TIDEWATER INC quarterly report, Q2 FY2014

Tidewater Inc. — Form 10-Q Summary

Business context and reporting period

This filing covers the quarter and six months ended September 30, 2013, Tidewater’s fiscal 2014 second quarter and first half. Tidewater provides offshore service vessels and marine support to the global energy industry. It reported 315 vessels available to serve the industry, including joint-venture vessels and vessels stacked or withdrawn from service.

Financial results and key metrics

Metric	Quarter ended Sep. 30, 2013	Quarter ended Sep. 30, 2012	Six months ended Sep. 30, 2013	Six months ended Sep. 30, 2012
Total revenue	$367.9 million	$311.9 million	$702.0 million	$606.4 million
Operating income	$76.6 million	$57.2 million	$120.0 million	$106.7 million
Net earnings	$54.2 million	$41.4 million	$84.3 million	$74.2 million
Diluted EPS	$1.09	$0.83	$1.70	$1.48
Operating margin	20.8%	18.3%	17.1%	17.6%

Quarterly revenue increased 18% and net earnings increased 31% year over year. For the first half, revenue rose 16% and net earnings rose 14%.
Quarterly vessel revenue was $363.7 million; vessel operating costs were $195.3 million, or 54% of vessel revenue, versus 56% a year earlier. First-half vessel operating costs were 56% of vessel revenue, unchanged year over year. Depreciation and amortization was $42.1 million for the quarter and $82.2 million for the half year.
First-half operating cash flow fell to $9.8 million from $146.3 million. The principal stated driver was a $165.4 million increase in trade and other receivables, including amounts associated with changed local payment requirements and Sonatide working capital.
Investing cash outflow was $275.5 million, including $220.3 million of property and equipment additions and $127.7 million for the Troms Offshore acquisition; $65.6 million of sale/leaseback proceeds partly offset these uses. Financing provided $270.7 million. Cash ended at $45.5 million, compared with $40.6 million at March 31, 2013.
At September 30, current assets were $681.8 million and current liabilities $301.3 million; trade and other receivables were $558.8 million, up from $393.4 million at fiscal year-end. Long-term debt was $1.446 billion, up from $1.000 billion. Debt increased to fund the acquisition, vessel investment and other obligations.
The company had $420 million available under its $600 million revolving facility. The amended $900 million credit facility matures in June 2018 and includes a maximum debt-to-capitalization ratio of 55% and minimum interest coverage of 3.0-to-1.0.
Interest and debt costs were $9.9 million for the quarter and $18.8 million for the half year, versus $7.1 million and $14.7 million, respectively, in the prior-year periods. The quarter and half-year results include a $4.1 million loss on early repayment of Troms Offshore bonds.

Material changes versus the prior comparable period

Revenue growth reflected a reported 17% increase in worldwide average day rates over the first half, a generally improving market, and $24.1 million of first-half revenue from Troms Offshore, acquired June 4, 2013.
Deepwater vessel revenue increased to $204.0 million for the quarter from $149.3 million a year earlier; worldwide fleet utilization rose to 73.2% from 67.8%, and average day rates rose to $17,603 from $15,384.
Segment performance diverged: first-half vessel revenue and operating profit increased in the Americas and Middle East/North Africa, while Asia/Pacific revenue and profit declined. Sub-Saharan Africa/Europe revenue grew, but first-half vessel operating profit fell to $64.8 million from $71.4 million, as operating costs, repairs and maintenance, and depreciation rose.
G&A expense increased 17% to $96.5 million in the first half, with higher professional services, personnel, and office costs. Depreciation and amortization increased 14% to $82.2 million.
In June 2013, Tidewater acquired Troms Offshore for $150 million cash plus assumed obligations of approximately $261.3 million. Preliminary purchase accounting included $42.2 million of goodwill.

Outlook, risks, contingencies, and unusual items

Management provided no specific company earnings or revenue guidance. It described crude-oil demand and offshore activity as supportive of vessel demand, while warning that natural-gas oversupply may weigh on Americas activity. Management also highlighted substantial new vessel construction industry-wide and the possibility of pressure on utilization and charter rates if capacity outpaces demand.
Tidewater had $643.9 million of unfunded vessel, ROV, and purchase commitments at September 30, including 30 vessels under construction and five ROVs. It expects to use operating cash, borrowing capacity and potentially additional borrowing or lease arrangements to fund fleet modernization.
Sonatide, Tidewater’s Angolan joint venture with Sonangol, was still operating under an expired agreement while a replacement awaited Sonangol’s signature. Tidewater reported approximately $280 million of Sonatide-related receivables and $70 million payable to Sonatide. A failed agreement or difficulty converting and remitting Angolan kwanza could raise working-capital needs; a wind-up and vessel redeployment could materially affect results and cash flows.
A $200 million share-repurchase authorization runs from July 2013 through June 2014; no shares were repurchased in the reported six months. The quarterly dividend remained $0.25 per share.
In September, Tidewater sold two vessels and leased them back, receiving $65.6 million and recording a deferred gain of $31.3 million. The operating leases run through September 2020, with $43.5 million of future minimum payments disclosed for these vessels.
Legal and regulatory matters include Brazilian customs fines originally assessed at 155 million reais (about $68.6 million), most of which had been disallowed on administrative appeal but remained potentially subject to further appeal; a possible Brazilian state tax assessment for which no amount was determined or accrued; and a Nigerian dispute over approximately $19 million due for services. Management did not accrue the Brazilian customs fines and stated it believed these matters would not materially affect the consolidated statements.
The Venezuela investment arbitration proceeds to a merits hearing scheduled for mid-2014; the tribunal excluded claims for the seized vessels but retained jurisdiction over claims concerning the operating subsidiary. Related PDVSA and Petrosucre receivables were fully reserved in 2009.
Tidewater’s subsidiary was placed into U.K. administration in July 2013 in connection with the Merchant Navy Officers Pension Fund. The company expects the administration to resolve the subsidiary’s participation and said it did not expect a material consolidated impact. The company also remains subject to a three-year DOJ deferred-prosecution agreement relating to FCPA matters and submitted its third annual report in October 2013.
Other risks include vessel construction delays and shipyard disputes, foreign exchange and political risks, weather and piracy, regulatory and environmental requirements, and the potential for rising crew and drydocking costs. A fast supply boat in Brazil remains suspended amid arbitration; the company reported insurance coverage for 90% of progress payments, leaving approximately $2.4 million of carrying value uncovered.

Important facts for investors to verify

Whether the Sonatide agreement is executed and whether the $280 million receivable balance and associated collection delays normalize.
How much cash the company generates from operations as receivables convert to cash, and whether working-capital needs continue to require borrowing.
Delivery timing, remaining cost and financing for the $643.9 million of unfunded commitments, alongside utilization and day-rate trends as industry vessel supply grows.
Debt levels, interest expense, covenant headroom and completion of the planned $200 million senior-note issuance scheduled for November 15, 2013.
Resolution and potential exposure from Brazilian tax/customs proceedings, the Nigerian receivable litigation, Venezuela arbitration, and shipyard disputes.
Performance and integration of Troms Offshore, including final purchase-price allocation and its contribution to revenue and operating profit.