Tidewater Inc. (NYSE: TDW) "owns 438 vessels, the world’s largest fleet of vessels serving the global offshore energy industry." Headquartered in New Orleans, the company has grown far beyond the Gulf of Mexico. International operations contributed 84 percent of Tidewater's Revenue in fiscal 2008. To continue this growth, Tidewater is substantially expanding and modernizing its fleet with annual investments between $300 million and $500 million.
Despite large capital expenditures, Tidewater management was optimistic enough to raise the dividend by 67 percent. In addition, Tidewater authorized $200 million in share repurchases.
The 10-Q states that Tidewater "did not experience any significant negative effects from the current financial crisis and credit market tightening." The company also reported that it "is in the process of re-assessing its stated strategy and investment plans," given the various uncertainties in the current environment.
Three months ago, when we analyzed the financial statements from the June 2008 quarter, the GCFR Overall Gauge of Tidewater fell from 42 to 26 of the 100 possible points. The force that exerted the most downward pressure on the Overall score was the contrarian Value gauge's negative reaction to the second quarter's surge in Tidewater's share price. With the subsequent price reversal (foretold by the Value gauge?) the downward force is no longer in effect.
Revenue in the June quarter was 11.3 percent greater than in June 2007, but the growth rate had clearly decelerated. Operating Expenses were up significantly. Cash Flow from Operations in the most recent four quarters was barely ahead of CFO in the four prior quarters, and Net Income was down 7 percent on this basis. Higher-than-average gains from asset sales prevented the income decline from being more severe.
To be sure, the Balance Sheet remained strong, as evidenced by a ratio of LTD/Equity that edged down to 15 percent despite higher capital spending.
Now, with the available data from the September 2008 quarter, our gauges display the following scores:
- Cash Management: 8 of 25 (unchanged from June)
- Growth: 3 of 25 (unchanged)
- Profitability: 2 of 25 (down from 3)
- Value: 15 of 25 (up from 9)
- Overall: 34 of 100 (up from 26)
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations.
Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($M) | | September 2008 (actual) | September 2008 (predicted) | (actual) |
| Revenue | | 347 | 355 | 319 |
| Op expenses | | | | |
| | CGS(1) | (177) | (180) | (162) |
| | Depreciation | (31) | (34) | (30) |
| | SG&A | (35) | (35) | (31) |
| Operating Income | | 104 | 106 | 97 |
| Other income | | | | |
| | Asset sales (2) | 6 | 6 | 2 |
| | Interest, etc. | 8 | 5 | 7 |
| Pretax income | | 118 | 116 | 105 |
| Income tax | | (22) | (20) | (19) |
| Net Income | | 95 | 96 | 86 |
| | | $1.85 | $1.85/sh | $1.55/sh |
| Shares outstanding | | 51.5 | 52.0 | 55.6 |
2. Tidewater considers gains on asset sales to be an operating item.
Revenue in the quarter was 8.7 percent greater than in the year-earlier period, but it was 2.2 percent less than our prediction. We had estimated that Revenue would grow by 11.2 percent. In the last four quarters, Revenue was 10.5 percent more than during the prior four quarters. [Tidewater's revenue would have been $6 million higher if there wasn't uncertainty about a certain customer's payments.]
Tidewater's Cost of Goods Sold (CGS) (i.e., Vessel operating costs and Costs of other marine revenues) were 50.9 percent of Revenue. Therefore, the company achieved a Gross Margin in the quarter of 49.1 percent, which fell just slightly short of our 49.3 percent estimate.
Depreciation expenses were 8.8 percent of Revenue, which was less than our 9.5 percent estimate.
Sales, General, and Administrative (SG&A) expenses were 10.2 percent of Revenue, a little more than our prediction of 10.0 percent.
Operating Income, as we define it, was 7.7 percent more than in the year-earlier quarter. It was lower than our estimate by 1.9 percent. We had expected an increase of 9.3 percent.
Income from Asset Sales matched our estimate, which was based on the company's earlier guidance. Miscellaneous non-operating income was $3 million more than we forecast. These two figures pushed pre-tax income a bit above our target.
The effective Income Tax Rate in the quarter was 18.9 percent, which exceeded the 17 percent guidance.
Net Income was 10.4 percent more than in the September 2007 quarter, and it was 1 percent below our prediction. We had expected an increase of 11.6 percent. On a per-share basis, earnings rose by 19 percent. The reduced number of shares outstanding magnified the earnings per share growth rate. Our EPS projection matched the actual figure.
| Cash Management | September 2008 | 3 months ago | 12 months ago |
| Current Ratio | 2.8 | 2.7 | 3.1 |
| LTD/Equity | 14.7% | 15.3% | 15.7% |
| Debt/CFO | 0.6 yrs | 0.7 yrs | 0.8 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 86.8 days | 85.6 days | 85.1 days |
| Working Capital/Market Capitalization | 11.1% | 9.8% | 11.8% |
| Cash Conversion Cycle Time (CCCT) | 71.7 days | 64.1 days | 56.0 days |
| Gauge score (0 to 25 points) | 8 | 8 | 7 |
Tidewater's cash level has dropped to fund the fleet modernization, but the Balance Sheet remains strong with leverage kept to a minimum. The increase in CCCT suggests reduced efficiency, but we're not sure how important this metric is for a services business
| Growth | September 2008 | 3 months ago | 12 months ago |
| Revenue growth | 10.5% | 12.4% | 17.7% |
| Revenue/Assets | 47.5% | 47.4% | 46.7% |
| CFO growth | 6.2% | 0.5% | 5.9% |
| Net Income growth | 0.0% | -7.2% | 18.2% |
| Gauge score (0 to 25 points) | 3 | 3 | 13 |
Revenue growth has clearly decelerated. Cash Flow from Operations and Net Income rebounded from last quarter's troubling data, but the numbers are not impressive.
| Profitability | September 2008 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 70.8% | 70.7% | 67.2% |
| ROIC | 14.6% | 15.1% | 16.4% |
| FCF/Equity | 3.5% | 4.6% | 6.4% |
| Accrual Ratio | 8.4% | 6.7% | 5.9% |
| Gauge score (0 to 25 points) | 2 | 3 | 4 |
The increase in Operating Expenses is a significant challenge for Tidewater. Crew and repair/maintenance costs are up substantially. In addition, Free Cash Flow is negatively affected by the high capital expenditures associated with the fleet expansion and modernization. We're also concerned that the increasing Accrual Ratio is indicating that less of the company's Net Income is due to CFO, and, therefore, more is due to changes in non-operational Balance Sheet accruals.
| Value. | September 2008 | 3 months ago | 12 months ago |
| P/E | 8.0 | 9.7 | 9.8 |
| P/E to S&P 500 average P/E | 44% | 53% | 58% |
| Price/Revenue | 2.1 | 2.6 | 2.9 |
| Enterprise Value/Cash Flow (EV/CFO) | 6.5 | 7.6 | 8.0 |
| Gauge score (0 to 25 points) | 15 | 9 | 14 |
Tidewater's valuation ratios can be compared with other companies in the Shipping industry.
| Overall | September 2008 | 3 months ago | 12 months ago |
| Gauge score (0 to 100 points) | 34 | 26 | 38 |
The mild rebound in the Overall gauge score is solely the result of the contrarian Value gauge's response to the steep decline in the share price. Growth and Profitability are stagnant.
Activity in the Gulf Coast is especially weak. Fortunately, the Tidewater's management has diversified the business into various international markets. Management also deserves credit for in investing in the future by acquiring more modern, efficient vessels without harming the company's financial strength. If the pace of the economy picks up, Tidewater will be ready.
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