Tidewater Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended June 30, 2012, compared with the three months ended June 30, 2011. Dollar amounts below are in millions unless stated otherwise. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and financial performance
Tidewater operates offshore service vessels and provides marine support to the global offshore energy industry. At June 30, 2012, it reported 336 vessels, including joint-venture vessels and vessels stacked or withdrawn from service. Management measures performance across Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe.
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total revenue | $294.4 | $254.6 | +15.6% |
| Vessel revenue | $290.1 | $253.3 | +14.5% |
| Operating income | $49.5 | $31.5 | +57.3% |
| Net earnings | $32.9 | $24.6 | +33.8% |
| Diluted EPS | $0.65 | $0.48 | +35.4% |
| Operating cash flow | $69.1 | $26.5 | +$42.6 |
| Capital additions to property and equipment | $77.4 | $69.7 | +$7.8 |
Operating margin was approximately 16.8%, versus 12.4%; net margin was approximately 11.2%, versus 9.6%. Vessel operating costs rose 8.9% to $165.8, slower than vessel revenue growth; vessel margin (vessel revenue less vessel operating costs) was $124.3, or approximately 42.8% of vessel revenue, compared with $101.0, or 39.9%.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $240.6 at June 30, down from $320.7 at March 31, 2012. Current assets were $639.6 and current liabilities $321.2; the resulting current ratio was approximately 2.0x and working capital $318.4.
- Cash declined by $80.1 during the quarter: operating cash flow of $69.1 was exceeded by investing outflows of $72.4 and financing outflows of $76.8. Operating cash flow less property-and-equipment additions was negative $8.4.
- Reported debt totaled $950.0: $125.0 term-loan borrowings and $825.0 senior notes. Of this, $60.0 was classified as current maturities and $890.0 as long-term debt. The $450.0 revolving facility had no borrowings and was available. The credit facility matures in January 2016 and includes a maximum debt-to-capitalization ratio of 55% and minimum interest coverage ratio of 3.0.
- The company repurchased 1.40 million shares for $65.0 at an average $46.43 per share. A new $200.0 repurchase authorization runs July 1, 2012 through June 30, 2013; none had been used as of June 30. The quarterly dividend remained $0.25 per share.
- Vessel-construction and purchase commitments were $412.2, with $172.7 scheduled for the remaining nine months of fiscal 2013. Management expects to fund fleet investment with operating cash flow, cash, available credit and, if appropriate, additional borrowing or lease arrangements.
Material changes and operating drivers
- Growth was concentrated outside the Americas. Asia/Pacific vessel revenue rose 46% to $51.7, Middle East/North Africa rose 25% to $32.5, and Sub-Saharan Africa/Europe rose 16% to $128.3; Americas revenue declined 4% to $77.7.
- Worldwide utilization increased to 68.4% from 61.5%, and average day rates increased to $14,275 from $12,496. Improved utilization and rates, particularly for deepwater and towing-supply vessels in Asia/Pacific and the Middle East, supported results. Newer vessels generated 98% of vessel margin, compared with 91% in the prior-year quarter.
- Vessel operating costs rose $13.5 to $165.8, including higher crew and repair-and-maintenance costs. General and administrative expense increased 8% to $40.7. Interest and other debt costs increased to $7.6 from $4.1, reflecting new senior notes and the term loan, as well as lower interest capitalization.
- Net cash from operations increased substantially, but management attributed part of the improvement to working-capital timing, including customer collections and billings and higher trade payables. It should not be assumed to represent a recurring run rate.
Outlook, risks, contingencies, and unusual items
- No specific company revenue or earnings guidance was provided. Management described demand as tied to customer exploration and production spending, crude and natural-gas prices, vessel supply, utilization and day rates. It noted crude prices had fallen during the quarter, U.S. natural-gas prices remained weak, and analyst surveys anticipated higher global E&P spending, particularly internationally.
- Management cited approximately 415 offshore support vessels under construction industry-wide, against an estimated worldwide fleet of about 2,775 vessels in the relevant classes. New vessel supply could pressure utilization and rates; retirement of older vessels and new drilling and production projects may offset some of that pressure. Crew shortages, wage inflation, drydockings, repair costs, energy-market volatility, political and currency risks, and regulatory changes are additional risks.
- Negotiations to restructure the Sonatide joint venture with Sonangol remained unresolved. A wind-up could cause redeployment costs, contract downtime and lost revenue, potentially materially affecting results and cash flow. Angola-related vessel revenue was approximately $62, or 21% of consolidated vessel revenue, in the quarter.
- Brazilian customs authorities originally assessed fines of about $77 for alleged vessel-import violations. An administrative appeal disallowed about $74; approximately $3 remained contested. Tidewater had paid or accrued none of the fines and said it believed the assessment lacked legal basis. A separate potential Brazilian state import-tax claim could be substantial, but no accrual was recorded because management judged a liability not probable.
- Two vessels under construction at a U.S. shipyard were substantially delayed; the shipyard sought extensions and contract-price increases, and negotiations continued. A delayed Brazilian crew/supply-boat project remained in arbitration; 90% of progress payments were covered by insurance, leaving approximately $2.4 of carrying value unsupported by that coverage.
- A U.K. multi-employer pension-fund assessment of $5.7 was accrued, with installments due through October 2014; additional assessments remain possible. Former CEO Dean Taylor was expected to receive a $12.6 supplemental-retirement lump sum in December 2012, with an estimated $4.4 settlement loss to be recorded at distribution.
- The FCPA-related deferred prosecution agreement requires ongoing compliance and reporting; its $7.35 fine had been paid. The related shareholder derivative suit was dismissed with leave to amend; the plaintiff instead demanded a board investigation, and motions concerning the proceedings remained pending.
- Subsequent to quarter-end, the company agreed to construct two deepwater PSVs for approximately $34.0 and purchase two for approximately $56.5. The filing also reported a $2.8 vessel-asset impairment charge in the quarter.
Most important facts for investors to verify
- Whether higher utilization and day rates persist, particularly in Asia/Pacific and the Middle East, and whether industry vessel deliveries pressure future pricing.
- Cash conversion and liquidity after accounting for the $412.2 of existing vessel commitments, the subsequent $90.5 of announced commitments, and any further share repurchases.
- The timing and refinancing or repayment plan for the $235.0 of 2003 senior notes with a reported weighted-average remaining life of 1.1 years, alongside compliance with debt covenants.
- Progress and financial consequences of the Sonatide negotiations, Brazilian customs and potential state-tax matters, and shipyard delay and arbitration disputes.
- Actual timing and amount of the former CEO’s retirement-plan settlement loss and any additional MNOPF contributions or other material contingencies.