A previous article examined in some detail Tidewater's Income Statement for the September quarter. Reported earnings, for reasons explained below, were $0.19 less than our $0.57 EPS estimate.
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.
In fiscal 2010, Tidewater's International business provided 92 percent of total vessel revenues and 96 percent of vessel operating profit.
The company's Market Value is currently around $2.6 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.
In summary, Tidewater's latest quarterly results produced the following changes to the gauge scores:
- Cash Management: 8 of 25 (down from 9 in June)
- Growth: 0 of 25 (unchanged)
- Profitability: 1 of 25 (unchanged)
- Value: 1 of 25 (down from 5)
- Overall: 9 of 100 (up from 15)
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 Management||30 Sep 2010||30 Jun 2010||30 Sep 2009||5-Yr Avg|
|LTD to Equity||15.7%||12.1%||11.6%||15.1%|
|Days of Sales Outstanding (days)||105.5||105.0||91.7||88.9|
|Cash Conversion Cycle Time (days)||107.9||105.8||82.5||68.9|
|Gauge Score (0 to 25)||8||9||10||9|
The Cash Management gauge nudged down a point to 8 because Tidewater's debt rose and the Current Ratio slipped below the classical 2.0 threshold.
The company's Working Capital (i.e., the difference between Current Assets and Current Liabilities) fell from $439 million in September 2009 to $201 million this year.
Because Revenue has also decreased, Working Capital as a percentage of trailing-year Revenue has not changed much in the last year.
One reason Tidewater's cash balances are lower is that the company is investing considerable sums to modernize its fleet of vessels. In the last six months, Tidewater acquired seven new and 16 other vessels at a total cost of $394 million.
The 10-Q reports that Tidewater, as of 30 September 2010, was committed to spend another $445 million to acquire or build additional 30 vessels. (The company has already invested $255.6 million for these vessels.)
Long-term debt increased to $390 million and will rise further. Tidewater sold $310 million in senior notes to institutional investors in mid-October, and the company intends to offer $115 million in additional notes before the end of the calendar year.
The Long-term debt to Equity ratio is going to increase substantially, but it is starting from a relatively low percentage.
Accounts Receivable have not fallen as sharply as Revenue. The resulting 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.)
|Growth||30 Sep 2010||30 Jun 2010||30 Sep 2009||5-Yr Avg|
|Operating Profit Growth||-13.1%||-6.4%||10.4%||-5.4%|
|Net Income Growth||-52.3%||-30.5%||4.1%||-6.8%|
|Gauge Score (0 to 25)||0||0||3||12|
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
The Growth gauge remained at zero for the third consecutive quarter because Revenue, Cash Flow, and Net Income were all much less in the last four quarters than in the four prior quarters.
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.
Revenue in the September quarter fell 9.6 percent, from $295.5 million last year to $267.1 million in the most recent three months. The utilization rate for Tidewater's worldwide fleet dropped from 67.8 percent in the September 2009 quarter to 61.8 percent in the latest period.
Tidewater has not scaled back its Total Assets in response to the decline, preferring to be prepare for the next upturn. The Revenue/Assets ratio has, therefore, fallen steeply.
Trailing year Net Income is a low as it has been since 2005.
|Profitability||30 Sep 2010||30 Jun 2010||30 Sep 2009||5-Yr Avg|
|Free Cash Flow/Invested Capital||-12.1%||-7.7%||3.0%||2.3%|
|Gauge Score (0 to 25)||1||1||9||9|
The Profitability gauge did not stir from its very weak level.
Operating expenses have increased steeply as a percentage of Revenue. In a business dependent of expensive physical assets, it is not possible to cut expenses in proportion to Revenue during downturns. This practicality aggravates the company's financial results during periods of cyclical weakness.
The increase in the Accrual Ratio (an undesired result) is another consequence of weaker Cash Flow from Operations.
Recall that hefty capital expenditures associated with the fleet expansion and modernization cut into Free Cash Flow.
|Value||30 Sep 2010||30 Jun 2010||30 Sep 2009||5-Yr Avg|
|P/E vs. S&P 500 P/E||0.9||0.6||0.3||0.5|
|Enterprise Value/Cash Flow (EV/CFO)||8.3||7.0||4.9||6.8|
|Gauge Score (0 to 25)||1||5||17||14|
|Share Price ($)||$44.81||$38.72||$47.09||-|
The Value gauge lost most of its points because lower earnings and a higher share price caused the Price/Earnings multiple to jump.
Declining earnings makes the PEG ratio immaterial.
Lower Revenues also led to a rise in the Price/Sales ratio, but the latest value remained less than its longer-term average.
The share price recently bounced back over $50 as fears of further global economic decline ebbed and prospects for increased offshore activity improved.
|Overall||30 Sep 2010||30 Jun 2010||30 Sep 2009||5-Yr Avg|
|Gauge Score (0 to 100)||9||16||47||46|
The gauge scores remained very 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.
The company's rising share price suggests investors see signs that global economic conditions have improved enough to get industry operators to step up offshore exploration and production activities. This year's Gulf of Mexico disaster also seems likely to result in a long-term, worldwide suspension of deepwater operations.
Tidewater is leveraging the strength of its Balance Sheet to finance the modernization of its fleet, an activity which is continuing. The company wants to be ready when offshore activity picks up.
Full disclosure: Long TDW at time of writing.