TDW: Financial Analysis through December 2007

We have analyzed Tidewater's (TDW) preliminary financial results for the quarter that ended on 31 December 2007, which was the third quarter of their fiscal 2008. Tidewater's press release includes all the data we require to compute GCFR gauge scores; however, we still intend to pore through the 10-Q report that the company will submit to the SEC. The formal report could contain additional information relevant to our analysis.

Tidewater claims to own "the world’s largest fleet of vessels serving the global offshore energy industry." Since Tidewater's assets are mobile, the company can shift vessels to the regions where activity is greatest and leasing rates are highest. Once focused on the Gulf of Mexico, international operations comprised almost 80 percent of Tidewater's business in fiscal 2007.

High prices for crude oil and natural gas leads to increased offshore production, which increases the need for maritime services, which, in turn, allows Tidewater to lease more of its vessels and at higher rates. If the economy slows in industrial nations, which is distinct possibility, the demand for energy products would abate, prices would decline, and offshore production would become relatively less attractive. In this scenario, Tidewater might have to cut its lease rates to keep its vessels active.

A similar result would occur simply if too many new vessels are put into operation at the same time. At the Southcoast Energy Conference in December 2007, the Times-Picayune reported that CEO and Chairman Dean Taylor said Tidewater "plans to invest between $300 million and $500 million annually through 2011 to renew its aging vessel fleet, with the hope of taking advantage of the growing opportunities in international markets."

When we analyzed Tidewater after the September quarter, which was the second of their fiscal year, we discovered that the Overall gauge score had declined to 35 points from earlier superlative levels in the 60's and 70's. Of the four individual gauges that fed into September's composite result, Value was the strongest at 13 points. Profitability was weakest at 4 points.

Now, with the available data from the December 2007 quarter, our gauges display the following scores:

• Cash Management: 8 of 25
• Growth: 8 of 25
• Profitability: 4 of 25
• Value: 17 of 25
  

• Overall: 41 of 100
  

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)		Dec 2007 (actual)	Dec 2007 (predicted)	Dec 2006 (actual)
Revenue		314	326	288
Op expenses
	CGS (1)	(150)	(166)	(131)
	Depreciation	(31)	(33)	(30)
	SG&A	(31)	(33)	(25)
Operating Income		102	95	103
Other income
	Asset sales (2)	1	3	9
	Interest, etc.	6	7	4
Pretax income		108	105	115
Income tax		(18)	(20)	(22)
Net Income		89	85	93
		$1.66/sh	1.53/sh	1.67/sh

<sub>1. CGS=Vessel operating costs + Costs of other marine revenues
2. Tidewater considers gains on asset sales to be an operating item.</sub>


Revenue fell short of expectations. We forecast Revenue to be 13 percent greater than in the year-earlier quarter, and the actual increase was 9.1 percent. The shortfall can be ascribed to lower vessel utilization rates, worldwide but especially in the U.S., and lower per-day lease rates in the U.S.

However, Operating Expenses as a percentage of Revenue were also lower than we expected, which increased earnings. We thought the Cost of Goods Sold (CGS) would be 51 percent of Revenue, and the actual value was only 47.9 percent. Depreciation and Sales, General, and Administrative (SG&A) expenses were both right on target at 10 percent of Revenue.

Keeping a lid on costs enabled Operating Income to exceed the forecast value by more than 7 percent.

Non-operating income was $3 million less than expected. On the other hand, the Income Tax Rate was a mere 17 percent, instead of the predicted 19 percent. As a result, Net Income surpased our prediction by 5.1 percent.


Cash Management. This gauge increased from 7 points in September to 8 points now.

The measures that helped the gauge were:

• LTD/Equity = 16.1 percent, compared to 16.7 percent a year ago despite significant capital equipment expenditures and share repurchases
• Current Ratio =2.7; down to a normal, healthy level from 4.8 in December 2006
• Debt/CFO = 0.7 years, unchanged from 12 months ago
  

The measures that hurt the gauge were:

• Working Capital/Market Capitalization = 11.6 percent, down from 17.4 percent.
• Cash Conversion Cycle Time (CCCT) = 56.5 days, up from 47 days, for this measure of efficiency
  
• Days of Sales Outstanding (DSO) = 87.3 days, up from last year's 84.8 days.
  

Growth. This gauge decreased from 11 points in September to 8 points now.

The measures that helped the gauge were:

• Revenue/Assets = 45.5 percent, up from 42.6 percent in a year; sales efficiency is improving
• Revenue growth = 14.3 percent year-over-year, good but down from 33.0 percent
  

The measure that hurt the gauge were:

• Net Income growth = 5.2 percent year-over-year, down from a rollicking 49.3 percent
• CFO growth = 1.9 percent year-over-year, down from 91.6 percent
  

Net income benefited from a change in the income tax rate from 21.6 to 18.7 percent The tax rate decreased as a result of a continuing shift to more operations outside the U.S.

Profitability. This gauge didn't change from 4 points in September.

The measures that helped the gauge were:

• ROIC = 16.2 percent, up a notch from 16.0 percent one year ago.
  

The measures that hurt the gauge were:

• FCF/Equity = 5.4 percent, down from 12.6 percent in a year (this is where the capital investments are having a negative effect.)
  
• Accrual Ratio = +9.2 percent, up from +4.4 percent in a year
• Operating Expenses/Revenue = 68.0 percent, up from 66.9 percent in a year
  

The increasing Accrual Ratio tells us 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. Tidewater's stock price dropped over the course of the quarter from $62.84 to $54.86. The Value gauge, based on the latter price, rose from the 14 points achieved three months ago to a healthy 17 points.

All measures had a positive impact on the gauge score:

• Enterprise Value/Cash Flow = 6.7, up from 6.0 in December 2006, but well below the five-year median of 11.6
  
• P/E = 8.4, up a little from 8.1 a year ago, but, again, well below the five-year median of 17
  
• P/E to S&P 500 average P/E = 50 percent discount, unchanged from one year ago.
• Price/Revenue ratio = 2.4, compared to the five-year median value of 2.9.
  

The average P/E for the Oil Well Services and Equipment industry is currently a more expensive 16.3. The average Price/Revenue for the industry is currently 3.3.

Now at a modest 41 out of 100 possible points, the Overall gauge has fallen from lofty levels in the 60s last year. The offshore industry seems to be past the top of the latest boom-bust cycle, and we see this manifested in the Growth and Profitability gauges. 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 from cost containment, despite the slowdown, and in investing in the future by acquiring more modern, efficient vessels without harming the company's financial strength. The drop in the stock price has pushed up the Value gauge to attractive levels. If economic growth proves to be more robust than currently feared, we will see the other gauges perk up, and Tidewater will once again become quite attractive.