15 May 2009

TDW: Financial Analysis through March 2009

Tidewater (NYSE: TDW) earned $2.13 per share in the fourth quarter of fiscal 2009, which ended 31 March 2009.  This amount is 31 percent more than the EPS of $1.63 in the year-earlier quarter.  The latest results were announced in this press release and this 10-K report

We had estimated earnings of $2.02.

This post provides the GCFR analysis of this period, which was the fourth quarter of the company's fiscal 2009.

We begin with some breaking news.

The 10-K states that Petroleos de Venezuela, S.A., which is Venezuela's national oil company, "took possession of 11 of [Tidewater's] vessels that were supporting PDVSA operations in the Lake Maracaibo region of Venezuela."   A Tidewater facility in this area was also seized.  Venezuelan law requires compensation for this expropriation, but Tidewater indicated that no offer had yet been received.  PDVSA also owes Tidewater approximately $40 million, according to the 10-K, for previous services.

El Universal, a newspaper in Caracas, describes the Venezuelan government's actions to take over oil operations in Lake Maracaibo.

Now, we take a step back and provide some background information about the company.

In its press releases, Tidewater (NYSE: TDW) states that it owns the world's largest fleet of vessels serving the global offshore energy industry. The company owned 430 vessels on 31 March 2009, 72 of which were not in service for reason or another.

Headquartered in New Orleans, the company has spread far beyond its Gulf of Mexico origin.  Revenues generated from international operations in fiscal 2009 to date were 87 percent of total Revenues. 

The Venezuelan news above indicates that Tidewater is now dealing with the political risk that can accompany international business. Earlier, oil service firms had to investigate compliance of operations in Nigeria, with the U.S. Foreign Corrupt Practices Act (FCPA).

Global economic weakness has reduced demand for crude oil and natural gas.  Lower energy prices have led to less production in expensive offshore areas, and this is diminishing the need for maritime support services.  A greater number of idle vessels, and reduced lease rates for those that remain active, would presumably lower the market value of Tidewater's fleet.   However, if the effects are localized, Tidewater can move its vessels from slower to busier regions.

Tidewater is substantially expanding and modernizing its fleet with annual investments between $300 million and $500 million.  As of 31 March 2009, Tidewater is obligated to purchase 46 new vessels at a total cost of about $992 million.  Delivery of these vessels will take place between now and July 2012.  In the current economic environment, this is somewhat risky.   David Phillips (a/k/a the 10-Q Detective, which we highly recommend) has asked 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.

Despite large capital expenditures, Tidewater management was optimistic enough last year about cash flows to raise the dividend by 67 percent.  In addition, the company's board authorized $200 million of share repurchases.  However, the 10-K reports that none of $200 million has, as yet, been spent. "The company will continue to evaluate share repurchase opportunities relative to other investment opportunities and in the context of current conditions in the credit and capital markets."

In the December 2008 quarter, Revenue, Cash Flow, and Net Income all improved.  Revenue in the quarter was 15.3 percent greater than in the year-earlier period; Cash Flow from Operations was up 29 percent; and, Net Income was 31 percent higher.  This performance, along with a nearly perfect Value Gauge measure after Tidewater's share price dropped 27 percent, fueled an increase in the GCFR Overall Gauge from 41 to 58 points of the 100 possible points.  (Tweaks to our gauges altered the scores from the values first reported.)

Now, with the available data from the March 2009 quarter, our gauges display the following scores:
  • Overall: 64 of 100 (up/down from 58)

Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations

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.


Revenue in the March quarter was 3.1 percent greater than in the year-earlier period.  Our estimate of 7.8-percent Revenue growth proved too optimistic for the current environment.  Tidewater's Revenue in all of fiscal 2009 was 9.5 percent greater than in fiscal 2008.

Tidewater's Cost of Goods Sold (CGS) (i.e., Vessel operating costs and Costs of other marine revenues) was 45 percent of Revenue.  Therefore, the company achieved a Gross Margin in the quarter of 55 percent.  The Gross Margin was substantially higher (i.e., more profitable) than March 2008's 48.8 percent and our estimate of 51 percent.  It's somewhat unusual for the margin to increase when Revenue is under pressure.  Tidewater management deserves credit for keeping operating costs down.

Depreciation expenses were 9.6 percent of Revenue.   Our estimate was close, but about $1 million too high.

Sales, General, and Administrative (SG&A) expenses were also about 10 percent of Revenue.  This figure matched our expectations.

Because of the much-improved and better-than-expected Gross Margin, Operating Income, as we define it, was 25 percent more than in the year-earlier quarter.  It surpassed our estimate by 6 percent.

Income from Asset Sales, which Tidewater treats as an operating item, was about $1 million more than our estimate.  On the other hand, miscellaneous non-operating income was about $1 million less than the value we predicted. 

The effective Income Tax Rate in the quarter was 17.1 percent, slightly below the 17.5 percent guidance. 

Net Income was 28.5 percent more than in the March 2008 quarter.  It was also 7 percent more than our prediction.  On a per-share basis, earnings rose by 31 percent.  Fewer shares outstanding magnified the earnings per share growth rate.

Now for the gauges:
Cash ManagementMarch 2009
3 months prior12 months prior
Current Ratio3.1
0.6 years
0.6 years
0.6 years
Finished Goods/Inventory
Days of Sales Outstanding (DSO)83.6 days
86.2 days
85.6 days
Working Capital/Invested Capital 18.8%
Cash Conversion Cycle Time56.7 days
69.6 days
63.4 days
Gauge Score (0 to 25)

Tidewater has high liquidity and low debt on its Balance Sheet, even though it is financing the modernization of its fleet.

GrowthMarch 20093 months prior12 months prior
Revenue growth9.5%
Revenue/Assets 47.7%
CFO growth
Net Income growth 16.7%
Gauge Score (0 to 25)10
Growth rates are trailing four quarters compared to four previous quarters.

As noted above, Revenue growth decelerated in the latest quarter.  Nevertheless, through good cost control, Tidewater expanded Net Income rather impressively.  It would be nice to see the same performance with Cash Flow from Operations.

ProfitabilityMarch 20093 months prior12 months prior
Operating Expenses/Revenue 68.5%
ROIC 15.8%
Free Cash Flow/Invested Capital
Accrual Ratio
Gauge Score (0 to 25)5

It's good to see the decrease in Operating Expenses, the ROIC has held up well.  However, Free Cash Flow has suffered, in part because of high capital expenditures associated with the fleet expansion and modernization.  We're concerned that the increasing Accrual Ratio is indicating 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. 

ValueMarch 20093 months prior
12 months prior
P/E 4.7
P/E vs. S&P 500 P/E 29.9%28.6%46.9%
Price/Revenue 1.4
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)25

Tidewater's share price dropped 7.8 percent during the March quarter, from $40.27 to $37.13.  This decrease, combined with the good operating performance, allowed Tidewater to achieve the last remaining Value gauge point.  The maximum score is 25 points.

The valuation ratios can be compared with other companies in the Shipping industry.

OverallMarch 20093 months prior
12 months prior
Gauge Score (0 to 100)64

Revenue in the final quarter of fiscal 2009 was up a modest 3.1 percent, but lower costs lifted the Gross Margin and, therefore, Net Income.  Earnings increased 28.5 percent over those in the March 2008 quarter.

Management also deserves credit for in investing in the future by acquiring more modern, efficient vessels without harming the company's financial strength.

Despite a strong fiscal year in many respects, Tidewater's share price fell 33 percent during those 12 months.  The decline can be attributed to lower energy prices, a slow economy worldwide, and weak equity markets.  These factors are, of course, related.

Tidewater's management has diversified the business into various international markets. (In fiscal 2009 to date, Revenues generated from international operations were 87 percent of total Revenues.)  The current difficulties in Venezuela are an unfortunate blot on this success.  Let's hope they can be resolved quickly and fairly, and they don't prove too much of a distraction to this fine company's executives and employees./

Full disclosure: Long TDW at time of writing.

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