Tidewater Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2010, Tidewater’s first quarter of fiscal 2011. The interim financial statements are unaudited; the independent accountant performed a review, not an audit. Amounts below are in U.S. dollars.
Business context
Tidewater provides offshore service vessels and marine support to the global energy industry, reporting International and United States segments. At quarter-end, it had 390 vessels including joint-venture and withdrawn-from-service vessels; international operations generated 91% of vessel revenue. Results depend substantially on customer offshore activity, vessel utilization and day rates.
Financial performance and liquidity
| Metric | Quarter ended June 30, 2010 | Prior-year quarter |
|---|---|---|
| Total revenue | $262.5 million | $326.6 million |
| Operating income | $45.3 million | $56.2 million |
| Net earnings | $39.8 million | $44.5 million |
| Diluted earnings per share | $0.77 | $0.86 |
| Operating cash flow | $52.8 million | $70.4 million |
| Capital additions to property and equipment | $141.1 million | $92.2 million |
- Revenue fell about 20%; operating income declined about 19% and net earnings about 10%. Operating margin was approximately 17.2%, versus 17.2% in the prior-year quarter; net margin increased to about 15.2% from 13.6%.
- Vessel revenue was $262.0 million, down from $310.4 million. International vessel revenue declined 17% to $237.1 million; U.S. vessel revenue rose 2% to $24.9 million. Other marine revenue dropped to $0.5 million from $16.2 million.
- Worldwide vessel utilization declined to 61.1% from 70.7%, while average day rates rose to $12,511 from $12,282. International utilization was 62.2% versus 73.2%; U.S. utilization was 51.1% versus 49.0%.
- Cash and cash equivalents were $122.9 million at June 30, down $100.2 million during the quarter. Cash used in investing was $121.1 million, principally reflecting vessel and other property additions; financing used $31.9 million, including $20.0 million of repurchases and $12.9 million of dividends.
- Long-term debt was $300.0 million at quarter-end; the $450.0 million revolving facility was undrawn and available. Subsequent to quarter-end, Tidewater borrowed $100.0 million under the facility and paid a $25.0 million senior note maturity on July 30. The filing reclassified that maturity as long-term at June 30.
- Total assets were $3.32 billion and stockholders’ equity was $2.47 billion at June 30. The company declared a $0.25-per-share dividend, unchanged from the prior-year quarter.
Material changes and unusual items
- Lower international utilization, weaker demand, fleet sales and stacking, and the loss of Venezuelan operations drove much of the revenue decline. International towing-supply/supply revenue fell sharply; deepwater vessel revenue increased, partly offsetting declines elsewhere.
- The prior-year quarter included a $48.6 million provision for Venezuelan operations, including a full reserve against PDVSA and Petrosucre receivables. No comparable provision was recorded in the current quarter. The current-year effective tax rate was 18.5%, versus 28.4%, primarily reflecting that prior-year provision.
- Current-quarter gains on asset dispositions were $5.6 million, compared with $12.5 million a year earlier; three stacked vessels incurred $1.3 million of impairment charges.
- Cash repurchases totaled $20.0 million for 486,800 shares at an average $41.06 per share. The repurchase authorization was extended through June 30, 2011, with $180.0 million remaining at quarter-end.
- At June 30, remaining commitments for 24 vessels under construction and 11 vessel purchases totaled $504.7 million. The company spent $134.1 million on vessel construction and purchases during the quarter.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said international utilization and day rates could remain weak or weaken further if oil prices or customer spending fall. It cited uncertain global recovery, industry vessel oversupply and a large pipeline of new vessel deliveries.
- The Deepwater Horizon spill response temporarily supported U.S. Gulf vessel demand and rates, but the deepwater drilling moratorium, permitting restrictions and potential regulatory or insurance-cost changes could reduce future U.S. Gulf activity. Management noted that international operations remain the principal revenue and earnings driver.
- Tidewater had no vessels or operations remaining in Venezuela following government seizures. It is pursuing ICSID arbitration for compensation; recovery is uncertain. The $8.2 million insurer payment is subject to repayment, less certain expenses, if the company later receives payment from Venezuela.
- A proposed SEC FCPA settlement would require approximately $11.4 million in total payments, including an $8.4 million settlement amount and a contingent $3.0 million penalty; court confirmation was pending. No DOJ resolution had been reached, and additional exposure could not be estimated; management warned that ultimate resolution could materially affect results or cash flows.
- Angola joint-venture agreement discussions with Sonangol were extended to January 31, 2011. Failure to agree on a new arrangement or further extension could impair Tidewater’s ability to compete in Angola, a major operating market and an important source of revenue from its largest customer, Chevron.
- Shipyard delays, including delays affecting two crewboats under construction in Brazil, could defer deliveries; certain customer contracts include liquidated damages for late delivery. The company also disclosed $3.8 million accrued for the UK Merchant Navy Officers Pension Fund, with possible additional contributions.
- Management identified risks including oil and gas demand and prices, competitor fleet growth, credit-market access, political instability and expropriation, foreign exchange, labor costs, and environmental and anti-corruption law enforcement. Disclosure controls were concluded to be effective; no material quarter-specific change in internal control was reported.
Most important facts for investors to verify
- Whether international utilization and day rates stabilize, particularly for towing-supply/supply vessels, and whether new vessel capacity pressures pricing.
- How the Deepwater Horizon moratorium and related regulation affect U.S. Gulf vessel demand, and whether spill-response work proves temporary.
- Progress and funding of the $504.7 million remaining vessel commitments, including delivery timing, delays and the effect on cash and borrowings.
- Outcomes and cash exposure from the SEC and DOJ FCPA matters, Venezuela arbitration and insurer repayment terms, and potential MNOPF assessments.
- Whether the Sonatide joint-venture agreement is renewed on acceptable terms before its extended January 31, 2011 termination date.
- Collectibility of approximately $9.2 million of deferred customer billings; the filing says revenue recognition is deferred until cash is collected or collection uncertainty is significantly reduced.