Filing scope and business context
The supplied document is an unaudited Form 10-Q for Era Group Inc., not Bristow Group Inc., for the three months ended March 31, 2017. Era operates helicopter transportation and related aviation services, primarily for offshore oil and gas, as well as emergency response, utility, dry-leasing and Alaska flightseeing activities. The interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $54.5 million | $62.6 million | Down $8.1 million, or approximately 13% |
| Operating loss | $(5.1) million | $(0.8) million | Loss increased $4.3 million |
| Operating margin | (9%) | (1%) | Down approximately 8 percentage points |
| Net loss attributable to Era | $(5.6) million | $(3.8) million | Loss increased $1.8 million |
| Basic and diluted loss per share | $(0.27) | $(0.19) | More loss per share |
| Cash flow from operations | $4.3 million | $14.8 million | Down $10.5 million |
| Capital expenditures | $1.0 million | $2.1 million | Down $1.1 million |
Oil and gas revenue was $47.5 million, or 87% of total revenue, compared with $51.8 million, or 83%, in the prior-year quarter. U.S. oil and gas revenue declined by $7.4 million, partially offset by a $3.1 million increase in international oil and gas revenue. Dry-leasing revenue decreased $0.7 million, while emergency response revenue declined $3.0 million.
Operating expenses declined $6.6 million to $37.8 million, mainly from lower repairs and maintenance and personnel costs. Administrative and general expense increased $1.2 million to $10.4 million, primarily because of higher professional services fees. Depreciation and amortization decreased $1.2 million to $11.6 million. The prior-year period included $2.9 million of gains on asset dispositions, compared with $0.1 million in the current quarter.
Cash and cash equivalents were $26.3 million at March 31, 2017, compared with $27.0 million at December 31, 2016. Total debt, including current maturities and before discounts and issuance costs, was approximately $232.1 million, consisting primarily of $144.8 million of 7.750% senior notes, $61.0 million drawn on the revolving facility, $22.8 million of promissory notes and $3.5 million of other debt. Net cash used in financing activities was $4.2 million, including $6.6 million of debt repayments and $2.0 million of revolving-facility borrowings.
The revolving credit facility had a $200.0 million commitment, $61.0 million outstanding and $1.3 million of letters of credit. Management reported additional borrowing capacity of $117.4 million as of March 31, 2017, subject to covenants and other limitations. The facility matures in March 2019, while the senior notes mature in December 2022.
Material changes and unusual items
- Revenue weakness continued in the U.S. oil and gas market because of lower helicopter utilization and excess heavy-helicopter capacity.
- International oil and gas revenue increased, including contributions from a new Suriname contract and higher Brazil revenue partly attributable to currency movements.
- The company continued to own nine H225 helicopters with related parts and equipment having a net book value of $158.6 million. H225 and AS332 L2 operations remained broadly suspended following the 2016 accident and related regulatory actions, creating uncertainty regarding utilization and residual values.
- Two AW189 helicopters delivered in the fourth quarter of 2016 had not yet been placed in service at March 31, 2017.
- In April 2017, after the reporting date, the company placed one S92 helicopter in service for a final payment of $2.8 million and sold one B212 helicopter and an Alaska hangar for $4.6 million.
- The company consolidated Aeróleo, a Brazilian variable-interest entity. Aeróleo contributed $10.2 million of revenue and $0.9 million of net income in the quarter; its assets and liabilities are subject to restrictions and its creditors generally have no recourse to other Era entities.
- The company had $3.8 million in like-kind-exchange escrow deposits and intended to use the funds for a qualifying asset transaction in the second quarter of 2017.
Outlook, risks and contingencies
Management expected positive operating cash flow to support working capital, but liquidity also depends on asset sales, cash balances, financing availability and fleet utilization. Unfunded helicopter commitments totaled $117.0 million, including $16.2 million expected during the remainder of 2017 and the balance through 2019. Approximately $103.5 million of commitments, including deposits on unexercised options, could be terminated subject to aggregate liquidated damages of $2.5 million.
Key risks include continued weakness or volatility in offshore oil and gas activity, customer cancellations or cost reductions, excess fleet capacity, helicopter safety and grounding risks, the prolonged H225 suspension, dependence on a limited customer and supplier base, foreign exchange exposure, debt covenants, seasonality, adverse regulatory or political developments and litigation.
Brazilian contingencies included approximately $7.4 million of disputed municipal assessments, $2.4 million of disputed tax-credit claims, $2.9 million of disputed social-security contributions, and other fines, customs matters and claims. The company had deposited $8.9 million into court-controlled escrow accounts and fully reserved those amounts. Management stated that the unresolved matters were not expected to have a material adverse effect, although outcomes could not be determined.
Management disclosed a material weakness in internal control over financial reporting related to classification and reconciliation of property and equipment. Remediation was ongoing, with completion and testing expected by the end of 2017. Disclosure controls were therefore deemed ineffective as of March 31, 2017.
Investor verification points
- Verify the issuer identity: the provided filing is for Era Group Inc., despite the request identifying Bristow Group Inc.
- Assess whether lower U.S. utilization, excess capacity and the H225 suspension are temporary or could persist through 2017 and beyond.
- Reconcile the $117.0 million of helicopter commitments with expected operating cash flow, asset-sale proceeds and available borrowing capacity.
- Review revolving-credit covenants, maturity timing and the effect of additional borrowing on liquidity.
- Monitor the H225 fleet’s carrying value, return-to-service prospects and potential impairment or residual-value effects.
- Track the Brazilian tax disputes, court-controlled escrow balances and other legal contingencies.
- Confirm completion and effectiveness of the remediation plan for the material internal-control weakness.