31 October 2009

TDW: Income Statement Analysis for the September 2009 Quarter

Tidewater (NYSE: TDW) earned $1.90 per share in the second quarter of fiscal 2010, which ended 30 September 2009, up from $1.85 in the same quarter of last year.  The recent quarter included a $34.4 million favorable resolution to tax litigation; earnings would have been $0.66 less, or a disappointing $1.24, without the tax benefit.

This post examines the Income Statement in the earnings announcement and the accompanying 10-Q and compares the entries for the quarter to our "look-ahead" estimates.  Our target for Tidewater's Net Income in the latest quarter was $1.56 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 various financial metrics we use to analyze Cash Management, GrowthProfitability and Value.
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 September quarter was 14.8 percent less than in the year-earlier period.  We expected a decline of only 7.7 percent.

The Revenue drop was most extreme, 43 percent, for vessels based in the U.S.  Fortunately, domestic operations are now a relatively minor part of Tidewater's business and were responsible for less than 8 percent of the quarter's total Revenue.  Revenue from vessels operating outside the U.S. (the vast majority) also declined, but by a less severe 10.7 percent. 

More than 70 percent of the Revenue decline can be attributed to the "Towing-supply/supply" class of vessel.

The utilization rate for the international fleet was 71.3 percent, down from 75.8 percent last year. The rate for U.S. vessels fell to 37.7 percent from 61.4 percent.

The average Revenue per Vessel per Day was up 1.8 percent, which confirms that newer higher-yield vessels were more in demand than the older "traditional" 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 September quarter, CGS was 53.6 percent of Revenue.  Therefore, the company achieved a Gross Margin of 46.4 percent, well below our 48.1-percent estimate.

The Gross Margin was less lucrative in only one of the last 16 quarters.   In the September 2008 quarter, the Gross Margin was a much more profitable at 49.1 percent. 

Tidewater responded to the lower vessel utilization rate by trimming operating costs a substantial 10 percent, but the amount of cost cutting didn't match the drop in Revenue.  The Crew cost component of Vessel Operating Costs was down the most.

Depreciation expenses were about $750,000 less than our $33 million estimate.  The actual expense was 10.9 percent of Revenue, whereas we expected 10.3 percent.

Sales, General, and Administrative expenses were $2.7 million more than our projection of $35 million.  This expense category included a $3.6 million loss to settle an obligation of a supplemental retirement plan.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, decreased by 36 percent, when compared to the September 2008 quarter.  Operating Income was also 22 percent less than our prediction.  Our estimate proved to be too high because Revenue and Gross Margin were lower than we expected and SG&A expenses were higher.

Income from Asset Sales, which Tidewater treats as an operating item, was less than $1 million below our $6 million estimate. As best we can determine, Tidewater sold 5 anchor handling towing supply vessels, 3 platform supply vessels, one crewboat, and two offshore tugs during the latest quarter.

Miscellaneous non-operating income was about $2.6 million less than the $6 million value we predicted.  Foreign exchange losses hurt the results.

Now we get to the most noteworthy item in the quarterly results. The IRS chose not to appeal a court ruling in Tidewater's favor "concerning the IRS disallowance of the company’s tax deduction for foreign sales corporation commissions for fiscal years 1999 and 2000."  Tidewater recorded a $34.3 million benefit to reverse "previously recorded liabilities for uncertain tax positions and interest income on the judgment."

Net Income, including the tax benefit, was 2.3 percent more than in the September 2008 quarter.  However, excluding the benefit, earnings would have been down about 33 percent.  Earnings on this basis were approximately 20 percent below our $80 million target.

In summary, Tidewater's Revenue in the second quarter of fiscal 2010 was approximately 7.5 percent less than we anticipated. Vessel demand dipped, especially, but not exclusively, in the U.S., leading to a fall in utilization rates.  Lower utilization also cut into the Gross Margin, although the company did its usual good job in keeping costs under control.  A loss to settle a retirement plan obligation was an exception.

The $34 million one-time tax benefit pushed Net Income from an amount that would have been disappointing to one than was surprisingly robust. 

Full disclosure: Long TDW at time of writing.

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