Tidewater Inc. (NYSE: TDW) has announced better-than-expected earnings and filed a 10-Q for the quarter that ended on 31 December 2008. This post provides the initial GCFR analysis of the period, which was the third quarter of the company's fiscal 2009.Tidewater "owns 431 vessels, the world’s largest fleet of vessels serving the global offshore energy industry." Headquartered in New Orleans, the company has grown far beyond its Gulf of Mexico base. 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.
As of 31 December 2008, Tidewater is obligated to purchase 56 new vessels at a total cost of about $1.1 billion. Delivery of these vessels will take place between now and July 2012.Despite large capital expenditures, Tidewater management was optimistic enough in May 2008 about cash flows to raise the dividend by 67 percent. In addition, the company's board authorized $200 million of share repurchases. However, the 10-Q reports that none of $200 million has, as yet, been spent. Tidewater is holding onto cash "[d]ue to the distress in the capital and liquidity markets" and to "maximize available liquidity for all investment opportunities."
The global economic slump has greatly reduced demand and, therefore, prices for crude oil and natural gas. Lower prices should, in time, lead to less offshore production and, therefore, diminish the need for maritime support services.
Tidewater has reported, for example, that the number of offshore drilling rigs in the Gulf of Mexico is at historically low levels.
A greater number of out-of-service vessels, and reduced lease rates for those that remain in service, would presumably lower the market value of Tidewater's fleet. Tidewater has had significant success moving vessels to more active locations.
David Phillips (a/k/a the 10-Q Detective, which we highly recommend) has asked whether Tidewater would be able to find alternative funding sources to meet its capital commitments if Cash Flow from Operations falls short of the company's expectations.
The GCFR Overall Gauge of Tidewater stood at 34 of the 100 possible points after the September 2008 quarter. Our analysis report explained this result in some detail. The increase in the Overall score was mostly due to the Value gauge moving up as Tidewater's share price fell.
Now, with the available data from the December 2008 quarter, our gauges display the following scores:
- Cash Management: 16 of 25 (up from 8 in September)
- Growth: 10 of 25 (up from 3)
- Profitability: 2 of 25 (unchanged)
- Value: 23 of 25 (up from 15)
- Overall: 56 of 100 (up from 34)
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.
http://sheet.zoho.com/public/ncarvin/tdw-income-statement?mode=html
Revenue in the quarter was 15.3 percent greater than in the year-earlier period, whereas we had estimated that Revenue would grow by 9 percent. In the last four quarters, Tidewater brought in 12 percent more Revenue than during the prior four quarters.
Tidewater's Cost of Goods Sold (CGS) (i.e., Vessel operating costs and Costs of other marine revenues) was 47.7 percent of Revenue. Therefore, the company achieved a Gross Margin in the quarter of 52.3 percent, which was significantly better than our 47.2 percent estimate.
Depreciation expenses were 8.9 percent of Revenue, which basically matches our 9.0 percent estimate.
Sales, General, and Administrative (SG&A) expenses were 8.7 percent of Revenue, rather less than our prediction of 10.0 percent.
Operating Income, as we define it, was 24 percent more than in the year-earlier quarter. It surpassed our estimate by 31 percent. We expected Operating Income to decline by 4.9 percent.
Income from Asset Sales matched our $5 million estimate, which was based on an average of recent quarters. Miscellaneous non-operating income was $3.8 million more than we forecast.
The effective Income Tax Rate in the quarter was 16.1 percent, which was below the 18 percent guidance.
Net Income was 31 percent more than in the December 2007 quarter, and it was 34 percent more than our prediction. We had expected a decrease of 2.2 percent. On a per-share basis, earnings rose by 37 percent. The reduced number of shares outstanding magnified the earnings per share growth rate. Our EPS projection matched the actual figure.
| Cash Management | December 2008 | 3 months ago | 12 months ago |
| Current Ratio | 3.0 | 2.8 | 2.7 |
| LTD/Equity | 14.0% | 14.7% | 16.1% |
| Debt/CFO | 0.6 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) | 86.2 days | 86.8 days | 87.3 days |
| Working Capital/Market Capitalization | 16.7% | 11.1% | 11.6% |
| Cash Conversion Cycle Time (CCCT) | 69.6 days | 71.7 days | 56.5 days |
| Gauge score (0 to 25 points) | 16 | 8 | 8 |
Tidewater's Balance Sheet is solid and becoming more so.
| Growth | December 2008 | 3 months ago | 12 months ago |
| Revenue growth | 12.0% | 10.5% | 14.3% |
| Revenue/Assets | 48.6% | 47.5% | 47.0% |
| CFO growth | 10.9% | 6.2% | 1.9% |
| Net Income growth | 9.0% | 0.0% | 5.2% |
| Gauge score (0 to 25 points) | 10 | 3 | 7 |
Revenue growth bounced back and both Cash Flow from Operations and Net Income grew at accelerating paces.
| Profitability | December 2008 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 70.0% | 70.8% | 68.0% |
| ROIC | 15.2% | 14.6% | 16.2% |
| FCF/Equity | 3.7% | 3.5% | 5.6% |
| Accrual Ratio | 8.7% | 8.4% | 6.7% |
| Gauge score (0 to 25 points) | 2 | 2 | 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 | December 2008 | 3 months ago | 12 months ago |
| P/E | 5.4 | 8.0 | 8.4 |
| P/E to S&P 500 average P/E | 40% | 45% | 47% |
| Price/Revenue | 1.5 | 2.1 | 2.4 |
| Enterprise Value/Cash Flow (EV/CFO) | 4.3 | 6.5 | 6.7 |
| Gauge score (0 to 25 points) | 23 | 15 | 17 |
Tidewater's stock price dropped 27 percent during the quarter, from $55.36 to $40.27.
The valuation ratios can be compared with other companies in the Shipping industry.
| Overall | December 2008 | 3 months ago | 12 months ago |
| Gauge score (0 to 100 points) | 56 | 34 | 41 |
The jump in the Overall score is a result of an exceptionally strong fourth quarter of 2008 for Tidewater. Revenue growth surged, yet costs remained under controlled. It turns out that many of the company’s operating costs do not change proportionally with changes in revenue. Therefore, increases in Revenue translate fairly directly into earnings and cash flow growth.
Despite significant capital spending, Tidewater's balance sheet is strong.
Tidewater's management has diversified the business into various international markets. (In fiscal 2009 to date, Revenues generated from international operations were 87 percent of total Revenues.) 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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