Filing Overview
Registrant: Era Group Inc., although the request identifies Bristow Group Inc. The supplied filing is Era Group’s unaudited Form 10-Q for the quarter ended March 31, 2014, filed May 6, 2014. Era Group was spun off from SEACOR Holdings on January 31, 2013 and operated helicopter services in the United States and internationally.
The company primarily transports personnel to offshore oil and gas installations and also provides search and rescue, air medical, firefighting support, flightseeing, fixed-base operations and helicopter leasing services.
Financial Results and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $79.4 million | $67.7 million | 17.3% increase |
| Operating income | $10.1 million | $14.6 million | 31.1% decrease |
| Operating margin | 12.7% | 21.6% | Down 8.9 percentage points |
| Net income attributable to Era Group | $4.4 million | $6.7 million | 33.6% decrease |
| Net income attributable to common shares | $4.4 million | $6.0 million | 25.6% decrease |
| Basic and diluted EPS | $0.22 | $0.28 | Decrease |
| Cash flow from operations | $9.7 million | $17.9 million | Decrease of $8.2 million |
Revenue growth was led by U.S. Gulf of Mexico oil and gas operations, which increased $13.0 million, higher heavy-helicopter revenue following the return of EC225 helicopters to service, increased search-and-rescue activity, and higher U.S. fleet count and rates. Revenue was partly offset by lower Alaska activity and reduced dry-leasing revenue.
Excluding gains on asset dispositions, operating margin improved to approximately 9% from approximately 6%. Reported operating income nevertheless declined because asset-sale gains fell to $2.9 million from $10.8 million in the prior-year quarter.
- Operating expenses increased $6.5 million, primarily from higher repairs and maintenance, personnel, fuel and costs associated with returning EC225 helicopters to service.
- Administrative and general expenses increased $2.2 million, including higher compensation and professional-service costs.
- Interest expense declined $1.0 million to $3.8 million, primarily because more interest was capitalized on helicopter deposits.
- The effective income tax rate increased to 39.0% from 37.3%.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $22.3 million at March 31, 2014, down from $31.3 million at December 31, 2013.
- Investing activities used $18.0 million, including $18.8 million of capital expenditures and $3.0 million deposited into escrow for a like-kind exchange; asset-sale proceeds were $3.6 million.
- Financing activities used $0.7 million, consisting primarily of scheduled debt payments. No preferred-stock dividend was paid in the quarter, compared with $5.0 million in Q1 2013.
- Total debt was $281.5 million, including $200.0 million of 7.750% senior notes due 2022, $55.0 million drawn on the revolving facility and promissory notes.
- On March 31, 2014, the company amended and restated its revolving credit facility, increasing commitments from $200.0 million to $300.0 million, with a potential $100.0 million accordion. Remaining availability was $244.3 million, net of letters of credit.
- The amended facility matures in March 2019 and includes financial and operating covenants that restrict, among other matters, additional debt, liens, asset sales, dividends, repurchases and certain investments.
Material Changes and Unusual Items
- The EC225 fleet returned to service, increasing revenue but also driving higher repairs, maintenance and power-by-hour costs.
- An April 2014 settlement with Airbus Helicopters concerning the prior EC225 operating suspension provides service and product credits. The company expects to recognize the benefit as a reduction of operating expenses over approximately six to ten quarters as credits are used.
- Deferred revenue increased to $26.5 million at March 31, 2014. This included $23.7 million related to Aeróleo in Brazil and $2.4 million related to an Indian customer. Revenue is generally recognized only when cash is received or collectability becomes reasonably assured.
- Aeróleo continues to face financial difficulties, including effects from Petrobras contract issues and OGX’s bankruptcy protection filing. A proposed transfer of the company’s partner’s interests could require an approximately $2.0 million capital infusion and may result in consolidation of Aeróleo after closing, expected in the second half of 2014.
- Unfunded helicopter purchase commitments totaled $326.3 million, including $83.4 million payable during the remainder of 2014. Approximately $147.4 million of commitments, including option deposits, could be terminated subject to aggregate liquidated damages of $9.7 million.
- The company sold two medium helicopters for $3.6 million and recorded a $2.9 million gain. One AW139 delivered in March was not operational at quarter-end.
Outlook, Risks and Contingencies
Management described offshore exploration and production activity, particularly in deepwater markets, as supportive of demand for medium and heavy helicopters. The company cited improving U.S. Gulf of Mexico activity, continued Brazilian offshore development, Alaska oil-sector investment and mandated offshore safety inspections as potential demand drivers. No quantified earnings or revenue guidance was provided.
- Key risks include dependence on offshore oil and gas activity, oil and gas prices, customer concentration, helicopter safety and potential fleet groundings, regulatory changes, foreign operations and currency exposure.
- Additional risks include manufacturer and supplier concentration, aging-fleet replacement, used-helicopter resale values, joint-venture financial difficulties, debt covenants, adverse weather and seasonality.
- The company had interest-rate swaps with an aggregate notional value of $31.8 million; their fair-value liability was $0.5 million at March 31, 2014.
- Non-U.S.-dollar capital purchase commitments totaled €152.8 million, or $210.4 million. A 10% adverse currency movement would increase the dollar equivalent by approximately $21.0 million.
- Management reported no material expected effect from ordinary-course litigation and no joint-venture guarantees outstanding at quarter-end.
- Management concluded that disclosure controls were effective, while continuing to enhance controls for processes previously handled by SEACOR or provided under transition services arrangements.
Investor Verification Priorities
- Confirm the issuer identity: the supplied filing is for Era Group Inc., not Bristow Group Inc.
- Verify whether Aeróleo’s proposed ownership transfer closed and whether Era Group subsequently consolidated Aeróleo.
- Track collection and recognition of the $23.7 million Aeróleo deferred revenue and the $2.4 million Indian customer balance.
- Assess the funding plan and covenant capacity for the $326.3 million helicopter commitment program.
- Monitor utilization of the Airbus settlement credits and their effect on operating expenses and margins.
- Reconcile reported revenue growth with the decline in reported operating income, focusing on prior-year asset-sale gains and current repair and maintenance costs.