Tidewater: In-Depth Analysis for the December 2010 Quarter

| About: Tidewater, Inc. (TDW)
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Tidewater (NYSE: TDW) earned $0.67 per diluted share on a GAAP basis in the December-ending third quarter of fiscal 2011, down 42 percent from $1.16 in the same three months of the previous year.

This post examines Tidewater's Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates. Reported earnings were $0.04 less than our $0.71 EPS estimate.

The principal sources for this review were the earnings announcement, the conference call, and the formal 10-Q report.

In a second article, we will report Tidewater's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Tidewater owns the world's largest fleet of vessels serving the global offshore energy industry in exploration, field development, and production. Headquartered in New Orleans for more than 50 years, Tidewater first serviced drillers in the Gulf of Mexico. It now conducts business on a global scale.

In fiscal 2010, which ended last March, Tidewater earned $259 million ($5.02 per share) on Revenue of $1.2 billion. These figures were down from earnings of $407 million ($7.89 per share) on Revenue of $1.4 billion in fiscal 2009.

The company's Market Value was recently $3.0 billion, but it has slipped below that threshold.

For financial reporting purposes, Tidewater's business is divided in U.S. and International segments. In fiscal 2010, the International segment provided 92 percent of total vessel revenues and 96 percent of vessel operating profit.

Profits in the offshore segment of the energy industry have been scarcer the last couple of years. The industry seems to oscillate between periods of high and low activity. Energy producers calibrate their exploration and production activities to changing economic and industry conditions. The Deepwater Horizon disaster in 2010, which led to an offshore drilling moratorium, almost certainly exacerbated the weakness during the current cycle. (A Tidewater vessel, the Damon B. Bankston, was on the scene when the rig failed with tragic results.)

The reduced demand for marine support has been reflected in lower utilization percentages for many classes of Tidewater's vessels, both in the U.S. and internationally. Overall, the utilization rate for the Tidewater fleet fell from 73.9 percent in fiscal 2009 to 65.9 percent in fiscal 2010. Deep-water vessels had the highest utilization rates in both years.

Tidewater is in the midst of an expensive, multi-year effort to expand and modernize its fleet. On 6 October 2010, Tidewater announced it had contracted with Dubai-based Drydocks World for the construction in Indonesia of four deepwater platform supply vessels at a cost of about $100 million. On 30 September 2010, Tidewater was committed to acquire 4 vessels and to build 26 other vessels for a total cost of $700 million.

Industry-wide, the number of new vessels being produced could add to oversupply unless older vessels are scrapped or "stacked." Tidewater is adept at moving vessels from slower to busier regions, although the associated mobilization costs can be significant.

In September 2010, Tidewater announced a plan to sell $425 million of senior unsecured notes to institutional investors. The notes, which will mature in five to twelve years after issuance, will be used for debt refinancing, capital expenditures including fleet modernization, and general corporate purposes.

In February 2011, Tidewater and its lenders agreed on a five-year, $575 million Amended Credit Agreement.

Political risks have long been a characteristic of the high-stakes international energy business, and Tidewater experienced one of these perils in 2009 when Petroleos de Venezuela, S.A., seized 11 Tidewater vessels and other assets in the Lake Maracaibo region of Venezuela.

Tidewater has significant operations in Angola, where it conducted business through a joint venture, known as Sonatide, with the state-owned Sonangol. The agreement governing the management and operation of Sonatide has now mostly expired. Talks to either re-institute the joint venture or establish a different long-term solution continue. Lack of an agreement would affect Tidewater's future revenues.

In the September 2010 quarter, Tidewater recorded a $4.35 million ($0.09 per common share) charge related to an agreement with the U.S. Department of Justice to resolve a Foreign Corrupt Practices Act investigation, most likely focused on Tidewater's operations in Nigeria. Tidewater is now engaged with related discussions with the Nigerian government.

Tidewater has a relatively small number of vessels in Egypt.

Additional background information about Tidewater and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.
Revenue in the December quarter fell 5.1 percent, from $286.5 million last year to $271.8 million in the most recent three months.

Reported revenue was within a whisker of our $272 million estimate.

Revenue from vessels based outside the U.S. fell 2.1 percent, from $254.6 million in the December 2009 quarter to $249.2 million in 2010. Nevertheless, Revenue from the international fleet was still 92 percent of total vessel revenues in the quarter.

U.S. Revenue inched up from $19.9 million to $20.4 million.

The utilization rate for Tidewater's worldwide fleet dropped from 66.5 percent in the December 2009 quarter to 63.7 percent in the latest period. The utilization rate for U.S.-based vessels rebounded from 39.5 percent to 52.0 percent.

Tidewater deemed 394 owned or chartered vessels, on average, to be "in service" during the December 2010 quarter, down from 395 in the year-earlier period. The latest count includes 92 "stacked" vessels, which are considered to be in service even though they do not have crews on board, and the vessels are receiving only limited maintenance. Tidewater stacks vessels for which it cannot find customers at attractive rates.

The number of deepwater vessels owned and operated worldwide (U.S. and International) by Tidewater increased from 46 to 59. The utilization rate for these vessels increased from 79.4 percent to 80.2 percent, but the average vessel "day rate" slipped 7 percent to $22,946. Nevertheless, the greater number of vessels enabled Revenue from this category to increase 15.6 percent to $108.9 million (40.4 percent of total vessel Revenue).

Towing-supply / supply vessels brought in more Revenue, $130.2 million, but this amount was down 14 percent from the December 2009 quarter. The utilization rate for these vessels plunged from 60.7 percent to 54.2 percent, and the average vessel day rate was 3.7 percent lower.

Of the various costs and expenses reported by Tidewater, we group "Vessel operating costs" and "Costs of other marine revenues" and call the combination Cost of Goods Sold. CGS increased 2.8 percent, from $158.8 million in the December 2009 quarter to $163.3 million (60.1 percent of Revenue). The latest results translate into a Gross Margin of 39.9 percent, much less profitable than last year's 44.6 percent.

The Gross Margin was 50 basis points below our 40.4-percent estimate.

Crew costs, which are the largest component of Vessel operating costs, were up 6.2 percent. Insurance costs, though much less significant, were up 250 percent.

Depreciation expenses rose from $32.7 million to $35.1 million because of newly acquired vessels. However, the expense was $1.9 million less than we anticipated.

Sales, General, and Administrative expenses were trimmed from $33.7 million $33.2 million. As a percentage of Revenue, these expenses decreased from 12.8 percent to 12.2 percent.

The reported SG&A amount was $1.8 million less than our $35 million estimate.

The latest quarter did not include separately identified special operating gains or losses.

Subtracting the various operating items discussed above from Revenue yields Operating Income of $40.2 million, down 34.5 percent from $61.3 million in the year-earlier quarter. Operating Income, on this basis, exceeded our $38 million estimate by 5.8 percent.

It's very typical for Tidewater to replace older vessels with new ones. In the most recent quarter, disposing of assets led to a $2.4 million gain, which was significantly less than our $7 million estimate. (Tidewater treats this type of gain as an operating item, but we keep it below the line in our Income Statement template.)

Miscellaneous non-operating income fell to $1.7 million from $4.3 million in the year-earlier quarter. Our estimate for this income was $3 million.

The effective Income Tax Rate was 22.4 percent, much more burdensome than the 15.4 percent rate in the December 2009 quarter. However, the increase was expected, and the latest rate was actually 2 percent below the 24.5 percent tax rate we had assumed.

Net Income of $34.4 million ($0.67 per share) was 43 percent less than last year's $59.9 million ($1.16 per share). The latest results also fell short of our $36.2 million ($0.71 per share) estimate by 5 percent. Since Operating Income, as discussed above, was slightly better than we had estimated, the shortfall at the bottom line was due to lower-than-expected asset sale gains and lower-than-expected miscellaneous non-operating income. The slightly lower-than-expected tax rate was an offsetting factor.

In summary, Tidewater's revenue decreased in the latest quarter, but the magnitude of the decline was consistent with expectations. Operating costs were slightly less than expectations. Asset disposal gains were below the typical quarterly amount, but some variability in this item is not usual. Non-operating income was adversely affected by some additional expenses, which trimmed earnings marginally.

Full disclosure: Long TDW at time of writing.