26 October 2007

TDW: Financial Analysis through September 2007

We have analyzed Tidewater's (TDW) preliminary financial results for the quarter that ended on 30 September 2007. Tidewater's report seems very complete, more so than after recent quarters. When the company submits a 10-Q report to the SEC, we will determine if the form contains additional data relevant to our analysis.

Tidewater owns a large fleet of vessels serving the global offshore energy industry. Once focused on the Gulf of Mexico, international operations comprised almost 80 percent of Tidewater's business in fiscal 2007.

When energy prices are rising, which has been the case for some time now, offshore production becomes increasingly profitable. The demand for maritime services to support this production has grown correspondingly, which has enabled Tidewater to lease its vessels for inflated rates. If changing economic conditions cause energy demand to soften and production to slow, rates will obviously decline and some vessels might have to be idled. Because each production area has its own unique challenges, which change over time, demand is not uniform across the world. Since Tidewater's assets are mobile, the company can shift vessels to the regions where activity is greatest and leasing rates are highest.

However, even the good times aren't perfect. Tidewater recently warned that its earnings will fall short of expectations because of regulatory dry-dockings, which cut into revenue growth and increase operating costs. In addition, fewer vessels were sold at a profit during the quarter, compared to the previous quarter.

When we analyzed Tidewater after the June quarter, which was actually the first of their fiscal year, we noted that the Overall score had declined to 45 points from earlier superlative levels in the 60's and 70's. Of the four individual gauges that fed into June's composite result, Growth was the strongest at 16 points. Profitability was weakest at 7 points.

Now, with the available data from the September 2007 quarter, our gauges display the following scores:

Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations. These expectations were established prior to Tidewater's warning of an earnings shortfall.


Sept 2007 (actual)
Sept 2007
Sept 2006
Op expenses

CGS (1) (162)

Depreciation (30)

SG&A (31)
Operating Income
Other income

Asset sales (2)

Interest, etc.
Pretax income

Income tax

Net Income


1. CGS=Vessel operating costs + Costs of other marine revenues
2. Tidewater considers gains on asset sales to be an operating item.

Revenue exceeded our expectations. We forecast Revenue to be 13.5 percent greater than in the year-earlier quarter, and the actual increase was 16.4 percent. However, costs as a percentage of revenue were also higher than we expected. We thought the Cost of Goods Sold (CGS) would be 47 percent of Revenue, and the actual value was a heftier 50.7 percent. Depreciation expenses were 9.4 percent of Revenue, a little less than our 10 percent estimate. Sales, General, and Administrative (SG&A) expenses were 9.6 percent of Revenue, compared to our forecast of 9 percent.

To summarize, costs outpaced revenues. The net effect was Operating Income 8.5 percent below the forecast value.

Non-operating income was only $1 million less than expected. The Income Tax Rate was a mere 18.0 percent, instead of the predicted 21 percent. As a result, Net Income fell below our prediction by only 5.5 percent.

Cash Management. This gauge decreased from 11 points in June to 5 points now.

The measures that helped the gauge were:
Cash being spent on new vessels or stock repurchases is not putting the company in financial straps.

The measures that hurt the gauge were:

Growth. This gauge decreased from 16 points in June to 11 points.

The measures that helped the gauge were:
  • Net Income growth = 18.2 percent year-over-year, commendable but down from 63.9 percent.
  • Revenue growth = 17.7 percent year-over-year, very good but down from 34.2 percent.
  • Revenue/Assets = 43.9 percent, up from 42.3 percent in a year; sales efficiency is improving.
The measure that hurt the gauge were:
  • CFO growth = 5.9 percent year-over-year, down from 106.5 percent.
Net income benefited from a change in the income tax rate from 23 to 19 percent The tax rate decreased as a result of a continuing shift to more operations outside the U.S.

Profitability. This gauge decreased from 7 points in June to xx points now.

The measures that helped the gauge were:
The measures that hurt the gauge were:
  • FCF/Equity = 6.0 percent, down from 11.4 percent in a year (capital investments are eating into FCF)
  • Accrual Ratio = 8.7 percent, up from +4.4 percent in a year.
The increasing Accrual Ratio tells us that less of the company's Net Income is due to CFO, and, therefore, more is due to changes in non-operational Balance Sheet accruals.

Value. Tidewater's stock price dropped sharply over the course of the quarter from $70.88 to $62.84. The Value gauge, based on the latter price, held steady at the 13 points achieved three months ago.

The measures that helped the gauge were:
The measures that hurt the gauge were:
The average P/E for the Oil Well Services and Equipment industry is currently a more expensive 20. The average Price/Revenue for the industry is currently 4.0.

Now at a modest 35 out of 100 possible points, the Overall gauge has fallen from lofty levels in the 60s. We can attribute the drop to slowing growth and higher costs. The earnings drop was cushioned by a lower tax rate, which can't fall much lower. Capital investing will be beneficial in the long run, but it cuts into working capital and free cash flow.

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