30 July 2009

TDW: Income Statement Analysis for the June 2009 Quarter

Tidewater (NYSE: TDW) earned $0.86 per share in the first quarter of fiscal 2010, which ended 30 June 2009, down from $1.64 in the same quarter of last year.  If a $48.6 million charge related to the seizure of Tidewater vessels in Venezuela is excluded, and no other changes are made, earnings were $1.80 per share.

This post examines the Income Statement for the quarter and compares its entries to our "look-ahead" estimates.  Our target for Tidewater's Net Income in the latest quarter was $1.81 per share.

In a second article, we will report Tidewater's scores as measured by the GCFR Financial Gauges. The follow-up post will also provide the latest figures for the financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Our principal sources were the earnings announcement and the 10-Q for the quarter.  Some background information about Tidewater and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue in the June quarter was 4.0 percent less than in the year-earlier period.  We had assumed that Revenue would be unchanged.

More than 87 percent of Tidewater's Revenue in the quarter was attributed to vessels operating outside the U.S.  Revenue from these international vessels slipped only one percent when compared to the June 2008 quarter.  Revenue from U.S.-based vessels, on the other hand, fell by 39 percent.  Other Marine Revenues increased 38 percent, but this is a relatively small part of Tidewater's business.

The utilization rate for the international fleet was 73 percent (down 3.4 percent from last year) and only 39 percent (down 14 percent) for the U.S. based vessels. 

Of the various costs and expenses reported by Tidewater, we group "Vessel operating costs" and "Costs of other marine revenues" and call the combination Cost of Goods Sold.  In the June quarter, CGS was 51.5 percent of Revenue.  Therefore, the company achieved a Gross Margin of 48.5 percent.  The Gross Margin was only 45 percent in June 2008, so the recent quarter was substantially more profitable by this measure.  However, the Gross Margin fell short of our 51-percent estimate.

Vessel operating costs were down a substantial 13 percent, but the Costs of the other marine revenue were up 41 percent.

Depreciation expenses were $2 million less than our $34 million estimate.  The actual expense was 9.7 percent of Revenue, whereas we expected 10 percent.

Sales, General, and Administrative expenses were also $2 million less than our projection.  At 10.5 percent of Revenue, these expenses were nearly the same as our 10.6 percent target.

As mentioned above, the recent quarter included a $48.6 million operating charge related to the seizure of Tidewater vessels and other assets in Venezuela by Petroleos de Venezuela, S.A.  The bulk of the charge, $44.8 million, reflects the uncertainty in whether and when PDVSA will pay Tidewater for services provided previously.  The remaining $3.75 million of the charge writes down the net book value of the seized assets. 

Without this charge Operating Income, as we define it, would have been $92 million, or 5.8 percent greater than the amount in the June 2008 quarter.  Operating Income excluding the charge fell short of our estimate by about 10 percent, primarily because of the lower Revenue.

Income from Asset Sales, which Tidewater treats as an operating item, was about $13 million, or $8 million more than our $5 million estimate. Tidewater sold "14 anchor handling towing supply vessels, 10 platform supply vessels and two crewboats."

Miscellaneous non-operating income was only about $1 million more than the value we predicted. 

The effective Income Tax Rate in the quarter was 28.4 percent, far above the 17.5 percent guidance.  Tidewater reported that the increase in the tax rate was related to the Venezuela charge.  [If the charge were excluded, the tax rate would have been 15.9 percent.

Net Income was 47.5 percent less than in the June 2008 quarter.  However, excluding the Venezuela charge, earnings would have been up 10 percent and would have matched our expectation.  Greater-than-expected income from asset sales made up for weaknesses in other areas.

In summary, Tidewater's Revenue in the first quarter of fiscal 2010 was approximately 4 percent less than we anticipated.  The decrease was due, for the most part, to a significant decline in demand for U.S. vessels, which is a relatively small part of Tidewater's business.

The company did a good job keeping operating costs under control, as seen in the Gross Margin increase.  The Revenue decline kept the Gross Margin from increasing as much as we expected.

Unfortunately, these generally good results were obscured by the asset expropriation that led to an operating charge of almost $50 million.

Full disclosure: Long TDW at time of writing.

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