Turnaround Letter-recommended Bristow Group (NYSE: BRS) made several announcements since yesterday’s market close. While the company could survive any one of its emerging problems, their combined weight makes it unlikely to recover. We are moving our recommendation to SELL.
The announcements included:
3Q earnings – operating revenues of $317 million fell 8.2% from a year ago. Adjusted EBITDA of $23.6 million was 32% below the year-ago result. Adjusted EBITDA excluding approximately $10 million in one-time items was 61% lower than a year ago.
Reporting of a material weakness in internal controls, which they said relates to whether some debt is classified as short-term rather than long-term. They are evaluating whether the company can obtain related waivers from lenders and are assessing the impact on BRS’s ability to operate as a going concern. Any revisions will be made in upcoming 10Q on Feb 19 (one week from today).
Terminating their agreement to buy Columbia Helicopters. Bristow has paid Columbia a $20 million breakup fee.
- Bristow CEO Jonathan Baliff is retiring at the end of February, accelerating his exit timetable. He will also resign from Bristow’s board of directors. The current interim president (the current Vice Chairman) will take the interim CEO role until a new CEO found.
There are a few positives in the news:
A new CEO could make significant improvements by aggressively cutting costs, divesting operations and paying down debt. The outgoing CEO did not make these changes nearly quickly enough, and also oversaw significant accounting problems.
The high 3Q operating cash burn of $42 million included an estimated $30 million - $35 million of unfavorable working capital outflows, mostly from payables/accrued liabilities. These outflows are unlikely to recur.
- Bristow still has $231 million in cash on its balance sheet.
The negatives are daunting:
Revenues continue to decline, so cost-cutting will only go so far, particularly as the Adjusted EBITDA margins are a thin 7.5%.
If the company can generate $100 million in EBITDA (a real stretch if not impossible), its debt level would be about 15x EBITDA. Given its very weak and likely shrinking recurring cash flows, it has little if any chance to reduce its leverage. Debt holders are likely very nervous, particularly with the material weakness, and may not grant any covenant waivers. Bristow’s unsecured bonds are currently trading around 30-cents on the dollar.
Given its financial difficulties, suppliers are increasingly likely to demand cash payments, further constricting its balance sheet.
Adjusted EBITDA is no longer covering Bristow’s interest payments, greatly shrinking its time horizon.
If Bristow were to sell some of its operations or assets, it is unclear what proceeds they could receive. It is likely that asset sales would only buy them a little time, rather than meaningfully increasing their chances of a successful turnaround.
- If the company files for bankruptcy, equity holders would almost certainly receive nothing. At a valuation of 8x an optimistic $100 million of EBITDA, the company’s operations would be worth $800 million compared to its estimated $1.5 billion in debt (partly offset by cash).
We see little chance of recovery in Bristow shares, given the combined weight of these announcements and the company’s deteriorating financial condition.
We are moving Bristow Group shares (BRS) to a SELL.
Disclosure Note: An employee of the Publisher owns BRS shares.