Tidewater Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended September 30, 2014, the second quarter and first half of fiscal 2015. Tidewater provides offshore support vessels and related services to the oil and gas industry. The interim financial statements are unaudited; the independent accountant’s review did not express an audit opinion.
Financial performance and position
| Metric | Quarter ended September 30, 2014 | Six months ended September 30, 2014 |
|---|---|---|
| Total revenue | $397.5 million, up 8.0% year over year | $783.2 million, up 11.6% |
| Vessel revenue | $391.0 million, up 7.5% | $772.5 million, up 11.1% |
| Operating income | $84.7 million, up 10.7%; 21.3% of revenue | $150.7 million, up 25.6%; 19.3% of revenue |
| Net earnings attributable to Tidewater | $60.9 million; diluted EPS $1.22 | $104.6 million; diluted EPS $2.10 |
| Operating cash flow | Not separately presented for the quarter | $185.3 million, versus $9.8 million a year earlier |
- For the six-month comparison, net earnings were $104.5 million versus $84.3 million; diluted EPS was $2.10 versus $1.70. Management attributed higher earnings primarily to revenue growth.
- Six-month vessel operating costs rose 9.9% to $430.1 million. Depreciation and amortization was $86.8 million, and interest and other debt costs, net, were $25.7 million.
- Six-month investing cash outflow was $91.7 million, including $128.4 million of property and equipment additions; financing cash outflow was $29.7 million. Cash increased to $124.3 million from $60.4 million at March 31, 2014.
- At September 30, current assets were $896.9 million and current liabilities $422.0 million (current ratio about 2.1). Working capital was about $474.9 million. This includes $408.0 million due from an affiliate, largely associated with Angola.
- Balance-sheet debt, including current maturities, was approximately $1.506 billion; total equity was $2.777 billion. The company had $600 million available on its revolving facility, which matures in June 2018. Credit agreements require debt-to-capitalization not above 55% and interest coverage of at least 3.0 to 1.0.
- The quarterly dividend was $0.25 per share. A share-repurchase authorization of up to $200 million was in effect through June 30, 2015; no shares had been repurchased under it.
Material changes versus prior comparable period
- Management reported a 9 percentage-point increase in worldwide vessel utilization and a 10% increase in average fleet day rates for the first half. The filing’s detailed fleet statistics report worldwide utilization of 79.5% versus 71.0% and average day rates of $19,056 versus $17,299.
- Americas vessel revenue increased 32% in the first half, led by deepwater activity. Middle East/North Africa revenue increased 21%, while Sub-Saharan Africa/Europe revenue declined 3%. Asia/Pacific revenue rose 7%, but segment operating profit declined amid higher crew and maintenance costs.
- Operating cash flow improved substantially year over year, principally because the prior-year period had a large increase in amounts due from affiliates; improved collections from Angola contributed to the current-period change.
- Capital spending on property and equipment fell to $128.4 million from $220.3 million, and there were no acquisition payments in the period versus $127.7 million in the prior-year period. The prior-year period also included a $4.1 million loss on early extinguishment of debt.
Outlook, management commentary, risks and unusual items
- Management characterized the worldwide offshore support vessel market as reasonably balanced at the time of filing, but noted that lower oil prices could weaken exploration and production spending. It cited October 2014 WTI and Brent prices of about $83 and $84 per barrel, respectively, and warned that vessel additions could pressure utilization and rates. No formal earnings or revenue guidance is provided.
- The company had $596.6 million of remaining commitments for 30 vessels and two ROVs under construction, with scheduled deliveries extending through June 2016. Management expects to use operating cash flow and borrowing capacity, and possibly new borrowings or lease financing, to fund commitments. It continues to assess these investments against other uses of cash, including share repurchases.
- Angola is a significant concentration and collection risk. The company reported $408 million due from Sonatide at quarter-end; new currency rules may delay conversion and transfer of kwanza receipts, and a maritime decree may require restructuring toward full Angolan ownership of local operators. Tidewater collected about $186 million from Angolan customers in the first half, against about $179 million of related revenue, including $82 million converted from kwanza into dollars. The company had transferred a net 10 vessels out of Angola since April 1.
- Management cited falling oil prices, customer spending decisions, industry vessel and rig overcapacity, skilled-labor costs, maintenance and drydock downtime, foreign-exchange controls, political and regulatory uncertainty, and shipyard delays among key risks. It estimated about 450 relevant offshore support vessels were under construction worldwide as of October 2014.
- Unusual items include $32.8 million of sale/leaseback proceeds from two vessels in the first half, with gains deferred and recognized over the lease terms; a $3.6 million quarterly net gain on asset dispositions; and $1.9 million of impairment charges for the six months.
- Contingencies include Brazilian customs fines originally assessed at 155 million reais (about $63.6 million), of which appeals had disallowed 127 million reais; the remaining 28 million reais was still pending and earlier decisions remained subject to possible appeal. Tidewater had neither paid nor accrued the fines and believed it had a high probability of success. Separately, about $5.3 million of Brazilian state tax deposits are expected to be returned following a Supreme Court decision, but timing is uncertain.
- For claims following the NANA TIDE sinking in the Democratic Republic of Congo, a report described $4.5 million in claims. The company had not accrued a liability because it had not concluded that any potential loss was both probable and reasonably estimable; insurance coverage may apply. A separate Nigerian dispute involves approximately $19 million of unpaid customer invoices; no reserve was recorded. The Venezuela investment-arbitration tribunal’s written merits decision remained pending, with timing uncertain.
- One Brazilian fast supply boat remained suspended amid a long-running shipyard arbitration; insurance covers 90% of progress payments, leaving about $2.4 million of carrying value uncovered. In October 2014, Tidewater and a U.S. shipyard also resolved disputes over an $11.7 million escrow, with the allocation confidential.
Most important facts for investors to verify
- Collection, convertibility and remittance of the $408 million Angola-related affiliate receivable, and the effect of new Angolan ownership and foreign-exchange rules.
- Funding, delivery timing and expected returns on the $596.6 million of remaining vessel and ROV commitments, alongside the company’s debt covenants and $600 million revolver availability.
- Whether utilization and day-rate improvements persist if oil prices fall or vessel supply grows, and how crew, repair, lease and drydock costs affect margins.
- Developments in the Brazilian customs appeals, DRC claims, Nigerian receivable litigation and Venezuela arbitration, including any change in accruals or insurance recovery.
- Cash-flow quality: the extent to which operating cash flow depends on affiliate settlements and collections, rather than recurring operating earnings.