Filing Scope and Business Context
The supplied filing is Era Group Inc.’s Form 10-K for the fiscal year ended December 31, 2017, not a Bristow Group filing. It reports annual results, with unaudited quarterly information including the fourth quarter. Era operates helicopter transportation, leasing, emergency-response and utility services, primarily for offshore oil and gas customers. The company has one reportable segment, 132 helicopters, and 747 employees at year-end.
Revenue remained concentrated in the U.S. Gulf of Mexico, which generated approximately 62% of operating revenue. International operations generated 34% of revenue, up from 31% in 2016. Approximately 91% of revenue was tied to offshore oil and gas activities and related emergency-response services.
Financial Performance and Position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $231.3 million | $247.2 million | Down $15.9 million |
| Operating income (loss) | $(136.5) million | $(3.4) million | Material deterioration |
| Operating margin | (58%) | (2%) | Down approximately 56 percentage points |
| Net income (loss) attributable to Era | $(28.2) million | $(8.0) million | Greater loss |
| Basic and diluted EPS | $(1.36) | $(0.39) | Greater loss per share |
| Cash flow from operations | $20.1 million | $58.5 million | Down $38.4 million |
| Capital expenditures | $16.8 million | $39.2 million | Down $22.4 million |
| Cash and equivalents | $13.6 million | $27.0 million | Down $13.4 million |
| Total assets | $792.1 million | $955.2 million | Down $163.1 million |
| Total equity | $445.7 million | $468.4 million | Down $22.7 million |
Operating expenses decreased modestly to $167.4 million from $169.9 million, primarily due to lower personnel, insurance and fuel costs. Repairs and maintenance increased by $8.5 million, while administrative and general expense increased by $5.9 million, including higher professional-services fees.
The annual loss included a $117.0 million impairment charge for H225 helicopters, parts and related inventory. A $122.7 million income-tax benefit, including an estimated $70.0 million benefit from the 2017 Tax Cuts and Jobs Act and tax effects of the H225 impairment, substantially reduced the reported net loss. The fourth quarter reported net income attributable to common shares of $61.7 million, or $2.89 per diluted share, despite an operating loss of $8.4 million, primarily reflecting tax benefits and other below-operating-line items.
Liquidity, Debt and Commitments
- Principal borrowings totaled $208.4 million at December 31, 2017, comprising $144.8 million of 7.750% senior notes, $39.0 million drawn on the revolving credit facility, $21.6 million of promissory notes and $3.0 million of other debt, including Brazilian tax installments.
- Long-term debt, net of current portion, was $202.2 million, compared with $230.1 million in 2016.
- Revolving-credit availability was $75.8 million at year-end, subject to borrowing-base and covenant compliance. The company stated that it was in compliance with all debt covenants at December 31, 2017.
- On March 7, 2018, the revolving facility was amended: total commitments were reduced from $200.0 million to $125.0 million, maturity was extended to March 31, 2021, and leverage and interest-coverage covenants were revised.
- Unfunded capital commitments were $117.7 million at year-end, primarily for 11 helicopters. Approximately $116.2 million could be terminated subject to aggregate liquidated damages of $2.6 million.
- Contractual obligations totaled $408.2 million, including $270.1 million of debt obligations, $117.7 million of capital purchase obligations, $15.0 million of operating leases and $5.5 million of other purchase obligations.
- The company does not pay cash dividends and expects to retain funds for debt reduction and business development.
Material Changes and Unusual Items
- Revenue declined 6.4% year over year, mainly from lower utilization of light helicopters and reduced emergency-response activity. Medium and heavy helicopter utilization improved, and international oil-and-gas revenue increased modestly.
- The prolonged offshore oil-and-gas downturn continued to pressure customer spending, contract pricing and fleet utilization, although management reported increased customer activity beginning in mid-2017.
- Era concluded that a broad return to service of its nine H225 helicopters was improbable and recorded the $117.0 million impairment. The remaining net book value of H225 helicopters and related inventory was $37.8 million.
- Era is pursuing litigation against Airbus alleging breach of contract, fraudulent inducement, fraud, negligent misrepresentation and unjust enrichment relating to H225 purchases. The amount and timing of any recovery are uncertain.
- In February 2018, the company sold its Alaska flightseeing assets, including eight AS350 helicopters and two facilities, for $10.0 million and stated that it would not conduct flightseeing operations in 2018.
- A Brazil subsidiary entered the PERT tax regularization program and recorded a $3.5 million income-tax benefit in the fourth quarter, offset partly by additional operating expense.
- Management identified material weaknesses in internal control over financial reporting related to interest accruals on Brazilian tax installments and income-tax and other tax accrual processes. The company stated that remediation was expected in the first quarter of 2018; controls were not effective as of December 31, 2017.
Outlook and Principal Risks
Management expects demand to improve as offshore oil-and-gas markets recover, but provides no quantified revenue, earnings or cash-flow guidance. The outlook depends heavily on oil and gas prices, offshore exploration and production spending, customer contract renewals, fleet utilization and helicopter values.
- Customer concentration is substantial: Anadarko, Petrobras and the U.S. government represented 28%, 22% and 16% of 2017 revenue, respectively; the top ten customers represented 84%.
- Many contracts can be canceled or downsized with limited notice and without significant penalties.
- Risks include further oil-and-gas market weakness, customer bankruptcies or consolidation, government budget reductions, pricing pressure, excess helicopter capacity, adverse weather, accidents, grounding of helicopter models and inadequate insurance coverage.
- Foreign operations expose the company to political, regulatory, tax, labor, currency and repatriation risks, particularly in Brazil and Colombia.
- Debt covenants and reduced revolving-credit commitments could constrain capital spending and liquidity if operating performance weakens.
- Brazilian tax disputes include approximately $7.1 million of municipal assessments, $3.0 million of disputed social-security contributions, customs and other tax claims, and $10.3 million deposited into court-controlled escrow accounts.
Investor Verification Points
- Confirm that the intended issuer is Era Group Inc.; the supplied document is not a Bristow Group Inc. Form 10-K.
- Assess normalized earnings and cash generation excluding the $117.0 million H225 impairment and the largely noncash tax benefit.
- Review the March 2018 credit-facility amendment, revised covenants and reduced borrowing capacity.
- Evaluate the recoverability and monetization prospects of the remaining $37.8 million H225 carrying value and the potential Airbus litigation recovery.
- Monitor offshore oil-and-gas activity, customer concentration, contract cancellations and fleet utilization.
- Verify completion and effectiveness of remediation for the identified internal-control material weaknesses.
- Review the status of Brazilian tax disputes, escrowed funds and PERT-related tax accounting.