Filing Scope and Business Context
The supplied filing is Era Group Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2017, not a Bristow Group Inc. filing. Era operated 133 helicopters, primarily serving offshore oil and gas customers, with additional emergency response, dry-leasing, utility, VIP transport and flightseeing activities. Operations are seasonal, particularly in the U.S. Gulf of Mexico and Alaska.
Financial Results and Key Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenue | $61.4 million, down 5.6% | $173.8 million, down 9.0% |
| Operating income (loss) | $(122.8) million | $(128.1) million |
| Net loss attributable to Era Group | $(81.4) million | $(89.9) million |
| Loss per diluted share | $(3.91) | $(4.34) |
| Cash flow from operating activities | Not separately provided | $17.9 million |
- Reported operating margin was approximately negative 200% in the quarter and negative 73% for the nine-month period, primarily because of a $117.0 million H225 impairment charge.
- Excluding gains on asset dispositions, nine-month operating loss margin was approximately negative 77%, compared with negative 3% in the prior-year period.
- Cash and cash equivalents were $26.9 million at September 30, 2017, substantially unchanged from $27.0 million at December 31, 2016.
- Total debt, including current maturities and before discounts and issuance costs, was $220.9 million, compared with $236.4 million at year-end 2016. Carrying value of long-term debt was $217.2 million, including the current portion.
- The $200.0 million revolving credit facility had $51.0 million outstanding, $1.3 million of letters of credit, and reported additional borrowing capacity of $124.6 million based on covenant calculations.
- Capital expenditures were $13.1 million; proceeds from asset dispositions were $5.7 million. Financing activities used $15.0 million, including $24.7 million of debt repayments and $9.0 million of revolver borrowings.
- Total assets declined to $815.8 million from $955.2 million, largely reflecting the H225 impairment. Stockholders’ equity declined to $382.9 million from $468.4 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined $3.6 million. U.S. oil and gas revenue increased $0.6 million, but international oil and gas revenue fell $0.5 million, emergency response revenue fell $3.3 million, and flightseeing revenue fell $0.3 million.
- Nine-month revenue declined $17.1 million, driven principally by lower U.S. oil and gas utilization and a $10.2 million decline in emergency response services following fewer search-and-rescue subscribers and the expiration of air medical contracts.
- Quarterly operating expense increased $3.6 million, primarily from $8.4 million higher repairs and maintenance expense, including higher power-by-the-hour costs and repair timing. Personnel and fuel costs declined.
- Nine-month operating expense decreased $9.0 million due mainly to lower personnel, fuel, insurance and other activity-related costs, partly offset by higher repairs and maintenance expense.
- Administrative and general expense increased $1.4 million in the quarter and $4.3 million for the nine months, primarily due to higher professional services fees and certain tax-related adjustments.
- The Company placed two AW189 and one S92 heavy helicopters into service during the nine months and disposed of two helicopters and other equipment for a $5.0 million gain.
- The Company corrected immaterial prior-period errors during the quarter, increasing operating expense by $0.2 million, administrative expense by $0.7 million, impairment loss by $0.3 million and tax benefit by $0.9 million.
Outlook, Unusual Items, Risks and Contingencies
- Management stated that it expects positive operating cash flow to support working capital, but capital commitments and debt obligations remain significant. Unfunded capital commitments totaled $118.6 million, primarily for helicopters; $7.4 million was expected to be payable during the remainder of 2017, while $114.3 million could be terminated subject primarily to $2.6 million of liquidated damages.
- Management concluded during the quarter that it could not develop a safety case to operate its H225 helicopters as originally planned. The Company continues to market the aircraft for lease or sale and recorded the $117.0 million impairment based on a Level 3 fair-value estimate.
- The Company has filed litigation against Airbus relating to the purchase of H225 helicopters and seeks damages, but the outcome cannot be predicted and litigation costs may be significant.
- On October 31, 2017, the Company elected Brazil’s PERT tax settlement program. Certain eligible obligations are expected to be settled through cash payments equal to 24% of the aggregate obligations and use of accumulated net operating losses, with cash installments through August 2019.
- Brazilian tax and customs disputes included approximately $7.4 million of municipal assessments, a $2.5 million tax-credit dispute, $3.0 million of disputed social-security contributions, and other fines and claims. Outcomes were not determinable, although management did not expect material adverse effects. The Company had deposited and fully reserved $10.2 million in court-controlled escrow accounts for certain matters.
- The filing provides no specific revenue, earnings or cash-flow guidance.
- Disclosure controls were deemed ineffective because of material weaknesses involving property and equipment classification and reconciliation, and tax-provision controls. Management was implementing remediation and expected completion by the end of 2017, but effectiveness was not assured.
- Key business risks include offshore oil and gas cyclicality, customer concentration and contract cancellations, helicopter safety and grounding risk, regulatory restrictions, foreign currency exposure, debt covenants, aircraft resale values, litigation, joint-venture and Brazil-related risks, and reliance on a limited number of manufacturers and suppliers.
Facts an Investor Should Verify
- Verify the issuer identity: the supplied text identifies Era Group Inc., while the request identifies Bristow Group Inc.
- Assess the recoverability and potential further impairment of the H225 fleet, capital parts and related inventory, including the effect of regulatory and customer acceptance developments.
- Reconcile revolver availability of $124.6 million with applicable maintenance covenants and the Company’s $118.6 million of unfunded capital commitments.
- Review the status and cash cost of the PERT settlement and the outstanding Brazilian tax, customs and social-security disputes.
- Evaluate whether the $45.2 million quarterly tax benefit and $48.1 million nine-month tax benefit are realizable and how future tax provisions may be affected.
- Monitor remediation of the material weaknesses and confirm whether subsequent filings report effective disclosure controls and internal control over financial reporting.
- Review the Airbus litigation, potential recoveries, associated legal costs and any implications for the remaining H225 assets.