31 May 2008

TDW: Financial Analysis through March 2008 (Update)

We previously posted an analysis of Tidewater's preliminary financial results for the quarter and fiscal year that ended on 31 March 2008.

Tidewater Inc. (TDW) owns "the worlds largest fleet of vessels serving the global offshore energy industry." The company has grown beyond its home base in the Gulf of Mexico to such an extent that international operations contributed 84 percent of Tidewater's Revenue in fiscal 2008. To continue this growth, Tidewater is substantially expanding and modernizing its fleet with annual investments between $300 million and $500 million.

Despite the capital investment program, Tidewater management was recently confident enough in its current and future cash flows to raise its dividend by 67 percent. This was the first dividend increase in more than a decade.

Tidewater has now submitted a complete annual report in a 10-K filed with the SEC. We have updated our analysis to incorporate the latest data. The additional data in the 10-K did not change The GCFR gauge scores. The Overall gauge remains at a modest 43 out of 100 possible points, as shown below. For details, please see the earlier post.

The data in the 10-K didn't change our examination of Tidewater's March 2008 quarterly Income Statement, which was included here.

A few tidbits from the Notes to the Financial Statements in the 10-K.

1. In the last three years, the percentage of pre-tax earnings derived from operations in the U.S. declined from 39 percent to 26 percent to 3 percent.

2. The high proportion of foreign income greatly reduces the company's U.S. tax liabilities below the U.S. federal statutory tax rate of 35 percent. The effective tax rate in the last three fiscal years declined from 27 percent to 21 percent to 18 percent.

3. The company's U.S. defined-benefit and supplemental pension plans and its post-retirement benefit plans are, in the aggregate, underfunded by $32 million. This amount is recognized on as a liability on the Balance Sheet.

4. Between July 2007 and March 2008, Tidewater repurchased $196 million worth of its common shares, at an average price per share of $54.76. The company was authorized to spend another $54 million on its shares, and it did so by 15 May 2008. The reduction in the number of shares outstanding can increase earnings per share.

5. Tidewater has made commitments to purchase 49 new vessels for a total cost of $960 million. These vessels are scheduled for delivery at various times over the next four years. On 31 March 2008, the company has 440 vessels, of which 367 were in active service. Management has signaled its interest in enhancing efforts to replace older vessels with "fewer, larger and more efficient" ones.

6. The company expects to be able to obtain the funds needed for fleet replacement, despite current conditions in the credit markets, "although the terms and pricing of such capital or borrowings may be on terms that are not as advantageous as the company has enjoyed historically."

7. As previously reported, the company is investigating, with the aid of a special counsel, compliance with the U.S. Foreign Corrupt Practices Act (FCPA). The initial investigation focused on operations in Nigeria, but then expanded to various other countries. The special counsel reported its findings to the company's audit committee this month. The Justice Department and the SEC have been, or will be, advised of the findings, and these agencies have requested related documentation. The company hasn't yet made any provisions for the liabilities that might result from enforcement actions because it hasn't concluded that the liabilities are "probable and reasonably estimable."

8. The company has redeployed some vessels from Nigeria to other parts of West Africa, in response to difficulties in getting and renewing operating permits. Nigeria can be a risky place to operate.

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