Filing Scope and Business Context
The supplied filing is Era Group Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed March 8, 2017. It is not a Bristow Group Inc. filing; Bristow is identified only as a competitor. Era operates helicopters primarily for offshore oil and gas transportation, search and rescue, air medical, utility, leasing, flightseeing and newly launched unmanned aerial services. The company reports one operating segment.
Era owned, leased or managed 136 helicopters at year-end, with 105 located in the United States and 31 internationally. Approximately 88% of 2016 revenue came from services supporting offshore oil and gas customers, while 31% came from international operations and 62% from the U.S. Gulf of Mexico.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $247.2 million | $281.8 million | Down 12.3% |
| Operating income (loss) | $(3.4) million | $24.3 million | Declined $27.7 million |
| Operating margin | (1.4%) | 8.6% | Down 10.0 percentage points |
| Net income (loss) attributable to Era | $(8.0) million | $8.7 million | Declined $16.7 million |
| Basic and diluted EPS | $(0.39) | $0.42 | Turned negative |
| Cash flow from operations | $58.5 million | $44.5 million | Up $14.0 million |
| Capital expenditures | $39.2 million | $60.1 million | Down $20.9 million |
| Cash and cash equivalents | $27.0 million | $14.4 million | Up $12.6 million |
| Total assets | $955.2 million | $1,004.4 million | Down $49.2 million |
| Total equity | $468.4 million | $471.3 million | Down $2.9 million |
Operating expenses were $169.9 million, administrative and general expense was $36.2 million, and depreciation and amortization was $49.3 million. Gains on asset dispositions were $4.8 million. Interest expense increased to $17.3 million from $13.5 million, partly because less interest was capitalized and financing costs were written off following the credit-facility amendment.
At December 31, 2016, principal borrowings totaled $236.4 million, consisting primarily of $144.8 million of 7.750% senior notes due 2022, $65.0 million under the revolving credit facility, $23.2 million of promissory notes and $3.4 million of Brazilian tax-related obligations. Revolving-credit availability was $120.2 million, subject to covenant compliance. The company was in compliance with its debt covenants at year-end.
Material Changes Versus the Prior Period
- Revenue declined $34.6 million, principally because of lower utilization and rates in the U.S. Gulf of Mexico and Alaska, reduced dry-leasing revenue, and the sale of the FBO in 2015.
- International revenue increased $16.7 million overall, aided by the consolidation of Aeróleo, new Suriname contracts and higher Colombian utilization. This was more than offset by U.S. revenue declines.
- Oil and gas revenue represented 83% of 2016 operating revenue versus 73% in 2015. Dry-leasing revenue fell to $13.2 million from $40.8 million.
- Operating results moved from an $8.6% margin to a negative 1.4% margin. Management attributed the deterioration primarily to lower revenue, higher excess capacity, Aeróleo consolidation effects and increased depreciation.
- Operating cash flow improved despite the loss, supported by working-capital changes, including lower receivables and higher accounts payable and other liabilities.
- Debt declined by approximately $39 million in principal during 2016. The company repurchased $5.0 million of senior notes for $4.5 million of cash and recognized a $0.5 million gain.
- During 2016, the company delivered two AW189 heavy helicopters, expanded into Suriname, began leasing helicopters and support services to a new Argentine customer, and launched unmanned aerial services.
Fourth-Quarter Information
The filing provides unaudited quarterly information rather than a separate quarterly filing. Fourth-quarter 2016 revenue was $56.3 million, operating loss was $1.4 million, net loss was $5.6 million, and net loss attributable to common shares was $5.5 million, or $(0.27) per basic and diluted share.
The fourth quarter included corrections that reduced operating income by $1.7 million and increased net loss by $1.0 million. The corrections primarily involved property and equipment classification and related expense items. Management stated that the corrections were immaterial to the annual and prior-period financial statements.
Outlook, Risks and Unusual Items
- Management expected continued demand at recently experienced levels while offshore oil and gas markets recover, but warned that persistently low oil and gas prices could delay or cancel offshore projects.
- All nine company-owned H225 helicopters were subject to operational suspension following a fatal April 2016 accident involving another operator. The net book value of the H225 helicopters and related inventory was $160.7 million at year-end. Management could not predict the duration of the suspension, residual values or market acceptance.
- Heavy-helicopter excess capacity remained elevated and negatively affected revenue. Failure to secure new projects could reduce utilization and results in 2017 and beyond.
- The company had $114.5 million of unfunded capital commitments for 12 helicopters at December 31, 2016. Approximately $101.0 million could be terminated with aggregate liquidated damages of $2.5 million; the filing also reports March 1, 2017 unfunded commitments of $115.6 million.
- Era amended its revolving credit facility in October 2016, reducing commitments to $200.0 million and providing additional covenant flexibility. The facility matures in March 2019.
- Brazilian tax disputes included approximately $7.2 million of municipal assessments, $2.2 million related to tax credits, $2.7 million of social-security claims and other smaller disputes. Management did not expect material adverse outcomes, but stated that outcomes could not be determined.
- Era filed litigation against Airbus regarding the purchase of H225 helicopters, seeking damages in an amount not yet determined.
- Management identified a material weakness in internal control over financial reporting involving the existence and proper classification of property and equipment. Remediation was ongoing with no expected completion timetable disclosed.
- The company does not pay cash dividends and does not currently intend to do so, citing debt reduction, growth funding and debt-agreement restrictions.
Most Important Facts to Verify
- Confirm that the intended issuer is Era Group Inc., not Bristow Group Inc.
- Assess the duration and financial impact of the H225 suspension and the recoverability of the $160.7 million H225-related carrying value.
- Review customer concentration: Anadarko, Petrobras and the U.S. government represented 24%, 20% and 16% of 2016 revenue, respectively.
- Evaluate covenant headroom, the March 2019 revolving-facility maturity and the company’s ability to fund approximately $114.5 million of helicopter commitments.
- Monitor heavy-helicopter utilization, contract cancellations, pricing and the effect of offshore oil and gas capital spending.
- Review the remediation of the material weakness and any subsequent restatements or control deficiencies.
- Track the Airbus litigation, Brazilian tax disputes, escrowed amounts and potential claims associated with operational and regulatory matters.