03 November 2010

TDW: Income Statement Analysis for the September 2010 Quarter

Tidewater (NYSE: TDW) earned $0.38 per diluted share on a GAAP basis in the September-ending second quarter of fiscal 2011, down 80 percent from $1.90 in the same three months of last year.

The earnings decline was approximately 70 percent if last year's $34.4 million ($0.66 per share) favorable resolution to tax litigation is excluded.

The latest results were consistent with Tidewater's pre-announcement on 25 October 2010 that earnings would be between $0.35 and $0.40 per share, which was well below consensus estimates at the time.

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, for reasons explained below, were $0.19 less than our $0.57 EPS estimate.

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

For financial reporting purposes, Tidewater's business is divided in U.S. and International segments.  In fiscal 2010, the International segment provided 92 percent of total vessel revenues and 96 percent of vessel operating profit.

The company's Market Value is currently around $2.5 billion.

Tidewater is in the midst of a multi-year effort to expand and modernize its fleet.  On 6 October 2010, Tidewater announced it had contracted with Dubai-based Drydocks World for the construction in Indonesia of four deepwater platform supply vessels at a cost of about $100 million.  On 30 September 2010, Tidewater was committed to acquire 4 vessels and to build 26 other vessels for a total cost of $700 million.

In September, Tidewater announced a plan to sell $425 million of senior unsecured notes to institutional investors.  The notes, which will mature in five to twelve years after issuance, will be used for debt refinancing, capital expenditures including fleet modernization, and general corporate purposes.

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 September quarter fell 9.6 percent, from $295.5 million last year to $267.1 million in the most recent three months. The revenue decline was primarily due to lower vessel utilization rates and fewer vessels in service.

Reported revenue was 1 percent less than our $270 million estimate.

Revenue from vessels based outside the U.S. fell 11 percent, from $271.9 million in the September 2009 quarter to $241.6 million this year.   Nevertheless, Revenue from the international fleet was still 90 percent of the total in the quarter.

U.S. Revenue inched up (due to the oil spill response?) from $22.7 million to $25.3 million.

The utilization rate for Tidewater's worldwide fleet dropped from 67.8 percent in the September 2009 quarter to 61.8 percent in the latest period. The utilization rate for U.S.-based vessels rose from 37.7 percent to 57.2 percent.

Tidewater deemed 395 owned or chartered vessels, on average, to be "in service" during the September 2010 quarter, down from 398 in the year-earlier period.  The latest count includes 94 "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.  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 49 to 63. The utilization rate for these vessels increased from 78.2 percent to 78.9 percent, but the average vessel "day rate" slipped 8 percent to $23,024. Nevertheless, the greater number of vessels enabled Revenue from this category to increase 18.6 percent to $104.9 million (39 percent of total vessel Revenue).

Towing-supply/supply vessels brought in more Revenue, $133 million, but this amount was down 23.6 percent from the September 2009 quarter. The utilization rate for these vessels plunged from 66.8 percent to 54.6 percent, and the average vessel day rate was 4.9 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 increased 7.4 percent, from $158.4 million in the September 2009 quarter to $170.1 million (63.7 percent of Revenue).  The latest results translate into a Gross Margin of 36.3 percent, far less profitable than last year's 46.4 percent.

Crew costs, which are the largest component of Vessel operating costs, were up 14 percent.

The Gross Margin, although down, was 110 basis points better than our 35.2 percent estimate.

Depreciation expenses rose from $32.3 million to $35.8 million because of newly acquired vessels.  The expense was $1.8 million more than anticipated.

Sales, General, and Administrative expenses nearly unchanged at $37.9 million.  However, the latest amount included a $4.35 million ($0.09 per common share) charge related to an agreement with the U.S. Department of Justice to resolve a Foreign Corrupt Practices Act investigation.

The reported SG&A amount was $2.9 million more than our $35 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 $23.3 million, down 65 percent from $66.7 million in the year-earlier quarter.  Operating Income, as we define it, missed our $26 million estimate by 10 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 $3.6 million gain, which was less than our $6 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 $1.8 million of impairment charges to write down the carrying value of an asset.

Miscellaneous non-operating income fell to $2.7 from $3.4 million in the year-earlier quarter.  Our estimate for this income was $4 million.

The effective Income Tax Rate was 34.4 percent, nearly double the assumed the tax rate of 18.5 percent.  The higher rate is due to Tidewater upping its estimated fiscal year tax rate from 18.5 percent to 22.5 percent.  It also reflects the settlement charge mentioned above, which does not have any tax benefits.

Net Income of $19.4 million ($0.38 per share) was 80 percent less than last year's $98.2 million ($1.90 per share). The latest results also fell short of our $29.3 million ($0.57 per share) estimate by 34 percent. 

In summary, revenue decreased  in the latest quarter, mostly because of lower utilization rates for the company's international vessels.  Operating costs did not fall in proportion to revenue, which led to lower margins and a substantial drop in Operating Income.  Non-operating income was also not as robust as we had expected, and the tax rate was much higher, exacerbating the decline in Net Income.  The quarter included a $4.35 million ($0.09 per common share) charge related to an agreement with the U.S. Department of Justice.

Full disclosure: Long TDW at time of writing.

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