20 September 2008

TDW: Look Ahead to September 2008 Quarterly Results

The GCFR Overall Gauge fell from 43 to 27 of the 100 possible points when we analyzed Tidewater Inc.'s 10-Q financial statements for the 30 June 2008 quarter, which was the first of fiscal 2009.

There was a lot of good news in the June quarter, including Revenue 11.3 percent greater than in June 2007 and Earnings per Share (EPS) rising from $1.55 to $1.64. The Balance Sheet also remained strong, as evidenced by a ratio of LTD/Equity that edged down to 15 percent despite higher capital spending.

Nevertheless, Revenue growth had clearly decelerated, and Operating Expenses were up significantly. Cash Flow from Operations in the most recent four quarters was barely ahead of CFO in the four prior quarters. Net Income in the last year was down 7 percent. Higher-than-average gains from asset sales cushioned the drop in income from being worse.

Lower profits combined with a stock price that increased from $55.11 to $65.03 (later reversed) during the June quarter explains the Value gauge's fall from 16 to 9 points and a large proportion of the decline in the Overall Gauge score.

We're now getting ready for the results from the nearly complete third quarter.

Tidewater Inc. (NYSE: TDW) owns "the world’s largest fleet of vessels serving the global offshore energy industry." Headquartered in New Orleans, the company has grown far beyond the Gulf of Mexico. 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.

High prices for crude oil and natural gas leads to more offshore production, which increases the need for maritime services. This demand allows Tidewater to lease more of its vessels and at higher rates. If the economy slows substantially in industrial nations, the demand for energy products would abate, prices would decline, and offshore production would become relatively less attractive. In this scenario, Tidewater would probably have to cut lease rates to keep its vessels active.

Despite large capital investments, good cash management enabled Tidewater to raise its dividend by 67 percent. In addition, Tidewater authorized $200 million in share repurchases.

On 31 October 2008, Tidewater is scheduled report its results for the quarter ending 30 September. 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 July'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 September 2008 quarter is $355 million. This figure is 11.2 percent greater than Revenue in the September 2007 quarter, and the year-over-year Revenue growth rate would be almost exactly the same.

Tidewater's Gross Margin fell to 45.0 percent of Revenue in the June quarter, from a more typical level of around 50 percent. The company identified several one-time factors that drove Vessel Operating Costs up and, thus, the Gross Margin down. Management expects the margin to rebound to 50 to 51 percent in the September quarter. Their specific guidance for Vessel Operating Costs is $166 to $170 million.

If we take the midpoint of Vessel Operating Costs ($168 million) and add $12 million for Cost of Other Marine Revenues, we get our Cost of Goods Sold estimate of $180.0 million. This is 50.7 percent of our $355 million Revenue estimate, equating to a Gross Margin of 49.3 percent.

Depreciation has been about 9.5 percent of Revenue in recent quarters. Given our estimate, this would equate to 0.095 * $355 million = $33.7 million for the September 2008 quarter.

By coincidence, SG&A expenses have also been about 10 percent of Revenue. We, therefore, expect a $35.5 million SG&A expense in the September quarter.

If our estimates hold true, Tidewater will attain an Operating Income, as we define it, of $106 million. This would be a 9.3 percent increase over Operating Income in the year-earlier quarter.

Tidewater management estimated that gains on asset sales in the September quarter would be "at least in the $5 million to $6 million range." We will, therefore, set our expectation at $5.5 million. Similarly, we assume Net Interest income will be $5 million. These figures would lift pre-tax income to $116 million.

Management trimmed its guidance for the effective income tax rate from 18 percent to "something closer to 17%." This would lead to Net Income of $96 million ($1.86 per share depending how many additional shares the company has repurchased). On an absolute basis, this is 11.6 percent above the amount earned in the September 2007 quarter. On a per-share basis, Net Income would increase by 19.2 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.

($M) September 2008
September 2007
Revenue 355 319
Op expenses
CGS(1) (180) (162)
Depreciation (34) (30)
SG&A (35)
Operating Income 106 97
Other income
Asset sales (2) 6 2
Interest, etc. 5 7
Pretax income 116 105
Income tax (20)
Net Income 96 86
$1.58/sh $1.55/sh
Shares outstanding 52.0 55.6
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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