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

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

PHI, Inc.

(Exact name of registrant as specified in its charter)

Louisiana		72-0395707
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
2001 SE Evangeline Thruway
Lafayette, Louisiana		70508
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (337) 235-2452

     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: o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No: þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at November 3, 2008
Voting Common Stock		2,852,616 shares
Non-Voting Common Stock		12,448,992 shares

 

 

PHI, INC.

Index — Form 10-Q

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

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PHI, INC. AND SUBSIDIARIES

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

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

PHI, INC. AND SUBSIDIARIES

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Operating revenues		$	135,460			$	118,401			$	382,716			$	333,129
Gain on disposition of assets			249				6,988				4,453				15,596
Other			29				1,119				532				4,263
			135,738				126,508				387,701				352,988
Expenses:
Direct expenses			110,370				101,427				318,353				291,779
Selling, general and administrative expenses			8,368				7,374				23,291				22,306
Interest expense			3,840				3,895				11,528				12,262
			122,578				112,696				353,172				326,347
Earnings before income taxes			13,160				13,812				34,529				26,641
Income taxes			5,263				5,183				13,811				10,180
Net earnings		$	7,897			$	8,629			$	20,718			$	16,461
Weighted average shares outstanding:
Basic			15,277				15,288				15,277				15,288
Diluted			15,282				15,306				15,281				15,307
Net earnings per share
Basic		$	0.52			$	0.56			$	1.36			$	1.08
Diluted		$	0.52			$	0.56			$	1.36			$	1.08

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

PHI, INC. AND SUBSIDIARIES

		Nine Months Ended
		September 30,
		2008				2007
Operating activities:
Net earnings		$	20,718			$	16,461
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			19,941				23,201
Deferred income taxes			13,102				9,193
Gain on asset dispositions			(4,453	)			(15,596	)
Other			689				665
Changes in operating assets and liabilities			(19,582	)			(17,457	)
Net cash provided by operating activities			30,415				16,467
Investing activities:
Purchase of property and equipment			(55,737	)			(97,488	)
Proceeds from asset dispositions			9,033				27,488
Purchase of short-term investments			(27,722	)			(104,337	)
Proceeds from sale of short-term investments			54,750				170,895
Deposits 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				36,450
Payments 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				820
Cash and cash equivalents, end of period		$	846			$	647
Supplemental Disclosures Cash Flow Information
Interest paid		$	7,239			$	8,263
Income taxes paid		$	234			$	21
Accrued payables related to purchase of property and equipment		$	791			$	502

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General

The accompanying unaudited condensed consolidated financial statements include the accounts of PHI, Inc. and subsidiaries (“PHI” or the “Company”). In the opinion of management, these financial statements reflect all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly the financial results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and the accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company’s financial results, particularly as they relate to the Company’s Oil and Gas operations, are influenced by seasonal fluctuations as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Therefore, the results of operations for interim periods are not necessarily indicative of the operating results that may be expected for a full fiscal year.

2. Segment Information

PHI is primarily a provider of helicopter services, including helicopter maintenance and repair services. We used a combination of factors to identify reportable segments as required by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). The overriding determination of our segments is based on how the chief operating decision-maker of our Company evaluates our results of operations. The underlying factors include customer bases, types of service, operational management, physical locations, and underlying economic characteristics of the types of work we perform.

A segment’s operating income is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has a portion of selling, general and administrative expense that is charged directly to the segment and a portion that is allocated. Direct charges represent the vast majority of segment selling, general and administrative expenses. Allocated selling, general and administrative expense is based primarily on total segment costs as a percentage of total operating costs. Unallocated overhead consists primarily of corporate selling, general, and administrative expenses that we do not allocate to the reportable segments.

Air Medical operations are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in a disproportionate share of selling, general and administrative expenses compared to the Company’s other reportable segments.

Oil and Gas Segment. Our Oil and Gas segment provides helicopter services primarily for the major oil and gas production companies transporting personnel and/or equipment to offshore platforms in the Gulf of Mexico, Angola and the Democratic Republic of Congo. We currently operate 152 aircraft in this segment.

Operating revenue from the Oil and Gas segment is derived mainly from long-term contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable rate for flight time. Most of our long-term contracts permit early termination by the customer generally without penalty. Operating costs for the Oil and Gas operations are primarily aircraft operations costs, including costs for pilots and maintenance personnel. Approximately 64% of our total operating revenue was generated by our Oil and Gas operations for the nine months ended September 30, 2008 and 2007.

Air Medical Segment. Our Air Medical segment provides transport services as an independent provider of emergency medical services and, to a lesser extent, under contract with certain hospitals. We operate in 17 states with 88 aircraft that are specially outfitted to accommodate emergency patients, medical personnel and emergency medical equipment. For the nine months ended September 30, 2008 and 2007, approximately 35% and 34% of our total operating revenues were generated by our Air Medical operations, respectively.

As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per loaded mile, regardless of aircraft model. Revenues are recorded net of contractual allowances under agreements with the third party payors and estimated uncompensated care when the services are provided. Contractual allowances and uncompensated care are estimated based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, Insurance, and Self-Pay. Payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute an 18 month historical payment analysis of accounts paid in full, by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. The allowance for contractual discounts was $39.1 million and $31.9 million as of September 30, 2008 and December 31, 2007, respectively. The allowance for uncompensated care was $19.6 million and $19.1 million as of September 30, 2008 and December 31, 2007, respectively.

Provisions for contractual discounts and estimated uncompensated care are as follows:

																		Accounts
		Revenue																Receivable
		Quarter Ended								Nine Months Ended
		September 30,								September 30,								September 30,
		2008				2007				2008				2007				2008				2007
Gross 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	%

Amounts attributable to Medicaid, Medicare, Insurance and Self Pay as a percentage of net Air Medical revenues are as follows:

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Medicaid			11	%			10	%			11	%			9	%
Medicare			17	%			15	%			17	%			15	%
Insurance			67	%			72	%			67	%			74	%
Self Pay			5	%			3	%			5	%			2	%

We also have a limited number of contracts with hospitals under which we receive a fixed monthly rate for aircraft availability and an hourly rate for flight time. Those contracts generate approximately 12% of the segment’s revenues.

Technical Services Segment. The Technical Services segment provides helicopter repair and overhaul services for flight operations customers that own their aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above cost. This segment also conducts flight operations unrelated to the other segments, and we currently operate four aircraft for the National Science Foundation in Antarctica under this segment.

Approximately 2% of our total operating revenues for the nine months ended September 30, 2008 and 2007 were generated by our Technical Services operations.

Summarized financial information concerning our reportable operating segments for the quarter and nine months ended September 30, 2008 and 2007 is as follows:

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Thousands of dollars)								(Thousands of dollars)
Segment operating revenues
Oil and Gas		$	86,689			$	76,853			$	243,352			$	213,843
Air Medical			47,534				39,839				133,105				113,036
Technical Services			1,237				1,709				6,259				6,250
Total operating revenues			135,460				118,401				382,716				333,129
Segment direct expenses (1)
Oil and Gas			68,074				65,805				192,157				185,000
Air Medical			41,125				34,579				121,494				102,220
Technical Services			1,171				1,043				4,702				4,559
Total direct expenses			110,370				101,427				318,353				291,779
Segment selling, general and administrative expenses
Oil and Gas			321				406				976				1,196
Air Medical			2,045				1,882				6,237				5,721
Technical Services			15				12				49				37
Total selling, general and administrative expenses			2,381				2,300				7,262				6,954
Total direct and selling, general and administrative expenses			112,751				103,727				325,615				298,733
Net segment profit
Oil and Gas			18,294				10,642				50,219				27,647
Air Medical			4,364				3,378				5,374				5,095
Technical Services			51				654				1,508				1,654
Total			22,709				14,674				57,101				34,396
Other, net (2)			278				8,107				4,985				19,859
Unallocated 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

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Oil and Gas		$	3,915			$	4,359			$	11,394			$	13,063
Air Medical			2,054				1,946				6,097				6,568
Technical Services			16				104				135				489
Total		$	5,985			$	6,409			$	17,626			$	20,120
Unallocated SG&A		$	770			$	1,011			$	2,315			$	3,081

3. Commitments and Contingencies

Environmental Matters — We have recorded an aggregate estimated liability of $0.2 million as of September 30, 2008 and December 31, 2007 for environmental remediation costs that are probable and

estimable. We have conducted environmental surveys of our former Lafayette facility, which we vacated in 2001, and have determined that limited soil and groundwater contamination exists at the facility. We have installed groundwater monitoring wells at the facility and periodically monitor and report on the contamination. In May 2003, we submitted a Louisiana Risk Evaluation/Corrective Action Plan (“RECAP”) Standard Site Assessment Report to the Louisiana Department of Environmental Quality (“LDEQ”) fully delineating the extent and type of contamination. In April, 2006 the Site Assessment was updated to include recent analytical data. LDEQ is reviewing the assessment report. Once LDEQ completes its review and reports on whether all contamination has been fully defined, a risk evaluation in accordance with RECAP will be submitted and evaluated by LDEQ. At that point, LDEQ will establish what cleanup standards must be met at the site. When the process is complete, we will be in a position to develop an appropriate remediation plan and determine the resulting cost of remediation. Based upon the May 2003 Site Assessment Report, the April 2006 update and ongoing monitoring, we believe the ultimate remediation costs for the former Lafayette facility will not be material to our consolidated financial position, results of operations, or cash flows.

Legal Matters — We have been named as a defendant in various legal actions that have arisen in the ordinary course of business and have not been finally adjudicated. In the opinion of management, the amount of the ultimate liability with respect to these actions will not have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.

As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the Office and Professional Employees International Union (“OPEIU”), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006. A trial date on strike-related matters has been postponed from November 3, 2008 until June 29, 2009. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.

Long-term Debt — The $200 million 7.125% Senior Notes mature April 15, 2013, and interest is payable semi-annually on April 15 and October 15. The notes contain restrictive covenants, including limitations on indebtedness, liens, dividends, repurchases of capital stock and other payments affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales, and mergers and consolidations and sales of assets. At September 30, 2008, the market value of the notes was approximately $167.0 million, based on quoted market indicators. We were in compliance with the covenants applicable to these notes as of September 30, 2008. The recent global credit and financial crisis has caused sharp decreases in demand and market prices for high-yield notes such as ours.

We have a $50 million revolving credit facility with a commercial bank, which is scheduled to expire on September 1, 2010. As of September 30, 2008, we had no borrowings and $5.2 million in letters of credit outstanding under the facility. The facility includes covenants related to working capital, funded debt to net worth, and consolidated net worth. As of September 30, 2008, we were in compliance with these covenants.

The continued credit crisis and related turmoil in the global financial system may have an impact on our ability to obtain lease financing, or also may impact pricing for such operating leases.

Operating Leases — We lease certain aircraft, facilities, and equipment used in our operations. The related lease agreements, which include both non-cancelable and month-to-month terms, generally provide for fixed monthly rentals, and certain real estate leases also include renewal options. We generally pay all insurance, taxes, and maintenance expenses associated with these aircraft, and some leases contain fair value purchase options.

At September 30, 2008, we had approximately $191.5 million in aggregate commitments under operating leases of which approximately $5.9 million is payable through December 31, 2008, and a total of $23.0 million is payable over the twelve months ending September 30, 2009. Of the total lease commitments, $171.1 million represents commitments for aircraft, and $20.4 million represents facility lease commitments, primarily for our facilities in Lafayette, Louisiana.

Purchase Commitments — At September 30, 2008, we had an order for six additional transport category aircraft at an approximate cost of $127.4 million with delivery dates throughout 2008 and 2009. We also had orders for 12 medium and light aircraft. Three of these aircraft are planned for service in the Air Medical segment, with the remaining nine aircraft planned for service in the Oil and Gas Segment. The total cost of these aircraft is $76.9 million and delivery dates are scheduled throughout 2008 and 2009. Included in other assets at September 30, 2008 is approximately $19.3 million of security deposits on aircraft.

4. Property and Equipment

Effective July 1, 2007, we changed the estimated residual value of certain aircraft from 40% to 54%. We believe the revised amounts reflect our historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on our experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for the three months ended September 30, 2008 was a reduction in depreciation expense of $0.8 million ($0.5 million after tax or $0.03 per diluted share), and $2.3 million ($1.4 million after tax or $0.09 per diluted share) for the nine months ended September 30, 2008. The effect of this change for the three and nine months ended September 30, 2007 was a reduction in depreciation expense of $0.8 million ($0.5 million after tax or $0.03 per diluted share).

The Company incurred damages to certain property and equipment as a result of Hurricanes Ike and Gustav. Management is still in the process of assessing the damages; however, it is management’s belief that these damages will be covered by insurance.

5. Valuation Accounts

We have established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, current market conditions, and other information. The allowance for doubtful accounts was approximately $0.1 million at September 30, 2008 and December 31, 2007. Revenues related to emergency flights generated by the Company’s Air Medical segment are recorded net of contractual allowances under agreements with third party payors when the services are provided. See Note 2 for additional information.

We have also established valuation reserves related to obsolete and excess inventory. The inventory valuation reserves were $7.7 million and $7.5 million at September 30, 2008 and December 31, 2007, respectively.

6. Employees

Union Related Matters — As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the Office and Professional Employees International Union (“OPEIU”), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. The pilots commenced a strike in September 2006, and a return to work process commenced in January 2007 for those pilots who had not terminated, and this was completed in April 2007. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006. A trial date on strike-related matters has been postponed from November 3,

2008 until June 29, 2009. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.

Employee Incentive Compensation — In 2002, we implemented an incentive compensation plan for non-executive and non-represented employees. For calendar year 2007, the represented pilots were added to this plan as part of the final implementation proposals made by the Company at the end of the collective bargaining negotiations in August 2006. The plan allows us to pay up to 7% of earnings before tax upon achieving a specified earnings threshold. During 2004, we implemented an executive/senior management plan for certain corporate and business unit management employees. Pursuant to these plans, we have accrued an estimated incentive compensation expense of $0.8 million for the nine months ended September 30, 2008. The Company also has a Safety Incentive Bonus. We have accrued $0.4 million for the Safety Incentive Bonus for the nine months ended September 30, 2008.

The management incentive compensation plan was amended August 5, 2008, to include safety components, in addition to certain earnings targets as provided in the prior plan. For 2008, the amended plan provides a potential bonus of 33% of what the prior incentive compensation plan would provide, due to the inclusion of safety factors.

7. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations.” The objective of this statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Management does not anticipate that implementation of SFAS No. 141(R) will have a material impact on the Company’s consolidated financial statements.

The Company adopted SFAS No. 157, “Fair Value Measurements,” beginning in its 2008 fiscal year and there was no material impact to its consolidated financial statements. SFAS No. 157 applies to all assets and liabilities that are being measured and reported on a fair value basis. SFAS No. 157 requires new disclosure that establishes a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The following table summarizes the valuation of our short-term investments and financial instruments by the above SFAS No. 157 pricing levels as of the valuation dates listed:

		September 30, 2008
						Quoted market				Significant Other
						prices in active				Observable Inputs
		Total				markets (Level 1)				(Level 2)
		(Thousands of dollars)
Short-term investments		$	35,942				—			$	35,942
Investments in other assets			3,576				—				3,576

The Company holds it short-term investments in a money market fund consisting mainly of government backed securities, which is classified as a short-term investment. Investments included in other assets consist mainly of multiple mutual funds that are highly liquid and diversified.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to elect to measure at fair value eligible financial instruments that are not currently measured at fair value. This election, which may be applied on an instrument by instrument basis, is typically irrevocable once made. SFAS 159 is effective for us as of January 1, 2008; however, we did not elect to measure any additional financial instruments at fair value as a result of this statement. Therefore, the adoption of SFAS No. 159 did not have an effect on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51,” which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS No. 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, beginning on or after December 15, 2008 and interim periods within those fiscal years and will be applied retrospectively to all noncontrolling interests including any that arose before the effective date. Early adoption is prohibited. Management does not currently expect that implementation of SFAS No. 160 will have a material impact on the Company’s consolidated financial statements.

In March 2008 the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” which requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Management does not anticipate that implementation of SFAS No. 161 will have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with accounting principles generally accepted in the United States of America. Management does not anticipate that implementation of SFAS No. 162 will have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts.” SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. SFAS No. 163 requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period (including interim periods) beginning after issuance of this statement. Except for those disclosures, earlier application is not permitted. Management does not currently expect that implementation of SFAS No. 163 will have a material impact on the Company’s consolidated financial statements.

8. Shareholders’ Equity

We had an average of 15.3 million common shares outstanding for the quarters ended September 30, 2008 and September 30, 2007.

At an annual meeting of stockholders on May 6, 2008, the number of authorized shares of non-voting common stock was increased from 12.5 million shares to 25 million shares.

9. Comprehensive Income

The following table summarizes the components of total comprehensive income (net of taxes):

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Thousands of dollars)								(Thousands of dollars)
Net earnings		$	7,897			$	8,629			$	20,718			$	16,461
SFAS No. 158 adjustment			22				14				25				(12	)
Comprehensive income		$	7,919			$	8,643			$	20,743			$	16,449

10. Condensed Consolidating Financial Information

Our 7.125% Senior Notes are fully and unconditionally guaranteed on a joint and several, senior basis by all of our Guarantor Subsidiaries.

The following supplemental condensed financial information sets forth, on a consolidated basis, the balance sheet, statement of operations, and statement of cash flows information for PHI, Inc. (“Parent Company Only”) and the Guarantor Subsidiaries. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenues and expenses.

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)

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

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)

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

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)

		For the quarter ended September 30, 2008
		Parent
		Company				Guarantor
		Only				Subsidiaries (1)				Eliminations				Consolidated
Operating revenues		$	117,647			$	17,813			$	—			$	135,460
Management fees			712				—				(712	)			—
Gain on disposition of assets, net			249				—				—				249
Other			29				—				—				29
			118,637				17,813				(712	)			135,738
Expenses:
Direct expenses			97,117				13,253				—				110,370
Management fees			—				712				(712	)			—
Selling, general, and administrative expenses			7,421				947				—				8,368
Equity in net income of consolidated subsidiaries			(2,781	)			—				2,781				—
Interest expense			3,840				—				—				3,840
			105,597				14,912				2,069				122,578
Earnings before income taxes			13,040				2,901				(2,781	)			13,160
Income taxes			5,143				120				—				5,263
Net earnings		$	7,897			$	2,781			$	(2,781	)		$	7,897

		For the quarter ended September 30, 2007
		Parent
		Company				Guarantor
		Only				Subsidiaries (1)				Eliminations				Consolidated
Operating revenues		$	100,311			$	18,090			$	—			$	118,401
Management fees			723				—				(723	)			—
Gain on dispositions of assets, net			6,988				—				—				6,988
Other			1,119				—				—				1,119
			109,141				18,090				(723	)			126,508
Expenses:
Direct expenses			89,533				11,894				—				101,427
Management fees			—				723				(723	)			—
Selling, general, and administrative expenses			6,607				767				—				7,374
Equity in net income of consolidated subsidiaries			(3,835	)			—				3,835				—
Interest expense			3,895				—				—				3,895
			96,200				13,384				3,112				112,696
Earnings before income taxes			12,941				4,706				(3,835	)			13,812
Income taxes			4,312				871				—				5,183
Net earnings		$	8,629			$	3,835			$	(3,835	)		$	8,629

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)

		For the nine months ended September 30, 2008
		Parent
		Company				Guarantor
		Only				Subsidiaries (1)				Eliminations				Consolidated
Operating revenues		$	325,863			$	56,853			$	—			$	382,716
Management fees			2,274				—				(2,274	)			—
Gain on disposition of assets, net			4,453				—				—				4,453
Other			532				—				—				532
			333,122				56,853				(2,274	)			387,701
Expenses:
Direct expenses			278,323				40,030				—				318,353
Management fees			—				2,274				(2,274	)			—
Selling, general, and administrative expenses			20,517				2,774				—				23,291
Equity in net income of consolidated subsidiaries			(10,493	)			—				10,493				—
Interest expense			11,528				—				—				11,528
			299,875				45,078				8,219				353,172
Earnings before income taxes			33,247				11,775				(10,493	)			34,529
Income taxes			12,529				1,282				—				13,811
Net earnings		$	20,718			$	10,493			$	(10,493	)		$	20,718

		For the nine months ended September 30, 2007
		Parent
		Company				Guarantor
		Only				Subsidiaries (1)				Eliminations				Consolidated
Operating revenues		$	282,892			$	50,237			$	—			$	333,129
Management fees			2,009				—				(2,009	)			—
Gain on dispositions of assets, net			15,596				—				—				15,596
Other			4,255				8				—				4,263
			304,752				50,245				(2,009	)			352,988
Expenses:
Direct expenses			257,298				34,481				—				291,779
Management fees			—				2,009				(2,009	)			—
Selling, general, and administrative expenses			20,060				2,246				—				22,306
Equity in net income of consolidated subsidiaries			(9,378	)			—				9,378				—
Interest expense			12,262				—				—				12,262
			280,242				38,736				7,369				326,347
Earnings before income taxes			24,510				11,509				(9,378	)			26,641
Income taxes			8,049				2,131				—				10,180
Net earnings		$	16,461			$	9,378			$	(9,378	)		$	16,461

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)

		For the nine months ended September 30, 2008
		Parent
		Company				Guarantor
		Only				Subsidiaries (1)				Eliminations				Consolidated
Net cash provided by operating activities		$	30,150			$	265			$	—			$	30,415
Investing activities:
Purchase of property and equipment			(55,685	)			(52	)			—				(55,737	)
Proceeds from asset dispositions			9,033				—				—				9,033
Proceeds from sale of short-term investments, net			27,028				—				—				27,028
Deposits 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				—				—				228
Net 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				—				1,425
Cash and cash equivalents, end of period		$	212			$	634			$	—			$	846

		For the nine months ended September 30, 2007
		Parent
		Company				Guarantor
		Only				Subsidiaries (1)				Eliminations				Consolidated
Net cash provided by operating activities		$	16,469			$	(2	)		$	—			$	16,467
Investing activities:
Purchase of property and equipment			(97,485	)			(3	)			—				(97,488	)
Proceeds from asset dispositions			27,488				—				—				27,488
Sale of short-term investments			66,558				—				—				66,558
Deposits 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				—				820
Cash and cash equivalents, end of period		$	217			$	430			$	—			$	647