20 May 2010

TDW: Income Statement Analysis for the March 2010 Quarter

Tidewater (NYSE: TDW) earned $1.10 per diluted share on a GAAP basis in fiscal 2010's fourth quarter.  Earnings were 48 percent less than the $2.13 per share Tidewater made in the same quarter of 2009.

Special items added about $0.06 per share to earnings in the quarter, which ended 31 March 2010.

This post examines Tidewater's Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates.  Reported earnings were, as luck would have it, only $0.02 more than the $1.08 per share we had forecast.

The principal sources for this income statement analysis were the earnings announcement, the conference call, and the formal 10-K report.

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.

Tidewater owns the world's largest fleet of vessels serving the global offshore energy industry.  Headquartered in New Orleans for more than 50 years, Tidewater first serviced drillers in the Gulf of Mexico.  Additional background information about Tidewater and the business environment in which it is currently operating can be found in the look-ahead.

A Tidewater supply vessel, the Damon B. Bankston, was tethered to the Deepwater Horizon oil rig that exploded in April.  A story by Paul Purpura in the Times-Picayune describes the heroic actions of the Bankston's captain and crew in the first moments after the disaster to save the lives of rig workers.

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 March quarter fell 23.9 percent, from $342 million in 2009 to $260 million in the last three months.  Revenue in the latest quarter fell short of our $285 million estimate by 8.8 percent.

Revenue for the entire fiscal year declined 16 percent, from $1.39 billion to $1.17 billion.

The Revenue decline is the result of energy companies scaling back offshore exploration and production.  They have done so in response to the lower demand (and prices) for energy when the worldwide economy is weak.  Offshore activity has historically been cyclical, but it's not hard to imagine the current Gulf of Mexico debacle having longer-term effects on the industry.

Revenue from International (i.e., non-U.S.) activities in the quarter fell 22.5 percent, from $304.5 million to $236.1 million.  However, International Revenue was still 91 percent of the total in the quarter.

U.S. Revenue skidded 24 percent from $29.7 million to $22.6 million.  Other marine revenues of $1.3 million were 82 percent less than in the year-earlier quarter.

The utilization rate for Tidewater's worldwide fleet dropped from 72.1 percent in the March 2009 quarter to 61.0 percent in the latest period.  The utilization rate for U.S.-based vessels slumped to 46 percent.

Tidewater deemed 376 owned or chartered vessels, on average, to be "in service" during the March 2010 quarter, down from 408 in the year-earlier period.  The 376 count includes 83 "stacked" vessels, which are considered to be in service even though they do not have crews on board and the vessels are receiving only limited maintenance.

The number of Deepwater vessels owned and operated worldwide (U.S. and International) by Tidewater increased from 40 to 56.  The utilization rate for these vessels declined from 84.5 percent to 80.2 percent, and the average vessel "day rate" slipped 8.9 percent to $24,200.  Nevertheless, the greater number of vessels enabled Revenue from this category to increase 15.5 percent to $97.4 million (37.7 percent of total Revenue).

Towing-supply/supply vessels brought in more Revenue, $132 million, but this amount was down 35.6 percent from the March 2009 quarter.  The utilization rate for these vessels plunged from 70.7 percent to 55.1 percent, and the average vessel day rate was 6.8 percent lower.

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 CGS decreased 4.2 percent, from $154 million in the March 2009 quarter to $147 million (56.6 percent of Revenue).  The latest results translate into a Gross Margin of 43.4 percent, 11.6 percent less profitable than the 55 percent Gross Margin in the 2009 quarter.

The Gross Margin was 200 basis points lower than 45.4 percent estimate.

Crew costs, which are the largest component of Vessel operating costs, were cut from $82.8 million to $79.3 million.  The latest amount includes a $1 million bonus to reward safety achievements during the last year.

Depreciation expenses were fairly static, as expected, increasing from $33 million to $34 million.

Sales, General, and Administrative expenses rose from $34 million to $44 million, an increase of 29 percent.   The entire increase (and a bit more) was due to an $11.4 million charge to resolve possible violations of the Foreign Corrupt Practices Act.  A settlement agreement was reached with the SEC's enforcement staff.

The reported SG&A amount exceeded our $36 million estimate by 22 percent.  However, SG&A exclusive of the settlement charge was actually $3.2 less than we anticipated.

The latest quarter included a special $5.4 million operating gain to account for an insurance recovery related to vessels seized earlier in Venezuela.

Subtracting the various operating items from Revenue yields Operating Income of $40.5 million, down 67 percent from $121 million in the year-earlier quarter.  The decrease can be attributed to lower Revenue, a weaker Gross Margin, and the settlement charge, partially offset by the insurance collection. 

Operating Income, as we define it, fell short of our $59 million estimate by 32 percent.

It's very typical for Tidewater to replace older vessels with new ones.  In the most recent quarter, disposing of assets led to a $5 million gain, which matched our estimate.  (Tidewater treats this type of gain as an operating item, but we prefer to keep it below the line.)

During fiscal 2010, Tidewater disposed of 55 vessels and had 15 vessels seized.

Miscellaneous non-operating income rose to $13.8 from $5.1 million in the year-earlier quarter.  The increase was due to an $11 million foreign exchange gain related to a currency devaluation in Venezuela.  (The devaluation reduced the dollar value of a liability.)

The net amount for these other items was $9 million more than we expected.

The effective income tax rate of 4.3 percent, compared to last year's 17.1 percent.  Income from less-taxed International operations made up a greater proportion of overall pretax profits.

We had assume the tax rate would be 18.0 percent.

Net Income of $56.9 million ($1.10 per share) was 48 percent less than last year's $110 million ($2.13 per share).

The latest results exceeded our $56 million ($1.08 per share) estimate by less than $1 million, but the accuracy of the estimate was simply luck.  Revenue was less than we anticipated, and the Gross Margin was nearly 200 basis point less profitable.  These negative factors were, more or less, balanced by special items and a lower tax burden.

Full disclosure: Long TDW at time of writing.

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