Founded in 1971, Erickson Air-Crane Inc (NASDAQ:EAC) is a world leader in the manufacture and operation of the S-64 Aircrane, one of the most versatile and powerful heavy-lift helicopters in the world. This gives Erickson a solid, leading position within the heavy-lift aviation industry—an industry that has high barriers to entry and very few competitors.


Moreover, the company is currently trading at a TTM P/E of 8.4 and a P/B ratio of 0.8, so Erickson looks to offer prospective value.

However, while the company looks to offer value, a closer inspection of its recent acquisitions, in particular the acquisition of Evergreen Helicopters, Inc, reveal that Erickson Air-Crane Inc (NASDAQ:EAC) could be in for a rocky ride ahead.

Erickson acquired Evergreen in a leveraged buy-out

Erickson Air-Crane Inc (NASDAQ:EAC) acquired Evergreen in a leveraged buy-out, saddling Erickson with $400 million in long-term debt. The total value of the transaction was only $250 million, but due to an additional acquisition and the need for additional working capital, Erickson had to increase its borrowing. Unfortunately, prior to Erickson’s buy-out, there was only one way to describe Evergreen and that is, in the words of Gordon Gecko, ‘a dog with fleas’.

The auditor’s report for Evergreen’s full-year 2012 report states:

‘The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern….The Company is in default on its debt, has negative working capital, and in addition, is a guarantor of certain of its Parent’s and a Stockholder Affiliate’s debt that is also in default at December 31, 2012. The default on the Company’s and its Parent’s debt and the resulting liquidity concerns raises substantial doubt about the Company’s ability to continue as a going concern….The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.”

Furthermore, up to 50 percent of Evergreen’s helicopter fleet was sitting idle at the point of acquisition. Why? Possibly due to low demand. However, considering the fact that Evergreen had negative working capital, was in default on its debts and one of its suppliers was demanding payment of $2,221,000 for parts supplied and unpaid for since 2006, it is likely that this, as Erickson calls it ‘idle capacity’, is actually in need of significant maintenance, which Evergreen could not afford.

Erickson brought itself at least four lawsuits

What’s more, it would appear that Erickson Air-Crane Inc (NASDAQ:EAC) has actually brought itself at least four lawsuits with the Evergreen acquisition. So far, these lawsuits are for claims totaling around $18 million against Evergreen, all of which relate to late or no payment for services rendered. There is also an ongoing suit with the state of Arizona relating to environment damages caused by Evergreen.

However, reading through Erickson’s corporate presentations, management seem to be infected with a case of undeniable optimism. They believe that the commissioning of idle capacity will lead to a significant revenue boost without mentioning how much it will cost to bring this capacity online. They also boast that Evergreen is a “highly cash generative business” with “strong customer relationships” (three of which are suing the company for late payment and environmental damage).

It remains to be seen if Erickson can turn the crippled Evergreen around but the now debt saddled Erickson has problems of its own.

Evergreen’s idle fleet back into service

During the second quarter of 2012, before Erickson embarked on its acquisition spree, the company reported revenues for the quarter of $38 million, gross margins of 27 percent, operating margins of 8.1 percent, interest costs of $1.7 million and a net margin of 3 percent. After its Evergreen acquisition during the first quarter of this year, the company reported second quarter 2013 revenues of $69 million, gross margins dropped to 25 percent, operating margins dropped to 7 percent, and interest costs have exploded to $6.6 million, 134 percent of operating income. Cash flows look no better, spending on aircraft support parts totaling $11.5 million during the period, up from the $665k reported during the same period last year—presumably as Erickson took on the task of getting Evergreen’s idle fleet back into service. All this spending meant that Erickson had to withdraw $79 million from its $100 million credit facility during the quarter, add on the $400 million in notes issued and the company starts to look like its drowning. Debt to assets is 60 percent, although strip out goodwill from the Evergreen acquisition and this ratio rises to 90 percent. I would not rule out this ratio moving above 100 percent during the next few quarters.

So overall, Erickson Air-Crane Inc (NASDAQ:EAC) many look to offer value but the company is currently drowning in debt and it is not possible to establish how long it will take the company to recover from its somewhat misguided acquisition.