06 August 2010

TDW: Income Statement Analysis for the June 2010 Quarter

Tidewater (NYSE: TDW) earned $0.77 per diluted share on a GAAP basis in fiscal 2011's first quarter, which ended on 30 June 2010.  Earnings per share decreased 10.5 percent when compared to the $0.86 Tidewater made in the same quarter of last year.

The latest results were consistent with Tidewater's "preannouncement," made on 21 July 2010, that earnings would be between $0.75 and $0.80 per share.

The company's results in the June 2009 quarter were depressed by a $48.6 million ($0.93 per share) charge related to difficulties in Venezuela.

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 $0.07 less than the $0.84 per share we had forecast prior to the release of the preannouncement.

The principal sources for this review were the earnings announcement, the conference call, and the formal 10-Q 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, Growth, Profitability and Value.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Tidewater owns the world's largest fleet of vessels serving the global offshore energy industry in exploration, field development, and production.  Headquartered in New Orleans for more than 50 years, Tidewater first serviced drillers in the Gulf of Mexico.

The Damon B. Bankston, a Tidewater vessel, was on the scene at the Deepwater Horizon when the rig failed with tragic and wide-reaching results.  The offshore drilling moratorium following the disaster will be a negative for Tidewater's business in the Gulf of Mexico; however, this region is a relatively small part of Tidewater's business.  In fiscal 2010, Tidewater's International operations provided 92 percent of total vessel revenues and 96 percent of vessel operating profit.

Additional 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 fell 19.6 percent, from $326.6 million last year to $262.5 million in the most recent three months.  The "other marine revenues" component of total revenue, always small relative to "vessel revenue," was almost non-existent ($529 thousand) in the latest period.

Total revenue was only 1.3 percent less than our $266 million estimate.

The Revenue decline is the result of energy companies scaling back offshore exploration and production.  Offshore activity has historically been cyclical, but it's not hard to imagine the Gulf of Mexico debacle having longer-term effects on the industry.

Revenue from vessels based outside the U.S. fell 17.1 percent, from $286 million in the June 2009 quarter to $237 million this year.  There was weaker demand for the vessels in the international fleet, and the company lost revenue from Venezuela because of last year's seizure.  Nevertheless, Revenue from the international fleet was still 91 percent of the total in the quarter.

U.S. Revenue inched up (due to the oil spill response?) from $24.45 million to $24.85 million.

The utilization rate for Tidewater's worldwide fleet dropped from 70.7 percent in the June 2009 quarter to 61.1 percent in the latest period.  The utilization rate for U.S.-based vessels rose from 49.0 percent to 51.1 percent.

Tidewater deemed 377 owned or chartered vessels, on average, to be "in service" during the June 2010 quarter, down from 393 in the year-earlier period. The 377 count includes 89 "stacked" vessels, which are considered to be in service even though they do not have crews onboard, and the vessels are receiving only limited maintenance. Tidewater stacks vessels for which it cannot find customers at attractive rates.

The number of Deepwater vessels owned and operated worldwide (U.S. and International) by Tidewater increased from 44 to 60.  The utilization rate for these vessels increased from 80.8 percent to 84.6 percent, but the average vessel "day rate" slipped 8.6 percent to $23,129.  Nevertheless, the greater number of vessels enabled Revenue from this category to increase 29.4 percent to $106.6 million (40.6 percent of total Revenue).

Towing-supply/supply vessels brought in more Revenue, $126.5 million (48.3 percent of total Revenue), but this amount was down 33.3 percent from the June 2009 quarter.  The utilization rate for these vessels plunged from 70.1 percent to 52.9 percent, and the average vessel day rate was 5.0 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 7.9 percent, from $168.4 million in the June 2009 quarter to $155.1 million (59.1 percent of Revenue).  The latest results translate into a Gross Margin of 40.9 percent, far less profitable than last year's 48.5 percent.

Vessel operating costs were inflated by costs to mobilize vessels from one area to another and to drydock a largest anchor handling towing supply vessel.

The Gross Margin was 70 basis points better than our 40.2 percent estimate.

Crew costs, which are the largest component of Vessel operating costs, were trimmed from $82.75 million in June 2009 to $80.7 million.

Depreciation expenses rose from $31.6 million to $35.0 million because of newly acquired vessels. The expense was $2 million more than anticipated.

Sales, General, and Administrative expenses fell from $34.4 million to $32.8 million, a decline of 4.7 percent, because of lower personnel costs.

The reported SG&A amount was 8.9 percent less than our $36 million estimate.

The latest quarter did not include separately identified unusual operating gains or losses.

Subtracting the various operating items discussed above from Revenue yields Operating Income of $39.7 million, down 9.1 percent from $43.7 million in the year-earlier quarter.  The decrease would have been much more substantial, but special charges in the June 2009 quarter took a big bite out of Operating Income.

Operating Income, as we define it, exceeded our $38 million estimate by 4.5 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 $5.6 million gain, which was less than our $9 million estimate.  (Tidewater treats this type of gain as an operating item, but we keep it below the line in our Income Statement template.)  The gain in the latest quarter was held down by market conditions and because it reflects $1.3 million of impairment charges on three stacked vessels.

Miscellaneous non-operating income fell to $3.6 from $5.9 million in the year-earlier quarter.  The decrease was due to lower equity and interest income and higher interest and debt costs.

The net amount for these other items was $0.9 million less than we expected.

The effective Income Tax Rate was 18.5 percent, much less than last year's inflated 28.4 percent.  We had assume the tax rate would be 16.0 percent.

Net Income of $39.8 million ($0.77 per share) was 10.5 percent less than last year's $44.5 million ($0.86 per share).

The latest results fell short of our $43.3 million ($0.84 per share) estimate by $3.5 million (8 percent). 

Full disclosure: Long TDW at time of writing.

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