TIDEWATER INC annual report, FY2014

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Tidewater Inc. — FY2014 Form 10-K Summary

Reporting period: Fiscal year ended March 31, 2014; fourth-quarter figures are also noted. Tidewater operates offshore support vessels and provides marine services to the global offshore energy industry.

Business context and results

The company reported across four geographic segments: Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe. Its business is driven mainly by vessel utilization and day rates, which depend on offshore oil and gas activity. At year-end it owned or chartered 294 vessels, including joint-venture vessels; 15 were stacked. The fleet generated 55.2% of vessel revenue from deepwater vessels.

  • FY2014 revenue: $1.435 billion, up 15% from $1.244 billion in FY2013. Vessel revenue was $1.418 billion. Management attributed growth to higher utilization and day rates in some markets, additional and newer vessels, and the Troms Offshore acquisition.
  • Profit: Operating income was $201.5 million, down from $206.2 million; operating margin was 14.0%, versus 16.6%. Net earnings were $140.3 million, down 7% from $150.8 million; diluted EPS was $2.82, versus $3.03.
  • Vessel economics: Vessel operating costs were $795.9 million, or 56% of vessel revenue, compared with 56% in FY2013. Vessel margin before depreciation and leases was $622.6 million, or approximately 43.9% of vessel revenue, versus approximately 43.7%.
  • Cash flow: Operating cash flow was $104.6 million, down 51% from $213.9 million. The principal driver was working capital tied up in Angola, including a $310.5 million cash-flow increase in amounts due from affiliates. Investing cash outflow was $403.7 million; financing provided $318.9 million.
  • Liquidity: Cash was $60.4 million; working capital was $418.5 million and the current ratio was 2.04. The $600 million revolver was fully available at March 31, 2014. Cash and liquidity figures should be considered alongside the substantial Angola receivable and vessel commitments.
  • Debt: Total debt was approximately $1.515 billion, including $9.5 million current and $1.505 billion long-term, up from $1.0 billion total at FY2013 year-end. Interest and other debt costs rose to $43.8 million from $29.7 million. The credit agreement matures in June 2018 and includes leverage and interest-coverage covenants.
  • Shareholder returns: The declared dividend remained $1.00 per share for FY2014. No shares were repurchased during FY2014. In May 2014, the board authorized a new repurchase program of up to $200 million for July 2014–June 2015.

Changes versus FY2013 and fourth quarter

  • FY2014 fourth-quarter revenue was $367.8 million, versus $328.3 million a year earlier; net earnings were $43.4 million, versus $46.6 million. Fourth-quarter operating income was $61.1 million.
  • Americas vessel revenue increased 26% and operating profit rose to $90.9 million from $40.3 million, supported by deepwater activity. Middle East/North Africa revenue rose 25%; Sub-Saharan Africa/Europe rose 17%, including Troms contributions. Asia/Pacific revenue fell 16% and operating profit fell 34% amid excess vessel capacity and vessel transfers to other markets.
  • Cost growth absorbed much of the revenue increase: vessel operating costs rose 15%, repair and maintenance costs rose 34%, and depreciation and amortization rose 14%. Interest and other debt costs increased 47%.
  • FY2014 included a $56.3 million non-cash goodwill impairment in Asia/Pacific, a $4.1 million loss on early debt extinguishment, and approximately $3.7 million of Troms acquisition transaction costs. Asset-disposition gains were $11.7 million, including gains associated with shipyard and vessel transactions.

Outlook, risks, and notable items

  • Management cited favorable crude-oil pricing and industry forecasts for increased exploration and production spending and offshore rig activity. It expected demand to support vessel markets, while emphasizing uncertainty. The filing provides no specific company revenue or earnings guidance.
  • Industry supply is a material risk: approximately 450 offshore support vessels were under construction, on order, or planned globally, while the existing fleet was estimated at about 3,100. Additions could pressure utilization and day rates; retirement of older vessels could partly offset this.
  • Angola / Sonatide: Approximately $430 million was due from the 49%-owned Sonatide venture at year-end, largely unpaid vessel revenue. Angolan rules requiring local-currency payments created collection, conversion, repatriation, currency, tax, and liquidity risks. Sonatide received the equivalent of about $67 million in kwanza during Q4; Tidewater subsequently collected about $66 million after year-end. Angola generated about $356.8 million, or 25% of consolidated vessel revenue, in FY2014. Management was considering reducing exposure, including redeploying vessels; associated downtime and mobilization costs could be material.
  • Capital commitments: The company had 30 vessels under construction costing approximately $833 million, with $573.5 million remaining to fund. Deliveries were scheduled from June 2014 through June 2016. Subsequent to year-end, it committed approximately $134 million for three additional vessels.
  • Contingencies: Tidewater was contesting Brazilian customs fines of approximately $68.4 million and reported a possible, unquantified future Brazilian state tax assessment. A Nigerian agent dispute concerned approximately $19 million in receivables; the company had not reserved that amount. The NANA TIDE sinking in the Democratic Republic of Congo resulted in a reported $1.2 million transport fine, which the company believed was insured. Venezuela expropriation arbitration remained pending; the filing does not provide a clear estimate of potential recovery. Management said ordinary-course legal matters were not expected to have a material adverse effect.
  • The DOJ deferred-prosecution agreement expired in November 2013, and criminal charges against the subsidiary were dismissed with prejudice. The company also reported an ongoing shipyard dispute involving $11.7 million held in escrow and a substantially delayed Brazilian fast supply boat under arbitration.

Most important facts for investors to verify

  • Collections, aging, currency conversion, and recoverability of the $430 million Sonatide receivable, and the resulting effect on operating cash flow and debt.
  • Progress on Angola payment arrangements, regulatory guidance, and any vessel redeployment or related lost revenue and costs.
  • Funding plan and expected returns for the $573.5 million remaining vessel commitments, plus subsequent new-build commitments and sale-leaseback obligations.
  • Whether capacity additions or weaker oil and gas spending pressure utilization and day rates, particularly in Asia/Pacific and shallow-water markets.
  • Developments in the Brazilian customs and potential state-tax matters, Nigerian receivable litigation, Venezuelan arbitration, and construction disputes.