Filing Scope and Business Context
Important entity mismatch: The supplied Form 10-Q is for Era Group Inc. (NYSE: ERA), not Bristow Group Inc. It covers the quarter and nine months ended September 30, 2019, and contains unaudited interim financial statements.
Era operates a 105-helicopter fleet serving offshore oil and gas customers, emergency response and utility markets, and third-party helicopter operators. Its primary market is the United States, with operations also in Brazil, Colombia, India, Mexico, Spain and Suriname. U.S. Gulf of Mexico activity is seasonal, typically strongest from April through September.
Financial Highlights
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $58.9 million, versus $54.6 million | $165.7 million, versus $169.7 million |
| Operating income (loss) | $1.7 million, versus $41.6 million | $(4.0) million, versus $33.7 million |
| Net income (loss attributable to Era) | $(1.9) million, or $(0.09) per diluted share | $(2.9) million, or $(0.14) per diluted share |
| Operating cash flow | Not separately provided | $19.8 million, versus $50.4 million |
| Cash and cash equivalents | $107.7 million at September 30, 2019, versus $50.8 million at December 31, 2018 | |
| Total debt principal | $163.0 million at September 30, 2019, versus $165.2 million at December 31, 2018 |
Third-quarter operating margin was approximately 2.9%, compared with 76.1% in the prior-year quarter. The nine-month operating margin was approximately (2.4)%, compared with 19.9% in the prior-year period. The comparisons are substantially affected by $42.0 million of litigation settlement proceeds recognized in 2018.
- Third-quarter operating revenue increased $4.3 million, or approximately 8%, driven by higher U.S. and international utilization, new dry-leasing contracts and new emergency-response contracts.
- Dry-leasing revenue increased to $4.3 million from $2.7 million in the quarter and to $12.1 million from $8.5 million for the nine months.
- Nine-month operating revenue declined to $153.6 million from $161.1 million, primarily because of lower U.S. and certain international oil and gas activity, partly offset by dry leasing and emergency response.
- Repairs and maintenance expense increased $2.2 million in the quarter and $3.0 million for the nine months, largely due to higher power-by-the-hour costs and repair timing.
- Administrative and general expense declined $8.8 million for the nine months, primarily because 2018 included professional fees related to litigation.
Cash Flow, Liquidity and Capital Structure
- Net cash increased $57.0 million during the first nine months, consisting principally of $19.8 million from operations and $45.9 million from investing activities, partly offset by $8.8 million used in financing.
- Investing cash inflows included $34.7 million of net proceeds from the sale of the Dart equity investment, $9.3 million from asset dispositions and $7.7 million of principal payments on notes receivable and equity-investee notes. Capital expenditures were $5.2 million.
- The company had no borrowings under its $125.0 million revolving credit facility at September 30, 2019, and had $0.7 million of standby letters of credit outstanding. The facility matures in March 2021.
- Debt consisted primarily of $144.1 million of 7.750% senior notes due December 2022 and $18.7 million of promissory notes. Current and long-term debt reported on the balance sheet totaled $160.6 million, net of discounts and issuance costs.
- Unfunded capital commitments totaled $78.2 million, primarily for three AW189 heavy helicopters and five AW169 light-twin helicopters, payable beginning in 2020 through 2021. The commitments may generally be terminated subject to aggregate liquidated damages of $2.1 million.
- The company repurchased 988,721 shares for $7.6 million during the first nine months. Approximately $15.3 million remained under the $25.0 million authorization at September 30, 2019.
Material Changes and Unusual Items
- Era sold its Dart joint venture on April 1, 2019, receiving gross proceeds of $38.0 million and recognizing net gains of $10.9 million. This contributed to $9.9 million of equity earnings for the nine-month period and eliminated comparable recurring equity earnings in the third quarter.
- The 2018 comparable periods included $42.0 million of litigation settlement proceeds, materially inflating prior-year operating income and net income.
- Era adopted the new lease accounting standard effective January 1, 2019. The adoption had no material initial income-statement impact; operating lease liabilities of $10.0 million and right-of-use assets of $9.9 million were recognized at September 30, 2019.
- During the fourth quarter of 2019, after the reporting date, Era exercised its option to acquire the remaining 50% economic and 20% voting interest in Aeróleo. The purchase price was not material.
Outlook, Risks and Contingencies
Management stated that it expects to generate positive operating cash flow and believes it will be adequate for working-capital needs, while retaining access to cash, asset-sale proceeds and the revolving facility for capital commitments and other liquidity requirements. The filing does not provide specific revenue, earnings or cash-flow guidance.
- Business performance remains exposed to offshore oil and gas cycles, commodity prices, customer cancellations, customer consolidation and cost-reduction programs.
- Other key risks include helicopter safety and grounding events, fleet aging, aircraft availability, fuel costs, adverse weather, regulation, foreign currency movements, political conditions and dependence on a limited number of customers, manufacturers and suppliers.
- Brazilian tax and civil disputes involved $13.3 million of stated tax claims, plus a separate $0.5 million consultant claim and a historical fatal-accident dispute. The company had deposited and fully reserved $5.1 million in court-controlled escrow accounts. Management said outcomes could not be determined but did not expect a material adverse effect.
- A 10% adverse currency movement would increase the U.S.-dollar value of the non-hedged helicopter purchase commitments by approximately $7.8 million. A similar movement would reduce the Brazilian subsidiary’s working-capital balance by approximately $0.7 million.
- Management reported effective disclosure controls, no material weakness in internal control over financial reporting and no material changes in internal controls during the quarter.
Investor Verification Items
- Verify that the intended issuer is Era Group Inc. rather than Bristow Group Inc.; the supplied filing is not a Bristow filing.
- Reconcile underlying operating performance excluding the $42.0 million 2018 litigation settlement and the 2019 Dart disposition gain.
- Assess whether $19.8 million of year-to-date operating cash flow is sufficient to fund the $78.2 million of helicopter commitments, debt service and ongoing maintenance spending.
- Review the maturity, covenants and refinancing requirements of the 7.750% senior notes and revolving credit facility.
- Monitor utilization, oil and gas customer activity, dry-leasing and emergency-response contract additions, and the impact of seasonal Gulf of Mexico demand.
- Follow developments in the Brazilian disputes, Aeróleo ownership transition and the outstanding helicopter purchase options.