06 September 2010

TDW: Financial Gauge 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 were 10.5 percent less than the $0.86 Tidewater made last year.  The decline would have been steeper, but the earlier period's results were depressed by a $0.93 per share special charge.

A previous article examined Tidewater's Income Statement for the June quarter in some detail.  Reported earnings were $0.07 less than the $0.84 per share we had forecast 

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for Tidewater and the associated financial gauge scores.  The metrics were calculated using data from Tidewater's current and historical financial statements, including those in the latest 10-Q report.

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 could have long-term negative implications for energy-related activities in the Gulf of Mexico; however, this region has become 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.

In summary, Tidewater's latest quarterly results produced the following changes to the gauge scores:

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash Management30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
Current Ratio2.
LTD to Equity12.1%11.2%13.2%15.2%
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)105.0100.288.288.0
Working Capital/Revenue36.7%37.1%29.3%34.2%
Cash Conversion Cycle Time (days)105.899.276.066.1
Gauge Score (0 to 25)991010

Tidewater's Balance Sheet remains strong, although some erosion from last year can be detected due to industry weakness and continued capital investments.

The company's Working Capital fell from $438 million in June 2009 to $293 million this year.  The latest amount as a proportion of Revenue is consistent with the company's historical range, and the Current Ratio, while down, is still above the classical 2.0 threshold.

It is prudent for Tidewater to hold ample amounts of Working Capital -- the latest Balance Sheet lists $123 million in cash and equivalents --because the company has to meet continuing capital commitments associated with the modernization of its fleet.  The 10-Q reports that Tidewater, as of 30 June 2010, was committed to spend $504.7 million to acquire or build 35 vessels, with deliveries scheduled through March 2012.  (The company has already invested $249.1 million for the 24 vessels now under construction.)

Long-term debt of $300 million has been steady for years and is relatively modest given the company's capital structure. 

Accounts Receivable have not fallen as sharply as Revenue.  The resulting significant increase in Days of Sales Outstanding could be indicating that customers have slowed their payments to Tidewater.  The 10-Q mentions "the uncertainty of a certain customer to make payment of vessel charter hire ... ."    (It isn't clear if this uncertainty is related to the seizure of Tidewater vessels in Venezuela.) 

Growth30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
Revenue Growth-19.8%-16.0%5.6%5.2%
Operating Profit Growth-11.9%-4.7%21.1%2.7%
CFO Growth-38.3%-37.3%9.6%2.1%
Net Income Growth-30.5%-36.2%6.0%1.9%
Gauge Score (0 to 25)00513
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Revenue, Cash Flow, and Net Income were all much less in the last four quarters than in the four prior quarters.  These drops results in a zero-point Growth gauge score for the second consecutive quarter.

The Revenue decline can be attributed to energy companies scaling back offshore exploration and production, and the drop may have been worsened by the disaster at the rig operated by BP in the Gulf of Mexico.

With slack demand worldwide reducing vessel utilization rates, Revenue from Tidewater's vessels based outside the U.S. fell 17.1 percent, from $286 million in the June 2009 quarter to $237 million this year. 

Tidewater has not scaled back its Total Assets in response to the decline, preferring to be prepare for the next upturn.  The Revenue/Assets ratio has, therefore, fallen steeply. 

Both Cash Flow from Operations and Net Income in the last four quarters were the lowest they had been since fiscal 2006. 

Profitability30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
Operating Expense/Revenue81.6%78.1%67.8%71.3%
Free Cash Flow/Invested Capital-7.7%-5.1%3.1%3.8%
Accrual Ratio11.1%7.0%5.5%4.4%
Gauge Score (0 to 25)14910

The operating margin continued to fall and returns on investment weakened further.  The Profitability gauge score declined again. 

Expenses in this business cannot be cut at the same pace as Revenue falls, which aggravates the downturns in earnings and cash flow during periods of weakness.  The increase in the Accrual Ratio (an undesired result) is another consequence of weaker Cash Flow from Operations.

Recall that Free Cash Flow accounts for the capital expenditures associated with the fleet expansion and modernization.

Value30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)522114
Share Price ($)$38.72$47.27$42.87-

The Value gauge picked up a few insignificant points as the steep decline in the Tidewater's share price lowered the Price/Earnings and other valuation multiples below their long-term averages.

The share price recently bounced back over $41 as fears of further global economic decline ebbed.

Declining earnings makes the PEG ratio immaterial.

Overall30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
Gauge Score (0 to 100)16155548

The gauge scores remained low because the continued worldwide slowdown in the offshore energy industry has reduced demand for the types of vessels operated by Tidewater and its competitors. 

Demand will recover (and Tidewater's growth and profitability will improve) when signs of global economic growth convince industry operators to step up offshore exploration and production activities.  The political implications of the Gulf Mexico disaster on future deepwater operations is a wildcard.

The long-term strength of its Balance Sheet has helped Tidewater modernize its fleet, an activity which is continuing.   The company wants to be ready to exploit the situation when offshore activity picks up. 

Full disclosure: Long TDW at time of writing.

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