Tidewater Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2011; comparative periods ended December 31, 2010. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Interim results are unaudited.
Business context
Tidewater provides offshore service vessels and marine support services to the global offshore energy industry. It reported four operating segments—Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe—after reorganizing its segments during the period; prior segment data was recast. At December 31, 2011, the company reported 343 owned or chartered vessels, excluding joint-venture vessels and vessels withdrawn from service.
Financial performance
| Metric | Quarter ended Dec. 31, 2011 | Quarter ended Dec. 31, 2010 | Nine months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Revenue | $272.1 | $271.8 | $777.6 | $801.4 |
| Operating income | $41.2 | $42.6 | $67.2 | $114.8 |
| Net earnings | $34.1 | $34.4 | $53.8 | $93.6 |
| Diluted EPS | $0.67 | $0.67 | $1.04 | $1.82 |
| Operating margin | 15.1% | 15.7% | 8.6% | 14.3% |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $157.7 | $218.1 |
- Quarterly vessel revenue was essentially flat year over year, while vessel operating costs fell to $155.8 million from $160.6 million. The resulting vessel revenue less vessel operating costs was approximately $114.6 million, or 42.1% of total revenue, versus $109.0 million, or 40.1%, a year earlier.
- Nine-month revenue declined 3.0%; net earnings fell 42.6%. The decline included a $30.9 million non-cash goodwill impairment charge in the Middle East/North Africa segment ($22.1 million after tax, or $0.43 per share). Excluding that charge, results still reflected lower revenue and higher debt costs.
- Quarterly general and administrative expense increased 22% to $40.4 million, primarily due to personnel, incentive compensation, expatriate-related costs, legal fees, and office expenses.
- Nine-month capital additions to property and equipment were $297.0 million, principally for vessel construction and purchases. Investing activities used $266.8 million. Cash declined $57.4 million during the nine months to $188.3 million.
Balance sheet, debt, and liquidity
- At December 31, 2011, cash and cash equivalents were $188.3 million; current assets were $538.4 million and current liabilities $206.8 million, for working capital of approximately $331.6 million.
- Long-term debt was $825.0 million, up from $700.0 million at March 31, 2011. Debt consisted of $165.0 million of 2011 notes, $425.0 million of 2010 notes, and $235.0 million of 2003 notes. Cash less reported debt was approximately negative $636.7 million.
- No credit-facility borrowings were outstanding at December 31, and the full $575.0 million facility was available. In January 2012, Tidewater drew the entire $125.0 million term-loan commitment as its delayed-draw period was expiring; proceeds were for general corporate purposes.
- The credit facility matures in January 2016 and includes a maximum debt-to-capitalization ratio of 55% and a minimum interest-coverage ratio of 3.0. A $60.0 million note maturity is scheduled for July 2012; the company said it could use the facility if needed.
Material changes and operating trends
- For the nine months, Americas vessel revenue decreased 13%, largely reflecting lower deepwater day rates and utilization. Asia/Pacific revenue declined 21%, driven by lower utilization and weaker demand in some vessel classes.
- Middle East/North Africa revenue grew 17%, but vessel operating profit declined sharply as costs rose while the segment scaled up operations and added vessels. Sub-Saharan Africa/Europe revenue rose 8%, supported by deepwater vessel additions, higher utilization, and higher day rates.
- Worldwide fleet utilization was 64.6% for the December quarter versus 62.7% a year earlier. Average worldwide day rates were $13,359 versus $12,337. Newer vessels accounted for 91% of vessel margin for the nine months, according to management.
- The effective tax rate was 8.5% for the quarter and 17.0% for the nine months, versus 22.4% and 23.8%. Management attributed the lower 2011 rates primarily to expiration of statutes of limitation on $8.4 million of uncertain tax liabilities.
- The board authorized a new $200 million repurchase program through June 30, 2012. Tidewater repurchased 739,231 shares for $35.0 million during the nine months, at an average $47.37 per share; approximately $165.0 million remained authorized at December 31. The quarterly dividend was $0.25 per share.
Outlook, commitments, and risks
- No company-specific earnings or revenue guidance is provided. Management said demand and results depend heavily on offshore exploration, development, and production spending, which is influenced by oil and natural-gas prices. Management noted expected growth in global E&P budgets, but also risks from economic uncertainty, weak North American natural-gas prices, and slow U.S. Gulf of Mexico permitting.
- Management highlighted potential pressure on utilization and day rates from approximately 453 offshore support vessels under construction worldwide, while noting that retirement of older vessels and new drilling and production projects could offset some added capacity. These are industry estimates and expectations, not company guidance.
- Vessel construction and purchase commitments totaled $690.1 million, with $420.0 million remaining at December 31. The program included 23 vessels under construction and seven planned purchases. Management expected to fund commitments with operating cash flow, cash, borrowing capacity, new borrowings, or leasing arrangements.
- Construction risks include a substantially delayed Brazilian crew/supply boat subject to arbitration and four Indonesian platform supply vessels delayed to projected delivery dates of July–December 2013 amid the shipyard parent’s financial difficulties. Refundment guarantees or other credit support are described, but recovery remains subject to counterparty and legal risks.
- The Sonatide joint-venture agreement in Angola was extended to March 31, 2012, with certain customer charters continuing on a charter-by-charter basis. Angola is Tidewater’s largest country of operations by vessel deployment and revenue; failure to secure a durable agreement could impair its ability to compete there.
- Brazilian customs fines initially totaled 155 million reais (about $83.2 million); an appeals board disallowed 149 million reais, while review continued and Tidewater contested the remaining amount. The company had not paid or accrued the fines. A separate potential Brazilian state import-tax exposure had not been quantified or accrued; management said liability was not probable based on counsel’s advice.
- The UK Merchant Navy Officers Pension Fund assessment was accrued at $7.1 million. The trustee was considering accelerating remaining installments or requiring security; Tidewater objected and continued installment payments pending resolution.
- Tidewater no longer operated in Venezuela after vessels and other assets were taken in 2009 and was pursuing arbitration for compensation; recovery is uncertain. The company also disclosed an early-stage shareholder derivative suit related to prior DOJ and SEC matters; it said the suit does not seek monetary damages from the company.
- Other disclosed risks include energy-market volatility, competition and fleet overcapacity, foreign exchange, political instability, expropriation, piracy, regulatory and environmental requirements, crew availability and costs, and vessel downtime. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue, utilization, and day rates improve or weaken across segments, particularly in the Americas and Asia/Pacific.
- Cash generation and funding capacity relative to $420.0 million of remaining vessel commitments, the July 2012 note maturity, repurchases, and dividends.
- Delivery progress and potential penalties or recoveries concerning delayed Brazilian and Indonesian vessel projects.
- Resolution of the Sonatide agreement and the outstanding Brazilian customs and potential state-tax matters.
- Whether operating earnings recover after the goodwill impairment and whether elevated corporate costs and interest expense persist.