##### Table of Contents



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: September 30, 2008
 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: 0-9827
 PHI, Inc.
  Louisiana
    
    72-0395707(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)2001 SE Evangeline ThruwayLafayette, Louisiana
    
    70508(Address of principal executive offices)
    
    (Zip Code)
 (337) 235-2452
 þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
   Class
    
    Outstanding at November 3, 2008Voting Common Stock
    
    2,852,616 sharesNon-Voting Common Stock
    
    12,448,992 shares




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##### 



PHI, INC.
 Index  Form 10-Q
 Part I  Financial InformationItem 1. Financial Statements  UnauditedCondensed Consolidated Balance Sheets  September 30, 2008
and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations  Quarter
and Nine Months Ended September 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows  Nine
Months Ended September 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30Part II  Other InformationItem 1. Legal Proceedings
    
    
    31Item 1.A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31Signatures
    
    
    32EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 PHI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Thousands of dollars)
 (Unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    846
    
    
    $
    1,425Short-term investments
    
    
    35,942
    
    
    
    62,970Accounts receivable  net of allowance:Trade
    
    
    115,963
    
    
    
    95,111Other
    
    
    4,069
    
    
    
    2,973Inventories of spare parts and supplies  net of allowance
    
    
    59,318
    
    
    
    55,831Other current assets
    
    
    10,630
    
    
    
    11,194Refundable income taxes
    
    
    757
    
    
    
    525Total current assets
    
    
    227,525
    
    
    
    230,029Other
    
    
    31,675
    
    
    
    27,148Property and equipment, net
    
    
    520,778
    
    
    
    484,119Total assets
    
    $
    779,978
    
    
    $
    741,296LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    22,719
    
    
    $
    28,454Accrued liabilities
    
    
    35,966
    
    
    
    24,942Total current liabilities
    
    
    58,685
    
    
    
    53,396Long-term debt
    
    
    200,000
    
    
    
    200,000Deferred income taxes
    
    
    64,746
    
    
    
    51,644Other long-term liabilities
    
    
    6,907
    
    
    
    7,587Commitments and contingencies (Note 3)Shareholders Equity:Voting common stock
    
    
    285
    
    
    
    285Non-voting common stock
    
    
    1,242
    
    
    
    1,242Additional paid-in capital
    
    
    291,265
    
    
    
    291,037Accumulated other comprehensive income
    
    
    86
    
    
    
    61Retained earnings
    
    
    156,762
    
    
    
    136,044Total shareholders equity
    
    
    449,640
    
    
    
    428,669Total liabilities and shareholders equity
    
    $
    779,978
    
    
    $
    741,296
  3




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PHI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (Unaudited)
 Quarter Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating revenues
    
    $
    135,460
    
    
    $
    118,401
    
    
    $
    382,716
    
    
    $
    333,129Gain on disposition of assets
    
    
    249
    
    
    
    6,988
    
    
    
    4,453
    
    
    
    15,596Other
    
    
    29
    
    
    
    1,119
    
    
    
    532
    
    
    
    4,263135,738
    
    
    
    126,508
    
    
    
    387,701
    
    
    
    352,988Expenses:Direct expenses
    
    
    110,370
    
    
    
    101,427
    
    
    
    318,353
    
    
    
    291,779Selling, general and
administrative expenses
    
    
    8,368
    
    
    
    7,374
    
    
    
    23,291
    
    
    
    22,306Interest expense
    
    
    3,840
    
    
    
    3,895
    
    
    
    11,528
    
    
    
    12,262122,578
    
    
    
    112,696
    
    
    
    353,172
    
    
    
    326,347Earnings before income taxes
    
    
    13,160
    
    
    
    13,812
    
    
    
    34,529
    
    
    
    26,641Income taxes
    
    
    5,263
    
    
    
    5,183
    
    
    
    13,811
    
    
    
    10,180Net earnings
    
    $
    7,897
    
    
    $
    8,629
    
    
    $
    20,718
    
    
    $
    16,461Weighted average shares
outstanding:Basic
    
    
    15,277
    
    
    
    15,288
    
    
    
    15,277
    
    
    
    15,288Diluted
    
    
    15,282
    
    
    
    15,306
    
    
    
    15,281
    
    
    
    15,307Net earnings per shareBasic
    
    $
    0.52
    
    
    $
    0.56
    
    
    $
    1.36
    
    
    $
    1.08Diluted
    
    $
    0.52
    
    
    $
    0.56
    
    
    $
    1.36
    
    
    $
    1.08
  4




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PHI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Thousands of dollars)
 (Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Operating activities:Net earnings
    
    $
    20,718
    
    
    $
    16,461Adjustments to reconcile net earnings to net cash
provided
by operating activities:Depreciation
    
    
    19,941
    
    
    
    23,201Deferred income taxes
    
    
    13,102
    
    
    
    9,193Gain on asset dispositions
    
    
    (4,453
    )
    
    
    (15,596
    )Other
    
    
    689
    
    
    
    665Changes in operating assets and liabilities
    
    
    (19,582
    )
    
    
    (17,457
    )Net cash provided by operating activities
    
    
    30,415
    
    
    
    16,467Investing activities:Purchase of property and equipment
    
    
    (55,737
    )
    
    
    (97,488
    )Proceeds from asset dispositions
    
    
    9,033
    
    
    
    27,488Purchase of short-term investments
    
    
    (27,722
    )
    
    
    (104,337
    )Proceeds from sale of short-term investments
    
    
    54,750
    
    
    
    170,895Deposits on aircraft
    
    
    (11,546
    )
    
    
    (9,448
    )Net cash used in investing activities
    
    
    (31,222
    )
    
    
    (12,890
    )Financing activities:Proceeds from line of credit
    
    
    3,800
    
    
    
    36,450Payments on line of credit
    
    
    (3,800
    )
    
    
    (40,200
    )Proceeds from exercise of stock options
    
    
    228
    
    
    
    Net cash provided by (used in) financing activities
    
    
    228
    
    
    
    (3,750
    )Decrease in cash and cash equivalents
    
    
    (579
    )
    
    
    (173
    )Cash and cash equivalents, beginning of period
    
    
    1,425
    
    
    
    820Cash and cash equivalents, end of period
    
    $
    846
    
    
    $
    647Supplemental Disclosures Cash Flow InformationInterest paid
    
    $
    7,239
    
    
    $
    8,263Income taxes paid
    
    $
    234
    
    
    $
    21Accrued payables related to purchase of property and
equipment
    
    $
    791
    
    
    $
    502
  5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. General
   2. Segment Information
    Oil and Gas Segment.
  6




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Air Medical Segment.
   AccountsRevenue
    
    ReceivableQuarter Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007
    
    2008
    
    2007Gross billings
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Provision for contractual
discounts
    
    
    46
    %
    
    
    45
    %
    
    
    47
    %
    
    
    45
    %
    
    
    35
    %
    
    
    34
    %Provision for uncompensated care
    
    
    12
    %
    
    
    12
    %
    
    
    11
    %
    
    
    12
    %
    
    
    18
    %
    
    
    20
    %
  Quarter Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Medicaid
    
    
    11
    %
    
    
    10
    %
    
    
    11
    %
    
    
    9
    %Medicare
    
    
    17
    %
    
    
    15
    %
    
    
    17
    %
    
    
    15
    %Insurance
    
    
    67
    %
    
    
    72
    %
    
    
    67
    %
    
    
    74
    %Self Pay
    
    
    5
    %
    
    
    3
    %
    
    
    5
    %
    
    
    2
    %
  Technical Services Segment.
 7




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Quarter Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Thousands of dollars)
    
    
    (Thousands of dollars)Segment operating revenuesOil and Gas
    
    $
    86,689
    
    
    $
    76,853
    
    
    $
    243,352
    
    
    $
    213,843Air Medical
    
    
    47,534
    
    
    
    39,839
    
    
    
    133,105
    
    
    
    113,036Technical Services
    
    
    1,237
    
    
    
    1,709
    
    
    
    6,259
    
    
    
    6,250Total operating revenues
    
    
    135,460
    
    
    
    118,401
    
    
    
    382,716
    
    
    
    333,129Segment direct expenses (1)Oil and Gas
    
    
    68,074
    
    
    
    65,805
    
    
    
    192,157
    
    
    
    185,000Air Medical
    
    
    41,125
    
    
    
    34,579
    
    
    
    121,494
    
    
    
    102,220Technical Services
    
    
    1,171
    
    
    
    1,043
    
    
    
    4,702
    
    
    
    4,559Total direct expenses
    
    
    110,370
    
    
    
    101,427
    
    
    
    318,353
    
    
    
    291,779Segment selling, general and administrative expensesOil and Gas
    
    
    321
    
    
    
    406
    
    
    
    976
    
    
    
    1,196Air Medical
    
    
    2,045
    
    
    
    1,882
    
    
    
    6,237
    
    
    
    5,721Technical Services
    
    
    15
    
    
    
    12
    
    
    
    49
    
    
    
    37Total selling, general and administrative expenses
    
    
    2,381
    
    
    
    2,300
    
    
    
    7,262
    
    
    
    6,954Total direct and selling, general and administrative expenses
    
    
    112,751
    
    
    
    103,727
    
    
    
    325,615
    
    
    
    298,733Net segment profitOil and Gas
    
    
    18,294
    
    
    
    10,642
    
    
    
    50,219
    
    
    
    27,647Air Medical
    
    
    4,364
    
    
    
    3,378
    
    
    
    5,374
    
    
    
    5,095Technical Services
    
    
    51
    
    
    
    654
    
    
    
    1,508
    
    
    
    1,654Total
    
    
    22,709
    
    
    
    14,674
    
    
    
    57,101
    
    
    
    34,396Other, net (2)
    
    
    278
    
    
    
    8,107
    
    
    
    4,985
    
    
    
    19,859Unallocated selling, general and administrative costs
    
    
    (5,987
    )
    
    
    (5,074
    )
    
    
    (16,029
    )
    
    
    (15,352
    )Interest expense
    
    
    (3,840
    )
    
    
    (3,895
    )
    
    
    (11,528
    )
    
    
    (12,262
    )Earnings before income taxes
    
    $
    13,160
    
    
    $
    13,812
    
    
    $
    34,529
    
    
    $
    26,641
 
 (1)
    
    Included in direct expense and unallocated selling, general, and administrative costs are the
depreciation expense amounts below: Quarter Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Oil and Gas
    
    $
    3,915
    
    
    $
    4,359
    
    
    $
    11,394
    
    
    $
    13,063Air Medical
    
    
    2,054
    
    
    
    1,946
    
    
    
    6,097
    
    
    
    6,568Technical Services
    
    
    16
    
    
    
    104
    
    
    
    135
    
    
    
    489Total
    
    $
    5,985
    
    
    $
    6,409
    
    
    $
    17,626
    
    
    $
    20,120Unallocated SG&A
    
    $
    770
    
    
    $
    1,011
    
    
    $
    2,315
    
    
    $
    3,081
 
 (2)
    
    Including gains on disposition of property and equipment, and other income. 3. Commitments and Contingencies
 Environmental Matters 
 8




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Legal Matters
  Long-term Debt
   Operating Leases
 9




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Purchase Commitments
 4. Property and Equipment
   5. Valuation Accounts
   6. Employees
 Union Related Matters 
 10




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Employee Incentive Compensation 
  7. Recent Accounting Pronouncements
       September 30, 2008Quoted market
    
    Significant Otherprices in active
    
    Observable InputsTotal
    
    markets (Level 1)
    
    (Level 2)(Thousands of dollars)Short-term investments
    
    $
    35,942
    
    
    
    
    
    
    $
    35,942Investments in other assets
    
    
    3,576
    
    
    
    
    
    
    
    3,576
 11




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12




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8. Shareholders Equity
   9. Comprehensive Income
  Quarter Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Thousands of dollars)
    
    
    (Thousands of dollars)Net earnings
    
    $
    7,897
    
    
    $
    8,629
    
    
    $
    20,718
    
    
    $
    16,461SFAS No. 158 adjustment
    
    
    22
    
    
    
    14
    
    
    
    25
    
    
    
    (12
    )Comprehensive income
    
    $
    7,919
    
    
    $
    8,643
    
    
    $
    20,743
    
    
    $
    16,449
 10. Condensed Consolidating Financial Information
   13




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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
 September 30, 2008ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries (1)
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    212
    
    
    $
    634
    
    
    $
    
    
    
    $
    846Short-term investments
    
    
    35,942
    
    
    
    
    
    
    
    
    
    
    
    35,942Accounts receivable  net
    
    
    107,904
    
    
    
    12,128
    
    
    
    
    
    
    
    120,032Inventories of spare parts and supplies
    
    
    59,318
    
    
    
    
    
    
    
    
    
    
    
    59,318Other current assets
    
    
    10,616
    
    
    
    14
    
    
    
    
    
    
    
    10,630Refundable income taxes
    
    
    757
    
    
    
    
    
    
    
    
    
    
    
    757Total current assets
    
    
    214,749
    
    
    
    12,776
    
    
    
    
    
    
    
    227,525Investment in subsidiaries and other
    
    
    69,877
    
    
    
    
    
    
    
    (69,877
    )
    
    
    Intercompany receivable
    
    
    
    
    
    
    65,338
    
    
    
    (65,338
    )
    
    
    Other assets
    
    
    31,360
    
    
    
    315
    
    
    
    
    
    
    
    31,675Property and equipment, net
    
    
    504,158
    
    
    
    16,620
    
    
    
    
    
    
    
    520,778Total assets
    
    $
    820,144
    
    
    $
    95,049
    
    
    $
    (135,215
    )
    
    $
    779,978LIABILITIES AND
SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    22,561
    
    
    $
    158
    
    
    $
    
    
    
    $
    22,719Accrued liabilities
    
    
    30,332
    
    
    
    5,634
    
    
    
    
    
    
    
    35,966Intercompany payable
    
    
    65,338
    
    
    
    
    
    
    
    (65,338
    )
    
    
    Total current liabilities
    
    
    118,231
    
    
    
    5,792
    
    
    
    (65,338
    )
    
    
    58,685Long-term debt
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000Deferred income taxes and other long-term
liabilities
    
    
    52,273
    
    
    
    19,380
    
    
    
    
    
    
    
    71,653Shareholders Equity:Paid-in capital
    
    
    292,792
    
    
    
    4,402
    
    
    
    (4,402
    )
    
    
    292,792Accumulated other comprehensive
income
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    86Retained earnings
    
    
    156,762
    
    
    
    65,475
    
    
    
    (65,475
    )
    
    
    156,762Total shareholders equity
    
    
    449,640
    
    
    
    69,877
    
    
    
    (69,877
    )
    
    
    449,640Total liabilities and
shareholders equity
    
    $
    820,144
    
    
    $
    95,049
    
    
    $
    (135,215
    )
    
    $
    779,978
 
 1)
    
    Foreign subsidiaries represent minor subsidiaries and are included in the guarantors
subsidiaries amounts. 14




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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
 December 31, 2007ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries (1)
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,004
    
    
    $
    421
    
    
    $
    
    
    
    $
    1,425Short-term investments
    
    
    62,970
    
    
    
    
    
    
    
    
    
    
    
    62,970Accounts receivable  net of allowance
    
    
    84,318
    
    
    
    13,766
    
    
    
    
    
    
    
    98,084Inventories of spare parts and supplies
    
    
    55,831
    
    
    
    
    
    
    
    
    
    
    
    55,831Other current assets
    
    
    11,184
    
    
    
    10
    
    
    
    
    
    
    
    11,194Refundable income taxes
    
    
    525
    
    
    
    
    
    
    
    
    
    
    
    525Total current assets
    
    
    215,832
    
    
    
    14,197
    
    
    
    
    
    
    
    230,029Investment in subsidiaries and others
    
    
    59,384
    
    
    
    
    
    
    
    (59,384
    )
    
    
    Intercompany receivable
    
    
    
    
    
    
    50,729
    
    
    
    (50,729
    )
    
    
    Other assets
    
    
    26,878
    
    
    
    270
    
    
    
    
    
    
    
    27,148Property and equipment, net
    
    
    468,070
    
    
    
    16,049
    
    
    
    
    
    
    
    484,119Total assets
    
    $
    770,164
    
    
    $
    81,245
    
    
    $
    (110,113
    )
    
    $
    741,296LIABILITIES AND
SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    24,696
    
    
    $
    3,758
    
    
    $
    
    
    
    $
    28,454Accrued liabilities
    
    
    24,942
    
    
    
    
    
    
    
    
    
    
    
    24,942Intercompany payable
    
    
    50,729
    
    
    
    
    
    
    
    (50,729
    )
    
    
    Total current liabilities
    
    
    100,367
    
    
    
    3,758
    
    
    
    (50,729
    )
    
    
    53,396Long-term debt
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000Deferred income taxes and other long-term
liabilities
    
    
    41,128
    
    
    
    18,103
    
    
    
    
    
    
    
    59,231Shareholders Equity:Paid-in capital
    
    
    292,564
    
    
    
    4,402
    
    
    
    (4,402
    )
    
    
    292,564Accumulated other comprehensive
income
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    61Retained earnings
    
    
    136,044
    
    
    
    54,982
    
    
    
    (54,982
    )
    
    
    136,044Total shareholders equity
    
    
    428,669
    
    
    
    59,384
    
    
    
    (59,384
    )
    
    
    428,669Total liabilities and
shareholders equity
    
    $
    770,164
    
    
    $
    81,245
    
    
    $
    (110,113
    )
    
    $
    741,296
 
 1)
    
    Foreign subsidiaries represent minor subsidiaries and are included in the guarantors
subsidiaries amounts. 15




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
 For the quarter ended September 30, 2008ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
(1)
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    117,647
    
    
    $
    17,813
    
    
    $
    
    
    
    $
    135,460Management fees
    
    
    712
    
    
    
    
    
    
    
    (712
    )
    
    
    Gain on disposition of assets, net
    
    
    249
    
    
    
    
    
    
    
    
    
    
    
    249Other
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    29118,637
    
    
    
    17,813
    
    
    
    (712
    )
    
    
    135,738Expenses:Direct expenses
    
    
    97,117
    
    
    
    13,253
    
    
    
    
    
    
    
    110,370Management fees
    
    
    
    
    
    
    712
    
    
    
    (712
    )
    
    
    Selling, general, and administrative
expenses
    
    
    7,421
    
    
    
    947
    
    
    
    
    
    
    
    8,368Equity in net income of consolidated
subsidiaries
    
    
    (2,781
    )
    
    
    
    
    
    
    2,781
    
    
    
    Interest expense
    
    
    3,840
    
    
    
    
    
    
    
    
    
    
    
    3,840105,597
    
    
    
    14,912
    
    
    
    2,069
    
    
    
    122,578Earnings before income taxes
    
    
    13,040
    
    
    
    2,901
    
    
    
    (2,781
    )
    
    
    13,160Income taxes
    
    
    5,143
    
    
    
    120
    
    
    
    
    
    
    
    5,263Net earnings
    
    $
    7,897
    
    
    $
    2,781
    
    
    $
    (2,781
    )
    
    $
    7,897
 For the quarter ended September 30, 2007ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries (1)
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    100,311
    
    
    $
    18,090
    
    
    $
    
    
    
    $
    118,401Management fees
    
    
    723
    
    
    
    
    
    
    
    (723
    )
    
    
    Gain on dispositions of assets, net
    
    
    6,988
    
    
    
    
    
    
    
    
    
    
    
    6,988Other
    
    
    1,119
    
    
    
    
    
    
    
    
    
    
    
    1,119109,141
    
    
    
    18,090
    
    
    
    (723
    )
    
    
    126,508Expenses:Direct expenses
    
    
    89,533
    
    
    
    11,894
    
    
    
    
    
    
    
    101,427Management fees
    
    
    
    
    
    
    723
    
    
    
    (723
    )
    
    
    Selling, general, and administrative
expenses
    
    
    6,607
    
    
    
    767
    
    
    
    
    
    
    
    7,374Equity in net income of consolidated
subsidiaries
    
    
    (3,835
    )
    
    
    
    
    
    
    3,835
    
    
    
    Interest expense
    
    
    3,895
    
    
    
    
    
    
    
    
    
    
    
    3,89596,200
    
    
    
    13,384
    
    
    
    3,112
    
    
    
    112,696Earnings before income taxes
    
    
    12,941
    
    
    
    4,706
    
    
    
    (3,835
    )
    
    
    13,812Income taxes
    
    
    4,312
    
    
    
    871
    
    
    
    
    
    
    
    5,183Net earnings
    
    $
    8,629
    
    
    $
    3,835
    
    
    $
    (3,835
    )
    
    $
    8,629
 
 1)
    
    Foreign subsidiaries represent minor subsidiaries and are included in the guarantors
subsidiaries amounts. 16




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)
 For the nine months ended September 30, 2008ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries (1)
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    325,863
    
    
    $
    56,853
    
    
    $
    
    
    
    $
    382,716Management fees
    
    
    2,274
    
    
    
    
    
    
    
    (2,274
    )
    
    
    Gain on disposition of assets, net
    
    
    4,453
    
    
    
    
    
    
    
    
    
    
    
    4,453Other
    
    
    532
    
    
    
    
    
    
    
    
    
    
    
    532333,122
    
    
    
    56,853
    
    
    
    (2,274
    )
    
    
    387,701Expenses:Direct expenses
    
    
    278,323
    
    
    
    40,030
    
    
    
    
    
    
    
    318,353Management fees
    
    
    
    
    
    
    2,274
    
    
    
    (2,274
    )
    
    
    Selling, general, and administrative
expenses
    
    
    20,517
    
    
    
    2,774
    
    
    
    
    
    
    
    23,291Equity in net income of consolidated
subsidiaries
    
    
    (10,493
    )
    
    
    
    
    
    
    10,493
    
    
    
    Interest expense
    
    
    11,528
    
    
    
    
    
    
    
    
    
    
    
    11,528299,875
    
    
    
    45,078
    
    
    
    8,219
    
    
    
    353,172Earnings before income taxes
    
    
    33,247
    
    
    
    11,775
    
    
    
    (10,493
    )
    
    
    34,529Income taxes
    
    
    12,529
    
    
    
    1,282
    
    
    
    
    
    
    
    13,811Net earnings
    
    $
    20,718
    
    
    $
    10,493
    
    
    $
    (10,493
    )
    
    $
    20,718
 For the nine months ended September 30, 2007ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries (1)
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    282,892
    
    
    $
    50,237
    
    
    $
    
    
    
    $
    333,129Management fees
    
    
    2,009
    
    
    
    
    
    
    
    (2,009
    )
    
    
    Gain on dispositions of assets, net
    
    
    15,596
    
    
    
    
    
    
    
    
    
    
    
    15,596Other
    
    
    4,255
    
    
    
    8
    
    
    
    
    
    
    
    4,263304,752
    
    
    
    50,245
    
    
    
    (2,009
    )
    
    
    352,988Expenses:Direct expenses
    
    
    257,298
    
    
    
    34,481
    
    
    
    
    
    
    
    291,779Management fees
    
    
    
    
    
    
    2,009
    
    
    
    (2,009
    )
    
    
    Selling, general, and administrative
expenses
    
    
    20,060
    
    
    
    2,246
    
    
    
    
    
    
    
    22,306Equity in net income of consolidated
subsidiaries
    
    
    (9,378
    )
    
    
    
    
    
    
    9,378
    
    
    
    Interest expense
    
    
    12,262
    
    
    
    
    
    
    
    
    
    
    
    12,262280,242
    
    
    
    38,736
    
    
    
    7,369
    
    
    
    326,347Earnings before income taxes
    
    
    24,510
    
    
    
    11,509
    
    
    
    (9,378
    )
    
    
    26,641Income taxes
    
    
    8,049
    
    
    
    2,131
    
    
    
    
    
    
    
    10,180Net earnings
    
    $
    16,461
    
    
    $
    9,378
    
    
    $
    (9,378
    )
    
    $
    16,461
 
 1)
    
    Foreign subsidiaries represent minor subsidiaries and are included in the guarantors
subsidiaries amounts. 17




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 For the nine months ended September 30, 2008ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries (1)
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    30,150
    
    
    $
    265
    
    
    $
    
    
    
    $
    30,415Investing activities:Purchase of property and equipment
    
    
    (55,685
    )
    
    
    (52
    )
    
    
    
    
    
    
    (55,737
    )Proceeds from asset dispositions
    
    
    9,033
    
    
    
    
    
    
    
    
    
    
    
    9,033Proceeds from sale of short-term
investments, net
    
    
    27,028
    
    
    
    
    
    
    
    
    
    
    
    27,028Deposits on aircraft
    
    
    (11,546
    )
    
    
    
    
    
    
    
    
    
    
    (11,546
    )Net cash used in investing activities
    
    
    (31,170
    )
    
    
    (52
    )
    
    
    
    
    
    
    (31,222
    )Financing activities:Proceeds from exercise of stock options
    
    
    228
    
    
    
    
    
    
    
    
    
    
    
    228Net cash provided by financing activities
    
    
    228
    
    
    
    
    
    
    
    
    
    
    
    228(Decrease) increase in cash and cash
equivalents
    
    
    (792
    )
    
    
    213
    
    
    
    
    
    
    
    (579
    )Cash and cash equivalents, beginning of
period
    
    
    1,004
    
    
    
    421
    
    
    
    
    
    
    
    1,425Cash and cash equivalents, end of period
    
    $
    212
    
    
    $
    634
    
    
    $
    
    
    
    $
    846
 For the nine months ended September 30, 2007ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries (1)
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    16,469
    
    
    $
    (2
    )
    
    $
    
    
    
    $
    16,467Investing activities:Purchase of property and equipment
    
    
    (97,485
    )
    
    
    (3
    )
    
    
    
    
    
    
    (97,488
    )Proceeds from asset dispositions
    
    
    27,488
    
    
    
    
    
    
    
    
    
    
    
    27,488Sale of short-term investments
    
    
    66,558
    
    
    
    
    
    
    
    
    
    
    
    66,558Deposits on aircraft
    
    
    (9,448
    )
    
    
    
    
    
    
    
    
    
    
    (9,448
    )Net cash used in investing activities
    
    
    (12,887
    )
    
    
    (3
    )
    
    
    
    
    
    
    (12,890
    )Financing activities:Payments on line of credit, net
    
    
    (3,750
    )
    
    
    
    
    
    
    
    
    
    
    (3,750
    )Net cash used in financing activities
    
    
    (3,750
    )
    
    
    
    
    
    
    
    
    
    
    (3,750
    )Decrease in cash and cash equivalents
    
    
    (168
    )
    
    
    (5
    )
    
    
    
    
    
    
    (173
    )Cash and cash equivalents, beginning of
period
    
    
    385
    
    
    
    435
    
    
    
    
    
    
    
    820Cash and cash equivalents, end of period
    
    $
    217
    
    
    $
    430
    
    
    $
    
    
    
    $
    647
 
 1)
    
    Foreign subsidiaries represent minor subsidiaries and are included in the guarantors
subsidiaries amounts. 18




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##### Table of Contents



Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking Statements
  Overview
   19




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20




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##### Table of Contents



Operating Statistics
  Quarter Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Flight hours:Oil and Gas
    
    
    29,623
    
    
    
    27,893
    
    
    
    84,202
    
    
    
    82,583Air Medical (1)
    
    
    9,860
    
    
    
    8,620
    
    
    
    28,355
    
    
    
    23,636Technical Services
    
    
    
    
    
    
    
    
    
    
    703
    
    
    
    408Total
    
    
    39,483
    
    
    
    36,513
    
    
    
    113,260
    
    
    
    106,627Air Medical Transports(2)
    
    
    6,046
    
    
    
    5,891
    
    
    
    17,468
    
    
    
    16,463
 September 30,2008
    
    2007Aircraft operated at period end:Oil and Gas
    
    
    152
    
    
    
    161Air Medical
    
    
    88
    
    
    
    72Technical Services
    
    
    4
    
    
    
    4Total (3)
    
    
    244
    
    
    
    237
 
 (1)
    
    Flight hours include 2,044 flight hours associated with hospital-based contracts, compared to
1,310 flight hours in the prior year quarter.(2)
    
    Represents individual patient transports for the period.(3)
    
    Includes 16 aircraft as of September 30, 2008 and 12 aircraft as of September 30, 2007 that
are customer owned. 
 21




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##### Table of Contents



Results of Operations
 Quarter Ended September 30, 2008 compared with Quarter Ended September 30, 2007
 Combined Operations
 Revenues
  Other Income and Gains
  Direct Expenses
 Selling, General, and Administrative Expenses
 Interest Expense
 Income Taxes
 22




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##### Table of Contents



Earnings
 Segment Discussion
 Oil and Gas
      23




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##### Table of Contents



Air Medical
      Technical Services
 24




---



##### Table of Contents



Nine Months Ended September 30, 2008 compared with Nine Months Ended September 30, 2007
 Combined Operations
 Revenues
  Other Income and Gains
  Direct Expenses
  25




---



##### Table of Contents



Selling, General, and Administrative Expenses
 Interest Expense
 Income Taxes
 Earnings
 Segment Discussion
 Oil and Gas
   26




---



##### Table of Contents



Air Medical
     27




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##### Table of Contents



Technical Services
 Liquidity and Capital Resources
 General
  Cash Flow
   28




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##### Table of Contents



Credit Facility
   Contractual Obligations
   Payment Due by YearBeyondTotal
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2012(Thousands of dollars)New aircraft purchase
commitments (1)
    
    $
    204,303
    
    
    $
    45,431
    
    
    $
    158,872
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Existing aircraft lease
obligations
    
    
    171,046
    
    
    
    4,966
    
    
    
    19,864
    
    
    
    20,466
    
    
    
    21,734
    
    
    
    22,401
    
    
    
    81,615Other lease
obligations
    
    
    20,443
    
    
    
    912
    
    
    
    3,027
    
    
    
    2,674
    
    
    
    2,213
    
    
    
    1,740
    
    
    
    9,877Long-term debt
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000$
    595,792
    
    
    $
    51,309
    
    
    $
    181,763
    
    
    $
    23,140
    
    
    $
    23,947
    
    
    $
    24,141
    
    
    $
    291,492
 
 (1)
    
    These commitments are for aircraft that we intend to fund from existing cash,
short-term investments, and operating leases. New Accounting Pronouncements
  29




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##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
   30




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1. A. RISK FACTORS
  The
global financial crisis and recent decreases in oil and gas prices may have an adverse impact on our
business and financial condition in ways that we currently cannot predict.
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
  3.1
    
    (i)   Composite Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to PHIs Report on Form 10-Q filed on August 7, 2008).(ii)   Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.1 to PHIs Report on Form 8-K filed December 18, 2007).4.1
    
    Amended and Restated Loan Agreement dated as of March 31, 2008 by and among
PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline
Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National
Bank
 31




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##### Table of Contents



(incorporated by reference to Exhibit 4.1 to PHIs Report on Form 10-Q filed on May
8, 2008).4.2
    
    Indenture dated April 12, 2006 among PHI, Inc., the Subsidiary Guarantors named
therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.2
to PHIs Report on Form 8-K filed on April 13, 2006).4.3
    
    First Supplemental Indenture dated April 12, 2006, among PHI, Inc., the
Subsidiary Guarantors named therein and The Bank of New York, as Trustee (incorporated
by reference to Exhibit 10.1 to PHIs Report on Form 8-K filed on April 13, 2006).10.1
    
    Terms of employment of Lance Bospflug, August 6, 2008.31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al
A. Gonsoulin, Chairman and Chief Executive Officer.31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by
Michael J. McCann, Chief Financial Officer.32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al
A. Gonsoulin, Chairman and Chief Executive Officer.32.2
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
Michael J. McCann, Chief Financial Officer.
 
 SIGNATURES
   November 10, 2008
    By:
    /s/ Al A. GonsoulinAl A. GonsoulinChairman and Chief Executive Officer November 10, 2008
    By:
    /s/ Michael J. McCannMichael J. McCannChief Financial Officer 32