Tidewater Inc. (TDW) owns "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.
High prices for crude oil and natural gas leads to more offshore production, which increases the need for maritime services. This demand allows Tidewater to lease more of its vessels and at higher rates. If the economy slows substantially in industrial nations, the demand for energy products would abate, prices would decline, and offshore production would become relatively less attractive. In this scenario, Tidewater would probably have to cut lease rates to keep its vessels active.
When we analyzed Tidewater's financial statements for the March 2008 quarter, the GCFR Overall Gauge edged up to 43, of the 100 possible, points, from 41 points three months previously. However, the score was down from 58 points one year earlier. Of the four individual gauges that fed into March's composite result, Value was the strongest at 16 of 25 points, and Profitability was weakest at 4 points. Revenue in the March quarter exceeded our expectations, but operating costs were also higher. Crew costs, insurance and loss reserves, leases, and the ubiquitous "other" were all up substantially. Fewer shares outstanding helped lift earnings per share.
Now, with the available data from the June 2008 quarter, our gauges display the following scores:
- Cash Management: 8 of 25 (down from 11 in March)
- Growth: 8 of 25 (down from 10)
- Profitability: 3 of 25 (down from 4)
- Value: 9 of 25 (down from 16)
- Overall: 27 of 100 (down from 43)
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations. We're pleased at how close our model of the company's performance was to the actual results, but there were some deviations worth noting.
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) | | June 2008 (actual) | June 2008 (predicted) | (actual) |
| Revenue | | 340 | 338 | 305 |
| Op expenses | | | | |
| | CGS(1) | (187) | (179) | (150) |
| | Depreciation | (31) | (34) | (28) |
| | SG&A | (35) | (34) | (32) |
| Operating Income | | 87 | 92 | 95 |
| Other income | | | | |
| | Asset sales (2) | 10 | 3 | 7 |
| | Interest, etc. | 5 | 6 | 6 |
| Pretax income | | 102 | 101 | 108 |
| Income tax | | (17) | (18) | (21) |
| Net Income | | 85 | 83 | 88 |
| | | $1.64 | $1.58/sh | $1.55/sh |
| Shares outstanding | | 51.8 | 52.3 | 56.5 |
2. Tidewater considers gains on asset sales to be an operating item.
We estimated Revenue would be 10.8 percent greater than in the year-earlier quarter, and it exceeded expectations with an increase of 11.3 percent. Revenue was down in the U.S., but international revenues rose a substantial 15.4 percent.
We thought Tidewater would achieve a Gross Margin in the quarter of 47.2 percent, and the actual margin fell short at 45.0 percent. This translates into a Cost of Goods Sold (CGS) of 55.0 percent of Revenue.
Depreciation expenses were 9.0 percent of Revenue, which was less than our 10 percent estimate. Sales, General, and Administrative (SG&A) expenses were 10.3 percent of Revenue, just slightly exceeding our prediction of 10.0 percent.
The lower-than-expected Gross Margin was the main reason Operating Income, as we define it, fell short of our forecast by 5.4 percent.
Income from Asset Sales was $7 million more than our estimate, and miscelleneous non-operating income was $1 million less than we forecast. These two figures pushed pre-tax income just slightly over our expectation.
The Income Tax Rate in the quarter was 17.0 percent, which was below our 18 percent projection. As a result, Net Income exceeded our prediction, but only by $2 million. The difference was more significant on a per-share basis because Tidewater repurchased more its common shares than expected.
Cash Management. This gauge decreased from 11 points in March to 8 points now.
| June 2008 | 3 months ago | 12 months ago | |
| Current Ratio | 2.7 | 3.2 | 3.6 |
| LTD/Equity | 15.3% | 15.5% | 15.9% |
| Debt/CFO | 0.7 yrs | 0.6 yrs | 0.7 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 85.6 days | 85.6 days | 84.5 days |
| Working Capital/Market Capitalization | 9.8% | 13.5% | 11.4% |
| Cash Conversion Cycle Time (CCCT) | 64.1 days | 63.4 days | 54.7 days |
Tidewater's cash levels have been trimmed somewhat as it buys new vessels ($115 million in the latest quarter), performs major repairs ($15 miilion), and repurchases its own shares ($54 million). However, the Balance Sheet remains very strong. Management is so confident in its financial position that it has increased its dividend by 67 percent and has authorized another $200 million in share repurchases.
Growth. This gauge decreased from 10 points in March to 8 points now.
| June 2008 | 3 months ago | 12 months ago | |
| Revenue growth | 12.4% | 12.9% | 21.5% |
| Revenue/Assets | 46.6% | 46.2% | 42.9% |
| CFO growth | 0.5% | 12.5% | 27.4% |
| Net Income growth | -7.2% | -2.2% | 33.9% |
While we can't take declining Net Income lightly, decelerating Cash Flow from Operations concerns us more.
Profitability. This gauge decreased from 4 points in March to 3 points now.
| June 2008 | 3 months ago | 12 months ago | |
| Operating Expenses/Revenue | 70.7% | 69.3% | 66.0% |
| ROIC | 15.1% | 16.2% | 17.1% |
| FCF/Equity | 4.5% | 7.0% | 8.1% |
| Accrual Ratio | 6.7% | 4.8% | 4.8% |
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. Tidewater's stock price increased substantially during the quarter from $55.11 to $65.03. However, it has since given back nearly the entire gain. The Value gauge, based on the quarter-end price, slipped from the 16 points achieved three months ago to only 9 points. [If we use the current share price, the Value gauge reads a much more attractive 15 points.]
| June 2008 | 3 months ago | 12 months ago | |
| P/E | 9.7 | 8.3 | 10.7 |
| P/E to S&P 500 average P/E | 55% | 48% | 65% |
| Price/Revenue | 2.6 | 2.3 | 3.5 |
| Enterprise Value/Cash Flow (EV/CFO) | 7.6 | 6.0 | 8.7 |
The weak Overall gauge score of 27 points reflects the company's slowing Growth and the effect of higher costs on Profitability. It is also a manifestation of share price gains that proved to be transitory. At current levels, the score would be about 9 points higher.
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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