08 June 2008

TDW: Look Ahead to June 2008 Results

When we analyzed Tidewater's financial results in the March 2008 quarter, which was the fourth of the company's fiscal year, we found that the Overall Gauge edged up to 43, out of 100 possible, points, from 41 points three months previously. However, it was down from 58 points one year earlier. Revenue exceeded our expectations, but operating costs were also higher. Crew costs, Insurance and loss reserves, leases, and the ubiquitous "other" were all up substantially. Fewer shares outstanding helped lift earnings per share.

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.

We noted the company's financial strength and low debt, despite large capital investments. Good cash management subsequently enabled Tidewater to raise its dividend by 67 percent.

On 24 July 2008, Tidewater will report its results for the quarter ending 30 June. In anticipation of this report, we've modeled Tidewater's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

Tidewater provides neither Revenue, nor Income, guidance. However, cost expectations for the June quarter were discussed during last April's conference call for financial analysts. The transcript from this call is available at SeekingAlpha.com.

Revenue is dependent on the number and types of vessels Tidewater own, the average vessel utilization, and lease charges (typically expressed in dollars per day). The utilization rate has recently been negatively affected by maintenance and moving vessels between operating locations. Based on extrapolations, our working estimate for Revenue in the June 2008 quarter is $338 million. This figure is 10.8 percent greater than Revenue in the June 2007 quarter, and it would result in year-over-year Revenue growth of 12.2 percent.

Tidewater's Gross Margin increased from 35 percent of Revenue in 2004 to almost 55 percent at the end of 2006. It then fell back to between 49 and 53 percent. One of the reasons costs have increased (and Revenue growth has slowed) is that more than the normal number of dry-dock inspections mandated by regulation have been required.

Management, anticipating a further, but temporary, surge in dry-dock costs stated that they "anticipate [vessel] operating cost for the June quarter to increase substantially ... and to come in as we now see it somewhere in the $166 [m]illion to $167 [m]illion range." We add the Cost of Other Marine Revenues to Vessel Operating Cost to produce what we refer to as Cost of Goods Sold. The Cost of Other Marine Revenues averaged $11.9 per quarter in fiscal 2008. If we take the midpoint of Vessel Operating Cost ($166.5 million) and add $12 million for Cost of Other Marine Revenues, we get our CGS estimate of $178.5 million. This is 52.8 percent of Revenue, equating to a Gross Margin of 47.2 percent.

Depreciation has been about 10 percent of Revenue in recent quarters. Given our estimate, this would equate to 0.1 * $338 million = $33.8 million for the June 2008 quarter.

By coincidence, SG&A expenses have also been about 10 percent of Revenue. These expenses have risen to include the costs of the company's previously disclosed investigation into 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.

If our estimates hold true, Tidewater will attain an Operating Income, as we define it, of $92 million. This would be 3.6 percent less than Operating Income in the year-earlier quarter.

We have no insight into how much, if anything, the company will earn by selling Assets. We assume $3 million simply because that has been the average in the last four quarters. Similarly, Net Interest income has averaged about $6 million. These figures would lift pre-tax income to $101 million.

Management expects the tax rate for the year to be "in the neighborhood of 18%." This would lead to Net Income of $83 million ($1.58 per share depending how many additional shares the company has repurchased). On an absolute basis, this is 5.6 percent below the amount earned in the June 2007 quarter. On a per-share basis, Net Income would increase by 2.0 percent.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.


June 2008
June 2007
Op expenses

CGS(1) (179)

Depreciation (34)

SG&A (34)
Operating Income
Other income

Asset sales (2)

Interest, etc.
Pretax income

Income tax

Net Income

Shares outstanding

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

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