Tidewater Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2012 (Tidewater fiscal 2013 second quarter). Unless otherwise noted, amounts below are in U.S. dollars. The interim statements are unaudited and were reviewed by the independent accountant.
Business context and financial performance
Tidewater provides offshore service vessels and marine support to the global energy industry. Its four reporting segments are Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe. Results depend substantially on vessel utilization and day rates, which are influenced by customer exploration and production spending.
- Quarter revenue: $311.9 million, up 24% from $250.9 million a year earlier. Vessel revenue was $309.8 million.
- Quarter earnings: Operating income was $57.2 million versus an operating loss of $5.5 million; net earnings were $41.4 million versus a net loss of $4.9 million. Diluted EPS was $0.83 versus a loss of $0.10.
- Six-month results: Revenue was $606.4 million, up 20%; operating income was $106.7 million versus $26.0 million; net earnings were $74.2 million versus $19.7 million. Diluted EPS was $1.48 versus $0.38.
- Margins: Vessel margin (vessel revenue less vessel operating costs) was $132.8 million, or 42.6% of vessel revenue, for the quarter, compared with $87.1 million, or 35.1%, a year earlier. Six-month vessel margin was $257.0 million, or 42.8%, compared with $188.1 million, or 37.5%. Operating margin was 18.3% for the quarter and 17.6% for the six months.
- Cash flow and investment: Six-month operating cash flow was $146.3 million, compared with $87.2 million. Capital additions to property and equipment were $189.8 million, and investing cash outflow was $181.2 million. Cash dividends paid were $25.1 million and share repurchases used $65.0 million.
- Liquidity and debt: Cash and equivalents were $136.7 million at September 30, down from $320.7 million at March 31. Current assets were $541.8 million and current liabilities $263.4 million (current ratio approximately 2.1). Reported long-term debt was $890.0 million, down from $950.0 million; net debt was approximately $753.3 million. The $450 million revolving credit line was undrawn and available. Credit agreements require debt-to-capitalization not above 55% and interest coverage of at least 3.0.
- Fleet activity: Worldwide vessel utilization was 67.8% for the quarter versus 60.2%; average day rate was $15,384 versus $12,771. For the six months, utilization was 68.1% versus 60.9%, and average day rate was $14,827 versus $12,631.
Material changes versus comparable periods
- Management attributed first-half revenue growth primarily to a 17% increase in average day rates and an approximately seven-percentage-point increase in utilization. Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe grew; Americas vessel revenue declined 2% for the six months.
- Sub-Saharan Africa/Europe was the largest segment, with first-half vessel revenue of $278.0 million, up $54.3 million. Asia/Pacific revenue increased $32.9 million and Middle East/North Africa increased $13.6 million.
- Higher vessel operating costs partly offset the revenue increase: first-half vessel operating costs rose 9% to $342.9 million. Depreciation and amortization rose to $71.8 million from $67.6 million, while interest and debt costs rose to $14.7 million from $8.8 million.
- The prior-year quarter and first half included a $30.9 million non-cash goodwill impairment charge ($22.1 million after tax, or $0.43 per share); no goodwill impairment was recorded in the current periods. This materially affects the year-over-year earnings comparison.
- Current-period first-half cash decreased by $184.0 million, reflecting investment outflows, $60.0 million of debt repayments, and $65.0 million of repurchases. The company repurchased 1.4 million shares at an average $46.43 per share; no repurchases were made under the new authorization through September 30.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management said higher oil prices generally support offshore activity but noted crude-price volatility, weak U.S. natural gas pricing, and uncertainty in customer spending. Management also highlighted a large global new-build vessel pipeline that could pressure rates if supply outpaces demand, partly offset by potential retirement of older vessels and new rig and production-unit demand.
- Fleet investment: Remaining commitments for 30 vessels under construction or purchase totaled approximately $485.1 million at September 30, including $445.6 million for construction and $40.4 million for purchases. Management expects to fund fleet investment with operating cash flow, available borrowing capacity, and potentially new borrowings or leases. Several projects have delivery delays; two U.S.-yard vessels received revised delivery dates and higher contract prices, and a Brazilian fast supply boat remains in arbitration after a lengthy delay.
- Sonatide/Angola: Restructuring discussions with Sonangol remained unresolved; the joint-venture agreement had been extended through December 31, 2012. Angolan operations generated approximately $134.3 million, or 22% of consolidated vessel revenue, in the first half. An unsuccessful restructuring could require a wind-up and vessel and staff redeployment, with costs and downtime that management says could be material.
- Contingencies: A Brazilian customs fine assessment originally equaled approximately $76.4 million; an appeals decision disallowed most of it, leaving about $3.0 million being contested. Tidewater has not accrued the fines and believes it has a high probability of success. A separate potential Brazilian state import-tax exposure has not been quantified or accrued; the company had not received a comparable assessment. The company also reported $4.1 million accrued for its U.K. multi-employer pension fund assessment.
- Other unusual items: The former CEO is expected to receive a $12.6 million supplemental retirement benefit distribution in December 2012; a $4.4 million settlement loss is expected to be recorded then. Certain Sub-Saharan Africa/Europe charter rate increases contributed $7.4 million of retroactive revenue in the quarter. The company remains subject to a DOJ deferred prosecution agreement and related compliance undertakings; its $7.35 million DOJ fine was paid.
- Other risks: Management cited energy-market volatility, vessel oversupply, skilled-crew wage pressure, foreign exchange, political and security conditions, regulation, and environmental and legal risks. The Maritime Labour Convention is expected to take effect in ratifying countries in August 2013; compliance costs could affect operations but were not estimable. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Sonatide restructuring succeeds, and the potential financial effect of a wind-up or redeployment of Angola-related vessels.
- Whether utilization and day-rate gains persist, particularly given the industry’s announced new-build supply and customer spending sensitivity to energy prices.
- Cash needs and funding capacity for the approximately $485 million of remaining vessel commitments, alongside dividends, debt repayment, and any future buybacks.
- Progress and final outcomes for delayed vessel construction, Brazilian customs appeals, and any future Brazilian state-tax claims.
- The timing and actual cost of the former CEO’s retirement settlement and the effects of other pension-fund assessments.