Tidewater Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2010 (fiscal 2011 second quarter and first half). The interim financial statements are unaudited; amounts below are in millions of dollars unless noted. Tidewater provides offshore service vessels and marine support to the global energy industry.
Financial performance and position
| Metric | Quarter ended September 30, 2010 | Prior-year quarter | Six months ended September 30, 2010 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $267.1 | $295.5 | $529.6 | $622.1 |
| Operating income | $26.9 | $72.0 | $72.2 | $128.2 |
| Net earnings | $19.4 | $98.2 | $59.2 | $142.7 |
| Diluted EPS | $0.38 | $1.90 | $1.15 | $2.77 |
| Operating margin | 10.1% | 24.4% | 13.6% | 20.6% |
| Net margin | 7.3% | 33.2% | 11.2% | 22.9% |
- First-half revenue fell about 15%; net earnings fell about 59%. In the quarter, revenue declined about 10% and net earnings about 80% year over year.
- International vessel revenue, about 91% of first-half vessel revenue, declined 14% to $478.7 million. International vessel operating profit fell to $74.1 million from $128.5 million. U.S. vessel revenue rose 6% to $50.1 million and operating profit rose to $10.7 million from $3.8 million.
- Worldwide fleet utilization was 61.8% in the quarter, down from 67.8% a year earlier; average day rates were $12,366, versus $12,426. International utilization was 62.3% versus 71.3%; U.S. utilization increased to 57.2% from 37.7%, aided by oil-spill response demand.
- Higher international crew, maintenance, fuel and depreciation costs weighed on results. First-half depreciation and amortization was $70.8 million, up from $63.9 million.
- First-half operating cash flow was $153.4 million, versus $164.8 million. Investing used $364.9 million, including $391.5 million of property and equipment additions. Financing provided $40.2 million. Cash declined to $51.7 million from $223.1 million at March 31, 2010.
- At September 30, current assets were $415.4 million and current liabilities $214.2 million, for working capital of approximately $201.2 million and a current ratio of about 1.94. Long-term debt was $390.0 million; the revolving facility had $115.0 million drawn and $335.0 million available, and matures in May 2012.
- Dividends were $0.25 per share for the quarter and $0.50 for the half-year, unchanged from the prior-year periods. The company repurchased $20.0 million of shares in the first quarter, none in the second quarter, with $180.0 million remaining under its authorization.
Material changes and management commentary
- International revenue weakness reflected lower utilization, fewer vessels in service, vessel sales and the loss of Venezuelan operations. Towing-supply/supply vessels drove much of the decline; deepwater vessel revenue increased.
- Management attributed the first-half earnings decline principally to lower revenue and a $24.4 million increase in income tax expense. The comparison also includes unusual prior-year items: a $49.1 million Venezuelan operations provision and a $34.3 million tax benefit from resolution of an IRS dispute. The filing estimates a fiscal 2011 operating tax rate of approximately 22.5%.
- Management described near-term markets as uncertain. Crude oil prices had recovered to roughly $75–$85 per barrel during the first nine months of calendar 2010, but offshore activity remained subject to energy demand, commodity prices, customer spending, and vessel supply. No specific earnings or revenue guidance is provided.
- The Deepwater Horizon response temporarily strengthened U.S. Gulf of Mexico vessel demand and rates, but that demand had declined significantly by September. Although the deepwater drilling moratorium was lifted October 12, 2010, new safety rules and slower permitting create uncertainty about activity and demand.
- The fleet renewal program includes commitments for 26 vessels under construction and four vessel purchases, at an aggregate stated cost of about $700.8 million; $445.2 million remained to be spent at September 30. Management expects to use operating cash flow, existing borrowing capacity and new financing. One crew/supply boat under construction in Brazil was substantially delayed, with further delay possible.
- After quarter-end, Tidewater issued $310.0 million of senior notes on October 15 and expected to issue a further $115.0 million on December 30. The notes carry a 4.25% weighted-average coupon and have maturities of five to 12 years. Proceeds were intended for revolver repayment, fleet investment and general purposes; these post-period proceeds are not included in September 30 cash or debt balances.
Risks, contingencies and unusual items
- FCPA investigations: The company reached a proposed SEC settlement requiring approximately $8.4 million at settlement, plus a contingent $3.0 million penalty, subject to court approval. It also reached an agreement in principle with the DOJ for a three-year deferred prosecution agreement involving a $7.35 million fine and compliance undertakings, also subject to definitive terms and court approval. A $4.35 million DOJ-related charge was recorded in the quarter; the SEC-related charge was recorded in fiscal 2010. The filing reports $15.7 million accrued for proposed SEC and DOJ settlements.
- Angola joint venture: Tidewater’s Sonatide agreement with Sonangol was extended to January 31, 2011 while the parties negotiate a longer-term arrangement. Failure to extend or replace it could impair competition in Angola, a significant operating market and source of revenue from major customer Chevron.
- Merchant Navy Officers Pension Fund: $9.2 million was accrued as payable at September 30, including a $6.0 million additional liability recorded in the quarter. The trustee sought immediate payment of the outstanding amount; Tidewater objected, and additional contributions may be claimed.
- Venezuela: The government’s seizure of vessels and other assets left Tidewater without Venezuelan operations. The company is pursuing ICSID arbitration, but recovery and timing are uncertain. Insurers paid $8.2 million under a settlement, subject to repayment from any later Venezuelan recovery, and Tidewater paid an associated $2.8 million premium.
- Market and operating risks: Potential offshore vessel overcapacity, weak exploration spending, regulatory changes, crew and shipyard cost inflation, foreign exchange, political risk, environmental rules and weather may affect utilization, rates and costs. More than 90% of revenue was generated outside U.S. territorial waters.
- Other unusual items include $3.1 million of vessel impairments recorded in the first half and approximately $9.2 million of billings deferred from revenue recognition because collection from a customer is uncertain. The company also disclosed $9.2 million of remaining vessel purchase and construction commitments under current assessments to the pension fund? The filing separately reports this as the MNOPF amount; vessel commitments are $445.2 million remaining.
Important facts for investors to verify
- Whether international utilization and vessel operating margins stabilize, and whether new vessels can be absorbed without worsening market overcapacity.
- Cash requirements and funding plans for the $445.2 million of remaining vessel commitments, including delivery delays and the expected completion of the remaining $115.0 million note issuance.
- Final court approval, payment terms and compliance obligations for the proposed SEC and DOJ resolutions.
- Outcome of Sonatide negotiations and the MNOPF trustee’s payment demand or any additional deficit assessments.
- U.S. Gulf permitting and regulatory developments after the Deepwater Horizon incident, and their effects on drilling activity, utilization and day rates.
- Potential recovery from Venezuela through arbitration, including the contingent obligation to reimburse insurers from any recovery.
Note: The source filing identifies the quarter ended September 30, 2010; this is Tidewater’s fiscal 2011 second quarter, notwithstanding the request metadata’s “2010 Q2” label.