Filing scope and business context
The supplied Form 10-Q is for Era Group Inc., not Bristow Group Inc. It covers the quarter and nine months ended September 30, 2016, and was filed November 1, 2016. Era operates helicopters primarily for offshore oil and gas transportation, as well as search and rescue, air medical, utility, flightseeing and dry-leasing services. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenue | $65.0 million, down 6.8% | $190.9 million, down 8.2% |
| Operating income (loss) | $2.4 million vs. $5.1 million | $(1.9) million vs. $19.5 million |
| Operating margin | 3.6% vs. 7.3% | (1.0)% vs. 9.4% |
| Net income (loss) attributable to Era | $(0.6) million vs. $0.9 million | $(2.4) million vs. $12.2 million |
| Diluted EPS | $(0.03) vs. $0.04 | $(0.12) vs. $0.59 |
| Cash flow from operations | $46.5 million vs. $35.8 million for the comparable nine-month period |
Revenue pressure was concentrated in U.S. Gulf of Mexico and Alaska oil-and-gas operations, reflecting lower utilization and rates. International revenue increased substantially, primarily because Aeróleo was consolidated beginning October 1, 2015, and because of new Suriname contracts. Dry-leasing revenue declined sharply.
As of September 30, 2016, cash and cash equivalents were $32.1 million, total assets were $971.5 million, and property and equipment, net, was $828.0 million. Total debt, including the current portion and before balance-sheet discounts and issuance costs, was $238.4 million; carrying-value long-term debt was $234.2 million. The company had $70.0 million outstanding under its revolving credit facility and $1.2 million of letters of credit.
Capital expenditures were $10.7 million, compared with $47.3 million in the prior-year period. Net cash used in investing activities was $3.3 million, while net cash used in financing activities was $26.2 million. Cash increased by $17.8 million during the nine months.
Material changes versus the prior comparable period
- Operating revenue decreased $4.7 million in the third quarter and $17.0 million for the nine-month period.
- Operating expenses decreased $2.6 million in the quarter but increased $5.7 million for the nine months, partly because of Aeróleo consolidation and higher personnel and other operating costs.
- Administrative and general expense decreased $1.7 million in the quarter and $4.9 million for the nine months, reflecting U.S. headcount and cost-control measures and the termination of the SEACOR transition-services agreement.
- Depreciation and amortization increased to $38.0 million for the nine months from $35.2 million, reflecting additional helicopters and infrastructure placed in service.
- The prior-year nine-month results included a $12.9 million pretax gain on the sale of the FBO business; no comparable gain occurred in 2016.
- Interest expense increased to $12.9 million from $9.5 million, primarily because interest on helicopter deposits was no longer capitalized, partly offset by debt repurchases.
- Era repurchased $5.0 million principal amount of its 7.750% senior notes during the nine months and recognized a $0.5 million gain on extinguishment.
- Aeróleo consolidation contributed $6.3 million to the loss attributable to noncontrolling interest through a contribution of partner-held notes payable as additional capital.
Outlook, risks, contingencies and unusual items
Management expects to generate positive operating cash flow and believes it will be adequate for working capital needs, but future liquidity will also depend on asset sales, borrowing capacity, capital expenditures and operating profitability. Unfunded helicopter commitments totaled $150.3 million, including $35.6 million expected to be payable during the remainder of 2016 and the balance through 2018. Approximately $107.7 million of these commitments could be terminated with aggregate liquidated damages of $2.5 million.
Following an October 27, 2016 amendment, revolving credit commitments were reduced from $300.0 million to $200.0 million. The amendment revised leverage, interest-coverage and asset-coverage covenants and added cash-sweep and cash-balance restrictions. Reported availability increased from $124.3 million before the amendment to $128.8 million after the amendment, subject to covenant compliance and other conditions.
Operations of the company’s nine H225 helicopters were suspended following a fatal April 2016 accident involving that model operated by a competitor. The H225 fleet and related parts had a net book value of $162.4 million at September 30, 2016. Management could not predict the duration of the suspension, future customer acceptance or the effect on residual values. A competitor’s bankruptcy and returned or potentially returned helicopters could also increase industry supply and pressure rates and secondary-market values.
Brazilian tax disputes include approximately $7.1 million of municipal assessments, a $2.2 million Aeróleo tax-credit dispute, $2.7 million of disputed social-security contributions and other value-added-tax and customs matters. The company has deposited $7.5 million into court-controlled escrow accounts and has fully reserved those amounts. Management states that adverse outcomes are not expected to be material, but the filing says certain outcomes cannot currently be determined.
Additional risks include dependence on volatile offshore oil-and-gas activity, customer concentration and cancellations, helicopter safety and grounding events, competition, foreign-currency exposure, political and regulatory conditions, insurance availability, fleet obsolescence and the secondary helicopter market.
Investor verification checklist
- Verify the issuer identity: the supplied filing is Era Group Inc., despite the request identifying Bristow Group Inc.
- Assess whether the H225 suspension could cause impairment or materially reduce utilization and residual values.
- Review compliance with the amended revolving-credit covenants and the company’s actual borrowing availability.
- Reconcile the $150.3 million helicopter commitment balance with deliveries, sales and termination rights after September 30, 2016.
- Evaluate whether declining U.S. oil-and-gas utilization and rates are offset by international growth and diversification.
- Monitor the Brazilian tax disputes, escrowed funds and any changes to recorded reserves.
- Separate recurring operating performance from unusual items, including the prior-year FBO gain, Aeróleo consolidation effects, asset-sale gains and PBH-related credits.