SEC Company Response from CHC HELICOPTER CORP (CIK 0000903124) — Dec 17, 2004
CHC HELICOPTER CORP (CIK 0000903124)
Date: Dec. 17, 2004 · CIK: 0000903124 · Accession: 0001279569-04-000544
AI Filing Summary & Sentiment
Letter
United States Securities and Exchange Commission V7B 1A3 T 604.276.7500 F 604.279.2474 www.chc.ca
Dear Mr. Webb:
Further to your correspondence dated November 9, 2004 please find enclosed our detailed response to the various issues raised. We understand that the purpose of your review is to assist us in our compliance obligations and to enhance the overall disclosure in our filings. We look forward to working with you to achieve these objectives.
Form 20-F
Item 3 - Key Information
Selected Financial Data, page 5
Issue
1.
Please review your presentation within Selected Financial Data to present EBITDA and all other non-GAAP measures in a position of least prominence. Specifically, your balance sheet data for both Canadian and US GAAP Selected Financial Data should be presented before any non-GAAP measures.
Response
1.
In future filings we will present all non-GAAP measures in a final section appropriately titled. This information will follow all other information in the Selected Financial Data table.
Property Plant and Equipment Facilities, page 33
Issue
2.
We note that you own several buildings on leased land, and that your old
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headquarters building was owned while the lease on the land expired in September 2004. Please tell us how you accounted for this disposition of the building as the lease has expired.
Response
2.
In anticipation of the expiry of the property lease and the relocation of our offices to a new facility in Vancouver, we ensured that the abandoned building was fully amortized at the time of relocation in August 2004.
Item 5 - Operating and Financial Review Prospects
Results of Operations
Non-GAAP Measures, page 43
Issue
3.
We note your disclosure on page 43 that you primarily use EBITDA as a measure of performance. We also noted your disclosure that certain investors, analysts, and others utilize these measures to assess your ability to service debt, and that you have also included a reconciliation to operating cash flow. Please note that you must present a reconciliation of the most comparable GAAP measure, in this case, net income. As such, please revise your disclosure to include only the most comparable measure. See FR-65 for guidance.
Response
3.
In future filings we will present a reconciliation of each non-GAAP measure to the most comparable GAAP measure.
Issue
4.
It is unclear why gain on disposal of assets, equity in earnings of associated companies, restructuring and debt settlement costs, and asset impairment charges are among the items added back to EBITDA to arrive at net income. Please note that, aside from interest, taxes, depreciation, and amortization, only non-recurring items (items that have not and are not expected to recur within two years, see FR-65) may be considered. Please supplementally explain why you believe these items are allowable or revise your definition of EBITDA, as appropriate.
Page 3
Response
4.
We previously did not consider the terms “Segment EBITDA” and “Consolidated Segment EBITDA” to be non-GAAP measures. “Segment EBITDA” is revenue less operating expenses allocated to each of our segments. “Consolidated Segment EBITDA” is the sum of “Segment EBITDA” from each of our segments and corresponds to a line item in our segmented information note. “Segment EBITDA” is used by the Company’s chief decision maker in making operating decisions and assessing performance of each segment.
We also now understand that the SEC FAQ published on June 13, 2003 clarifies that the presentation of a total or consolidated segment profit or loss measure in any context other than the note disclosure required by GAAP is considered a non-GAAP financial measure.
As a result, in future filings we will not use the term “Consolidated Segment EBITDA” but will continue to use “Segment EBITDA” when discussing segment results.
Gain on Disposal of Assets, page 63
Issue
5.
We note your disclosure on page 63 of a total loss of an S76 aircraft supporting operations in Azerbaijan, resulting in a $2.4 million gain. Please supplementally explain to us and revise your disclosure to indicate the facts and circumstances surrounding the event and the recognition of this gain. Include in your response a brief description of the aircraft, related property damage, book value of asset lost, insurance proceeds received, and any pending litigation or other matters related to this incident. If you have accrued but not received insurance proceeds, please tell us why you believe accrual is appropriate. To the extent that any portion of the $4.5 million total insurance proceeds relates to other matters, please include a similar discussion of those matters with your response and revised disclosure. Refer to SFAS 5 for guidance.
Response
5.
As noted, the recognized gain of $2.4 million relates to a total loss of an S76
Page 4
aircraft supporting operations in Azerbaijan. This aircraft is a medium sized twin turbine helicopter that was used in a training session and crashed as a result of pilot error. Due to the severity of the damage to the aircraft, it was not economical to repair and rebuild. There was damage to the airport runway, which was covered directly by our insurance providers, and there was no related personal injury to the crew on board. Insurance proceeds were received prior to the fiscal 2003 year-end and therefore the gain recorded was not contingent on proceeds to be received at a later date. No outstanding litigation related to this incident existed at April 30, 2003.
When this incident occurred the aircraft had a net book value of approximately $1.8 million with total insurance proceeds received of $4.5 million. A net gain on sale of $2.4 million was recorded after directly related costs of $0.3 million were applied against this gain.
In future filings we will expand our disclosure on issues of a similar nature.
Liquidity and Capital Resources
Operating Activities, page 72
Issue
6.
We noted from your disclosure that you still own a majority of your flying assets, and that you have, in the prior fiscal year, participated in the sale/leaseback of six Super Puma aircraft. We also note that your discussion of liquidity on page 73 addresses available borrowing capacity and excess cash, but does not discuss future sale/leaseback transactions as a potential source of liquidity. Please expand this disclosure to address your ability to involve existing owned assets in sale/leaseback transactions.
Response
6.
The prior fiscal year had an exceptionally high number of sale/leaseback transactions that is not expected to recur in the future. Generally, sale/leaseback arrangements are used to finance newly acquired aircraft and therefore we do not see this as a means of meeting future working capital, capital expenditure or debt obligation requirements. Therefore, this alternative source of financing has not been identified in previous filings.
Page 5
In future filings we will explain that we do not expect to use sale/leaseback transactions as a source of liquidity.
Investing Activities, page 77
Issue
7.
We noted your discussion of the $3.8 million reclassification from cash to other assets related to your reinsurance subsidiary. Please explain to us and expand your disclosure related to the description of your business to include the nature and scope of these operations.
Response
7.
The Company’s reinsurance subsidiary, which was acquired as part of the Helicopter Service Group in 1999, has not been very active and provides insurance cover for risks where coverage is not available in the market or where the premium is excessive. The subsidiary has primarily been involved in providing insurance for the Company’s pilots and death and disability risks for employees in Norway. The subsidiary cannot accept any insurance business directly as insured risks must be covered first by reputable third party insurers who may then reinsure with our subsidiary. Results of operations are insignificant with net earnings before tax for the reinsurance business in 2003 of approximately $3,000 and $10,000 in 2004.
As such, we do not believe that any additional disclosure is required.
Risk and Uncertainties, page 82
Issue
8.
It appears that your Foreign Currency Risk section does not adhere to the guidelines set forth in Item 11(A) of the instructions to Form 20-F. Please revise your filing to include one of the three allowable methods of presenting the required sensitivity analysis.
Response
8.
Under item 11 “Quantitative and Qualitative Disclosures About Market Risk” of Form 20-F we provide a quantitative analysis which contains a discussion
Page 6
of foreign currency exchange risk and provides a sensitivity analysis showing the impact on long-term debt and earnings. We will provide a reference in the foreign currency section of “Risks and Uncertainties” to item 11 in future filings.
Financial Statements
Consolidated Income Statement, page 122
Issue
9.
Revenues and operating expenses should be separated into product revenue (e.g., composites or parts sold as part of repair and overhaul) and services (e.g., flying revenue, charter revenue). Also, operating expenses such as amortization, gain on disposals of fixed assets, asset impairment charges, restructuring, and debt settlement costs, other than write-off of deferred financing charges and make-whole premiums, should be considered part of operating expenses. Please revise or explain supplementally.
Response
9.
Since service revenue (flying and repair and overhaul) exceeds 90% of the Company’s consolidated total we have decided to combine all other revenue with this amount in accordance with guidance provided under Regulation S-X (210.5-.03). Repair and overhaul revenue is considered service not product revenue as parts used in the repair and overhaul process are a component of the services provided and are not priced separately. On this basis related costs and expenses have also been combined.
As well, we will revise the format of our income statement in future filings. This revision will include the identification of operating expenses and new subtotals as required under the guidance.
Page 7
Note 1 - Summary of Significant Accounting Policies
Inventory, page 125
Issue
10.
Please explain to us and revise your disclosure to describe your policy with regard to excess and obsolete inventory. Refer to paragraph 4 of Chapter 2 of the AICPA Industry Audit Guide, Audits of Airlines, for guidance.
Response
10.
We will revise our disclosure in future filings to describe our existing policy in more detail as follows:
“Inventory, consisting primarily of aircraft parts held for internal consumption and for use in the completion of repair and overhaul work for external customers, is valued at the lower of replacement cost and average cost less an allowance for obsolescence which considers the lives of the related aircraft fleet and other factors. The cost of overhauled inventory includes the cost of raw materials, direct labor and related overhead.”
Revenue Recognition
Issue
11.
We note that you recognize revenues from helicopter operations based on the terms of the customer contracts that generally provide for revenue on the basis of hours flown at contract rates or fixed monthly charges or a combination of both. We also note that revenues from engine and component repair as well as overhaul and composite manufacturing are recognized on the percentage of completion method, and that a portion of this revenue is recognized on a monthly basis to reflect ongoing services provided. In instances where a revenue stream from one contract is recognized in both variable and fixed intervals, please explain to us how you have met the bifurcation criteria set forth in EITF 00-21, and how the split was determined. Include in your explanation a description of the service provided on a continual basis that could be sold or delivered separately, and how you determined the fair value thereof.
Response
11.
The most significant element of the Company’s revenue that involves multiple deliverables is revenue earned on repair and overhaul work completed under what are commonly referred to as Power By The Hour (“PBH”) contracts. These contracts are provided by the company’s repair
Page 8
and overhaul businesses primarily at its Astec operations in Stavanger, Norway. PBH contracts typically involve the customer paying a fixed amount (the PBH hourly rate) per hour flown. This payment obliges the Company to provide:
·
major component overhauls (engines, main gearboxes, rotorheads, transmissions etc.) at a future date when a predetermined number of hours have been “used” on these components, and;
·
to provide ongoing repairs on major components and maintenance on non-major components (“routine maintenance”) on a regular and continuous basis.
In PBH arrangements it is appropriate to have separate units of accounting for major component overhauls and routine maintenance work because:
·
both major components overhauls and routine maintenance have value to the customer on a standalone basis;
·
there is objective and reliable evidence of the fair value of the undelivered item (the future major component overhaul - see below); and,
·
PBH contracts do not provide for a general right to the customer for the return of services or repairs provided under routine maintenance.
Revenue is recognized using the residual value method as outlined in EITF - 00-21 as follows:
·
Major components (undelivered item) - The amount allocated to major component overhaul is deferred for recognition when work is completed. Fair value for PBH major component work is based on the following factors:
·
Comparison to competitor PBH rates for similar job profiles.
·
Comparison to non-PBH quoted rates and contracts that Astec has with third parties as Astec does perform similar work on most major components for both PBH and non-PBH customers.
·
Routine maintenance (delivered item) - The remaining balance from PBH revenue (excluding the amount deferred for future major component overhaul) is allocated to routine maintenance revenue and recognized immediately as services are performed. The residual value method rather than the relative fair value method is
Page 9
used because objective and reliable values for the large number of often small value services provided under routine maintenance is not always available.
Contracts that have fixed and variable rate flying revenue do not involve multiple deliverables. The customer is generally required to pay a monthly amount to have an aircraft available, plus an hourly amount for hours flown during that month. For these contracts all revenue invoiced or accrued in a particular period is for services performed in that period.
Note 13 - Debt Obligations, page 135
Issue
12.
The disclosure on page 135 describing the collateral for the senior credit facilities is unclear with respect to the meaning of the phrase “provided charges”. Also, it is unclear why a $750 million debenture would be provided as collateral for approximately $140 million in senior credit facilities. Please supplementally clarify the use of a debenture to provide collateral and revise your disclosure, as appropriate.
Response
12.
The company has pledged substantially all owned assets in certain jurisdictions as security against amounts owed to senior lenders. “Provided charges” refers to a debenture put in place to evidence the lender’s legal claim against these assets. Debentures are typically granted in excess of the total amount, which may be borrowed. This e
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CORRESP 1 filename1.htm Correspondence December 17, 2004 Max A. Webb Assistant Director United States Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549-0305 Re: CHC Helicopter Corporation Form 20-F for the Year Ended April 30, 2004 Commission File Number: 1-31472 CHC Helicopter Corporation 4740 Agar Drive Richmond, B.C. Canada V7B 1A3 T 604.276.7500 F 604.279.2474 www.chc.ca Dear Mr. Webb: Further to your correspondence dated November 9, 2004 please find enclosed our detailed response to the various issues raised. We understand that the purpose of your review is to assist us in our compliance obligations and to enhance the overall disclosure in our filings. We look forward to working with you to achieve these objectives. Form 20-F Item 3 - Key Information Selected Financial Data, page 5 Issue 1. Please review your presentation within Selected Financial Data to present EBITDA and all other non-GAAP measures in a position of least prominence. Specifically, your balance sheet data for both Canadian and US GAAP Selected Financial Data should be presented before any non-GAAP measures. Response 1. In future filings we will present all non-GAAP measures in a final section appropriately titled. This information will follow all other information in the Selected Financial Data table. Property Plant and Equipment Facilities, page 33 Issue 2. We note that you own several buildings on leased land, and that your old Page 2 headquarters building was owned while the lease on the land expired in September 2004. Please tell us how you accounted for this disposition of the building as the lease has expired. Response 2. In anticipation of the expiry of the property lease and the relocation of our offices to a new facility in Vancouver, we ensured that the abandoned building was fully amortized at the time of relocation in August 2004. Item 5 - Operating and Financial Review Prospects Results of Operations Non-GAAP Measures, page 43 Issue 3. We note your disclosure on page 43 that you primarily use EBITDA as a measure of performance. We also noted your disclosure that certain investors, analysts, and others utilize these measures to assess your ability to service debt, and that you have also included a reconciliation to operating cash flow. Please note that you must present a reconciliation of the most comparable GAAP measure, in this case, net income. As such, please revise your disclosure to include only the most comparable measure. See FR-65 for guidance. Response 3. In future filings we will present a reconciliation of each non-GAAP measure to the most comparable GAAP measure. Issue 4. It is unclear why gain on disposal of assets, equity in earnings of associated companies, restructuring and debt settlement costs, and asset impairment charges are among the items added back to EBITDA to arrive at net income. Please note that, aside from interest, taxes, depreciation, and amortization, only non-recurring items (items that have not and are not expected to recur within two years, see FR-65) may be considered. Please supplementally explain why you believe these items are allowable or revise your definition of EBITDA, as appropriate. Page 3 Response 4. We previously did not consider the terms “Segment EBITDA” and “Consolidated Segment EBITDA” to be non-GAAP measures. “Segment EBITDA” is revenue less operating expenses allocated to each of our segments. “Consolidated Segment EBITDA” is the sum of “Segment EBITDA” from each of our segments and corresponds to a line item in our segmented information note. “Segment EBITDA” is used by the Company’s chief decision maker in making operating decisions and assessing performance of each segment. We also now understand that the SEC FAQ published on June 13, 2003 clarifies that the presentation of a total or consolidated segment profit or loss measure in any context other than the note disclosure required by GAAP is considered a non-GAAP financial measure. As a result, in future filings we will not use the term “Consolidated Segment EBITDA” but will continue to use “Segment EBITDA” when discussing segment results. Gain on Disposal of Assets, page 63 Issue 5. We note your disclosure on page 63 of a total loss of an S76 aircraft supporting operations in Azerbaijan, resulting in a $2.4 million gain. Please supplementally explain to us and revise your disclosure to indicate the facts and circumstances surrounding the event and the recognition of this gain. Include in your response a brief description of the aircraft, related property damage, book value of asset lost, insurance proceeds received, and any pending litigation or other matters related to this incident. If you have accrued but not received insurance proceeds, please tell us why you believe accrual is appropriate. To the extent that any portion of the $4.5 million total insurance proceeds relates to other matters, please include a similar discussion of those matters with your response and revised disclosure. Refer to SFAS 5 for guidance. Response 5. As noted, the recognized gain of $2.4 million relates to a total loss of an S76 Page 4 aircraft supporting operations in Azerbaijan. This aircraft is a medium sized twin turbine helicopter that was used in a training session and crashed as a result of pilot error. Due to the severity of the damage to the aircraft, it was not economical to repair and rebuild. There was damage to the airport runway, which was covered directly by our insurance providers, and there was no related personal injury to the crew on board. Insurance proceeds were received prior to the fiscal 2003 year-end and therefore the gain recorded was not contingent on proceeds to be received at a later date. No outstanding litigation related to this incident existed at April 30, 2003. When this incident occurred the aircraft had a net book value of approximately $1.8 million with total insurance proceeds received of $4.5 million. A net gain on sale of $2.4 million was recorded after directly related costs of $0.3 million were applied against this gain. In future filings we will expand our disclosure on issues of a similar nature. Liquidity and Capital Resources Operating Activities, page 72 Issue 6. We noted from your disclosure that you still own a majority of your flying assets, and that you have, in the prior fiscal year, participated in the sale/leaseback of six Super Puma aircraft. We also note that your discussion of liquidity on page 73 addresses available borrowing capacity and excess cash, but does not discuss future sale/leaseback transactions as a potential source of liquidity. Please expand this disclosure to address your ability to involve existing owned assets in sale/leaseback transactions. Response 6. The prior fiscal year had an exceptionally high number of sale/leaseback transactions that is not expected to recur in the future. Generally, sale/leaseback arrangements are used to finance newly acquired aircraft and therefore we do not see this as a means of meeting future working capital, capital expenditure or debt obligation requirements. Therefore, this alternative source of financing has not been identified in previous filings. Page 5 In future filings we will explain that we do not expect to use sale/leaseback transactions as a source of liquidity. Investing Activities, page 77 Issue 7. We noted your discussion of the $3.8 million reclassification from cash to other assets related to your reinsurance subsidiary. Please explain to us and expand your disclosure related to the description of your business to include the nature and scope of these operations. Response 7. The Company’s reinsurance subsidiary, which was acquired as part of the Helicopter Service Group in 1999, has not been very active and provides insurance cover for risks where coverage is not available in the market or where the premium is excessive. The subsidiary has primarily been involved in providing insurance for the Company’s pilots and death and disability risks for employees in Norway. The subsidiary cannot accept any insurance business directly as insured risks must be covered first by reputable third party insurers who may then reinsure with our subsidiary. Results of operations are insignificant with net earnings before tax for the reinsurance business in 2003 of approximately $3,000 and $10,000 in 2004. As such, we do not believe that any additional disclosure is required. Risk and Uncertainties, page 82 Issue 8. It appears that your Foreign Currency Risk section does not adhere to the guidelines set forth in Item 11(A) of the instructions to Form 20-F. Please revise your filing to include one of the three allowable methods of presenting the required sensitivity analysis. Response 8. Under item 11 “Quantitative and Qualitative Disclosures About Market Risk” of Form 20-F we provide a quantitative analysis which contains a discussion Page 6 of foreign currency exchange risk and provides a sensitivity analysis showing the impact on long-term debt and earnings. We will provide a reference in the foreign currency section of “Risks and Uncertainties” to item 11 in future filings. Financial Statements Consolidated Income Statement, page 122 Issue 9. Revenues and operating expenses should be separated into product revenue (e.g., composites or parts sold as part of repair and overhaul) and services (e.g., flying revenue, charter revenue). Also, operating expenses such as amortization, gain on disposals of fixed assets, asset impairment charges, restructuring, and debt settlement costs, other than write-off of deferred financing charges and make-whole premiums, should be considered part of operating expenses. Please revise or explain supplementally. Response 9. Since service revenue (flying and repair and overhaul) exceeds 90% of the Company’s consolidated total we have decided to combine all other revenue with this amount in accordance with guidance provided under Regulation S-X (210.5-.03). Repair and overhaul revenue is considered service not product revenue as parts used in the repair and overhaul process are a component of the services provided and are not priced separately. On this basis related costs and expenses have also been combined. As well, we will revise the format of our income statement in future filings. This revision will include the identification of operating expenses and new subtotals as required under the guidance. Page 7 Note 1 - Summary of Significant Accounting Policies Inventory, page 125 Issue 10. Please explain to us and revise your disclosure to describe your policy with regard to excess and obsolete inventory. Refer to paragraph 4 of Chapter 2 of the AICPA Industry Audit Guide, Audits of Airlines, for guidance. Response 10. We will revise our disclosure in future filings to describe our existing policy in more detail as follows: “Inventory, consisting primarily of aircraft parts held for internal consumption and for use in the completion of repair and overhaul work for external customers, is valued at the lower of replacement cost and average cost less an allowance for obsolescence which considers the lives of the related aircraft fleet and other factors. The cost of overhauled inventory includes the cost of raw materials, direct labor and related overhead.” Revenue Recognition Issue 11. We note that you recognize revenues from helicopter operations based on the terms of the customer contracts that generally provide for revenue on the basis of hours flown at contract rates or fixed monthly charges or a combination of both. We also note that revenues from engine and component repair as well as overhaul and composite manufacturing are recognized on the percentage of completion method, and that a portion of this revenue is recognized on a monthly basis to reflect ongoing services provided. In instances where a revenue stream from one contract is recognized in both variable and fixed intervals, please explain to us how you have met the bifurcation criteria set forth in EITF 00-21, and how the split was determined. Include in your explanation a description of the service provided on a continual basis that could be sold or delivered separately, and how you determined the fair value thereof. Response 11. The most significant element of the Company’s revenue that involves multiple deliverables is revenue earned on repair and overhaul work completed under what are commonly referred to as Power By The Hour (“PBH”) contracts. These contracts are provided by the company’s repair Page 8 and overhaul businesses primarily at its Astec operations in Stavanger, Norway. PBH contracts typically involve the customer paying a fixed amount (the PBH hourly rate) per hour flown. This payment obliges the Company to provide: · major component overhauls (engines, main gearboxes, rotorheads, transmissions etc.) at a future date when a predetermined number of hours have been “used” on these components, and; · to provide ongoing repairs on major components and maintenance on non-major components (“routine maintenance”) on a regular and continuous basis. In PBH arrangements it is appropriate to have separate units of accounting for major component overhauls and routine maintenance work because: · both major components overhauls and routine maintenance have value to the customer on a standalone basis; · there is objective and reliable evidence of the fair value of the undelivered item (the future major component overhaul - see below); and, · PBH contracts do not provide for a general right to the customer for the return of services or repairs provided under routine maintenance. Revenue is recognized using the residual value method as outlined in EITF - 00-21 as follows: · Major components (undelivered item) - The amount allocated to major component overhaul is deferred for recognition when work is completed. Fair value for PBH major component work is based on the following factors: · Comparison to competitor PBH rates for similar job profiles. · Comparison to non-PBH quoted rates and contracts that Astec has with third parties as Astec does perform similar work on most major components for both PBH and non-PBH customers. · Routine maintenance (delivered item) - The remaining balance from PBH revenue (excluding the amount deferred for future major component overhaul) is allocated to routine maintenance revenue and recognized immediately as services are performed. The residual value method rather than the relative fair value method is Page 9 used because objective and reliable values for the large number of often small value services provided under routine maintenance is not always available. Contracts that have fixed and variable rate flying revenue do not involve multiple deliverables. The customer is generally required to pay a monthly amount to have an aircraft available, plus an hourly amount for hours flown during that month. For these contracts all revenue invoiced or accrued in a particular period is for services performed in that period. Note 13 - Debt Obligations, page 135 Issue 12. The disclosure on page 135 describing the collateral for the senior credit facilities is unclear with respect to the meaning of the phrase “provided charges”. Also, it is unclear why a $750 million debenture would be provided as collateral for approximately $140 million in senior credit facilities. Please supplementally clarify the use of a debenture to provide collateral and revise your disclosure, as appropriate. Response 12. The company has pledged substantially all owned assets in certain jurisdictions as security against amounts owed to senior lenders. “Provided charges” refers to a debenture put in place to evidence the lender’s legal claim against these assets. Debentures are typically granted in excess of the total amount, which may be borrowed. This e