28 November 2008

TDW: Look Ahead to December 2008 Quarterly Results

The GCFR Overall Gauge of Tidewater (NYSE: TDW) rose from 26 to 34 of the 100 possible points in the
September 2008 quarter, which was the second of fiscal 2009.  Our analysis report explained this result in some detail.

The increase was mostly due to the Value gauge's improving score, from 6 to 15 of the 25 possible points.  This contrary indicator tends to move in the opposite direction of the share price.  It strengthened when Tidewater's share price fell from $65.03 to $55.36 during the September quarter.  Since the shares kept going down in October and November, the gauge will probably increase again in the current quarter.

The Growth and Profitability gauges, at 3 and 2 points, respectively, have been quite weak for a few quarters.  A significant challenge for Tidewater has been the increase in Operating Expenses, such as Crew and repair/maintenance costs.  In addition, Free Cash Flow is negatively affected by the high capital expenditures associated with the fleet expansion and modernization.

To look ahead, we've modeled Tidewater's Income Statement for the December 2008 quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that the company will announce on, or about, 2 February 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

Tidewater Inc. (NYSE: TDW) "owns 438 vessels, 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.

The current global economic slump, and prospects for worse, has already reduced demand and, therefore, prices for crude oil and natural gas.  If it hasn't already, the lower prices will eventually lead to diminished offshore production and less need for supporting maritime services.  Tidewater might have to accept lower lease rates, move vessels to more active locations, or even take vessels out of service.  The need for maintenance has also recently been a drag on the vessel utilization rate.

In bnet.com, David Phillips (a/k/a the 10-Q Detective, which we highly recommended to all GCFR readers) asks whether Tidewater would be able to find alternative funding sources to meet its capital commitments if Cash Flow from Operations falls short of the company's expectations because of low lease rates for Tidewater's vessels.

Despite large capital expenditures, management was optimistic enough to raise the dividend by 67 percent.  In addition, Tidewater authorized $200 million in share repurchases.

Tidewater provides neither Revenue, nor Income, guidance.  However, cost expectations for the December quarter were discussed during the 27 October conference call with 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, moving vessels between operating locations, and new vessels entering the fleet.

Based on extrapolations, which should be viewed skeptically given the discontinuities in the general economy and the energy industry, our working estimate for Revenue in the December 2008 quarter is $343 million.  This figure is 9 percent greater than Revenue in the December 2007 quarter, and the year-over-year Revenue growth rate would be about 10 percent.

Management's guidance for the vessel operating margin is 50 to 52 percent.  Their estimate for Vessel Operating Costs is $172 to $178 million.  If we take the midpoint of Vessel Operating Costs ($175 million) and add $6 million for Cost of Other Marine Revenues, we get our Cost of Goods Sold estimate of $181 million.  This is 52.8 percent of our $343 million Revenue estimate, equating to a Gross Margin, as we define it, of 47.2 percent.

Depreciation has been about 9 percent of Revenue in the couple of quarters.  Given our estimate, this would equate to 0.09 * $343 million = $31 million for the December 2008 quarter. 

SG&A expenses have been about 10 percent of Revenue.  We, therefore, expect a $34.3 million SG&A expense in the December quarter.

If our estimates hold true, Tidewater will attain an Operating Income, as we define it, of $97 million.  This would be a 4.9 percent decline from Operating Income in the year-earlier quarter.

Tidewater management didn't estimate gains on asset sales, so we will use the recent average of about $5 million.  Similarly, we assume Net Interest income will be $5 million.  These figures would lift pre-tax income to $107 million.

Management raised its guidance for the effective income tax rate from 17 to 18 percent.  This would lead to Net Income of $87 million ($1.75 per share depending how many additional shares the company has repurchased).  On an absolute basis, this is 2.2 percent below the amount earned in the December 2007 quarter.  However, on a per-share basis, Net Income would increase by 6 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) December 2008
December 2007
Revenue 343 314
Op expenses
CGS(1) (181) (150)
Depreciation (31) (31)
SG&A (34)
Operating Income 97 102
Other income
Asset sales (2) 5 1
Interest, etc. 5 6
Pretax income 107 108
Income tax (19)
Net Income 87 89
$1.75/sh $1.66/sh
Shares outstanding 50.0 53.8
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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