Tidewater Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly period ended December 31, 2013 (Tidewater fiscal 2014 third quarter). Tidewater operates offshore service vessels supporting exploration, development and production in four geographic segments. At period-end, it reported 298 vessels available to serve the industry, including joint-venture vessels and stacked vessels. Financial amounts below are in U.S. dollars; unless stated otherwise, millions.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2013 | Prior-year quarter | Nine months ended Dec. 31, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $365.2 | $309.5 | $1,067.3 | $915.8 |
| Operating income | $20.5 | $41.0 | $140.5 | $147.7 |
| Operating margin | 5.6% | 13.2% | 13.2% | 16.1% |
| Net earnings | $12.6 | $29.9 | $96.8 | $104.2 |
| Diluted EPS | $0.25 | $0.61 | $1.95 | $2.09 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $69.8 | $182.7 |
- Quarterly vessel revenue rose 18%; worldwide fleet utilization was 76.7% versus 67.5%, and average day rate was $17,492 versus $15,286.
- Quarterly vessel operating costs were $197.7 million, or 55% of vessel revenue, compared with $176.9 million, or 58%, a year earlier. Depreciation and amortization was $42.4 million, up from $37.2 million.
- Cash and cash equivalents were $114.1 million at December 31, compared with $40.6 million at March 31, 2013. Current assets were $803.9 million and current liabilities $339.2 million; working capital was $464.7 million.
- Long-term debt was $1.464 billion. The company had $300 million drawn under its term loan and the full $600 million revolver available. The credit facility matures in June 2018 and includes debt-to-capitalization and interest-coverage covenants.
- Cash used in investing activities was $274.2 million for the nine months, including $397.5 million of property and equipment additions and $127.7 million for the Troms acquisition, partly offset by $207.4 million of sale-leaseback proceeds. Financing provided $278.0 million. Dividends declared were $0.25 per share quarterly; no shares were repurchased in the reported nine months.
Material changes versus prior comparable periods
- Nine-month revenue increased 17%, which management attributed to a 16% increase in average worldwide day rates and $51.4 million of Troms Offshore revenue. Nine-month net earnings fell 7%; operating income declined despite revenue growth.
- The quarter included a $56.3 million noncash goodwill impairment that eliminated the Asia/Pacific segment’s goodwill. Management linked it to regional vessel overcapacity and weaker expected cash flows. The charge contributed materially to the year-over-year earnings decline.
- Nine-month operating cash flow fell 62%, primarily because receivables increased by $223.5 million, including balances associated with Angola. Vessel and equipment investment increased, while borrowings and sale-leasebacks helped fund spending and working capital.
- Segment trends were mixed: nine-month vessel revenue increased in Americas, Middle East/North Africa and Sub-Saharan Africa/Europe, but fell 16% in Asia/Pacific. The latter region faced excess vessel capacity; management transferred vessels to stronger markets.
- Debt increased following the issuance of $500 million in senior notes, facility borrowing and the Troms acquisition; the company also repaid debt, including Troms obligations and $140 million of older notes.
Outlook, management commentary, risks and unusual items
- Management described the global offshore vessel market as reasonably balanced and cited improving demand prospects, particularly for deepwater vessels. It also noted substantial industry newbuild supply, which could pressure utilization and charter rates, while retirement of older vessels and additional drilling rigs could offset some oversupply. No company-specific earnings or revenue guidance was provided.
- Angola is a significant working-capital and currency risk. A new foreign-exchange law creates uncertainty over payment in local currency and repatriation. At December 31, about $362 million was related to Sonatide in trade and other receivables; Tidewater had deferred some customer invoicing and used borrowing and other arrangements to fund the resulting working-capital needs. A customer paid Sonatide the kwanza equivalent of approximately $63 million in January 2014. Management said the final payment structure remained unresolved and considered possible vessel redeployment, which could entail material costs and downtime.
- The company had $609.3 million of remaining commitments for 29 vessels under construction, in addition to other operating, debt and lease obligations. Management expected to use operating cash flow, borrowing capacity and potentially further financing to fund fleet renewal.
- Six vessels were sold and leased back in fiscal 2014, generating $207.4 million in proceeds and $67.6 million of deferred gains. The agreements are treated as operating leases; future minimum payments for these six vessels were $132.4 million.
- Contingencies include Brazilian customs fines originally assessed at 155 million reais (about $65.6 million), most of which had been disallowed on administrative appeal; a possible, unquantified Brazilian state tax assessment for which no accrual was recorded; a disputed approximately $19 million Nigerian receivable; and arbitration against Venezuela concerning expropriated operations. Tidewater stated that the Venezuelan merits hearing was scheduled for mid-2014. A DRC agency requested $0.25 million related to the sinking of the Nana Tide.
- The company reported that its DOJ deferred-prosecution agreement expired and the underlying criminal charges were dismissed with prejudice after the DOJ determined Tidewater had met its obligations. The company also reported a completed settlement with U.S. and Nigerian authorities regarding previously disclosed FCPA matters.
- Other risks include oil and gas spending and commodity-price changes, competitor fleet additions, crew and drydock costs, political and regulatory uncertainty, currency fluctuations, environmental requirements and vessel construction delays. An arbitrated shipyard dispute concerns a Brazilian supply boat long overdue; a separate $11.7 million escrow relating to delivered vessels remained disputed.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. The auditor’s interim review reported no material modifications needed; it was not an audit opinion on the interim statements.
Important facts for investors to verify
- Whether the approximately $362 million of Sonatide-related receivables can be collected promptly, and the effects of Angola’s currency rules on cash conversion and repatriation.
- How operating cash flow and liquidity develop as receivables normalize, given the $609.3 million vessel commitment balance and the company’s planned fleet investment.
- Debt levels, interest expense, covenant headroom and funding costs; the filing states the covenant thresholds but does not provide a clear calculation of headroom.
- Whether vessel utilization and day rates remain strong enough to offset rising operating, maintenance, depreciation and lease costs, especially amid industry newbuild supply.
- Potential outcomes and financial exposure from the Brazilian tax matters, Nigerian receivable litigation, Venezuelan arbitration, shipyard disputes and environmental matters; several outcomes or amounts remain uncertain.