| Bristow Group Inc “Item 9A Controls and Procedures” and “Item 1A Risk Factors — The SEC investigation, any related proceedings in other countries and the consequences of the activities identified in the Internal Review could result in civil or criminal proceedings, the imposition of fines and penalties, the commencement of third-party litigation, the incurrence of expenses, the loss of business and other adverse effects on our Company” included elsewhere in this Annual Report |
| We believe that our relations with our employees are satisfactory |
| Item 1A Risk Factors If you hold our securities or are considering an investment in our securities, you should carefully consider the following risks, together with the other information contained in this Annual Report |
| 12 _________________________________________________________________ [68]Table of Contents The SEC investigation, any related proceedings in other countries and the consequences of the activities identified in the Internal Review could result in civil or criminal proceedings, the imposition of fines and penalties, the commencement of third-party litigation, the incurrence of expenses, the loss of business and other adverse effects on our Company |
| In February 2005, we voluntarily advised the staff of the SEC that the Audit Committee of our Board of Directors had engaged special outside counsel to undertake a review of certain payments made by two of our affiliated entities in a foreign country |
| The review of these payments, which initially focused on Foreign Corrupt Practices Act matters, was subsequently expanded by such special outside counsel to cover operations in other countries and other issues |
| In connection with this review, special outside counsel to the Audit Committee retained forensic accountants |
| As a result of the findings of the Internal Review, our Annual Report on Form 10-K for the year ended March 31, 2005 reflected our restated financial statements |
| For further information on the restatements, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2005 |
| The SEC then notified us that it had initiated an informal inquiry and requested that we provide certain documents on a voluntary basis |
| The SEC thereafter advised us that the inquiry has become a formal investigation |
| All known required restatements were reflected in the financial statements included in our fiscal year 2005 Annual Report, and no further restatements were required in this fiscal year 2006 Annual Report |
| As a follow-up to matters identified during the course of the Internal Review, special counsel to the Audit Committee is completing certain work, and may be called upon to undertake additional work in the future to assist in responding to inquiries from the SEC, from other governmental authorities or customers, or as follow-up to the previous work performed by such special counsel |
| In October 2005, the Audit Committee reached certain conclusions with respect to findings to date from the Internal Review |
| The Audit Committee concluded that, over a considerable period of time, (a) improper payments were made by, and on behalf of, certain foreign affiliated entities directly or indirectly to employees of the Nigerian government, (b) improper payments were made by certain foreign affiliated entities to Nigerian employees of certain customers with whom we have contracts, (c) inadequate employee payroll declarations and, in certain instances, tax payments were made by us or our affiliated entities in certain jurisdictions, (d) inadequate valuations for customs purposes may have been declared in certain jurisdictions resulting in the underpayment of import duties, and (e) an affiliated entity in a South American country, with the assistance of our personnel and two of our other affiliated entities, engaged in transactions which appear to have assisted the South American entity in the circumvention of currency transfer restrictions and other regulations |
| In addition, as a result of the Internal Review, the Audit Committee and management determined that there were deficiencies in our books and records and internal controls with respect to the foregoing and certain other activities |
| Based on the Audit Committee’s findings and recommendations, the Board of Directors has taken disciplinary action with respect to our personnel who it determined bore responsibility for these matters |
| The disciplinary actions included termination or resignation of employment (including of certain members of senior management), changes of job responsibility, reductions in incentive compensation payments and reprimands |
| One of our affiliates has also obtained the resignation of certain of its personnel |
| We have initiated remedial action, including initiating action to correct underreporting of payroll tax, disclosing to certain customers inappropriate payments made to customer personnel and terminating certain agency, business and joint venture relationships |
| We also have taken steps to reinforce our commitment to conduct our business with integrity by creating an internal corporate compliance function, instituting a new code of business conduct (our new code of business conduct entitled “Code of Business Integrity” is available on our website, http://www |
| bristowgroup |
| com), and developing and implementing a training program for all employees |
| In addition to the disciplinary actions referred to above, we have also taken steps to strengthen our control environment by hiring new key members of senior and financial management, including persons with appropriate technical accounting expertise, expanding our corporate finance group and internal audit staff, realigning reporting lines within the accounting function so that field accounting reports directly to the corporate accounting function instead of operations management, and improving the management of our tax structure to comply with its intended design |
| Our compliance program has also begun full operation, and clear corporate 13 _________________________________________________________________ [69]Table of Contents policies have been established and communicated to our relevant personnel related to employee expenses, delegation of authority, revenue recognition and customer billings |
| We have communicated the Audit Committee’s conclusions with respect to the findings of the Internal Review to regulatory authorities in some, but not all, of the jurisdictions in which the relevant activities took place |
| We are in the process of gathering and analyzing additional information related to these matters, and expect to disclose the Audit Committee’s conclusions to regulatory authorities in other jurisdictions once this process has been completed |
| Such disclosure may result in legal and administrative proceedings, the institution of administrative, civil injunctive or criminal proceedings involving us and/or current or former employees, officers and/or directors who are within the jurisdictions of such authorities, the imposition of fines and other penalties, remedies and/or sanctions, including precluding us from participating in business operations in their countries |
| To the extent that violations of the law may have occurred in several countries in which we operate, we do not yet know whether such violations can be cured merely by the payment of fines or whether other actions may be taken against us, including requiring us to curtail our business operations in one or more such countries for a period of time |
| In the event that we curtail our business operations in any such country, we then may face difficulties exporting our aircraft from such country |
| As of March 31, 2006, the book values of our aircraft in Nigeria and the South American country where certain improper activities took place were approximately dlra115dtta9 million and dlra8dtta1 million, respectively |
| We cannot predict the ultimate outcome of the SEC investigation, nor can we predict whether other applicable US and foreign governmental authorities will initiate separate investigations |
| The outcome of the SEC investigation and any related legal and administrative proceedings could include the institution of administrative, civil injunctive or criminal proceedings involving us and/or current or former employees, officers and/or directors, the imposition of fines and other penalties, remedies and/or sanctions, modifications to business practices and compliance programs and/or referral to other governmental agencies for other appropriate actions |
| It is not possible to accurately predict at this time when matters relating to the SEC investigation will be completed, the final outcome of the SEC investigation, what if any actions may be taken by the SEC or by other governmental agencies in the US or in foreign jurisdictions, or the effect that such actions may have on our consolidated financial statements |
| In addition, in view of the findings of the Internal Review, we are likely to encounter difficulties in the future conducting business in Nigeria and a South American country, and with certain customers |
| It is also possible that certain of our existing contracts may be cancelled (although none have been cancelled as of the date of filing of this Annual Report) and that we may become subject to claims by third parties, possibly resulting in litigation |
| The matters identified in the Internal Review and their effects could have a material adverse effect on our business, financial condition and results of operations |
| In connection with its conclusions regarding payroll declarations and tax payments, the Audit Committee determined on November 23, 2005, following the recommendation of our senior management, that there was a need to restate our historical consolidated financial statements, including those for the quarterly periods in fiscal year 2005 |
| Such restatement was reflected in our fiscal year 2005 Annual Report |
| As of March 31, 2006, we have accrued an aggregate of dlra20dtta1 million for the taxes, penalties and interest attributable to underreported employee payroll |
| Operating income for fiscal years 2006, 2005 and 2004 includes dlra4dtta3 million, dlra3dtta8 million and dlra4dtta2 million, respectively, attributable to this accrual |
| At this time, we cannot estimate what additional payments, fines, penalties and/or litigation and related expenses may be required in connection with the matters identified as a result of the Internal Review, the SEC investigation, and/or any other related regulatory investigation that may be instituted or third-party litigation; however, such payments, fines, penalties and/or expenses could have a material adverse effect on our business, financial condition and results of operations |
| As we continue to respond to the SEC investigation and other governmental authorities and take other actions relating to improper activities that have been identified in connection with the Internal Review, there can be no assurance that restatements, in addition to those reflected in our fiscal year 2005 Annual Report, will not be required or that our historical financial statements included in this Annual Report will not change or require further amendment |
| In addition, new issues may be identified that may impact our financial statements and the scope of the restatements described in this Annual Report and lead us to take other remedial actions or otherwise adversely impact us |
| 14 _________________________________________________________________ [70]Table of Contents For additional discussion of the SEC investigation, the Internal Review, and “Item 1A Risk Factors” and our Consolidated Financial Statements for fiscal years 2006, 2005 and 2004, and the related notes thereto, all of which are included elsewhere in this Annual Report |
| Executive Overview This Executive Overview only includes what management considers to be the most important information and analysis for evaluating our financial condition and operating performance |
| It provides the context for the discussion and analysis of the financial statements which follows and does not disclose every item bearing on our financial condition and operating performance |
| General We are a leading provider of helicopter transportation services to the worldwide offshore oil and gas industry with major operations in the US Gulf of Mexico and the North Sea |
| We also have operations, both directly and indirectly, in most of the other major offshore oil and gas producing regions of the world, including Alaska, Australia, Brazil, China, Egypt, Kazakhstan, Malaysia, Mexico, Nigeria, Russia, Trinidad and Turkmenistan |
| Additionally, we are a leading provider of production management services for oil and gas production facilities in the US Gulf of Mexico |
| As of March 31, 2006, we owned or leased 331 aircraft (including eight aircraft held for sale), and our unconsolidated affiliates operated an additional 146 aircraft throughout the world (excluding those aircraft leased from us) |
| We conduct our business in two segments: Helicopter Services and Production Management Services |
| The Helicopter Services segment conducts its operations through seven business units: • North America; • South and Central America; • Europe; • West Africa; 27 _________________________________________________________________ [83]Table of Contents • Southeast Asia; • Other International; and • EH Centralized Operations |
| During fiscal year 2006, our North America, South and Central America, Europe, West Africa, Southeast Asia, Other International and EH Centralized Operations business units contributed 26prca, 6prca, 31prca, 14prca, 8prca, 4prca and 2prca, respectively, of our gross revenue |
| Our Production Management Services segment contributed the remaining 9prca of our gross revenue in fiscal year 2006 |
| Our operating revenue depends on the demand for our services and the pricing terms of our contracts |
| We measure the demand for our helicopter services in flight hours |
| Demand for our services depends on the level of worldwide offshore oil and gas exploration, development and production activities |
| We believe that our customers’ exploration and development activities are influenced by actual and expected trends in commodity prices for oil and gas |
| Exploration and development activities generally use medium-size and larger aircraft on which we typically earn higher margins |
| We believe that production-related activities are less sensitive to variances in commodity prices, and accordingly, provide more stable activity levels and revenue stream |
| We estimate that a majority of our operating revenue from Helicopter Services is related to the production activities of the oil and gas companies |
| Helicopter Services are seasonal in nature, as our flight activities are influenced by the length of daylight hours and weather conditions |
| The worst of these conditions typically occurs during the winter months when our ability to safely fly and our customers’ ability to safely conduct their operations, is inhibited |
| Accordingly, our flight activity is generally lower in the fourth fiscal quarter |
| Our helicopter contracts are generally based on a two-tier rate structure consisting of a daily or monthly fixed fee plus additional fees for each hour flown |
| We also provide services to customers on an “ad hoc” basis, which usually entails a shorter notice period and shorter duration |
| Our charges for ad hoc services are generally based on an hourly rate, or a daily or monthly fixed fee plus additional fees for each hour flown |
| Generally, our ad hoc services have a higher margin than our other helicopter contracts due to supply and demand dynamics |
| In addition, our standard rate structure is based on fuel costs remaining at or below a predetermined threshold |
| Fuel costs in excess of this threshold are generally charged to the customer |
| We also derive revenue from reimbursements for third party out-of-pocket costs such as certain landing and navigation costs, consultant salaries, travel and accommodation costs, and dispatcher charges |
| The costs incurred that are rebilled to our customers are presented as reimbursable expense and the related revenue is presented as reimbursable revenue in our consolidated statements of income |
| Our helicopter contracts are for varying periods and in certain cases permit the customer to cancel the charter before the end of the contract term |
| These contracts provide that the customer will reimburse us for cost increases associated with the contract and are cancelable by the customer with notice of generally 30 days in the US Gulf of Mexico, 90 to 180 days in Europe and 90 days in West Africa |
| In North America, we generally enter into short-term contracts for twelve months or less, although we occasionally enter into longer-term contracts |
| In Europe, contracts are longer term, generally between two and five years |
| In South and Central America, West Africa, Southeast Asia and Other International, contract length generally ranges from three to five years |
| At the expiration of a contract, our customers often negotiate renewal terms with us for the next contract period |
| Contracts are generally awarded based on a number of factors, including price, quality of service, equipment and record of safety |
| An incumbent operator has a competitive advantage in the bidding process based on its relationship with the customer, its knowledge of the site characteristics and its understanding of the cost structure for the operations |
| Maintenance and repair expenses, training costs, employee wages and insurance premiums represent a significant portion of our overall expenses |
| Our production management costs also include contracted transportation services |
| We expense maintenance and repair costs, including major aircraft component overhaul costs, as the costs are incurred |
| As a result, our earnings in any given period are directly impacted by the amount of our maintenance and repair expenses for that period |
| In certain instances, major aircraft components, primarily engines and transmissions, are maintained by third-party vendors under contractual arrangements |
| Under these agreements, we are charged an agreed amount per hour of flying time |
| 28 _________________________________________________________________ [84]Table of Contents As a result of local laws limiting foreign ownership of aviation companies, we conduct helicopter services in many foreign countries through interests in affiliates, some of which are unconsolidated |
| Generally, we realize revenue from these foreign operations by leasing aircraft and providing services and technical support to those entities |
| For additional information about these unconsolidated affiliates, see Note 3 in the “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report |
| Market Outlook Worldwide demand for hydrocarbons is expected to continue to grow for the foreseeable future |
| This growth, driven largely by economic expansion, is expected to result in sustained strength in oil and natural gas prices, driving further increases in offshore exploration and development activity by our customers |
| We believe this increase in offshore exploration and development activity is also likely to lead to growth in production related activities as these development projects come on stream |
| As a result of the current commodity price environment, we have experienced an increase in aircraft fleet utilization in all of our present markets and expect this trend to continue |
| In addition, as operators increasingly pursue prospects in deepwater and push further offshore, we expect demand for medium and large helicopters to be further stimulated |
| In particular, we expect growth in demand for additional helicopter support in North and South America, West Africa and Asia, including the Caspian Sea region |
| We expect that the relative importance of our Southeast Asia and Other International business units will continue to increase as the major oil and gas companies increasingly focus on prospects outside of North America and the North Sea |
| This growth will provide us with opportunities to add new aircraft to our fleet, as well as opportunities to redeploy aircraft from weaker markets into markets that will sustain higher rates for our services |
| Currently, helicopter manufacturers are indicating very limited supply availability during the next three years |
| We expect that this tightness in aircraft availability from the manufacturers and the lack of suitable aircraft in the secondary market, coupled with the increase in demand for helicopter support, will result in upward pressure on the rates we charge for our services |
| At the same time, we believe that our recent aircraft acquisitions and commitments position us to capture a portion of the upside created by the current market conditions |
| Current activity levels in the Gulf of Mexico are at or near all-time highs |
| In the near term, we also believe that the impact of hurricanes Katrina and Rita will continue to result in higher activity levels as operators repair facilities and work to bring production back on line |
| While contracts in the North Sea are generally long term, we have experienced a trend of increased spot market contracting of helicopters as exploration activity has increased in the North Sea |
| Our Other International operations have experienced high customer demand for aircraft to support new and ongoing operations, and we expect this trend to continue |
| Due to the current high levels of fleet utilization, we have experienced, along with other helicopter operators, some difficulty in meeting our customers’ needs for short-notice exploration drilling support, particularly in remote international locations |
| Despite our expectations of growth in demand for helicopter support, our operations in Nigeria and a South American country may be negatively affected as a result of our remedial actions taken in connection with the Internal Review, as discussed in more detail below under “Investigations |
| ” 29 _________________________________________________________________ [85]Table of Contents Overview of Operating Results The following table presents our operating results and other income statement information for the applicable periods: Fiscal Year Ended March 31, 2006 2005 2004 (In thousands) Gross revenue: Operating revenue $ 688cmam719 $ 608cmam922 $ 558cmam137 Reimbursable revenue 80cmam221 64cmam724 58cmam864 Total gross revenue 768cmam940 673cmam646 617cmam001 Operating expense: Direct cost 512cmam518 454cmam836 417cmam359 Reimbursable expense 78cmam525 63cmam303 58cmam090 Depreciation and amortization 42cmam256 40cmam693 39cmam543 General and administrative 61cmam948 45cmam245 38cmam892 Gain on disposal of assets (102 ) (8cmam039 ) (3cmam943 ) Curtailment gain — — (21cmam665 ) Total operating expense 695cmam145 596cmam038 528cmam276 Operating income 73cmam795 77cmam608 88cmam725 Earnings from unconsolidated affiliates, net 6cmam758 9cmam600 11cmam039 Interest expense, net (10cmam530 ) (12cmam477 ) (15cmam140 ) Loss on extinguishment of debt — — (6cmam205 ) Other income (expense), net 4cmam612 (1cmam126 ) (7cmam810 ) Income before provision for income taxes and minority interest 74cmam635 73cmam605 70cmam609 Provision for income taxes 16cmam607 21cmam835 19cmam402 Minority interest (219 ) (210 ) (1cmam382 ) Net income $ 57cmam809 $ 51cmam560 $ 49cmam825 Fiscal Year 2006 Compared to Fiscal Year 2005 Our gross revenue increased to dlra768dtta9 million, an increase of 14dtta1prca, for fiscal year 2006 from dlra673dtta6 million for fiscal year 2005 |
| The increase in gross revenue was noted in both our Helicopter Services segment and our Production Management Services segment |
| Helicopter Services contributed to most of the increase with improvements for North America, resulting from an increase in flight hours and rates, and improvements in Europe, resulting from higher rates and new contracts |
| Our operating expenses for fiscal year 2006 increased to dlra695dtta1 million, an increase of 16dtta6prca, from dlra596dtta0 million for fiscal year 2005 |
| The increase was primarily a result of higher costs associated with higher activity levels, higher labor costs, higher fuel rates (which are generally recovered from our customers) and higher professional fees related to the Internal Review and DOJ investigations |
| In addition, we had a gain on disposal of assets of dlra0dtta1 million for fiscal year 2006 compared to a gain on disposal of assets of dlra8dtta0 million for fiscal year 2005 |
| As a result of the higher professional fees and lower gains on disposals of assets, our operating income and operating margin for fiscal year 2006 decreased to dlra73dtta8 million and 9dtta6prca, respectively, compared to dlra77dtta6 million and 11dtta5prca, respectively, for fiscal year 2005 |
| This increase primarily resulted from the decrease in the overall effective tax rate from 29dtta7prca to 22dtta3prca primarily due to the reversal of reserves for tax contingencies in fiscal year 2006 and foreign exchange gains of dlra5dtta4 million in fiscal year 2006 compared to foreign exchange losses of dlra1dtta3 million in fiscal year 2005 |
| 30 _________________________________________________________________ [86]Table of Contents Fiscal Year 2005 Compared to Fiscal Year 2004 Our gross revenue increased to dlra673dtta6 million, an increase of 9dtta2prca, for fiscal year 2005 from dlra617dtta0 million for fiscal year 2004 |
| The increase in gross revenue for our Helicopter Services segment was primarily due to higher third-party revenue from rate increases in our North America business unit and a favorable change in the mix of aircraft in our other Helicopter Services business units as compared to fiscal year 2004 |
| Gross revenue from our Production Management Services segment increased due to additional activity from a major customer |
| The increase was primarily a result of higher labor and maintenance costs in fiscal year 2005 and a dlra21dtta7 million curtailment gain reflected in operating expense for fiscal year 2004 |
| However, excluding the curtailment gain of dlra21dtta7 million in fiscal year 2004, our operating income and operating margin for fiscal year 2005 increased compared to fiscal year 2004 primarily as a result of higher revenue |
| Excluding the curtailment gain discussed above, our net income for fiscal year 2005 increased by dlra17dtta5 million compared to fiscal year 2004, primarily as a result of higher revenue and a decrease in other expense |
| Other expenses decreased due to lower foreign exchange losses in fiscal year 2005 as compared to fiscal year 2004 and the dlra6dtta2 million loss on extinguishment of debt charged to expense during fiscal year 2004 |
| Internal Review In February 2005, we voluntarily advised the staff of the SEC that the Audit Committee of our Board of Directors had engaged special outside counsel to undertake a review of certain payments made by two of our affiliated entities in a foreign country |
| As a result of the findings of the Internal Review, our fiscal year 2005 Annual Report reflected our restated financial statements |
| For further information on the restatements, see our fiscal year 2005 Annual Report |
| For additional discussion of the SEC investigation, the Internal Review, and |