provides a detail of the components of net periodic pension cost (in thousands):
 
 
Three Months Ended 
 June 30,
 
 
2018
 
2017
Service cost for benefits earned during the period
 
$
219

 
$
206

Interest cost on pension benefit obligation
 
3,364

 
3,113

Expected return on assets
 
(4,434
)
 
(5,106
)
Amortization of unrecognized losses
 
2,057

 
1,965

Net periodic pension cost
 
$
1,206

 
$
178

The current estimates of our cash contributions to our defined benefit pension plans to be paid in fiscal year 2019 are $16.9 million, of which $4.3 million was paid during the three months ended June 30, 2018. The weighted-average expected long-term rate of return on assets for our U.K. pension plans as of March 31, 2018 was 3.6%.
Incentive Compensation
Stock-based awards are currently made under the Bristow Group Inc. 2007 Long-Term Incentive Plan (the “2007 Plan”). A maximum of 10,646,729 shares of 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