Form 10-K for fiscal year ended March 31, 2011
Table of Contents
Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2011

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

 

 

Commission file number: 1-6311

Tidewater Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   

LOGO

 

   72-048776
(State of incorporation)       (I.R.S. Employer Identification No.)

 

601 Poydras St., Suite 1900

New Orleans, Louisiana

      70130
(Address of principal executive offices)       (Zip Code)

Registrant’s telephone number, including area code: (504) 568-1010

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, par value $0.10   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨


Table of Contents
Index to Financial Statements

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer x    Accelerated filer ¨      Non-accelerated filer ¨      Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨    No x

As of September 30, 2010, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was $2,286,393,685 based on the closing sales price as reported on the New York Stock Exchange of $44.81.

As of May 5, 2011, 51,876,038 shares of Tidewater Inc. common stock $0.10 par value per share were outstanding. Registrant has no other class of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for its 2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s last fiscal year is incorporated by reference into Part III of this Annual Report on Form 10-K.


Table of Contents
Index to Financial Statements

TIDEWATER INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED MARCH 31, 2011

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENT

     4   

PART I

     4   

ITEM 1.

  BUSINESS      4   

ITEM 1A.

  RISK FACTORS      17   

ITEM 1B.

  UNRESOLVED STAFF COMMENTS      24   

ITEM 2.

  PROPERTIES      24   

ITEM 3.

  LEGAL PROCEEDINGS      24   

ITEM 4.

  RESERVED      25   

PART II

     26   

ITEM 5.

  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES      26   

ITEM 6.

  SELECTED FINANCIAL DATA      28   

ITEM 7.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      29   

ITEM 7A.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      64   

ITEM 8.

  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      66   

ITEM 9.

  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      66   

ITEM 9A.

  CONTROLS AND PROCEDURES      66   

ITEM 9B.

  OTHER INFORMATION      67   

PART III

     68   

ITEM 10.

  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      68   

ITEM 11.

  EXECUTIVE COMPENSATION      68   

ITEM 12.

  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS      68   

ITEM 13.

  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE      68   

ITEM 14.

  PRINCIPAL ACCOUNTING FEES AND SERVICES      68   

PART IV

     69   

ITEM 15.

  EXHIBITS, FINANCIAL STATEMENT SCHEDULES      69   

SIGNATURES OF REGISTRANT

     74   

SIGNATURES OF DIRECTORS

     74   

 

-3-


Table of Contents
Index to Financial Statements

FORWARD-LOOKING STATEMENT

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, this Annual Report on Form 10-K and the information incorporated herein by reference contain certain forward-looking statements which reflect the company’s current view with respect to future events and financial performance. All such forward-looking statements are subject to risks and uncertainties, and the company’s future results of operations could differ materially from its historical results or current expectations. Some of these risks are discussed in this report and in Item 1A. “Risk Factors” and include, without limitation, volatility in worldwide energy demand and oil and gas prices; fleet additions by competitors and industry overcapacity; changes in capital spending by customers in the energy industry for offshore exploration, field development and production; changing customer demands for vessel specifications, which may make some of our older vessels technologically obsolete for certain customer projects or in certain markets; uncertainty of global financial market conditions and difficulty in accessing credit or capital; acts of terrorism and piracy; significant weather conditions; unsettled political conditions, war, civil unrest and governmental actions, such as expropriation, especially in higher risk countries where we operate; foreign currency fluctuations; labor influences proposed by international conventions; increased regulatory burdens and oversight following the Deepwater Horizon incident; and enforcement of laws related to the environment, labor and foreign corrupt practices.

Forward-looking statements, which can generally be identified by the use of such terminology as “may,” “expect,” “anticipate,” “estimate,” “forecast,” “believe,” “think,” “could,” “continue,” “intend,” “seek,” “plan,” and similar expressions contained in this report, are predictions and not guarantees of future performance or events. Any forward-looking statements are based on the company’s assessment of current industry, financial and economic information, which by its nature is dynamic and subject to rapid and possibly abrupt changes. The company’s actual results may differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. While management believes that these forward-looking statements are reasonable when made, there can be no assurance that future developments that affect us will be those that we anticipate and have identified. The forward-looking statements should be considered in the context of the risk factors listed above and discussed in greater detail elsewhere in this Annual Report on Form 10-K. Investors and prospective investors are cautioned not to rely unduly on such forward-looking statements, which speak only as of the date hereof. Management disclaims any obligation to update or revise any forward-looking statements contained herein to reflect new information, future events or developments.

In certain places in this report, we refer to reports published by third parties that purport to describe trends or developments in energy production and drilling and exploration activity. The company does so for the convenience of our investors and potential investors and in an effort to provide information available in the market that will lead to a better understanding of the market environment in which the company operates. The company specifically disclaims any responsibility for the accuracy and completeness of such information and undertakes no obligation to update such information.

PART I

 

ITEM 1. BUSINESS

General

Tidewater Inc., a Delaware corporation that is listed on the New York Stock Exchange under the symbol “TDW”, provides offshore service vessels and marine support services to the global offshore energy industry through the operation of a diversified fleet of marine service vessels. The company was incorporated in 1956 and conducts its operations through wholly-owned United States (U.S.) and international subsidiaries and joint ventures. Unless otherwise required by the context, the term “company” as used herein refers to Tidewater Inc. and its consolidated subsidiaries.

The company provides services in support of all phases of offshore exploration, field development and production, including towing of, and anchor handling for, mobile offshore drilling units; transporting supplies and personnel necessary to sustain drilling, workover and production activities; offshore construction and seismic support; and a variety of specialized services such as pipe and cable laying. The size and composition of the

 

-4-


Table of Contents
Index to Financial Statements

company’s offshore service vessel fleet includes vessels that are operated under joint ventures, as well as vessels that have been stacked or withdrawn from service.

The company has one of the widest operating global footprints in the offshore energy industry with operations in most of the world’s significant crude oil and natural gas exploration and production regions. The company is also one of the most experienced international operators in the offshore energy industry with over five decades of international experience.

At March 31, 2011, the company had 378 vessels (of which 10 were operated through joint ventures, 90 were stacked and four were withdrawn from service) available to serve the global energy industry. Please refer to Note (1) of Notes to Consolidated Financial Statements included in Item 8 of this report for additional information regarding our stacked vessels and vessels withdrawn from service.

The company also operates two shipyards, which construct, modify and repair vessels. The shipyards perform both repair work and new construction work for outside customers, as well as the construction, repair and modification of the company’s own vessels.

The company’s revenues, net earnings and cash flows from operations are largely dependent upon the activity level of its offshore marine vessel fleet. As is the case with other energy service companies, our business activity is largely dependent on the level of drilling and exploration activity by our customers. Our customers’ business activity, in turn, is dependent on crude oil and natural gas prices, which fluctuate depending on expected future levels of supply and demand for crude oil and natural gas, and on estimates of the cost to find, develop and produce reserves. Since the Deepwater Horizon incident, the level of drilling activity off the continental shelf of the U.S. Gulf of Mexico (GOM) had been suppressed while the federal government evaluated the causes of the incident and announced a plan for enhanced regulatory and safety oversight as a condition to granting additional drilling and exploration permits. The Bureau of Ocean Energy Management Regulation and Enforcement (BOEMRE) began issuing permits for deepwater exploration and drilling in the latter part of February 2011 although the pace of issuing new permits has been slow to date.

Offices and Facilities

The company’s worldwide headquarters and principal executive offices are located at 601 Poydras Street, Suite 1900, New Orleans, Louisiana 70130, and its telephone number is (504) 568-1010. The company’s U.S. marine operations are based in Amelia, Louisiana; Oxnard, California; and Houston, Texas. The company’s shipyards and shipyard operations are located in Houma, Louisiana. We conduct our international operations through facilities and offices located in over 30 countries. Our principal international offices and/or warehouse facilities, most of which are leased, are located in Rio de Janeiro and Macae, Brazil; Ciudad Del Carmen, Mexico; Port of Spain, Trinidad; Aberdeen, Scotland; Cairo, Egypt; Luanda and Cabinda, Angola; Lagos and Onne Port, Nigeria; Douala, Cameroon; Singapore; Perth, Australia; Shenzhen, China; Port Moresby, Papua New Guinea; and Dubai, United Arab Emirates. The company’s operations generally do not require highly specialized facilities, and suitable facilities are generally available on a lease basis as required.

Business Segments

The company operates in two reportable segments: International and the United States. The principal customers for each business segment are major and independent oil and natural gas exploration, field development and production companies; drilling contractors; and other companies that provide various services to the offshore energy industry, including but not limited to, offshore construction companies, diving companies and well stimulation companies. The international business segment also has customers that are foreign government-owned or -controlled organizations and companies that explore and produce oil and natural gas.

The company’s vessels in its international segment are geographically dispersed throughout the major crude oil and natural gas exploration and development areas of the world. Although barriers such as mobilization costs, the availability of suitable vessels and cabotage rules in certain countries occasionally restrict the ability of the company to move vessels between international markets, the company’s diverse, mobile asset base and the wide geographic distribution of its vessel assets enable the company to respond relatively quickly to changes in market conditions. As such, significant variations between international regions tend to be of a short-term duration, as the company routinely moves vessels between and within geographic regions.

 

-5-


Table of Contents
Index to Financial Statements

The company’s internationally-based vessels operate in the shallow, intermediate and deepwater offshore markets around the world. The deepwater offshore market continues to be a growing sector of the international offshore crude oil and natural gas markets due in part to technological developments that have made such exploration feasible. It is the one sector that has not experienced significant negative effects from the 2008-2009 global economic recession, largely because deepwater exploration and development typically involves significant capital investment and multi-year development plans. Such projects are generally underwritten by the participating exploration, development and production companies using relatively conservative assumptions in regards to crude oil and natural gas prices and therefore are not as susceptible to short-term fluctuations in the price of crude oil and natural gas.

The company’s international market segment revenue is derived primarily from vessel time charter contracts that are generally three months to two years in duration. The base rate of hire for a term contract is generally a fixed rate, though some charter arrangements include clauses to recover specific additional costs.

The company’s vessels in its U.S. segment operate primarily in shallow, intermediate and deep waters of the U.S. GOM. A small percentage of the vessels in the U.S. segment operate in the U.S. coastal waters of the Pacific and Atlantic oceans. Drilling in the shallow and intermediate waters of the U.S. GOM generally are more susceptible to short-term fluctuations in the commodity prices of crude oil and natural gas. The deepwater offshore market has been a growing sector of the U.S. GOM and is the one domestic market that did not experience any significant negative effects from the 2008-2009 global economic recession for the reasons cited above. However, the April 2010 Deepwater Horizon incident did significantly affect drilling activity in the U.S. GOM. The Department of the Interior, through the BOEMRE, imposed a moratorium on certain drilling activities in the U.S. GOM while the BOEMRE overhauled the offshore crude oil and natural gas regulatory process.

The company’s U.S. market segment revenue is derived from vessel time charter contracts that are on a term basis and on a “spot” basis, which is a short-term agreement (one day to three months) to provide offshore marine services to a customer for a specific short-term job. The company’s U.S.-based deepwater class vessels are primarily contracted on a term basis.

Please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report for a greater discussion of the company’s International and U.S. segments, including the macroeconomic environment and market direction for each segment. In addition, please refer to Note (13) of Notes to Consolidated Financial Statements for segment, geographical data and major customer information.

The Past and Potential Future Impact of the Deepwater Horizon Disaster on Our Business

As an international energy service company that derives over 90% of its revenues from operations outside of United States territorial waters, we believe that the overall impact of the Deepwater Horizon incident will not have a significant immediate impact on our overall operations or financial performance. Less than 7% of our total fleet operates in the U.S. GOM, and, if necessary, these vessels can be mobilized to serve other markets if demand for their services does not continue to exist in the U.S. GOM because of any precipitous and long-term reduction in the level of drilling and exploration activity in that region.

On October 12, 2010, the U.S. government lifted the previously imposed moratorium suspending all deepwater drilling and exploration activity. New regulations of the BOEMRE calling for additional safety measures and inspections have caused significant disruption and delays in the permit process and are creating uncertainty as to when drilling activity will recommence to pre-moratorium levels. One of the consequences of the new regulatory environment may be that future deepwater exploration activity domestically will be limited to very large oil companies, which may limit the number of customers for the company’s services in supporting deepwater exploration.

Although exploration activity in the shallow waters of the U.S. GOM was allowed to re-commence prior to October 12, 2010, and the BOEMRE began issuing permits for deepwater exploration and drilling in the latter part of February 2011, but only a limited number of new drilling permits have been issued since the spill. It appears the re-commencement of new drilling activities in the Gulf of Mexico will be a slow process. Over the longer term, we, like others that operate in the U.S. GOM, are concerned that new safety standards and other regulatory responses to the rig explosion and oil spill will result in higher operating costs and reduced

 

-6-


Table of Contents
Index to Financial Statements

exploration and field development (and particularly deepwater exploration and field development). We do not know when, or if, drilling activities will return to the levels seen prior to the Deepwater Horizon disaster.

In an effort to promote offshore drilling, a number of bills were introduced in the U.S. House of Representatives in late March 2011, that aim to increase offshore drilling by requiring the U.S. Department of the Interior to act on drilling application permits within 30 days of receipt, to conduct the postponed crude oil and natural gas lease sales in the U.S. GOM and offshore Virginia, and also to auction a majority of the crude oil and natural gas leases that contain the most known reserves. It is too early in the legislative process to determine if any or all of these bills will be passed or signed into law.

If exploration and production activity continues to migrate from the U.S. GOM to international markets because of the additional regulations and higher operating costs in the U.S. GOM, it is also probable that other offshore supply vessel owners will redeploy additional vessels to international markets. This could increase competition and have a negative effect on vessel utilization and day rates in international markets, depending on the number of drilling rigs and offshore supply vessels that exit the U.S. GOM and move to international markets.

Geographic Areas of Operation

The company’s fleet is deployed in the major global offshore oil and gas areas of the world. The principal areas of the company’s operations include the U.S. GOM, the Persian/Arabian Gulf, and areas offshore Australia, Brazil, Egypt, India, Indonesia, Malaysia, Mexico, Trinidad, and West and East Africa. The company regularly evaluates the deployment of its assets and repositions its vessels based on customer demand, relative market conditions, and other considerations.

Revenues and operating profit derived from International and United States marine operations and total marine assets for the International and United States segments for each of the fiscal years ended March 31 are summarized below:

 

(In thousands)                   
   
     2011     2010     2009  
   

Revenues:

      

Vessel revenues:

      

International

   $ 962,522        1,048,553        1,209,426   

United States

     88,691        89,609        146,896   

Other marine revenues

     4,175        30,472        34,513   
   
   $     1,055,388                1,168,634                1,390,835   
   

Marine operating profit:

      

Vessel activity:

      

International

   $ 162,051        252,354        437,695   

United States

     11,581        9,196        34,797   
   
     173,632        261,550        472,492   

Corporate expenses

     (46,361     (51,432     (38,622

Gain on asset dispositions, net

     13,228        28,178        27,251   

Other marine services

     (1,163     2,034        4,348   
   

Operating income

   $ 139,336        240,330        465,469   
   

Total marine assets:

      

International

   $ 3,237,846        2,822,058        2,575,637   

United States

     381,077        334,182        394,129   
   

Total marine assets

   $ 3,618,923        3,156,240        2,969,766   
   

Please refer to Item 7 of this report and Note (13) of Notes to Consolidated Financial Statements included in Item 8 of this report for further disclosure of segment revenues, operating profits, and total assets by geographical areas in which the company operates.

 

-7-


Table of Contents
Index to Financial Statements

Our Global Vessel Fleet

The company continues an aggressive but disciplined vessel construction, acquisition and replacement program that was initiated with the intent of assuring the company’s presence in nearly all major oil and gas producing regions of the world through the replacement of aging vessels in the company’s fleet with fewer, larger, and more technologically sophisticated vessels. Since calendar 2000, the company purchased and/or constructed 214 vessels for approximately $2.9 billion. To date, the company has generally funded its vessel programs from its operating cash flow and funds provided by the private placements of $725.0 million in senior unsecured notes, borrowings under revolving credit facilities, and various sales-leaseback arrangements.

The company’s strategy contemplates organic growth through the construction of vessels at a variety of shipyards worldwide and possible acquisitions of recently built vessels and/or other owners and operators having attractive offshore supply vessels or fleets. The company has the largest number of new vessels among its competitors in the industry, but it also has the largest number of older vessels for which management regularly evaluates disposition and other alternatives. The company intends to pursue its long-term fleet replenishment and modernization strategy on a disciplined basis and, in each case, will carefully consider whether proposed investments and transactions have the appropriate risk/reward profile.

The average age of the company’s 364 owned or chartered vessel fleet (including stacked vessels but excluding joint-venture vessels and vessels withdrawn from service) at March 31, 2011 is approximately 16.5 years. The average age of the 193 vessels that the company acquired or constructed since calendar year 2000 as part of its new build and acquisition program (and which accounted for approximately 80% of vessel revenue in fiscal 2011) is approximately 5.4 years. The remaining 171 vessels have an average age of 29.0 years. Of the company’s 364 vessels, 65 are deepwater class vessels, 217 are in the towing-supply/supply class vessels, 56 are crew/utility class vessels and 26 are offshore tugs.

At March 31, 2011, the company had agreements to acquire eight vessels and commitments to build 28 vessels at a number of different shipyards around the world (with one of these vessels being constructed in the United States by the company’s wholly-owned shipyard, Quality Shipyards, L.L.C.) at a total cost, including contract costs and other incidental costs, of approximately $857.2 million. Of the 28 new-build vessels, eight are anchor handling towing supply vessels ranging between 5,150 and 8,200 brake horsepower (BHP), 19 are platform supply vessels ranging between 3,200 and 6,360 deadweight tons of cargo capacity, and one is a fast crew/supply boat. Scheduled delivery for these vessels began in April 2011, with delivery of the final vessel expected in April 2013.

Of the eight vessels to be purchased, seven are anchor handling towing supply vessels and one is a platform supply vessel. The aggregate approximate purchase price for these eight vessels is $107.9 million. The company expects to take possession of six of the seven anchor handling towing supply vessels throughout calendar year 2011 and the final anchor handling towing supply vessel in February 2012 for an aggregate purchase price of $86.0 million. The company took possession of the platform supply vessel in April 2011 for an approximate purchase price of $21.9 million. At March 31, 2011, the company had expended $21.8 million for the acquisition of these eight vessels.

At March 31, 2011, the company had invested $341.2 million in progress payments towards the construction of 28 vessels and $21.8 million towards the purchase of the eight vessels. At March 31, 2011, the remaining expenditures necessary to complete construction of the 28 vessels currently under construction (based on contract prices), and to fund the acquisition of the eight vessels was $494.2 million.

A full discussion of the company’s capital commitments, scheduled delivery dates and vessel sales is disclosed in the “Vessel Count, Dispositions, Acquisitions and Construction Programs” section of Item 7 and Note (10) of Notes to Consolidated Financial Statements included in Item 8 of this report. The “Vessel Count, Dispositions, Acquisitions and Construction Programs” section of Item 7 also contains a table comparing the actual March 31, 2011 vessel count and the average number of vessels by class and geographic distribution during the three years ended March 31, 2011, 2010 and 2009.

Between April 1999 and March 2011, the company also sold, primarily to buyers that operate outside of our industry, 543 vessels. Most of the vessel sales were at prices that exceeded their carrying values. In aggregate,

 

-8-


Table of Contents
Index to Financial Statements

proceeds from, and pre-tax gains on, vessel dispositions during this period approximated $605.8 million and $279.1 million, respectively.

Our Vessel Classifications

The company’s vessels regularly and routinely move from one operating area to another, often to and from offshore operating areas of different continents. The company discloses its vessel statistical information, such as revenue, utilization and average day rates, by vessel class. Listed below are the company’s five major vessel classes along with a description of the type of vessels categorized in each class and the services the respective vessels typically perform. Tables comparing the average size of the company’s marine fleet by class and geographic distribution for the last three fiscal years are included in Item 7 of this report.

Deepwater Vessels

Included in this vessel class are large (typically greater than 230-feet and/or with at least 2,801 tons in dead weight cargo carrying capacity), platform supply vessels (PSVs) and large, higher-horsepower (generally greater than 10,000 horsepower) anchor handling towing supply (AHTS) vessels. This vessel class is generally chartered to customers for use in transporting supplies and equipment from shore bases to deepwater and intermediate water depth offshore drilling rigs, platforms and other installations. Platform supply vessels, which have large cargo capacities, serve drilling and production facilities and support offshore construction and maintenance work. The anchor handling towing supply vessels are equipped to tow drilling rigs and other marine equipment, as well as to set anchors for the positioning and mooring of drilling rigs. Also included in this vessel class are specialty vessels that can support offshore well stimulation, construction work, subsea services and/or have fire fighting capabilities and/or accommodation facilities. These vessels are generally available for routine supply and towing services but are outfitted and primarily intended for specialty services. Included in the specialty vessel category is the company’s one multi-purpose platform supply vessel (MPSV), which is designed for subsea service and construction support activities.

Towing-Supply and Supply Vessels

This is the company’s largest fleet class by number of vessels. Included in this class are anchor handling towing supply vessels and supply vessels with horsepower below 10,000 BHP, and platform supply vessels that are generally less than 230 feet. The vessels in this class perform the same functions and services as their deepwater vessel class counterparts except they are generally chartered to customers for use in intermediate and shallow waters.

Crewboats and Utility Vessels

Crewboats and utility vessels are chartered to customers for use in transporting personnel and supplies from shore bases to offshore drilling rigs, platforms and other installations. These vessels are also often equipped for oil field security missions in markets where piracy, kidnapping or other potential violence presents a concern.

Offshore Tugs

Offshore tugs tow floating drilling rigs; assist in the docking of tankers; tow barges; assist pipe laying, cable laying and construction barges; and are used in a variety of other commercial towing operations, including towing barges carrying a variety of bulk cargoes and containerized cargo.

Other Vessels

Until the first quarter of fiscal 2010, the company’s “Other Vessels” included inshore tugs and production, line-handling and various other special purpose vessels. Inshore tugs, which are operated principally within inland waters, tow drilling rigs to and from their locations and tow-barges carrying equipment and materials for use principally in inland waters for drilling and production operations. Barges are either used in conjunction with company tugs or are chartered to others. The company sold its remaining “other” type vessels during the first quarter of fiscal 2010.

 

-9-


Table of Contents
Index to Financial Statements

Revenue Contribution of Main Classes of Vessels

Revenues from vessel operations were derived from the main classes of vessels in the following percentages:

 

                 Year Ended March 31,               
   
     2011      2010      2009  
   

Deepwater vessels

     39.6%         31.9%         24.0%   

Towing-supply/supply

     49.2%         56.9%         61.9%   

Crew/utility

     7.8%         7.9%         9.0%   

Offshore tugs

     3.4%         3.3%         4.6%   

Other

     0.0%         0.0%         0.5%   
   

Shipyard Operations

Quality Shipyards, L.L.C., a wholly-owned subsidiary of the company, operates two shipyards in Houma, Louisiana, that construct, modernize and repair vessels. The shipyards perform repair work and new construction work for third-party customers, as well as the construction, repair and modification of the company’s own vessels. During the last three fiscal years, Quality Shipyards, L.L.C. constructed and delivered two 266-foot platform supply vessels and is currently constructing one additional 266-foot platform supply vessel for the company. The two 266-foot platform supply vessels were delivered during fiscal 2010. The 266-foot deepwater, platform supply vessel that is currently under construction is expected to be delivered in November 2011.

Customers and Contracts

The company’s operations are materially dependent upon the levels of activity in offshore crude oil and natural gas exploration, field development and production throughout the world, which is affected by trends in worldwide crude oil and natural gas prices (including expectations of future commodity pricing) that are ultimately influenced by the supply and demand relationship for these natural resources. The activity levels of our customers are also influenced by the cost of exploring and producing crude oil and natural gas, which can be affected by environmental regulations, technological advances that affect energy production and consumption, significant weather conditions, the ability of our customers to raise capital, and local and international economic and political environments, including government mandated moratoriums. A discussion of current market conditions and trends appears under “Macroeconomic Environment and Outlook” in Item 7 of this report.

The company’s principal customers are major and independent oil and natural gas exploration, field development and production companies; foreign government-owned or -controlled organizations and companies that explore and produce oil and natural gas; drilling contractors; and companies that provide other services to the offshore energy industry, including but not limited to, offshore construction companies, diving companies and well stimulation companies.

In recent years, consolidation of exploration, field development, and production companies has occurred and this trend may continue in the future. Consolidation reduces the number of customers for the company’s equipment, and may negatively affect exploration, field development and production activity as consolidated companies generally focus on increasing efficiency and reducing costs and delay or abandon exploration activity with less promise. Such activity could adversely affect demand for the company’s vessels, and reduce the company’s revenues.

The company’s primary source of revenue is derived from time charter contracts of its vessels on a rate per day of service basis; therefore, vessel revenues are recognized on a daily basis throughout the contract period. As noted above, these time charter contracts are generally either on a term or “spot” basis. There are no material differences in the cost structure of the company’s contracts based on whether the contracts are spot or term because the operating costs are generally the same without regard to the length of a contract.

For the year ended March 31, 2011, Chevron Corporation (including its worldwide subsidiaries and affiliates) accounted for approximately 16.2% and Petroleo Brasileiro SA accounted for approximately 15.4% of total revenues. The unexpected loss of either or both of these two significant customers could, at least in the short term, have a material adverse effect on the company’s vessel utilization and its results of operations. The five

 

-10-


Table of Contents
Index to Financial Statements

largest customers of the company accounted for approximately 45.3% of the company’s fiscal 2011 total revenues, while the 10 largest customers accounted for approximately 62.8% of the company’s total revenues.

Competition

The principal competitive factors for the offshore vessel service industry are the suitability and availability of vessel equipment, price and quality of service. In addition, the ability to demonstrate a strong safety record and attract and retain qualified and skilled personnel are also important competitive factors. The company has numerous competitors in all areas in which it operates around the world, and the business environment in all of these markets is highly competitive.

The company’s diverse, mobile asset base and the wide geographic distribution of its assets generally enable the company to respond relatively quickly to changes in market conditions and to provide a broad range of vessel services to its customers around the world. The company’s management believes the company has a competitive advantage because of the size, diversity and geographic distribution of its vessel fleet. Economies of scale and experience level in the many areas of the world in which we operate are also considered competitive advantages as is the company’s strong financial position.

According to ODS-Petrodata, the global offshore supply vessel market has approximately 405 new-build offshore support vessels (platform supply vessels and anchor handlers only) at March 31, 2011 that are currently estimated to be under construction and that are expected to be delivered to the worldwide offshore vessel market primarily over the next three and a half years. The current worldwide fleet of these classes of vessels is estimated at approximately 2,590 vessels, of which we estimate in excess of 15% are stacked. An increase in worldwide vessel capacity could have the effect of lowering charter rates, particularly when there are lower levels of exploration, field development and production activity. The worldwide offshore marine vessel industry, however, also has a large number of aging vessels, including more than 760 vessels, or approximately 30% of the worldwide offshore fleet, that are at least 25 years old, that are nearing or exceeding original expectations of their estimated economic lives. These older vessels could potentially be removed from the market within the next few years if the cost of extending the vessels’ lives is not economically justifiable. Although the future attrition rate of these aging vessels cannot be accurately predicted, the company believes that the retirement of a sizeable portion of these aging vessels would likely mitigate the potential combined negative effects of new-build vessels on vessel utilization and vessel pricing. Additional vessel demand could also be created with the addition of new drilling rigs and floating production units that are expected to be delivered and become operational over the next few years, which should help minimize the possible negative effects of the new-build offshore support vessels being added to the offshore support vessel fleet. It is unknown at this time the extent to which the recovery from the recent global recession will influence the utilization of equipment currently in existence or the ultimate timing of delivery and placing into service of new drilling rigs, floating production units and vessels currently under construction.

Challenges We Confront as an International Offshore Vessel Company

The company operates in many challenging operating environments around the world that present varying degrees of political, social, economic and other uncertainties. We operate in markets where there are risks of expropriation, confiscation or nationalization of our vessels or other assets, terrorism, piracy, civil unrest, changing foreign currency exchange rates and controls, and changing political conditions, any of which may adversely affect our operations. Although the company takes what it believes to be prudent measures to safeguard its property, personnel and financial condition against these risks, it cannot mitigate entirely the foregoing risks, although the wide geographic dispersion of the company’s vessels helps reduce the likely overall potential impact of these risks. In addition, immigration, customs, tax and other regulations (and administrative and judicial interpretations thereof) can have a material impact on our ability to work in certain countries and on our operating costs.

In some international operating environments, local customs or laws may require the company to form joint ventures with local owners or use local agents. The company is dedicated to carrying out its international operations in compliance with the rules and regulations of the Office of Foreign Assets Control (OFAC), the Trading with the Enemy Act, the Foreign Corrupt Practices Act (FCPA), and other applicable laws and regulations. The company has adopted policies and procedures to mitigate the risks of violating these rules and regulations.

 

-11-


Table of Contents
Index to Financial Statements

Sonatide

Tidewater has a 49% ownership interest in Sonatide, a joint venture that owns vessels that serve the Angolan offshore energy industry. Tidewater has previously disclosed that it has been in discussions with its joint venture partner, Sonangol, with respect to certain terms and conditions of the joint venture agreement under which Sonatide is managed and operated. This joint venture agreement was originally scheduled to expire by its terms on July 31, 2010; however, representatives of Sonangol and Tidewater have, from time to time, agreed to extend the expiration date of the joint venture agreement. The most recent extension extends the expiration date to July 31, 2011. The purpose of these extensions is to give the parties additional time to negotiate the terms of a new, more permanent joint venture agreement.

Successfully concluding a new joint venture agreement in a timely manner is a priority for the company. No assurances can be given, however, that these discussions will be successfully concluded or whether such terms will be advantageous to the company. Failing to further extend the existing Sonatide joint venture or reach a new joint venture agreement with Sonangol could impair the company’s ability to continue to effectively compete for business in Angola in the future. More Tidewater vessels are deployed in Angola and more revenue is derived from our operations in Angola than in or from any of Tidewater’s other countries of operation.

Sonangol and Tidewater have agreed to continue the Sonatide joint venture to the extent required to fulfill several new or renewed charterparty agreements with customers in Angola that extend well beyond July 31, 2011. These charterparty agreements cover a substantial portion of our vessels in Angola. Accordingly, while no assurances can be given that negotiations of a new, more permanent joint venture agreement will be successfully concluded, the joint venture has been extended, on a charter by charter basis, to fulfill the remaining term of existing charters for the vessels owned by the joint venture and the Tidewater-owned vessels operating in Angola. Over the course of the last few months, a number of new or renewed charters have been entered into on this basis.

International Labour Organization’s Maritime Labour Convention

The International Labour Organization’s Maritime Labour Convention, 2006 (the Convention) seeks to mandate globally, among other things, seafarer working conditions, ship accommodations, wages, conditions of employment, health and other benefits for all ships (and the seafarers on those ships) that are engaged in commercial activities. To date, this Convention has been ratified by 12 countries, namely, the Bahamas, Bosnia and Herzegovina, Bulgaria, Canada, Croatia, Liberia, Marshall Islands, Norway, Panama, St. Vincent and the Grenadines, Spain and Switzerland representing in excess of 33% of the world’s vessel tonnage. If adopted by an additional 18 countries, then within 12 months thereof, the Convention will become law. In the unlikely event that ratification were to be achieved in 2011, the Convention would become law in 2012 or 2013, depending upon the date of final ratification. Even though the company believes that the labor changes proposed by this Convention are unnecessary in light of existing international labor laws that govern many of these issues, and the Company continues to work with industry representatives to oppose ratification of this Convention, the Company will continue to review and assess its seafarer labor relationships in light of the Convention requirements. Should this Convention become law, the company and its customers’ operations may be negatively affected by future compliance costs.

Government Regulation

The company is subject to various United States federal, state and local statutes and regulations governing the operation and maintenance of its vessels. The company’s U.S. flag vessels are subject to the jurisdiction of the United States Coast Guard, the United States Customs and Border Protection, and the United States Maritime Administration. The company is also subject to international laws and conventions and the laws of international jurisdictions where the company and its offshore vessels operate.

Under the citizenship provisions of the Merchant Marine Act of 1920 and the Shipping Act, 1916, as amended, the company would not be permitted to engage in the U.S. coastwise trade if more than 25% of the company’s outstanding stock were owned by non-U.S. citizens. For a company engaged in the U.S. coastwise trade to be deemed a U.S. citizen: (i) the company must be organized under the laws of the United States or of a state, territory or possession thereof, (ii) each of the chief executive officer and the chairman of the board of directors

 

-12-


Table of Contents
Index to Financial Statements

of such corporation must be a U.S. citizen, (iii) no more than a minority of the number of directors of such corporation necessary to constitute a quorum for the transaction of business can be non-U.S. citizens and (iv) at least 75% of the interest in such company must be owned by U.S. citizens. The company has a dual stock certificate system to protect against non-U.S. citizens owning more than 25% of its common stock. In addition, the company’s charter provides the company with certain remedies with respect to any transfer or purported transfer of shares of the company’s common stock that would result in the ownership by non-U.S. citizens of more than 24% of its common stock. Based on information supplied to the company by its transfer agent, approximately 18.6% of the company’s outstanding common stock was owned by non-U.S. citizens as of March 31, 2011.

The laws of the U.S. require that vessels engaged in the U.S. coastwise trade must be built in the U.S. In addition, once a U.S.-built vessel is registered under a non-U.S. flag, it cannot thereafter engage in U.S. coastwise trade. Therefore, the company’s non-U.S. flag vessels must operate outside of the U.S. coastwise trade. Of the total 378 vessels owned or operated by the company at March 31, 2011, 319 vessels were registered under flags other than the United States and 59 vessels were registered under the U.S. flag. If the company is not able to secure adequate numbers of charters abroad for its non-U.S. flag vessels, even if work would otherwise have been available for such vessels in the United States, these vessels cannot operate in the U.S. coastwise trade, and the company’s financial performance could be affected.

All of the company’s offshore vessels are subject to either United States or international safety and classification standards or sometimes both. U.S. flag towing-supply, supply vessels and crewboats are required to undergo periodic inspections twice within every five year period pursuant to U.S. Coast Guard regulations. Vessels registered under flags other than the United States are subject to similar regulations and are governed by the laws of the applicable international jurisdictions and the rules and requirements of various classification societies, such as the American Bureau of Shipping.

The company is in compliance with the International Ship and Port Facility Security Code (ISPS), an amendment to the Safety of Life at Sea (SOLAS) Convention (1974/1988), and further mandated in the Maritime Transportation and Security Act of 2002 to align United States regulations with those of SOLAS and the ISPS Code. Under the ISPS Code, the company performs worldwide security assessments, risk analyses, and develops vessel and required port facility security plans to enhance safe and secure vessel and facility operations. Additionally, the company has developed security annexes for those U.S. flag vessels that transit or work in waters designated as high risk by the United States Coast Guard pursuant to Marsec Directive 104-6, Revision five.

Environmental Compliance

During the ordinary course of business, the company’s operations are subject to a wide variety of environmental laws and regulations that govern the discharge of oil and pollutants into navigable waters. Violations of these laws may result in civil and criminal penalties, fines, injunction and other sanctions. Compliance with the existing governmental regulations that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment has not had, nor is expected to have, a material effect on the company. Environmental laws and regulations are subject to change however, and may impose increasingly strict requirements and, as such, the company cannot estimate the ultimate cost of complying with such potential changes to environmental laws and regulations.

All vessels over 79 feet in registered length, regardless of flag, that are operating as a means of transportation within the inland and offshore waters of the U.S. (but not beyond the three nautical mile territorial sea limit) must comply with the Environmental Protection Agency’s National Pollutant Discharge Elimination System (NPDES) Vessel General Permit (VGP) for discharges incidental to the normal operation of vessels. For our vessels, that includes ballast water, bilge water, graywater, cooling water, chain locker effluent, deck wash down and runoff, cathodic protection, and other such type runoff. The company believes that it is in full compliance with the VGP.

The company is also involved in various legal proceedings that relate to asbestos and other environmental matters. In the opinion of management, based on current information, the amount of ultimate liability, if any, with respect to these proceedings is not expected to have a material adverse effect on the company’s financial position, results of operations, or cash flows. The company is proactive in establishing policies and operating

 

-13-


Table of Contents
Index to Financial Statements

procedures for safeguarding the environment against any hazardous materials aboard its vessels and at shore base locations. Whenever possible, hazardous materials are maintained or transferred in confined areas in an attempt to ensure containment if accidents occur. In addition, the company has established operating policies that are intended to increase awareness of actions that may harm the environment.

Safety

The company is committed to ensuring the safety of its operations for both its employees and its customers. The company’s principal operations occur in offshore waters where the workplace environment presents safety challenges. Because the work environment presents these challenges, the company must work diligently to maintain workplace safety. Management regularly communicates with its personnel to promote safety and instill safe work habits through company media and safety review sessions. The company also regularly conducts safety training meetings for its seamen and shore based staff personnel. The company dedicates personnel and resources to ensure safe operations and regulatory compliance. The company’s Director of Health, Safety and Environmental Management is involved in proactive efforts to prevent accidents and injuries and reviews all incidents that occur throughout the company. In addition, the company employs safety personnel at every operating location who are responsible for administering the company’s safety programs and fostering the company’s safety culture. The company believes that every employee is a safety supervisor, and gives each employee the right, the responsibility, and the obligation to stop any operation that the employee deems to be unsafe, whether it is deemed to be, in retrospect, unsafe or not.

Risk Management

The operation of any marine vessel involves an inherent risk of catastrophic marine disaster; adverse sea and weather conditions; mechanical failure; collisions and property losses to the vessel. In addition, the nature of our operations exposes the company to the potential risks of damage to and loss of drilling rigs and production facilities; war, sabotage, pirate and terrorism risks; and business interruption due to political action or inaction, including nationalization of assets by foreign governments. Any such event may result in a reduction in revenues or increased costs. The company’s vessels are generally insured for their estimated market value against damage or loss, including war, terrorism acts, and pollution risks, but the company does not fully insure for business interruption. The company also carries workers’ compensation, maritime employer’s liability, director and officer liability, general liability (including third party pollution) and other insurance customary in the industry.

The company seeks to secure appropriate insurance coverage at competitive rates by maintaining a self-retention layer up to certain limits on its marine package policies. The company carefully monitors claims and participates actively in claims estimates and adjustments. Estimated costs of self-insured claims, which include estimates for incurred but unreported claims, are accrued as liabilities on our balance sheet.

The continued threat of terrorist activity and other acts of war or hostility have significantly increased the risk of political, economic and social instability in some of the geographic areas in which the company operates. It is possible that further acts of terrorism may be directed against the United States domestically or abroad, and such acts of terrorism could be directed against properties and personnel of U.S.-owned companies such as ours. The resulting economic, political and social uncertainties, including the potential for future terrorist acts and war, could cause the premiums charged for our insurance coverage to increase. The company currently maintains war risk coverage on its entire fleet.

Management believes that the company’s insurance coverage is adequate. The company has not experienced a loss in excess of insurance policy limits; however, there is no assurance that the company’s liability coverage will be adequate to cover all potential claims that may arise. While the company believes that it should be able to maintain adequate insurance in the future at rates considered commercially acceptable, it cannot guarantee such with the current level of uncertainty in the markets the company operates.

Raw Materials

The company’s wholly-owned subsidiary, Quality Shipyards, L.L.C., performs both repair work and new construction work for outside customers, as well as the construction, repair and modification of the company’s own vessels. The shipyard operations require raw materials, such as alloy steels in various forms, welding

 

-14-


Table of Contents
Index to Financial Statements

gases, paint, fuels and lubricants, which are available from many sources. The shipyard does not depend on any one supplier or source for any of these materials. Although shortages for some of these materials and fuels have occurred from time to time, no material shortage currently exists nor does the shipyard anticipate any shortages. The commodity price for iron ore, the main component of steel, is typically volatile, and shortages may occur from time to time.

Seasonality

The company’s global vessel fleet generally has its highest utilization rates in the warmer months when the weather is more favorable for offshore exploration, field development and construction work. The company’s U.S. GOM operations can be impacted by the Atlantic hurricane season from the months of June through November, when offshore exploration, field development and construction work tends to slow or halt in an effort to mitigate potential losses and damage that may occur to the offshore oil and gas infrastructure should a hurricane enter the U.S. GOM. However, demand for offshore marine vessels typically increases in the U.S. GOM in connection with repair and remediation work that follows any hurricane damage to offshore crude oil and natural gas infrastructure. The company’s vessels that operate in Southeast Asia and Pacific are impacted by the monsoon season, which moves across the region between September and early March.

The company’s business volume is more dependent on crude oil and natural gas prices and global supply and demand conditions for the company’s offshore marine services than any seasonal variation.

Employees

As of March 31, 2011, the company had approximately 7,500 employees worldwide. The company strives to maintain excellent relations with its employees. The company is not a party to any union contract in the United States but through several subsidiaries is a party to union agreements covering local nationals in several countries other than the United States. In the past, the company has been the subject of a union organizing campaign for the U.S. GOM employees by maritime labor unions. These union organizing efforts have abated, although the threat has not been completely eliminated. If the employees in the U.S. GOM were to unionize, the company’s flexibility in managing industry changes in the domestic market could be adversely affected.

 

-15-


Table of Contents
Index to Financial Statements

Executive Officers of the Registrant

 

Name

  

    Age    

  

Position

Dean E. Taylor    62       

Chairman of the Board of Directors since 2003. Chief Executive Officer since March 2002. President since October 2001. Executive Vice President from 2000 to 2001. Senior Vice President from 1998 to 2000.

Jeffrey M. Platt    53       

Chief Operations Officer since March 2010. Executive Vice President since July 2006. Senior Vice President from 2004 to June 2006. Vice President from 2001 to 2004.

Stephen W. Dick    61       

Executive Vice President since December 2001. Senior Vice President from 1999 to 2001. Vice President from 1990 to 1999.

Quinn P. Fanning    47       

Chief Financial Officer since September 2008. Executive Vice President since July 2008. Prior to July 2008, Mr. Fanning was a Managing Director with Citigroup Global Markets Inc. In his 12 year investment banking career, all of which was with Citigroup or predecessor companies, Mr. Fanning generally focused on advisory services for the energy industry.

Joseph M. Bennett    55       

Executive Vice President since June 2008. Chief Investor Relations Officer since 2005. Senior Vice President from 2005 to May 2008. Principal Accounting Officer from 2001 to May 2008. Vice President from 2001 to 2005. Controller from 1990 to 2005.

Bruce D. Lundstrom    47       

Executive Vice President since August 2008. Senior Vice President from September 2007 to July 2008. General Counsel since September 24, 2007.

There are no family relationships between the directors or executive officers of the company. The company’s officers are elected annually by the Board of Directors and serve for one-year terms or until their successors are elected.

Available Information

The company makes available free of charge, on or through its website (www.tdw.com), its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and amendments to such filings, as soon as reasonably practicable after each is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials the company has filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains the company’s reports, proxy and information statements, and the company’s other SEC filings. The address of the SEC’s website is www.sec.gov. Information appearing on the company’s website is not part of any report that it files with the SEC.

The company also makes available its Code of Business Conduct and Ethics (Code), which is posted on our website, for its directors, chief executive officer, chief financial officer, principal accounting officer, and other officers and employees on matters of business conduct and ethics, including compliance standards and procedures. We will make timely disclosure by a Current Report on Form 8-K and on our website of any change to, or waiver from, the Code of Business Conduct and Ethics for our principal executive and senior financial officers. Any changes or waivers to the Code will be maintained on the company’s website for at least 12 months. A copy of the Code is also available in print to any stockholder upon written request addressed to Tidewater Inc., 601 Poydras Street, Suite 1900, New Orleans, Louisiana 70130.

 

-16-


Table of Contents
Index to Financial Statements

ITEM 1A. RISK FACTORS

The company operates globally in many challenging and highly competitive markets. Listed below are some of the more critical or unique risk factors that we have identified as affecting or potentially affecting the company and the offshore marine service industry. You should consider these risks when evaluating any of the company’s forward-looking statements. The effect of any one risk factor or a combination of several risk factors could materially affect the company’s results of operations, financial condition and cash flows and the accuracy of any forward-looking statements made in this Annual Report on Form 10-K.

Oil and Gas Prices Are Highly Volatile

Commodity prices for crude oil and natural gas are highly volatile. Prices are extremely sensitive to the respective supply/demand relationship for crude oil and natural gas. High demand for crude oil and natural gas, reductions in supplies and/or low inventory levels for these resources as well as any perceptions about future supply interruptions can cause prices for crude oil and natural gas to rise. Conversely, low demand for crude oil and natural gas, increases in supplies and/or increases in crude oil and natural gas inventories cause prices for crude oil and natural gas to decrease. In addition, global military, political, and economic events, including civil unrest in the Middle East and North Africa oil producing and exporting countries, have contributed to crude oil and natural gas price volatility.

Factors that affect the supply of crude oil and natural gas include, but are not limited to, the following: global demand for the hydrocarbons; the Organization of Petroleum Exporting Countries’ (OPEC) ability to control crude oil production levels and pricing, as well as, the level of production by non-OPEC countries; political and economic uncertainties (including wars, terrorist acts or security operations); advances in exploration and field development technologies; significant weather conditions; and governmental policies/restrictions placed on exploration and production of natural resources.

Prolonged material downturns in crude oil and natural gas prices and/or perceptions of long-term lower commodity prices can negatively impact the development plans of exploration and production companies given the long-term nature of large-scale development projects. In addition, a prolonged recession may result in a decrease in demand for offshore support vessel services and a reduction in charter rates and/or utilization rates, which would have a material adverse effect on our results of operations, cash flows and financial condition. Higher commodity prices, however, do not necessarily translate into increased demand for offshore support vessel services as increased commodity supply could come from land-based energy markets.

Crude oil pricing volatility has increased in recent years as crude oil has emerged into a financial asset class used for speculative purchase. Traditionally, crude oil futures and options were purchased by the commercial traders for future production in an effort to hedge against price risk. More recently, non-commercial market participants have traded crude oil derivatives to profit off of the price performance of crude oil instead of traditional investments. The extent to which speculation causes excessive crude oil pricing volatility is currently not fully known; however, there is a growing consensus that speculative purchase of crude oil futures and options helped push crude oil prices to record levels in mid-2008. The escalation in energy prices and subsequent financial crisis and global economic recession helped to create a global accord to limit or prevent excessive speculation in an effort to diminish extreme crude oil price volatility.

Changes in the Level of Capital Spending by Our Customers

Our principal customers are major and independent oil and natural gas exploration, field development and production companies; foreign government-owned or -controlled organizations and companies that explore and produce oil and natural gas; drilling contractors; and companies that provide other services to the offshore energy industry, such as, offshore construction companies, diving companies and well stimulation companies. Our results of operations are highly dependent on the level of capital spending for exploration and field development by the companies that operate in the energy industry. The energy industry’s level of capital spending is substantially related to current and expected future demand for hydrocarbons and the prevailing commodity prices of crude oil and, to a lesser extent, natural gas. When commodity prices are low, our customers generally reduce their capital spending budgets for onshore and offshore drilling, exploration and field development. The level of offshore crude oil and natural gas exploration, development and production activity has historically been volatile, and that volatility is likely to continue.

 

-17-


Table of Contents
Index to Financial Statements

Other factors that influence the level of capital spending by our customers that are beyond our control include: worldwide demand for crude oil and natural gas; the cost of exploring and producing crude oil and natural gas, which can be affected by environmental regulations; significant weather conditions; technological advances that affect energy production and consumption; local and international economic and political environment; and the availability and cost of financing.

The Offshore Marine Service Industry is Highly Competitive

The company operates in a highly competitive industry, which could depress vessel charter rates and utilization and adversely affect the company’s financial performance. We compete for business with our competitors on the basis of price; reputation for quality service; quality, suitability and technical capabilities of vessels; availability of vessels; safety and efficiency; cost of mobilizing vessels from one market to a different market; and national flag preference. In addition, competition in international markets may be adversely affected by regulations requiring, among other things, the awarding of contracts to local contractors, the employment of local citizens and/or the purchase of supplies from local vendors that favor or require local ownership. In general, declines in the level of offshore drilling and development activity by the energy industry negatively affects the demand for our vessels and results in downward pressure on day rates. Extended periods of low vessel demand and/or low day rates reduce the company’s revenues.

Risk Associated With the Loss of a Major Customer

We derive a significant amount of revenue from a few customers. For the years ended March 31, 2011, 2010 and 2009, the five largest customers accounted for approximately 45.3%, 47.3% and 45.4%, respectively, of the company’s total revenues, while the 10 largest customers accounted for a respective 62.8%, 61.8% and 60.3% of our total revenues. Our results of operations, financial condition and cash flows could be materially adversely affected if one or more of these customers decide to interrupt or curtail their activities; terminate their contracts with us; fail to renew existing contracts; and/or refuse to award new contracts, and we were unable to contract our vessels with new customers at comparable day rates.

Consolidation of the Company’s Customer Base

Oil and natural gas companies, energy companies and drilling contractors have undergone consolidation, and additional consolidation is possible. Consolidation reduces the number of customers for the company’s equipment, and may negatively affect exploration, field development and production activity as consolidated companies focus on increasing efficiency and reducing costs and delay or abandon exploration activity with less promise. Such activity could adversely affect demand for the company’s vessels and reduce the company’s revenues.

Unconventional Natural Gas Sources are Exerting Downward Pricing Pressures on the Price of Natural Gas

The rise in production of unconventional gas resources (onshore shale plays resulting from technological advancements in horizontal drilling and fracturing) in North America and the commissioning of a number of new large Liquefied Natural Gas (LNG) export facilities around the world are contributing to an over-supplied natural gas market. While production of natural gas from unconventional sources is a relatively small portion of the worldwide natural gas production, it is increasing because improved drilling efficiencies are lowering the costs of extraction. There is a significant oversupply of natural gas inventories in the United States in part due to the increase of unconventional gas in the market. Prolonged increases in the worldwide supply of natural gas, whether from conventional or unconventional sources, will likely continue to suppress natural gas prices. A prolonged period of suppressed natural gas prices would likely have a negative impact on development plans of exploration and production companies, which in turn, may result in a decrease in demand for offshore support vessel services. This effect could be particularly acute in our U.S. operating segment, which is more oriented towards natural gas than crude oil production, and therefore more sensitive to the changes in the market pricing for natural gas than to changes in the market pricing of crude oil.

 

-18-


Table of Contents
Index to Financial Statements

Challenging Macroeconomic Conditions

Uncertainty about future global economic market conditions makes it challenging to forecast operating results and to make decisions about future investments. The success of our business is both directly and indirectly dependent upon conditions in the global financial and credit markets that are outside of our control and difficult to predict. Uncertain economic conditions may lead our customers to postpone capital spending in response to tighter credit and reductions in income or asset values. Similarly, when lenders and institutional investors reduce, and in some cases, cease to provide funding to corporate and other industrial borrowers, the liquidity and financial condition of our customers can be adversely impacted. These factors may also adversely affect our liquidity and financial condition. Factors such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls, and national and international political circumstances (including wars, terrorist acts or security operations) can have a material negative effect on our business and operations, which in turn would reduce our revenues and profitability.

Prolonged material economic downturns in crude oil and natural gas prices can negatively affect the development plans of exploration and production companies. In addition, a prolonged recession may result in a decrease in demand for offshore support vessel services and a reduction in charter rates and/or utilization rates, which would have a material adverse effect on the company’s results of operations, cash flows and financial condition. Prior to mid-2008, oil and gas companies had increased their respective exploration and field development activities in response to a very favorable pricing environment for oil and gas that existed at that time. Worldwide demand for crude oil and natural gas dropped precipitously and energy prices sharply declined as a result of a 2008-2009 global economic recession. Two years later, there are signs that economic improvement is underway; however, the pace of recovery and demand for energy and, in turn, offshore supply vessel services has been slow to recover. In addition, the recent increases in crude oil prices, resulting from higher demand for hydrocarbons and civil unrest in the Middle East and North African oil producing and exporting countries, has renewed economists’ concerns that high energy prices could imperil the economic recovery, although high commodity pricing generally bodes well for the energy industry.

Potential Overcapacity in the Offshore Marine Industry

Over the past decade, construction of offshore vessels of the types the company operates has increased significantly. Excess offshore supply vessel capacity likewise usually exerts downward pressure on charter rates. Excess capacity can occur when newly constructed vessels enter the market and when vessels are mobilized between market areas. While the company is committed to the construction of additional vessels, it has also sold and/or scrapped a significant number of vessels over the last several years. A discussion about the aging of the company’s fleet, which has necessitated the company’s new vessel construction programs, appears in the “Vessel Count, Dispositions, Acquisitions and Construction Programs” section of Item 7 in this report.

The offshore supply vessel market has approximately 405 new-build offshore support vessels (platform supply vessels and anchor handlers only) that are currently estimated to be under construction and that are expected to be delivered to the worldwide offshore vessel market over the next three and a half years, according to ODS-Petrodata. The current worldwide fleet of these classes of vessels is estimated at approximately 2,590 vessels. An increase in vessel capacity could result in increased competition in the company’s industry which may have the effect of lowering charter rates and utilization rates, which, in turn, would result in lower revenues to the company. Also, please read “Potential Repeal or Amendment of the Shipping Act May Have an Adverse Impact on the Company’s U.S. Segment” risk below for additional information that can increase vessels overcapacity in our U.S. Segment.

Risks Associated with Vessel Construction and Maintenance

The company has a number of vessels currently under construction, and it may construct additional vessels in response to current and future market conditions. In addition, the company routinely engages shipyards to drydock vessels for regulatory compliance and to provide repair and maintenance services. Construction projects and drydockings are subject to risks of delay and cost overruns, resulting from shortages of equipment, materials and skilled labor; lack of shipyard availability; unforeseen design and engineering problems; work stoppages; weather interference; unanticipated cost increases; unscheduled delays in the delivery of material

 

-19-


Table of Contents
Index to Financial Statements

and equipment; financial and other difficulties at shipyards including labor disputes and shipyard insolvency; and inability to obtain necessary certifications and approvals.

A significant delay in either construction or drydockings of vessels could have a material adverse effect on our ability to fulfill contract commitments and to realize timely revenues with respect to vessels under construction, conversion or other drydockings. Significant cost overruns or delays for vessels under construction could also adversely affect the company’s financial condition, results of operations or cash flows. The demand for vessels currently under construction may diminish from levels originally anticipated. If the company fails to obtain favorable contracts for newly constructed vessels, such failure could have a material adverse effect on the company’s revenues and profitability.

Also, difficult economic market conditions and/or prolonged distress in credit and capital markets may hamper the ability of shipyards to meet their scheduled deliveries of new vessels or the ability of the company to renew its fleet through new vessel construction or acquisitions. In addition, there is always the risk of insolvency of the shipyards that construct or drydock our vessels, which could adversely affect our new construction program, and consequently, adversely affect our financial condition, results of operations or cash flows.

Risks Associated with Operating Internationally

For the fiscal years ended March 31, 2011, 2010 and 2009, 92%, 92%, and 89%, respectively, of the company’s total revenues were generated by its international segment. The company’s international vessel operations are vulnerable to many risks inherent in doing business in countries other than the United States, some of which have recently become more pronounced. Our customary risks of operating internationally include political and economic instability within the host country; possible vessel seizures or nationalization of assets and other governmental actions by the host country (please refer to Item 7 in this report and Note (10) of Notes to Consolidated Financial Statements for a discussion of our Venezuelan operations regarding vessel seizures); foreign government regulations that favor or require the awarding of contracts to local competitors; an inability to recruit and retain management of overseas operations; currency fluctuations, revaluations, devaluations and restrictions on repatriation of currency; and import/export quotas and restrictions - most of which are beyond the control of the company.

The company is also subject to acts of piracy and kidnappings that put its assets and personnel at risk. The increase in the level of these criminal or terrorist acts over the last few years has been well-publicized. As a marine services company that usually operates in offshore, coastal or tidal waters, the company is particularly vulnerable to these kinds of unlawful activities. Although the company takes what it considers to be prudent measures to protect its personnel and assets in markets that present these risks, it has confronted these kinds of incidents in the past, and there can be no assurance it will not be subjected to them in the future.

The continued threat of terrorist activity and other acts of war or hostility have significantly increased the risk of political, economic and social instability in some of the geographic areas in which the company operates. It is possible that further acts of terrorism may be directed against the United States domestically or abroad and such acts of terrorism could be directed against properties and personnel of U.S.-owned companies such as ours. To date, the company has not experienced any material adverse effects on its results of operations and financial condition as a result of terrorism, political instability or war.

International Operations Exposed to Currency Devaluation and Fluctuation Risk

Due to the company’s international operations, the company is exposed to foreign currency exchange rate risks on all charter hire contracts denominated in foreign currencies. For some of our international contracts, a portion of the revenue and local expenses are incurred in local currencies and the company is at risk of changes in the exchange rates between the U.S. dollar and foreign currencies. We generally do not hedge against any foreign currency rate fluctuations associated with foreign currency contracts that arise in the normal course of business, which exposes us to the risk of exchange rate losses. Gains and losses from the revaluation of our assets and liabilities denominated in currencies other than our functional currency are included in our consolidated statements of operations. Foreign currency fluctuations may cause the U.S. dollar value of our international results of operations and net assets to vary with exchange rate fluctuations. This could have a negative impact on our results of operations and financial position. In addition, fluctuations in

 

-20-


Table of Contents
Index to Financial Statements

currencies relative to currencies in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.

To minimize the financial impact of these items, the company attempts to contract a significant majority of its services in U.S. dollars. In addition, the company attempts to minimize its financial impact of these risks, by matching the currency of the company’s operating costs with the currency of revenue streams when considered appropriate. The company continually monitors the currency exchange risks associated with all contracts not denominated in U.S. dollars.

Operational Hazards Inherent to the Offshore Marine Vessel Industry

The operation of any marine vessel involves inherent risk that could adversely affect our financial performance if we are not adequately insured or indemnified. Our operations are also subject to various operating hazards and risks, including risk of catastrophic marine disaster; adverse sea and weather conditions; mechanical failure; collisions and property losses to the vessel; damage to and loss of drilling rigs and production facilities; war, sabotage, pirate and terrorism risks; and business interruption due to political action or inaction, including nationalization of assets by foreign governments.

These risks present a threat to the safety of personnel and to our vessels, cargo, equipment under tow and other property, as well as the environment. Any such event may result in a reduction in revenues, increased costs, property damage, and additionally, third parties may have significant claims against us for damages due to personal injury, death, property damage, pollution and loss of business. Our vessels are generally insured for their estimated market value against damage or loss, including war, terrorism acts, and pollution risks, but the company does not fully insure for business interruption. Our insurance coverage is subject to deductibles and certain exclusions. We can provide no assurance, however, that our insurance coverage will be available beyond the renewal periods, that we will be able to obtain insurance for all operational risks and that our insurance policies will be adequate to cover future claims that may arise.

Compliance with the Foreign Corrupt Practices Act and Similar Worldwide Anti-Bribery Laws

Our international operations require us to comply with a number of U.S. and international laws and regulations, including those involving anti-bribery and anti-corruption. In order to effectively compete in certain foreign jurisdictions, the company seeks to establish joint ventures with local operators or strategic partners. As a U.S. corporation, the company is subject to the regulations imposed by the Foreign Corrupt Practices Act (FCPA), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business or obtaining an improper business benefit. The company has adopted proactive procedures to promote compliance with the FCPA, but it may be held liable for actions taken by its strategic or local partners or agents even though these partners or agents may not themselves be subjected to the FCPA. Any determination that the company has violated the FCPA could have a material adverse effect on its business, results of operations, and cash flows.

A full discussion of the company’s FCPA internal investigation is disclosed in the “Internal Investigation” section of Note (10) of Notes to Consolidated Financial Statements included in Item 8 of this report.

Compliance with Complex and Developing Laws and Regulations

The company’s U.S. and International segment operations are subject to many complex and burdensome laws and regulations. Stringent federal, state, local and foreign laws and regulations governing worker health and safety and the manning, construction and operation of vessels significantly affect our operations. Many aspects of the marine industry are subject to extensive governmental regulation by the United States Coast Guard and the United States Customs and Border Protection and their foreign equivalents, and to regulation by private industry organizations such as the American Bureau of Shipping, the Oil Companies International Marine Forum, and the International Marine Contractors Association.

The company’s operations are also subject to federal, state, local and international laws and regulations that control the discharge of pollutants into the environment or otherwise relate to environmental protection. Compliance with such laws and regulations may require installation of costly equipment, increased manning or

 

-21-


Table of Contents
Index to Financial Statements

operational changes. Some environmental laws impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject the company to liability without regard to whether the company was negligent or at fault.

Further, many of the countries in which the company operates have laws, regulations and enforcement systems that are largely undeveloped, and the requirements of these systems are not always readily discernable even to experienced and proactive participants. Further, these laws, regulations and enforcement systems can be unpredictable and subject to frequent change or reinterpretation, sometimes with retroactive effect, and with associated taxes, fees, or penalties sought from the company based on that reinterpretation or retroactive effect. While the company endeavors to comply with applicable laws and regulations, the company’s compliance efforts might not always be wholly successful, and failure to comply may result in administrative and civil penalties, criminal sanctions, imposition of remedial obligations or the suspension or termination of the company’s operations. These laws and regulations may expose the company to liability for the conduct of or conditions caused by others, including charterers or third party agents. Moreover, these laws and regulations could be changed or be interpreted in new, unexpected ways that substantially increase costs that the company may not be able to pass along to its customers. Any changes in laws, regulations or standards that would impose additional requirements or restrictions could adversely affect the company’s financial condition, results of operations or cash flows.

In order to meet the continuing challenge of complying with applicable laws and regulations in jurisdictions where it operates, the company revitalized and strengthened its compliance training, makes available and uses a worldwide compliance reporting system and performs compliance auditing/monitoring. The company appointed its general counsel as its chief compliance officer in fiscal 2008 to help organize and lead these compliance efforts. This strengthened compliance program may from time to time identify past practices that need to be changed or remediated. Such corrective or remedial measures could involve significant expenditures or lead to changes in operational practices that could adversely affect the company’s financial condition, results of operations or cash flows.

We are subject to the Merchant Marine Act of 1936, which provides that, upon proclamation by the President of the United States of a national emergency or a threat to the security of the national defense, the Secretary of Transportation may requisition or purchase any vessel or other watercraft owned by U.S. citizens (including U.S. corporations), including vessels under construction in the United States. If our vessels were purchased or requisitioned by the U.S. federal government, we would be entitled to be paid the fair market value of the vessels in the case of a purchase or, in the case of a requisition, the fair market value of charter hire, but we would not be entitled to be compensated for any consequential damages suffered. Although the purchase or requisition of one or a few of our vessels for an extended period of time will not cause adverse material negative financial effects to our company, the purchase or requisition of several or a significant number of our vessels for an extended period of time may adversely affect our financial condition, results of operations, and cash flows.

Risk of Changes in Laws Governing U.S. Taxation of Foreign Source Income

We operate globally through various subsidiaries which are subject to changes in applicable tax laws, treaties or regulations in the jurisdictions in which we conduct our business, including laws or policies directed toward companies organized in jurisdictions with low tax rates. A material change in the tax laws or policies, or their interpretation, of any country in which we conduct business, or in which we are incorporated or resident, could result in a higher effective tax rate on our worldwide earnings, and such change could be significant to our financial results.

Approximately 92% of the company’s revenues and net income are generated by its operations outside of the United States. The company’s effective tax rate has averaged approximately 18.7% since fiscal 2006, primarily a result of the passage of The American Jobs Creation Act of 2004, which excluded from the company’s current taxable income in the U.S. income earned offshore through the company’s controlled foreign subsidiaries.

Periodically, tax legislative initiatives are proposed to effectively increase U.S. taxation of income with respect to foreign operations. Whether any such initiatives will win congressional or executive approval and become law is presently unknown; however, if any such initiatives were to become law, and were such law to apply to the company’s international operations, it would result in a materially higher tax expense, which would have a

 

-22-


Table of Contents
Index to Financial Statements

material impact on the company’s financial condition, results of operations or cash flows, and which could cause the company to review the utility of continued U.S. domicile.

In addition, our income tax returns are subject to review and examination by the Internal Revenue Service and other tax authorities where tax returns are filed. The company routinely evaluates the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes. We do not recognize the benefit of income tax positions we believe are more likely than not to be disallowed upon challenge by a tax authority. If any tax authority successfully challenges our operational structure or intercompany transfer pricing policies, or if the terms of certain income tax treaties are interpreted in a manner that is adverse to our structure, or if we lose a material tax dispute in any country, our effective tax rate on our worldwide earnings could increase, and our financial condition and results of operations could be materially adversely affected.

Potential Repeal or Amendment of the Shipping Act May Have an Adverse Impact on the Company’s U.S. Segment

The provisions of the Shipping Act restricting coastwise trade to vessels controlled by U.S. citizens may from time to time be circumvented by foreign competitors that seek to engage in trade reserved for vessels controlled by U.S. citizens and otherwise qualifying for coastwise trade. There have also been attempts to repeal or amend the citizen provision of the Shipping Act, and these attempts are expected to continue. Legal challenges against such actions are difficult, costly to pursue and unpredictable.

To the extent foreign competition is permitted to engage in U.S. coastwise trade by vessels that are built in lower-cost shipyards, owned and manned by foreign nationals with favorable foreign tax incentives and with lower wages and benefits than U.S. citizens, such increased competition could have a material adverse effect on the company’s U.S. segment operations. However, for the fiscal years ended March 31, 2011, 2010 and 2009, 92%, 92%, and 89%, respectively, of the company’s vessel revenues were generated by its international segment.

Compliance with Environmental Regulations May Adversely Impact Our Operations and Markets

A variety of regulatory developments, proposals and requirements have been introduced in the U.S. and various other countries that are focused on restricting the emission of carbon dioxide, methane and other gases. If such legislation is enacted, increased cost of energy as well as environmental and other costs and capital expenditures could be necessary to comply with the limitations. These developments may curtail production and demand for hydrocarbons such as crude oil and natural gas in areas of the world where our customers operate and thus adversely affect future demand for the company’s offshore supply vessels, which are highly dependent on the level of activity in offshore oil and natural gas exploration, development and production market. Although it is unlikely that demand for oil and gas will lessen dramatically over the short-term, in the long-term, demand for oil and gas or increased regulation of environmental regulations may create greater incentives for use of alternative energy sources. Unless and until legislation is enacted and its terms are known, we cannot reasonably or reliably estimate its impact on our financial condition, results of operations and ability to compete. However, any long term material adverse effect on the crude oil and natural gas industry may adversely affect our financial condition, results of operations and cash flows.

The Deepwater Horizon Incident and Effects of the Drilling Moratorium in the U.S. Gulf of Mexico Could Have a Material Significant Impact on Exploration and Production Activities in United States Coastal Waters that Could Adversely Affect the U. S. Operations of the Company

As we are an energy service company, the success and profitability of our operations in the United States are dependent on the level of upstream drilling and exploration activity in the U.S. GOM, and to a lesser extent on the West Coast of the United States and in Alaska. In particular, many of our new-build vessels were designed to operate in deep water off the continental shelf to assist in drilling and exploration efforts in those areas. Since fiscal 2009, between 63% and 40% of our revenues in the U.S. GOM have come from our deepwater vessels, and the margins that we earn on deepwater vessels have typically been higher than margins we achieve on other classes of our vessels. Although the BOEMRE has begun to issue new drilling permits, the pace remains slow, and in any event, the new rules and requirements could continue to suppress the level of drilling activity and the demand for our services, which could have a material adverse effect on our U.S. operations. In

 

-23-


Table of Contents
Index to Financial Statements

addition, if exploration and production activity migrates from the U.S. GOM to international markets because of the additional regulations and higher operating costs in the U.S. GOM, it is also possible that other offshore supply vessel owners will redeploy additional vessels to international markets. These mobilizations could increase competition and have a negative effect on vessel utilization and day rates in international markets, depending on the number of drilling rigs that exit the U.S. GOM and move to international markets.

Also among the uncertainties that confront the industry are whether Congress will repeal the $75.0 million cap for non-reclamation liabilities under the Oil Pollution Act of 1990 and whether insurance will continue to be available at a reasonable cost and with reasonable policy limits to support drilling and exploration activity in the U.S. GOM. Although the eventual outcome of these developments is currently unknown, we believe that, even in the best case for the industry that we serve, additional regulatory and operational costs will be incurred, and these additional costs may either reduce the level of exploratory activity in the U.S. GOM, reduce demand for our services, or both.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Information on Properties is contained in Item 1 of this report.

 

ITEM 3. LEGAL PROCEEDINGS

Shareholder Derivative Suit

In mid February 2011, an individual claiming to be a Tidewater shareholder filed a shareholder derivative suit in the U.S. District Court for the Eastern District of Louisiana. The defendants in the suit are individual directors and certain officers of Tidewater Inc. Tidewater Inc. is also a nominal defendant in the lawsuit. The suit asserts various causes of action, including breach of fiduciary duty, against the individual defendants in connection with the facts and circumstances giving rise to the settlements with the DOJ and SEC and seeks a number of remedies against the individual defendants and the company as a result. While the company will incur costs in connection with the defense of this law suit, the suit does not seek monetary damages against the company. The individual defendants and the company have recently retained legal counsel. The lawsuit is still in an early stage.

Settlement with the Nigerian Government

The company announced on March 3, 2011, that it had reached an agreement with the Federal Government of Nigeria (“FGN”) to settle and resolve the previously disclosed investigation by the FGN relating to allegations that a third party customs broker had made improper payments to government officials in Nigeria on behalf of the company’s foreign subsidiaries. The FGN’s investigation in this regard focused on facts and circumstances associated with Nigeria operations in 2007 and previous years that were detailed in the company’s previous settlements with the DOJ and SEC. Pursuant to the settlement agreement, the FGN has terminated the above-mentioned investigation and agreed not to bring any criminal charges or civil claims against the company or any associated persons arising from these allegations. In return, one of the company’s Nigerian subsidiaries agreed to pay $6.0 million to the FGN and to pay an additional $0.3 million for the FGN’s attorneys’ fees and other expenses. The total $6.3 million ($0.12 per diluted common share) settlement payments were recorded and paid during the quarter ended March 31, 2011. Among other provisions in the settlement agreement, the company’s Nigerian subsidiary also affirmed a continuing commitment to good corporate governance and compliance.

 

-24-


Table of Contents
Index to Financial Statements

Other Items

Various legal proceedings and claims are outstanding which arose in the ordinary course of business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions, will not have a material adverse effect on the company’s financial position, results of operations, or cash flows. Information related to various commitments and contingencies, including legal proceedings, is disclosed in Note (10) of Notes to Consolidated Financial Statements included in this report.

 

ITEM 4. RESERVED

 

-25-


Table of Contents
Index to Financial Statements

PART II

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Market Prices

The company’s common stock is traded on the New York Stock Exchange under the symbol “TDW.” At March 31, 2011, there were 826 record holders of the company’s common stock, based on the record holder list maintained by the company’s stock transfer agent. The closing price on the New York Stock Exchange Composite Tape on March 31, 2011 was $59.85. The following table sets forth for the periods indicated the high and low sales price of the company’s common stock as reported on the New York Stock Exchange Composite Tape and the amount of cash dividends per share declared on Tidewater common stock.

 

   
Quarter ended    June 30      September 30      December 31      March 31  
   

 

Fiscal 2011 common stock prices:

           

High

   $ 57.08       $ 44.99       $ 54.15       $ 63.55   

Low

     38.65         38.00         42.81         52.44   

Dividend

     .25         .25         .25         .25   

 

Fiscal 2010 common stock prices:

           

High

   $ 52.03       $ 48.95       $ 48.62       $ 51.43   

Low

     35.65         40.45         40.78         42.96   

Dividend

     .25         .25         .25         .25   

 

 

Issuer Repurchases of Equity Securities

In May 2011, the company’s Board of Directors replaced the existing share repurchase program with a new $200.0 million repurchase program that is effective through June 30, 2012. The Board of Directors authorized the company to repurchase shares of its common stock in open-market or privately-negotiated transactions.

In July 2009, the company’s Board of Directors authorized the company to spend up to $200.0 million to repurchase shares of its common stock in open-market or privately-negotiated transactions. The repurchase program was scheduled to expire on June 30, 2010, but the company announced on May 14, 2010 that its Board of Directors had extended this program through June 30, 2011, unless further extended by the Board of Directors. The company uses its available cash and, when considered advantageous, borrowings under its revolving credit facility, or other borrowings, to fund any share repurchases. The company expended $20.0 million for the repurchase and cancellation of 486,800 common shares, at an average price paid per common share of $41.06 during the three-month period ended June 30, 2010, and $180.0 million remains available to repurchase shares under the 2009 share repurchase program at March 31, 2011. The company will continue to evaluate share repurchase opportunities relative to other investment opportunities and in the context of current conditions in the credit and capital markets.

Dividend Program

The Board of Directors declared dividends of $51.5 million, $51.7 million, and $51.5 million, or $1.00 per share, for the years ended March 31, 2011, 2010 and 2009, respectively. The declaration of dividends is at the discretion of the company’s Board of Directors.

 

-26-


Table of Contents
Index to Financial Statements

Performance Graph

The following graph compares the cumulative total stockholder return on the company’s common stock against the cumulative total return of the Standard & Poor’s 500 Stock Index and the cumulative total return of the Value Line Oilfield Services Group Index (the “Peer Group”) over the last five fiscal years. The analysis assumes the investment of $100 on April 1, 2006, at closing prices on March 31, 2006, and the reinvestment of dividends. The Value Line Oilfield Services Group consists of 25 companies including Tidewater Inc.

LOGO

 

Indexed returns                                          
Years ended March 31                                          
   
Company name/Index    2006      2007      2008      2009      2010      2011  
   

 

Tidewater Inc.

     100         107.27         101.94         70.18         91.30         118.03   

S&P 500

     100         111.83         106.15         65.72         98.43         113.83   

Peer Group

     100         102.63         133.87         60.02         99.53         144.04   
   

Investors are cautioned against drawing conclusions from the data contained in the graph, as past results are not necessarily indicative of future performance.

The above graph is being furnished pursuant to the Securities and Exchange Commission rules. It will not be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the company specifically incorporates it by reference.

 

-27-


Table of Contents
Index to Financial Statements

ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth a summary of selected financial data for each of the last five fiscal years. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the Consolidated Financial Statements of the company included in Item 8 of this report.

 

Years Ended March 31                               
(In thousands, except ratio and per share amounts)                               
   
     2011 (A)     2010 (B)     2009     2008     2007 (C)  
   

Statement of Earnings Data :

          

Revenues:

          

Vessel revenues

   $ 1,051,213        1,138,162        1,356,322        1,215,134        1,097,582   

Other marine services revenues

     4,175        30,472        34,513        55,037        27,678   
   
   $ 1,055,388        1,168,634        1,390,835        1,270,171        1,125,260   
   

Gain on asset dispositions, net

   $ 13,228        28,178        27,251        11,449        42,787   
   

Provision for Venezuelan operations

   $        43,720                        
   

Net earnings

   $ 105,616        259,476        406,898        348,763        356,646   
   

Basic earnings per common share

   $ 2.06        5.04        7.92        6.43        6.38   
   

Diluted earnings per common share

   $ 2.05        5.02        7.89        6.39        6.31   
   

Cash dividends declared per common share (D)

   $ 1.00        1.00        1.00        .60        .60   
   

 

Balance Sheet Data (at end of period):

          

Cash and cash equivalents

   $ 245,720        223,070        250,793        270,205        393,806   
   

Total assets

   $ 3,748,116        3,293,357        3,073,804        2,751,780        2,649,298   
   

Current maturities of long-term debt

   $        25,000                        
   

Long-term debt

   $ 700,000        275,000        300,000        300,000        300,000   
   

Capitalized lease obligations

   $                      10,059        19,712   
   

Stockholders’ equity

   $ 2,513,944        2,464,030        2,244,678        1,930,084        1,886,010   
   

Working capital

   $ 395,558        380,915        431,101        431,691        584,869   
   

Current ratio

     3.15        2.86        3.12        3.17        4.98   
   

 

Cash Flow Data:

          

Net cash provided by operating activities

   $ 264,206        328,261        523,889        486,842        435,095   
   

Net cash (used in) provided by investing activities

   $ (569,943     (298,482     (434,055     (272,001     (151,156
   

Net cash provided by (used in) financing activities

   $ 328,387        (57,502     (109,246     (338,442     (136,242
   

 

(A)

Fiscal 2011 net earnings includes a $4.4 million, or $0.08 per common share, final settlement with the DOJ and a $6.3 million, or $0.12 per common share, settlement with the Federal Government of Nigeria related to the internal investigation as disclosed in Note (10) of Notes to Consolidated Financial Statements.

(B)

In addition to the Provision for Venezuelan operations separately stated above, fiscal 2010 net earnings includes (1) the reversal of $36.1 million, or $0.70 per common share, of uncertain tax positions related to the resolution of a tax dispute with the U.S. IRS as disclosed in Note (3) of Notes to Consolidated Financial Statements, (2) an $11.4 million, or $0.22 per common share, proposed settlement with the SEC related to the internal investigation as disclosed in Note (10) of Notes to Consolidated Financial Statements, and (3) an $11.0 million, or $0.21 per common share, foreign exchange gain resulting from the devaluation of the Venezuelan bolivar fuerte relative to the U.S. dollar.

(C)

During fiscal 2007, the company sold 14 offshore tugs for a cash price of $43.7 million, resulting in a $34.0 million pre-tax financial gain, or approximately $20.8 million after-tax, or $0.37 per diluted common share.

(D)

In May 2008, the company’s Board of Directors authorized the increase of the company’s quarterly dividend from $0.15 per share to $0.25 per share, a 67% increase. The declaration of dividends is at the discretion of the company’s Board of Directors.

 

-28-


Table of Contents
Index to Financial Statements

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements as of March 31, 2011 and 2010 and for the years ended March 31, 2011, 2010 and 2009 that we included in Item 8 of this Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. The company’s future results of operations could differ materially from its historical results or those anticipated in its forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A and elsewhere in this report. With respect to this section, the cautionary language applicable to such forward-looking statements described in “Forward-Looking Statements” found before Item 1 of this report is incorporated by reference into this Item 7. The following discussion should also be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and related disclosures of this report.

Fiscal 2011 Business Highlights and Key Focus

During fiscal 2011, the company continued its focus on maintaining its competitive advantages and its market share in international markets where it operates, and continued to modernize its vessel fleet to generate future earnings capacity while removing from active service certain traditional vessels that currently have fewer market opportunities because customer demand for such vessels has declined significantly. Key elements of the company’s strategy continue to be the preservation of its strong financial position and the maintenance of adequate liquidity to fund the expansion of its fleet of newer vessels. Operating management focused on safe operations and maintaining disciplined cost control.

The company’s strategy contemplates the possible acquisitions of vessels and/or other owners and operators of offshore supply vessels as well as organic growth through the construction of vessels at a variety of shipyards worldwide. The company has the largest number of new vessels among its competitors in the industry, and it also has the largest fleet of older vessels in the industry. Management regularly evaluates alternatives for its older fleet. The company intends to pursue its long-term fleet replenishment and modernization strategy on a disciplined basis and, in each case, will carefully consider whether proposed investments and transactions have the appropriate risk/reward profile.

The company’s consolidated net earnings during fiscal 2011 decreased 59%, or $153.9 million, as compared to fiscal 2010, due primarily to an approximate 10%, or $113.2 million, decrease in total revenues, a $33.3 million, or 6%, increase in vessel operating costs, and a $34.2 million, or 414%, increase in income taxes as disclosed in Note (3) of Notes to Consolidated Financial Statements during the comparative periods.

The company recorded $1.1 billion in revenues during fiscal 2011 as compared to $1.2 billion in fiscal 2010, which is a decrease of approximately $113.2 million over the revenue earned during fiscal 2010 due largely to an approximate four percentage point reduction in total worldwide utilization. Also, fiscal 2010 earnings includes a $43.7 million provision for Venezuelan operations (as disclosed in Note (10) of Notes to Consolidated Financial Statements) and the reversal of $34.3 million income tax liabilities as disclosed in Note (3) of Notes to Consolidated Financial Statements.

Vessel revenues generated by the company’s international segment decreased approximately $86.0 million, or 8%, during fiscal 2011 compared to fiscal 2010, while vessel revenues generated by the U.S. segment increased approximately $0.9 million, or 1%, during the same comparative periods. Fiscal 2010 revenues included $11.3 million of revenues generated by the company’s Venezuelan operations. Other marine revenues decreased approximately $26.3 million, or 86%, during the same comparative periods primarily because ship construction at the company’s shipyards for unaffiliated customers has declined. International segment vessel operating costs increased approximately 7%, or $37.0 million, while the company’s U.S. segment vessel operating costs decreased approximately 7%, or $3.6 million, during fiscal 2011 as compared to fiscal 2010. Costs of other marine revenues decreased approximately $22.7 million, or 83%, during the same comparative periods. A significant portion of the company’s operations are conducted internationally; therefore, the company’s international vessel operations are the primary driver of its revenue and earnings. Revenues generated from international vessel operations, as a percentage of the company’s total vessel revenues, was 92% during fiscal 2011 and fiscal 2010.

 

-29-


Table of Contents
Index to Financial Statements

In January 2011, the company amended and extended its then existing $450.0 million credit facility (the “previous facility”) and established $575.0 million in new credit facilities (the “new facilities”) for a five year period maturing January 2016. The new facilities include a $125.0 million term loan (“term loan”) and a $450.0 million revolving line of credit (“revolver”). The new facilities revolver and term loan borrowings bear interest at the company’s option at the greater of (i) prime or the federal funds rate plus 0.50 to 1.25%, or (ii) Eurodollar rates plus margins ranging from 1.50 to 2.25%, based on the company’s consolidated funded debt to total capitalization ratio.

On September 9, 2010, the company announced that it had entered into a note purchase agreement with a group of institutional investors to place $425.0 million of senior unsecured notes (“Senior Note Offering”). On October 15, 2010, the company completed the sale of $310.0 million of these notes, and completed the sale of an additional $115.0 million of the notes on December 30, 2010. The notes have maturities ranging from five years to 12 years and have a weighted average life to maturity of approximately nine years. The weighted average coupon rate on the notes is 4.25%. Proceeds from the note sales were used to repay borrowings under the company’s Previous Facility, as it existed at December 31, 2010, to fund capital expenditures related to the company’s on-going fleet enhancement program and for general corporate purposes.

During fiscal 2011, the company continued its significant vessel construction and acquisition program that began in calendar year 2000. This program facilitated the company’s entrance into deepwater markets around the world in addition to allowing the company to begin to replace its core fleet with fewer, larger, and more technologically sophisticated vessels. The vessel construction and acquisition program was initiated with the intent of strengthening the company’s presence in all major oil and gas producing regions of the world through the replacement of aging vessels in the company’s core fleet. During this time, the company purchased and/or constructed 214 vessels for approximately $2.9 billion. Between April 1999 and March 2011, the company also sold, primarily to buyers that operate outside of our industry, 543 vessels. Most of the vessel sales were at prices that exceeded their carrying values. In aggregate, proceeds from, and pre-tax gains on, vessel dispositions during this period approximated $605.8 million and $279.1 million, respectively.

In recent years, the company has generally funded vessel additions with operating cash flow, and funds provided by the July 2003 private placement of $300.0 million and the September 2010 private placement of $425.0 million in senior unsecured notes, borrowings under its revolving credit facilities and various leasing arrangements.

At March 31, 2011, the company had agreements to acquire eight vessels and commitments to build 28 vessels at a number of different shipyards around the world (with one of these vessels being constructed in the United States by the company’s wholly-owned shipyard, Quality Shipyards, L.L.C.) at a total cost, including contract costs and other incidental costs, of approximately $857.2 million. At March 31, 2011, the company had invested $341.2 million in progress payments towards the construction of 28 vessels and $21.8 million towards the purchase of the eight vessels. At March 31, 2011, the remaining expenditures necessary to complete construction of the 28 vessels currently under construction (based on contract prices) and to fund the acquisition of the eight vessels was $494.2 million. A full discussion of the company’s capital commitments, scheduled delivery dates and vessel sales is disclosed in the “Vessel Count, Dispositions, Acquisitions and Construction Programs” section of Item 7 and Note (10) of Notes to Consolidated Financial Statements included in Item 8 of this report.

Macroeconomic Environment and Outlook

The primary driver of our business, and therefore revenues, is the level of our customers’ capital and operating expenditures for oil and natural gas exploration, field development and production. These expenditures, in turn, generally reflect our customers’ expectations for future oil and natural gas prices, economic growth, hydrocarbon demand and estimates of current and future oil and natural gas production. The prices of crude oil and natural gas are critical factors in exploration and production (E&P) companies’ decisions to contract drilling rigs and offshore service vessels in the United States (U.S.) Gulf of Mexico (GOM) or in international markets, with the international market being driven by supply and demand for crude oil, and the U.S. GOM being influenced both by the supply and demand for natural gas (in regards to shallow water activity) and the supply and demand for crude oil (in regards to deepwater activity).

 

-30-


Table of Contents
Index to Financial Statements

Crude oil prices gradually recovered and stabilized in the range of $75 to $90 per barrel during the majority of calendar year 2010 due to signs of improvement in the global economy, lead by emerging economies, and, in part, because the Organization of Petroleum Exporting Countries (OPEC) reduced its crude oil production targets by more than 6.0% over the past 2.5 years in an effort to stabilize crude oil prices. Crude oil prices have increased since the beginning of calendar year 2011 as colder-than-normal winter weather in North America and the Euro-zone translated into higher demand for crude oil. In addition, crude oil prices have increased due to bullish sentiment about supply tightness in calendar year 2011 due to continued improvements in the global economy, along with concerns related to potential supply interruptions and disruptions due to the political tensions in the Middle East and North Africa. During the last scheduled OPEC meeting, held in mid-December 2010, OPEC officials voted to maintain its existing production targets asserting that worldwide crude oil supplies were well balanced (with crude oil stocks above five-year averages) and that OPEC holds excess spare capacity which can be made available to the market should crude oil prices increase to levels that could possibly jeopardize the global economic recovery that is underway. Although a global economic recovery is underway, demand for offshore vessel services was slow to recover in fiscal 2011 from the demand weakness experienced the last two fiscal years resulting from the 2008-2009 global recession. The company expects that utilization and day rates for its internationally-based vessels will continue to be correlated with crude oil prices, which in mid-April 2011 were trading around $110 per barrel for West Texas Intermediate crude and $122 for Intercontinental Exchange (ICE) Brent crude. The significant increase in oil prices bodes well for increases in drilling and exploration activity and resulting demand for the company’s vessels in the various international markets and the deepwater of the U.S. GOM (assuming the pace of permits increases).

Prices for natural gas were generally bearish throughout calendar year 2010 due to the rise in production of unconventional gas resources in North America (onshore shale plays resulting from technological advancements in horizontal drilling and fracturing) and the commissioning of a number of new large Liquefied Natural Gas (LNG) exporting facilities around the world, which are contributing to an over-supplied natural gas market. Since December 2010, colder-than-normal winter weather in the North America and the Euro-zone caused a spike in natural gas prices, that continued throughout the first quarter of calendar year 2011, as increases in demand for natural gas were met with production disruptions (resulting from the cold weather) and the potential for a future increase in demand for the resource by Japan as the country starts to rebuild from the devastating effects of the earthquake and tsunami that struck the country in March 2011. Despite recent improvements in demand for natural gas, inventories for the resource in the U.S. continue to be oversupplied and have grown year-over-year by approximately five Bcf per day. As of mid-April 2011, prices were trading in the $4.00 to $4.20 Mcf range. Analysts expect prices to decrease during calendar year 2011 if a dramatic slowdown does not occur in natural gas production. High natural gas inventories exert downward pricing pressures on the resource. While production of natural gas from unconventional sources is still a relatively small portion of the worldwide natural gas production, it is increasing because improved drilling efficiencies are lowering the costs of extraction. Prolonged increases in the supply of natural gas, whether the supply comes from conventional or unconventional production, will suppress prices for natural gas. A prolonged downturn in natural gas prices can negatively impact the offshore exploration and development plans of E&P companies, which in turn, would result in a decrease in demand for offshore support vessel services, primarily in the company’s U.S. segment.

Certain oil and gas industry analysts are reporting in their 2011 E&P expenditures (both land-based and offshore) surveys that global capital expenditure budgets for E&P companies are forecast to increase by approximately 11% over calendar year 2010 levels. The surveys forecast that international capital spending budgets will increase approximately 12%, while North American capital spending budgets are forecast to increase approximately 8%. The industry analysts’ reports that the gains in international spending will be led by the “super major” international oil companies and the national oil companies. It is anticipated that the North American capital budget increases will primarily be spent onshore rather than offshore. Capital expenditure budgets incorporated into the spending surveys were based on an approximate $77 average price per barrel of oil and an approximate $4.27 per mcf average natural gas price for calendar 2011.

Historically, when the U.S. market weakened, the company would redeploy some of its highly mobile assets to international markets where, market conditions permitting, the vessels could benefit from stronger demand and average day rates and from statutory income tax rates that are generally lower than those in the U.S. The company’s ability to mitigate the effects of a weak U.S. GOM market by redeploying vessels to other markets could be reduced due to the recent challenges in international markets. The company continues to assess the demand for vessels in the U.S. GOM and in the various international markets and may relocate additional

 

-31-


Table of Contents
Index to Financial Statements

vessels to international areas and between international areas if and when the need arises. The cost of mobilizing vessels to a different market is sometimes for the account of the company and sometimes for the account of a contracting customer, depending upon market conditions within a particular market.

In recent years, international deepwater activity has been a growing part of the worldwide offshore crude oil and natural gas markets and a source of growth for the company. International deepwater activity did not experience significant negative effects from the 2008-2009 global economic recession, largely because deepwater oil and gas development typically involves significant capital investment and multi-year development plans. Such projects are generally underwritten by the participating exploration, development and production companies using relatively conservative assumptions relating to crude oil and natural gas prices. These projects are therefore considered less susceptible to short-term fluctuations in the price of crude oil and natural gas. During the past few years, worldwide rig construction increased as rig owners capitalized on the high worldwide demand for drilling. Reports published during the most recently completed quarter suggest that over the next five and a half years and beyond, the worldwide movable drilling rig count (currently estimated at approximately 830 movable offshore rigs worldwide, approximately thirty percent of which are designed to operate in deeper waters) will increase as approximately 150 new-build offshore rigs that are currently on order and under construction are delivered. Of the estimated 830 movable offshore rigs worldwide, approximately 560 are currently working. It is further estimated that approximately 50% of the new build rigs are built to operate in deeper waters, suggesting that the number of rigs designed to operate in deeper waters could grow in the coming years by approximately one third. Investment is also being made in the floating production market, with approximately 55 new floating production units currently under construction and are expected to be delivered over the next six and a half years and beyond to supplement the current approximately 345 floating production units worldwide. To the extent the rigs are built and delivered, it is believed that the new build rigs will largely target international regions rather than the U.S. GOM due to longer contract durations, generally lower operating costs (including insurance costs) and higher drilling day rates available in the international markets. Additional and future regulatory oversight and control with respect to offshore drilling in the U.S. GOM following the explosion of the Deepwater Horizon may also increase the relative appeal of international markets.

According to ODS-Petrodata, the global offshore supply vessel market has approximately 405 new-build offshore support vessels (platform supply vessels and anchor handlers only) at March 31, 2011, that are currently estimated to be under construction and that are expected to be delivered to the worldwide offshore vessel market primarily over the next three and half years. The current worldwide fleet of these classes of vessels is estimated at approximately 2,590 vessels, of which we estimate in excess of 15% are stacked. An increase in worldwide vessel capacity could have the effect of lowering charter rates, particularly when there are lower levels of exploration, field development and production activity. The worldwide offshore marine vessel industry, however, also has a large number of aging vessels, including more than 760 vessels, or approximately 30% of the worldwide offshore fleet, that are at least 25 years old, that are nearing or exceeding original expectations of their estimated economic lives. These older vessels could potentially be removed from the market within the next few years if the cost of extending the vessels’ lives is not economically justifiable. Although the future attrition rate of these aging vessels cannot be accurately predicted, the company believes that the retirement of a sizeable portion of these aging vessels would likely mitigate the potential combined negative effects of new-build vessels on vessel utilization and vessel pricing. Additional vessel demand could also be created with the addition of new drilling rigs and floating production units that are expected to be delivered and become operational over the next few years, which should help minimize the possible negative effects of the new-build offshore support vessels being added to the offshore support vessel fleet. It is unknown at this time the extent to which the recovery from the recent worldwide recession will influence the utilization of equipment currently in existence or the ultimate timing of delivery and placing into service of new drilling rigs, floating production units and vessels currently under construction.

Principal Factors That Drive Our Revenues

The company’s revenues, net earnings and cash flows from operations are largely dependent upon the activity level of its offshore marine vessel fleet. As is the case with other energy service companies, our business activity is largely dependent on the level of drilling and exploration activity by our customers. Our customers’ business activity, in turn, is dependent on crude oil and natural gas prices, which fluctuate depending on expected future levels of supply and demand for crude oil and natural gas, and on estimates of the cost to find, develop and produce reserves. In addition, since the Deepwater Horizon incident, the level of drilling activity off

 

-32-


Table of Contents
Index to Financial Statements

the continental shelf of the U.S. GOM has diminished while the U.S. government evaluated the causes of the incident and announced a plan for enhanced regulatory and safety oversight as a condition to granting additional drilling and exploration permits. As of March 31, 2011, fewer than 10 drilling permits for deepwater exploration activity had been issued since the Deepwater Horizon incident in April 2010.

The company’s revenues in both the International and United States segments are driven primarily by the company’s fleet size, vessel utilization and day rates. Because a sizeable portion of the company’s operating costs and its depreciation does not change proportionally with changes in revenue, the company’s operating profit is largely dependent on revenue levels.

Principal Factors That Drive Our Operating Costs

Operating costs consist primarily of crew costs, repair and maintenance, insurance and loss reserves, fuel, lube oil and supplies and vessel operating lease expense.

Fleet size, fleet composition, geographic areas of operation, supply and demand for marine personnel, and local labor requirements are the major factors which affect overall crew costs in both the International and United States segments. In addition, the company’s newer, more technologically sophisticated anchor handling towing supply vessels and platform supply vessels generally require a greater number of specially trained fleet personnel than the company’s older, smaller vessels. The company believes that competition for skilled crew personnel may again intensify, particularly in international markets, as new-build support vessels currently under construction increase the number of offshore vessels operating worldwide. If competition for personnel intensifies, the company’s crew costs will likely increase.

The timing and amount of repair and maintenance costs are influenced by customer demand, vessel age and safety and inspection drydockings mandated by regulatory agencies. A certain number of drydockings are required within a given period to meet regulatory requirements. Drydocking costs are incurred only if the company believes a drydocking can be justified economically, taking into consideration the vessel’s age, physical condition and future marketability. If the company elects to forego a required drydocking, the company will stack and possibly sell the vessel, as the vessel is not permitted to work without valid regulatory certifications. When the company drydocks a productive vessel, the company not only foregoes vessel revenues and incurs drydocking cost, but also continues to incur vessel operating costs and vessel depreciation. In any given period, downtime associated with drydockings and major repairs and maintenance can have a significant effect on the company’s revenues and operating costs.

At times, vessel drydockings take on an increased significance to the company and its financial performance. Older vessels typically require more frequent and more expensive repairs and drydockings. Newer vessels (generally those built after 2000), which now account for a majority of the company’s revenues and vessel margin (vessel revenues less vessel operating cost), can also result in expensive drydockings, even in the early years of a vessel’s useful life due to these vessels’ larger relative size and greater relative complexity. Conversely, when the company stacks vessels, the number of drydockings in any period could decline. The combination of these factors can affect drydock costs, which are primarily included in repair and maintenance expense, and incrementally increase the volatility of the company’s revenues and operating income, thus making period-to-period comparisons more difficult.

Although the company attempts to efficiently manage its fleet drydocking schedule to minimize the disruptive effect on its revenues and costs, changes in the demand for (and supply of) shipyard services can result in heavy workloads at shipyards and inflationary pressure on shipyard pricing. In recent years, increases in drydocking costs and days off hire (due to vessels being drydocked) contributed to volatility in repair and maintenance costs and revenue. In addition, some of the more recently constructed vessels are now experiencing their first or second required regulatory drydockings.

Insurance and loss reserves costs are dependent on a variety of factors, including the company’s safety record and the cost of insurance, and can fluctuate from time to time. The company’s vessels are generally insured for up to their estimated fair market value in order to cover damage or loss resulting from marine casualties, adverse weather conditions, mechanical failure, collisions, and property losses to the vessel. The company also purchases coverage for third-party liability losses with limits that it believes are reasonable for its operations.

 

-33-


Table of Contents
Index to Financial Statements

Insurance limits are reviewed annually and third-party coverage is purchased based on the expected scope of on-going operations and the cost of third-party coverage.

Fuel and lube costs can also fluctuate in any given period depending on the number and distance of vessel mobilizations and drydockings in addition to changes in fuel prices.

The company also incurs vessel operating costs that are aggregated under the “other” vessel operating cost heading. These costs consist of brokers’ commissions, training costs and other miscellaneous costs. Brokers’ commission costs are incurred primarily in the company’s international operations where brokers sometimes assist in obtaining work for the company’s vessels. Brokers generally are paid a percentage of day rates and, accordingly, commissions paid to brokers generally fluctuate in accordance with vessel revenue. Other costs include, but are not limited to, satellite communication fees, agent fees, port fees, canal transit fees, vessel certification fees and temporary vessel importation fees.

Results of Operations

The following table compares revenues and operating expenses (excluding general and administrative expenses, depreciation expense, provision for Venezuelan operations, and gains on asset dispositions) for the company’s vessel fleet and the related percentage of total revenue for the years ended March 31. Vessel revenues and operating costs relate to vessels owned and operated by the company, while other marine revenues relate to third-party activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related activities.

 

(In thousands)    2011      %      2010      %      2009      %  
   

Revenues (A):

                 

Vessel revenues:

                 

International

   $ 962,522         91%         1,048,553         90%         1,209,426         87%   

United States

     88,691         8%         89,609         8%         146,896         11%   
   
     1,051,213         100%         1,138,162         97%         1,356,322         98%   

Other marine revenues

     4,175         <1%         30,472         3%         34,513         2%   
   

Total revenues

   $ 1,055,388         100%         1,168,634         100%         1,390,835         100%   
   

Operating costs:

                 

Vessel operating costs:

                 

Crew costs

   $ 338,126         32%         320,229         27%         357,249         26%   

Repair and maintenance

     110,496         10%         104,413         9%         119,672         9%   

Insurance and loss reserves

     19,601         2%         12,948         1%         12,817         1%   

Fuel, lube and supplies

     61,784         6%         56,637         5%         65,249         5%   

Vessel operating leases

     17,964         2%         15,054         1%         6,996         1%   

Other

     90,619         9%         95,978         8%         98,893         7%   
   
     638,590         61%         605,259         52%         660,876         48%   

Costs of other marine revenues

     4,660         <1%         27,387         2%         29,282         2%   
   

Total

   $ 643,250         61%         632,646         54%         690,158         50%   
   

 

(A)

For fiscal 2011, 2010 and 2009, Chevron Corporation (including its worldwide subsidiaries and affiliates) accounted for 16.2%, 18.3% and 19.1%, respectively, of total revenues while Petroleo Brasileiro SA accounted for 15.4%, 13.1% and 10.1% of total revenues, respectively.

 

-34-


Table of Contents
Index to Financial Statements

The following table subdivides vessel operating costs presented above by the company’s International and United States segments and its related percentage of total revenue for the fiscal years ended March 31.

 

(In thousands)    2011      %      2010      %      2009      %  
   

International vessel operating costs:

                 

Crew costs

   $ 307,698         29%         286,500         25%         300,401         22%   

Repair and maintenance

     100,114         9%         94,882         8%         108,115         8%   

Insurance and loss reserves

     17,490         2%         9,176         1%         9,130         1%   

Fuel, lube and supplies

     58,462         6%         54,403         5%         62,392         4%   

Vessel operating leases

     15,510         1%         11,907         1%         3,849         <1%   

Other

     88,939         8%         94,384         8%         94,751         7%   
   
     588,213         56%         551,252         47%         578,638         42%   

United States vessel operating costs:

                 

Crew costs

   $ 30,428         3%         33,729         3%         56,848         4%   

Repair and maintenance

     10,382         1%         9,531         1%         11,557         1%   

Insurance and loss reserves

     2,111         <1%         3,772         <1%         3,687         <1%   

Fuel, lube and supplies

     3,322         <1%         2,234         <1%         2,857         <1%   

Vessel operating leases

     2,454         <1%         3,147         <1%         3,147         <1%   

Other

     1,680         <1%         1,594         <1%         4,142         <1%   
   
     50,377         5%         54,007         5%         82,238         6%   
   

Total vessel operating costs

   $ 638,590         61%         605,259         52%         660,876         48%   
   

As a result of the uncertainty of a certain customer to make payments of vessel charter hire the company has deferred the recognition of approximately $12.0 million of billings as of March 31, 2011 and 2010 and $6.1 million of billings as of March 31, 2009, which would otherwise have been recognized as revenue. The company will recognize the amounts as revenue as cash is collected or at such time as the uncertainty has been significantly reduced. Although we currently have no ongoing business with this customer, the company is continuing efforts to collect all amounts due from this customer and is currently pursuing all legal remedies to collect the outstanding balance.

The following table compares operating income and other components of earnings before income taxes, and its related percentage of total revenues for the years ended March 31 consists of the following:

 

(In thousands)    2011     %     2010     %     2009     %  
   

Marine operating profit:

            

Vessel activity:

            

International

   $ 162,051        15%        252,354        22%        437,695        31%   

United States

     11,581        1%        9,196        1%        34,797        3%   
   
     173,632        16%        261,550        22%        472,492        34%   

Corporate expenses

     (46,361     (4%     (51,432     (4%     (38,622     (3%

Gain on asset dispositions, net

     13,228        1%        28,178        2%        27,251        2%   

Other marine services

     (1,163     (<1%     2,034        <1%        4,348        <1%   
   

Operating income

     139,336        13%        240,330        21%        465,469        33%   
   

Foreign exchange gain

     2,278        <1%        4,094        <1%        2,695        <1%   

Equity in net earnings of unconsolidated companies

     12,185        1%        18,107        2%        16,978        1%   

Interest income and other, net

     5,065        <1%        6,882        1%        7,066        1%   

Interest and other debt costs

     (10,769     (1%     (1,679     (<1%     (693     (<1%
   

Earnings before income taxes

   $ 148,095        14%        267,734        23%        491,515        35%   
   

Fiscal 2011 Compared to Fiscal 2010

Consolidated Results

The company’s consolidated net earnings during fiscal 2011 decreased 59%, or $153.9 million, as compared to fiscal 2010, due primarily to an approximate 10%, or $113.2 million, decrease in total revenues, a $33.3 million, or 6%, increase in vessel operating costs, and a $34.2 million, or 414%, increase in income taxes as disclosed in Note (3) of Notes to Consolidated Financial Statements during the comparative periods.

The company recorded $1.1 billion in revenues during fiscal 2011 as compared to $1.2 billion in fiscal 2010, a decrease of approximately $113.2 million, primarily due to an approximate four percentage point reduction in total worldwide utilization and a decrease in the company’s shipyard activity for unaffiliated customers. Also, fiscal 2010 earnings included a $43.7 million provision for Venezuelan operations (as disclosed in

 

-35-


Table of Contents
Index to Financial Statements

Note (10) of Notes to Consolidated Financial Statements) and the reversal of $34.3 million income tax liabilities as disclosed in Note (3) of Notes to Consolidated Financial Statements.

A significant portion of the company’s operations are conducted internationally; therefore, the company’s international vessel operations are the primary driver of its revenue and earnings. Revenues generated from international vessel operations, as a percentage of the company’s total vessel revenues, was 92% during fiscal 2011 and fiscal 2010. Vessel revenues generated by the company’s international segment decreased approximately $86.0 million, or 8%, during fiscal 2011 compared to fiscal 2010, while vessel revenues generated by the U.S. segment decreased approximately $0.9 million, or 1%, during the same comparative periods. In part, the decline in revenues reflected the vessel seizures in Venezuela in mid-2009 with fiscal 2010 including $11.3 million of revenues generated by the company’s Venezuelan operations. Other marine revenues decreased approximately $26.3 million, or 86%, during the same comparative periods primarily because ship construction at the company’s shipyards was completed on several projects and the shipyard has not been able to secure additional backlog. International segment vessel operating costs increased approximately 7%, or $37.0 million, while the company’s U.S. segment vessel operating costs decreased approximately 7%, or $3.6 million, during fiscal 2011 as compared to fiscal 2010. Costs of other marine revenues decreased approximately $22.7 million, or 83%, during the same comparative periods.

At March 31, 2011, the company had 364 owned or chartered vessels (excluding joint-venture vessels and vessels withdrawn from service) in its fleet with an average age of 16.5 years. The average age of 193 newer vessels that have been acquired or constructed since calendar year 2000 as part of the company’s new build and acquisition program is 5.4 years. The remaining 171 vessels have an average age of 29.0 years. During fiscal 2011 and 2010, the company’s newer vessels generated $838.5 million and $770.5 million, respectively, of consolidated revenue and accounted for 88%, or $363.9 million, and 74%, or $395.3 million, respectively, of total vessel margin (vessel revenues less vessel operating cost).

International Segment Operations. The company’s international results of operations are primarily dependent on the supply and demand relationship for crude oil. During fiscal 2011, internationally-based vessel utilization rates decreased approximately six percentage points as compared to fiscal 2010 due principally to reduced demand for the company’s traditional vessels by our customers. E&P customers reduced their capital spending budgets in response to lower hydrocarbon demand and weaker commodity prices precipitated by the 2008-2009 global economic recession. The 2008-2009 global recession resulted in a decrease in demand for offshore support vessel services worldwide. This reduced demand has led to an industry-wide reduction in charter rates and utilization rates on vessels as our customers needed fewer vessels and demanded pricing concessions.

Internationally-based vessel revenues decreased 8%, or $86.0 million, during fiscal 2011 as compared to fiscal 2010, primarily due to an approximate 12 percentage point decrease in utilization rates and 3% decrease in average day rates on the towing supply/supply class of vessels as a result of weaker demand for this vessel class. In addition, the company’s revenues decreased because of the loss of revenue from the seizure of its Venezuelan operations in May and July of 2009. The company’s Venezuelan operations contributed no revenues during fiscal 2011 as compared to $11.3 million of revenues contributed during fiscal 2010. The 21% or $131.1 million, decline in the towing supply/supply class of vessels revenue, during fiscal 2011 as compared to fiscal 2010, was partially offset by an 18%, or $54.1 million increase in revenue earned by the company’s deepwater class of vessels due to the addition of 23 deepwater vessels to the international fleet throughout fiscal 2010 and fiscal 2011 following the addition of newly-built and acquired deepwater vessels to the fleet and the transfer of deepwater class vessels from the U.S. GOM market.

Average day rates for all internationally-based vessels during fiscal 2011 were comparable to the average day rates achieved during fiscal 2010, which reflects a change in the mix of vessels operating during fiscal 2011. As a general matter, leading edge day rates are declining across vessel classes; however, the impact of this decline on average day rate statistics has been mitigated by vessel charter contracts entered into in fiscal 2011 and prior years and a change in the mix of vessels that worked during fiscal 2011, relative to fiscal 2010. In particular, the company added 55 new vessels to the fleet since the first quarter of fiscal 2010 and stacked 100 older, traditional vessels throughout fiscal 2010 and fiscal 2011, and the traditional vessels generally earn lower day rates than newer vessels. As a result, the average working vessel during fiscal 2011 earned a higher average day rate than the average working vessel during fiscal 2010.

 

-36-


Table of Contents
Index to Financial Statements

The company continued to stack and remove from its active fleet of internationally-based vessels those vessels that could not find attractive charter contracts. At the beginning of fiscal 2011, the company had 63 internationally-based vessels that were stacked. During fiscal 2011, the company stacked 48 additional vessels, sold and/or disposed of 27 vessels from the previously stacked vessel fleet, and returned to international service one vessel, with the net result being a total of 83 stacked internationally-based vessels as of March 31, 2011. Vessel utilization rates are calculated by dividing the number of days a vessel works by the number of days the vessel is available to work. Our higher number of stacked vessels depressed international utilization rates during the comparative periods because stacked vessels are considered available to work and are included in the calculation of utilization rates.

The company’s towing supply/supply vessels were the source of the majority of the revenue decline realized during fiscal 2011 as compared to fiscal 2010. This class of vessels accounted for approximately $131.1 million of the revenue decline (a 21% reduction) during fiscal 2011 as compared to fiscal 2010, due to a 12 percentage point decrease in utilization rates and an approximate 3% decrease in average day rates, primarily reflecting weaker demand for the company’s vessels (and particularly the company’s traditional vessels) and the seizure of vessels by the Venezuelan government. The company’s crew/utility class of vessels were responsible for approximately $6.9 million of the decline in revenue (an 8% reduction) during the same comparative periods due to 2% lower average day rates because of weaker demand for such vessels and due to fewer crewboats operating internationally, primarily due to vessel sales. Increased revenue generated by the company’s deepwater class of vessels partially offset revenue losses incurred by the other vessel classes operating in the international segment. Revenues earned by the deepwater class of vessels increased approximately 18%, or $54.1 million, during fiscal 2011 as compared to fiscal 2010, due to stable utilization rates, despite an approximate 9% decrease in average day rates, during the comparative periods and, more importantly, due to an increase in the number of deepwater vessels operating in the international market following the addition of newly-built and acquired deepwater vessels to the fleet and because of three deepwater vessels mobilizing to international markets from the U.S. GOM during the third quarter of fiscal 2011. Vessel revenues, utilization percentages and average day rates by vessel class for the international segment are disclosed in the “Vessel Class Revenues and Statistics by Segment” section of this report.

Vessel operating profit for internationally-based vessels decreased approximately 36%, or $90.3 million, during fiscal 2011 as compared to fiscal 2010, because of lower revenues and 7%, or $37.0 million, higher operating costs during the comparative periods. Vessel operating profit also decreased during the same comparative periods because of an approximate 8%, or $8.9 million, increase in depreciation expense. Depreciation expense increased during fiscal 2011 as compared to fiscal 2010 because of newly-constructed and acquired vessels that were added to the international fleet and because of the mobilization of vessels from the U.S. GOM to international markets during the third quarter of fiscal 2011. Also, fiscal 2010 vessel operating profit includes a $43.7 million provision for Venezuelan operations (as disclosed in Note (10) of Notes to Consolidated Financial Statements).

Crew costs increased approximately 7%, or $21.2 million, during fiscal 2011 as compared to fiscal 2010, due to an increase in the number of internationally-based vessels and because of a $6.0 million charge associated with the company’s participation in the Merchant Navy Officers Pension Fund (MNOPF) as disclosed in Note (10) of Notes to Consolidated Financial Statements. Repair and maintenance costs increased approximately 6%, or $5.2 million, during fiscal 2011 as compared to fiscal 2010. This trend largely reflects a greater number of drydockings being performed during the current fiscal year. In particular, during fiscal 2011, we performed four scheduled drydockings of our largest anchor handling towing supply vessel class of vessels (for an aggregate cost of $14.5 million) as compared to one drydocking being performed on the same class of vessel during fiscal 2010 for a total cost of $3.3 million. International vessel operating lease costs increased approximately $3.6 million, or 30%, during fiscal 2011 because the company entered into six additional vessel operating leases during fiscal 2010, as disclosed in Note (9) of Notes to Consolidated Financial Statements and in the “Off-Balance Sheet Arrangements” section of this report, and because one vessel operating under an operating lease transferred from the U.S. GOM to an international market during the third quarter of fiscal 2011. Fuel, lube and supply costs were higher by approximately 7%, or $4.1 million, respectively, during fiscal 2011 as compared to fiscal 2010 due to vessel mobilizations on the company’s newly delivered vessels and because of vessels mobilizing from one international area to a different international area. Insurance and loss reserves increased approximately $8.3 million due to an increase in the number of vessels operating internationally and due to unfavorable development of losses during the current fiscal year.

 

-37-


Table of Contents
Index to Financial Statements

United States Segment Operations. The company’s United States results of operations are primarily dependent on the supply and demand relationship for natural gas (in regards to shallow water activity) and the supply and demand for crude oil (in regards to deepwater activity). During fiscal 2011, vessel day rates in the U.S. GOM offshore vessel market trended higher as the normal supply/demand fundamentals were affected by the strong demand for vessels to assist with the U.S. Gulf oil spill response effort following the catastrophic explosion of the Deepwater Horizon in April 2010. Increased demand for the company’s vessels helped drive utilization rates for the company’s U.S. segment higher during fiscal 2011 as compared to the same periods during fiscal 2010. All of the company’s available-for-work U.S. segment vessels were working at relatively full utilization, including a number of the company’s vessels assisting with the oil spill containment effort that was underway during the first half of fiscal 2011; however, by September 30, 2010 vessel demand related to the oil spill containment effort had declined significantly.

Vessel revenues from the U.S.-based vessels decreased a modest 1%, or $0.9 million, during fiscal 2011 as compared to fiscal 2010, as a result of lower revenues generated on the U.S.-based crew/utility class of vessels primarily due to the disposition of vessels resulting from weak demand for the company’s crewboats in the U.S. GOM market. In addition, average day rates on this same class of vessel decreased approximately 4% during fiscal 2011 as compared to fiscal 2010.

Revenues earned by the U.S.-based towing supply/supply class of vessels somewhat offset the lower revenues earned by the crew/utility class of vessels. During fiscal 2011, revenues earned by the company’s towing supply/supply class of vessels increased $1.2 million, or 4%, due to an 11 percentage point increase in utilization, despite a 4% decrease in average day rates. Higher utilization for the U.S. towing supply/supply class of vessels, in part, reflects the disposition of vessels. Revenue on the company’s deepwater class of vessels during fiscal 2011 were comparable to the revenues earned during fiscal 2010, due to a two percentage point increase in utilization rates because the supply/demand fundamentals in the U.S. GOM vessel market improved for the deepwater class of vessels because they were used as part of the spill containment effort following the Deepwater Horizon explosion in April 2010; however, throughout the company’s third quarter of fiscal 2011, vessel demand related to the oil spill containment effort had declined significantly and the company mobilized three deepwater vessels from the U.S. GOM to international markets. Vessel revenues, utilization percentages and average day rates by vessel class for the U.S. segment are disclosed in the “Vessel Class Revenues and Statistics by Segment” section of this report.

The company continues to stack and remove from its active fleet vessels that cannot find attractive charter hire contracts. At the beginning of fiscal 2011, the company had 20 stacked vessels in the U.S. segment. During fiscal 2011, the company stacked six additional vessels, sold and/or disposed of 14 vessels from the previously stacked vessel fleet, and returned to domestic service five vessels, resulting in a total of seven U.S.-based stacked vessels as of March 31, 2011.

U.S.-based vessel operating profit increased approximately $2.4 million, or 26%, during fiscal 2011 as compared to the same periods in fiscal 2010, due to lower vessel operating costs (primarily crew costs, insurance and loss reserves and vessel operating leases). Crew costs decreased approximately 10%, or $3.3 million, during fiscal 2011, primarily due to vessels mobilizing to international markets and reductions in crew personnel on the remaining crews staffing the vessels. Vessel operating leases were $0.7 million, or 22%, lower during the same comparative periods because one vessel operating under an operating lease mobilized to an international market during the third quarter of fiscal 2011. Insurance and loss reserves were lower during fiscal 2011 as compared to fiscal 2010 because of fewer vessels operating in the U.S. GOM.

Other Items. Insurance and loss reserves expense increased $6.7 million, or 51%, during fiscal 2011 as compared to fiscal 2010, because of lower premiums and favorable adjustments to loss reserves during fiscal 2010 and due to unfavorable development of losses during the current fiscal year.

Gain on asset dispositions, net during fiscal 2011 decreased approximately $13.2 million, or 53%, as compared to fiscal 2010, due to fewer vessel sales, lower gains earned on the mix of vessels sold, and higher impairment charges taken in fiscal 2011 as discussed below. Dispositions of vessels can fluctuate significantly from period to period.

The company performed a review of all its assets for asset impairment during fiscal 2011, which resulted in the company recording $9.0 million in impairments on 19 assets to write down the carrying value of these assets to

 

-38-


Table of Contents
Index to Financial Statements

a combined fair value of $13.6 million. During fiscal 2010, the combined fair value of 17 assets that incurred impairments totaling $3.1 million was $10.6 million. The impairment charges were recorded in gain on asset dispositions, net.

Fiscal 2010 Compared to Fiscal 2009

During late 2008 and early 2009, prices for crude oil and natural gas fell dramatically from their respective peaks achieved earlier in calendar year 2008 due to a global recession that caused a precipitous drop in worldwide demand for oil and gas.

Consolidated Results

The company’s consolidated net earnings were $259.5 million during fiscal 2010 as compared to $406.9 million during fiscal 2009, a decrease of approximately 36%, or $147.4 million, due to a 16% decrease in total revenues during the comparative periods and to a $43.7 million, net provision for Venezuelan operations, as disclosed in Note (10) of Notes to Consolidated Financial Statements, an $11.4 million, or $0.22 per common share, proposed settlement with the SEC related to the previously announced internal investigation as disclosed in Note (10) of Notes to Consolidated Financial Statements, partially offset by approximately 8% lower vessel operating costs and the reversal of $36.1 million of accrued income tax liabilities as disclosed in Note (3) of Notes to Consolidated Financial Statements.

The company recorded $1.2 billion in revenue during fiscal 2010 as compared to the $1.4 billion recorded during fiscal 2009, a decrease of approximately 16%, or $222.2 million, primarily due to the loss of revenue from the termination of the company’s Venezuelan operations and to an approximate eight percentage point reduction in total worldwide utilization. The company’s Venezuelan operations contributed $11.3 million of revenues during fiscal 2010 as compared to $61.6 million of revenues contributed during fiscal 2009. Vessel revenues generated by the company’s international segment decreased approximately $160.9 million, or 13%, during fiscal 2010 compared to fiscal 2009, while the vessel revenues generated by the U.S. segment decreased approximately $57.3 million, or 39%, during the same comparative periods. Other marine revenues decreased approximately 12%, or $4.0 million, during the same comparative periods. International segment vessel operating costs decreased approximately 5%, or $27.4 million, while the company’s U.S. segment vessel operating costs decreased approximately 34%, or $28.2 million, during fiscal 2010 as compared to fiscal 2009. The company reduced its vessel operating costs in reaction to the contraction in spending by our customers. Costs of other marine revenues decreased approximately 6%, or $1.9 million, during the same comparative periods. A significant portion of the company’s operations continue to be conducted internationally, therefore, the company’s international vessel operations continue to be the primary driver of its earnings. Revenues generated from international vessel operations, as a percentage of the company’s total vessel revenues, was 92% during fiscal 2010 compared to 89% during fiscal 2009.

At March 31, 2010, the company had 377 owned or chartered vessels (excluding joint-venture vessels and vessels withdrawn from service) in its fleet with an average age of 17.8 years. The average age of 170 newer vessels that had been acquired or constructed since calendar year 2000 as part of the company’s new build and acquisition program is 5.4 years. The remaining 207 vessels had an average age of 28.0 years. During fiscal 2010 and 2009, the company’s newer vessels generated $770.5 million and $712.0 million, respectively, of consolidated revenues and accounted for 79% and 59%, respectively, of total vessel margin (vessel revenues less vessel operating expenses less vessel depreciation of $76.2 million and $64.4 million, respectively), while the traditional vessels generated $367.7 million and $644.3 million of the consolidated revenues during the same comparative periods, respectively, and accounted for the remaining 21% and 41% of total vessel margin, respectively. Vessel depreciation on the company’s traditional vessels was $50.6 million and $58.0 million, respectively, during the same comparative periods.

International Segment Operations. The company’s international results of operations are primarily dependent on the supply and demand relationship for crude oil. During fiscal 2010, internationally-based vessel utilization rates decreased approximately seven percentage points as compared to fiscal 2009 due to the 2008-2009 global economic recession. E&P customers reduced their capital spending budgets in response to lower hydrocarbon demand and weaker commodity prices. During fiscal 2010, the global recession resulted in a decrease in demand for offshore support vessel services. This reduction in demand led to an industry-wide reduction in charter rates and utilization rates on vessels as our customers demanded pricing concessions.

 

-39-


Table of Contents
Index to Financial Statements

Internationally-based vessel revenues decreased $160.9 million, or 13%, during fiscal 2010 as compared to fiscal 2009, primarily due to an approximate seven percentage point decrease in utilization rates on vessels operating in international markets, reflecting weaker demand for the company’s vessels. Average day rates for internationally-based vessels increased a relatively modest 2% during fiscal 2010 as compared to fiscal 2009. Higher average day rates for internationally-based vessels reflected a change in the mix of vessels operating during fiscal 2010 compared to fiscal 2009. Leading edge day rates generally had been declining across vessel classes; however, the impact of the decline on average day rate statistics was mitigated by a change in the mix of vessels that were working in fiscal 2010 relative to fiscal 2009. In particular, the company stacked a number of traditional vessels in fiscal 2010 and the traditional vessels generally earned lower day rates than the newer vessels. As a result, the average working vessel in fiscal 2010 earned a higher day rate than the average working vessel in fiscal 2009. In addition, the company’s revenues decreased during the comparative periods because of the loss of revenue from the seizure of its Venezuelan operations. The company’s Venezuelan operations contributed $11.3 million of revenues during fiscal 2010 as compared to $61.6 million of revenues contributed during fiscal 2009.

During fiscal 2010, the company continued to stack and remove from its internationally-based active fleet vessels that could not find attractive charter hire contracts. At the beginning of fiscal 2010, the company had 46 internationally-based stacked vessels. During fiscal 2010, the company stacked 52 additional vessels, sold 32 vessels from the previously stacked vessel fleet, and returned to international service three vessels, resulting in a total of 63 internationally-based stacked vessels as of March 31, 2010. Vessel utilization rates are calculated by dividing the number of days a vessel works by the number of days the vessel is available to work. Stacked internationally-based vessels depressed international utilization rates during the comparative periods because stacked vessels are considered available to work, and as such, are included in the calculation of utilization rates.

The company’s towing supply/supply class of vessels were responsible for approximately 95%, or $153.1 million, of the loss in revenue during fiscal 2010 as compared to fiscal 2009, primarily due to a decrease in the number of towing-supply/supply vessels operating in the international market because of vessel sales, the seizure of vessels by the Venezuelan government, and because of lower utilization rates resulting from weaker demand for the company vessels that continued to operate internationally. The company’s crew/utility class of vessels were responsible for approximately 10%, or $16.5 million, of the loss in revenue during the same comparative periods due to lower utilization and average day rates because of weaker demand for the company’s crew/utility class of vessels. The company’s internationally-based offshore tugs were responsible for approximately 15%, or $24.3 million, of the loss in revenue during fiscal 2010 as compared to fiscal 2009 due to lower utilization and average day rates and to a decrease in the number of offshore tugs operating in the international market because of vessel sales and the seizure of vessels by the Venezuelan government.

Increases in revenues generated by the company’s deepwater class of vessels offset some of the revenue losses of the other vessel classes operating in the international segment. Revenues earned by the deepwater class of vessels increased approximately 15%, or $39.5 million during fiscal 2010 as compared to fiscal 2009, despite decreases in utilization and average day rates, due to an increase in the number of deepwater vessels operating in the international market following the addition of newly-built deepwater vessels to the fleet and to vessels transferring from the U.S. GOM market. Vessel revenues, utilization percentages and average day rates by vessel class for the international segment are disclosed in the “Vessel Class Revenues and Statistics by Segment” section of this report.

Operating profit for internationally-based vessels decreased approximately 42%, or $185.3 million, during fiscal 2010 as compared to fiscal 2009, primarily due to 13% lower revenues from internationally-based vessels, a $43.7 million provision for Venezuelan operations, as disclosed in Note (10) of Notes to Consolidated Financial Statements, and approximately 8%, or $9.2 million, higher depreciation expense. Excluding the provision for Venezuelan operations, the company’s operating profit from internationally-based vessels decreased approximately 32%, or $141.6 million, during fiscal 2010 as compared to fiscal 2009, due to lower revenues from internationally-based vessels, which were partially offset by an approximate 5%, or $27.4 million, reduction in operating costs from internationally-based vessels (primarily crew costs, repair and maintenance and fuel, lube and supply costs). Depreciation expense associated with internationally-based vessels increased during the comparative periods because of the transfer of vessels from the U.S. GOM to international markets and to newly-constructed vessels that were added to the international fleet during fiscal 2010 and 2009.

 

-40-


Table of Contents
Index to Financial Statements

International crew costs were lower by approximately 5%, or $13.9 million, during fiscal 2010 as compared to fiscal 2009, because of fewer vessels operating internationally as a result of vessels sales, stacking of vessels, and the seizing of vessels by the Venezuelan government. Repair and maintenance costs for internationally-based vessels decreased approximately 12%, or $13.2 million, because there were fewer drydockings performed during the same comparative periods. Fuel, lube and supply costs were lower by approximately 13%, or $8.0 million, during the same comparative periods, due to the same reasons listed above for lower crew costs.

International vessel operating lease costs increased approximately $8.1 million, or 209%, during fiscal 2010 as compared to fiscal 2009, because of six additional vessel operating leases initiated during fiscal 2010, as disclosed in Note (9) of Notes to Consolidated Financial Statements.

United States Segment Operations. The company’s United States results of operations are primarily dependent on the supply and demand relationship for natural gas (in regards to shallow water activity) and the supply and demand for crude oil (in regards to deepwater activity). The number of operating drilling rigs in the U.S. offshore market is generally the primary driver of activity, and the U.S. GOM remained at historically low levels due to a reduction in exploration and field development activity in the U.S. GOM, particularly in non-deepwater areas. As a result of the deterioration of the macroeconomic environment in the U.S. GOM over the last few years and due to the 2008-2009 global economic recession that began, during fiscal 2010, the total U.S.-based vessel utilization decreased approximately 18 percentage points as compared to fiscal 2009.

Vessel revenues from U.S.-based vessels decreased approximately 39%, or $57.3 million, during fiscal 2010 as compared to fiscal 2009, primarily due to an approximate 18 percentage point decrease in total U.S. utilization rates, which reflected the deterioration in the macroeconomic environment in the U.S. GOM market during the comparative periods. Average day rates increased approximately 9% during the same comparative time periods, but the increase in average day rates was insufficient to mitigate the negative effects that lower utilization rates had on U.S. segment revenues. Higher average U.S. day rates reflect a change in the mix of vessels operating during fiscal 2010 compared to fiscal 2009. As was the case with international operations, leading edge day rates in the U.S. segment generally declined across vessel classes; however, the impact of this decline on average day rate statistics was mitigated by the company stacking traditional vessels. Vessel revenues also decreased during the comparative periods because of the transfer of approximately three vessels to international markets.

In response to the deteriorating U.S. GOM market conditions, the company stacked and removed from its active fleet vessels that could not find attractive charter hire contracts. At the beginning of fiscal 2010, the U.S. GOM had 15 stacked vessels. During fiscal 2010, the company stacked 11 additional vessels, sold five vessels from the previously stacked vessel fleet, and returned to domestic service one vessel, resulting in a total of 20 U.S.-based stacked vessels as of March 31, 2010. The depressed utilization rates during fiscal 2010 are reflective of the reduced demand for vessels in the U.S. GOM and the stacking of additional vessels.

The company’s deepwater class of vessels was responsible for approximately $2.9 million, or 5%, of the loss in revenue during fiscal 2010 as compared to fiscal 2009, because three deepwater vessels required drydockings during fiscal 2010. Average day rates on the deepwater class of vessels increased approximately 8%, during the comparative periods because one deepwater vessel performed short-term charter assignments periodically during fiscal 2010 at contract rates substantially higher than the otherwise average day rate. The company’s towing supply/supply class of vessels were responsible for approximately 68%, or $39.2 million, of the loss in revenue during fiscal 2010 as compared to fiscal 2009, due to an approximate 10 percentage point decrease in utilization, an approximate 30% decrease in average day rates resulting from the transfer of vessels to international markets, vessel sales and weak demand for the company’s vessels in the shallow waters of the U.S. GOM market. The company’s crew/utility class of vessels was responsible for approximately $15.1 million, or 26%, of the loss in revenue during the same comparative periods due to the transfer of crewboats to international markets. Vessel revenues, utilization percentages and average day rates by vessel class for the U.S. segment are disclosed in the “Vessel Class Revenues and Statistics by Segment” section of this report.

U.S.-based operating profit decreased approximately $25.6 million, or 74%, during fiscal 2010 compared to fiscal 2009, primarily due to lower revenues. Reductions in revenues were somewhat offset by an approximate $28.2 million, or 34%, decrease in vessel operating costs (primarily crew costs and repair and maintenance costs) and an approximate $5.1 million, or 32%, decrease in depreciation expense resulting from fewer vessels

 

-41-


Table of Contents
Index to Financial Statements

operating in the U.S. GOM market during fiscal 2010 compared to fiscal 2009. Crew costs decreased approximately 41%, or $23.1 million during fiscal 2010 compared to fiscal 2009, due to the transfer of vessels to international markets, reductions in crew personnel and wage reductions on crews staffing the remaining active vessels. Repair and maintenance costs were approximately 18%, or $2.0 million lower during fiscal 2010 as compared to fiscal 2009 because comparatively fewer drydocks were performed in fiscal 2010 versus fiscal 2009 and, because fewer vessels were operating in the U.S. GOM, comparatively lower expenditures were required for routine maintenance and repairs.

Other Items. Foreign exchange gains increased approximately $1.4 million, or 52%, during fiscal 2010 as compared to fiscal 2009, primarily due to an $11.0 million, or $0.21 per common share, foreign exchange gain related to the 50% devaluation of the Venezuelan bolivar fuerte relative to U.S. dollar. Excluding this gain, foreign exchange gains decreased approximately $9.6 million, or 356%, due to the devaluation of the U.S. dollar relative to other currencies.

Fiscal 2010 insurance and loss reserves were comparable to fiscal 2009.

Gain on asset dispositions, net, during fiscal 2010 increased approximately 3%, or $0.9 million, as compared to fiscal 2009, due to higher gains earned on the mix of vessels sold. Dispositions of vessels can vary from quarter to quarter; therefore, gains on sales of assets may fluctuate significantly from period to period. The company recorded impairment charges of $3.1 million and $3.1 million during fiscal 2011 and 2010, respectively, on certain stacked vessels, which are included in gains on asset dispositions, net.

Vessel Class Revenue and Statistics by Segment

Vessel utilization is determined primarily by market conditions and to a lesser extent by drydocking requirements. Vessel day rates are determined by the demand created largely through the level of offshore exploration, field development and production spending by energy companies relative to the supply of offshore service vessels. Suitability of equipment and the degree of service provided also influence vessel day rates. Vessel utilization rates are calculated by dividing the number of days a vessel works during a reporting period by the number of days the vessel is available to work in the reporting period. Average day rates are calculated by dividing the revenue a vessel earns during a reporting period by the number of days the vessel worked in the reporting period. Vessel utilization and average day rates are calculated only on vessels in service and, as such do not include vessels withdrawn from service (four vessels at March 31, 2011) or joint venture vessels (10 vessels at March 31, 2011). The following tables compare revenues, day-based utilization percentages and average day rates by vessel class and in total for each of the quarters in the years ended March 31:

 

-42-


Table of Contents
Index to Financial Statements
REVENUE BY VESSEL CLASS:                                   
(In thousands)                                   
Fiscal Year 2011    First      Second      Third      Fourth      Year  
   

International-based fleet:

              

Deepwater vessels

   $ 89,595         88,193         96,540         86,524         360,852   

Towing-supply/supply

     119,097         124,797         122,412         118,806         485,112   

Crew/utility

     19,110         19,812         20,534         20,979         80,435   

Offshore tugs

     9,343         8,777         9,704         8,299         36,123   

Total

   $ 237,145         241,579         249,190         234,608         962,522   

United States-based fleet:

              

Deepwater vessels

   $ 17,048         16,672         12,373         9,385         55,478   

Towing-supply/supply

     7,371         8,190         7,738         8,721         32,020   

Crew/utility

     432         429         332                 1,193   

Total

   $ 24,851         25,291         20,443         18,106         88,691   

Worldwide fleet:

              

Deepwater vessels

   $ 106,643         104,865         108,913         95,909         416,330   

Towing-supply/supply

     126,468         132,987         130,150         127,527         517,132   

Crew/utility

     19,542         20,241         20,866         20,979         81,628   

Offshore tugs

     9,343         8,777         9,704         8,299         36,123   

Total

   $ 261,996         266,870         269,633         252,714         1,051,213   
   
Fiscal Year 2010    First      Second      Third      Fourth      Year  
   

International-based fleet:

              

Deepwater vessels

   $ 69,113         73,695         81,670         82,285         306,763   

Towing-supply/supply

     180,181         166,472         144,500         125,087         616,240   

Crew/utility

     25,570         22,393         19,812         19,528         87,303   

Offshore tugs

     10,557         9,338         8,604         9,181         37,680   

Other

     567                                 567   

Total

   $ 285,988         271,898         254,586         236,081         1,048,553   

United States-based fleet:

              

Deepwater vessels

   $ 13,297         14,714         12,554         15,160         55,725   

Towing-supply/supply

     9,515         7,342         6,931         6,990         30,778   

Crew/utility

     1,636         609         436         425         3,106   

Total

   $ 24,448         22,665         19,921         22,575         89,609   

Worldwide fleet:

              

Deepwater vessels

   $ 82,410         88,409         94,224         97,445         362,488   

Towing-supply/supply

     189,696         173,814         151,431         132,077         647,018   

Crew/utility

     27,206         23,002         20,248         19,953         90,409   

Offshore tugs

     10,557         9,338         8,604         9,181         37,680   

Other

     567                                 567   

Total

   $ 310,436         294,563         274,507         258,656         1,138,162   
   
Fiscal Year 2009    First      Second      Third      Fourth      Year  
   

International-based fleet:

              

Deepwater vessels

   $ 58,284         67,642         69,740         71,553         267,219   

Towing-supply/supply

     184,959         193,415         199,580         191,342         769,296   

Crew/utility

     27,369         26,709         25,627         24,145         103,850   

Offshore tugs

     15,826         14,993         15,467         15,688         61,974   

Other

     1,831         1,876         1,655         1,725         7,087   

Total

   $ 288,269         304,635         312,069         304,453         1,209,426   

United States-based fleet:

              

Deepwater vessels

   $ 16,932         16,099         12,795         12,818         58,644   

Towing-supply/supply

     17,675         18,644         19,945         13,742         70,006   

Crew/utility

     5,495         5,259         4,372         3,120         18,246   

Total

   $ 40,102         40,002         37,112         29,680         146,896   

Worldwide fleet:

              

Deepwater vessels

   $ 75,216         83,741         82,535         84,371         325,863   

Towing-supply/supply

     202,634         212,059         219,525         205,084         839,302   

Crew/utility

     32,864         31,968         29,999         27,265         122,096   

Offshore tugs

     15,826         14,993         15,467         15,688         61,974   

Other

     1,831         1,876         1,655         1,725         7,087   

Total

   $ 328,371         344,637         349,181         334,133         1,356,322   
   

 

-43-


Table of Contents
Index to Financial Statements

UTILIZATION:

Fiscal Year 2011

   First     Second      Third      Fourth      Year  
   

International-based fleet:

             

Deepwater vessels

     83.6     77.4         79.6         75.2         78.8   

Towing-supply/supply

     53.9        55.2         55.1         54.5         54.7   

Crew/utility

     72.4        76.0         80.6         85.8         78.5   

Offshore tugs

     59.4        55.1         58.7         53.7         56.8   

Total

     62.2     62.3         63.7         63.2         62.8   

United States-based fleet:

             

Deepwater vessels

     91.0     89.1         86.0         82.9         87.8   

Towing-supply/supply

     44.1        48.9         45.9         54.2         47.9   

Crew/utility

     20.4        32.5         25.9         —           23.2   

Total

     51.1     57.2         52.0         57.9         54.2   

Worldwide fleet:

             

Deepwater vessels

     84.6     78.9         80.2         75.8         79.8   

Towing-supply/supply

     52.9        54.6         54.2         54.5         54.0   

Crew/utility

     68.5        73.9         77.9         84.3         75.9   

Offshore tugs

     59.4        55.1         58.7         53.7         56.8   

Total

     61.1     61.8         62.7         62.8         62.1   
   
Fiscal Year 2010   

First

   

Second

    

Third

    

Fourth

    

Year

 
   

International-based fleet:

             

Deepwater vessels

     78.8     78.5         78.8         78.5         78.6   

Towing-supply/supply

     73.9        71.1         63.8         56.7         66.6   

Crew/utility

     75.7        71.3         70.4         72.3         72.4   

Offshore tugs

     54.2        60.4         56.0         56.8         56.8   

Other

     79.2        —           —           —           79.2   

Total

     73.2     71.3         66.5         62.7         68.5   

United States-based fleet:

             

Deepwater vessels

     92.4     76.7         83.7         92.0         86.1   

Towing-supply/supply

     39.4        32.2         35.8         41.8         37.3   

Crew/utility

     45.4        18.7         14.3         14.2         23.8   

Total

     49.0     37.7         39.5         46.0         43.1   

Worldwide fleet:

             

Deepwater vessels

     80.8     78.2         79.4         80.2         79.6   

Towing-supply/supply

     70.1        66.8         60.7         55.1         63.3   

Crew/utility

     72.6        66.4         65.0         66.4         67.7   

Offshore tugs

     54.2        60.4         56.0         56.8         56.8   

Other

     79.2        —           —           —           79.2   

Total

     70.7     67.8         63.8         61.0         65.9   
   
Fiscal Year 2009    First     Second      Third      Fourth      Year  
   

International-based fleet:

             

Deepwater vessels

     83.6     85.8         85.7         82.1         84.2   

Towing-supply/supply

     77.2        75.7         76.1         74.4         75.8   

Crew/utility

     86.1        79.5         75.5         71.0         78.0   

Offshore tugs

     53.4        60.4         65.2         66.8         61.1   

Other

     41.8        59.1         95.1         97.7         64.6   

Total

     76.6     75.8         76.0         74.0         75.6   

United States-based fleet:

             

Deepwater vessels

     94.9     98.0         96.7         98.5         96.9   

Towing-supply/supply

     49.8        48.1         49.0         42.3         47.5   

Crew/utility

     77.3        75.5         84.1         73.9         77.7   

Total

     63.0     61.4         62.4         56.3         61.0   

Worldwide fleet:

             

Deepwater vessels

     85.9     88.0         87.3         84.5         86.4   

Towing-supply/supply

     73.6        72.2         72.7         70.7         72.3   

Crew/utility

     84.7        78.9         76.6         71.4         78.0   

Offshore tugs

     53.4        60.4         65.2         66.8         61.1   

Other

     41.8        59.1         95.1         97.7         64.6   

Total

     74.8     74.0         74.4         72.1         73.9   
   

 

-44-


Table of Contents
Index to Financial Statements
0000000000 0000000000 0000000000 0000000000 0000000000

AVERAGE DAY RATES:

Fiscal Year 2011

   First      Second      Third      Fourth      Year  
   

International-based fleet:

              

Deepwater vessels

   $ 22,690         22,619         22,663         21,294         22,315   

Towing-supply/supply

     12,108         11,975         11,761         12,090         11,980   

Crew/utility

     4,793         4,766         4,829         4,850         4,810   

Offshore tugs

     6,402         6,415         6,665         6,601         6,520   

Total

   $ 12,331         12,173         12,230         12,048         12,195   

United States-based fleet:

              

Deepwater vessels

   $ 25,747         25,432         25,425         25,163         25,480   

Towing-supply/supply

     7,702         8,268         8,374         9,936         8,540   

Crew/utility

     4,749         4,778         4,749                 4,759   

Total

   $ 14,531         14,570         13,806         14,477         14,357   

Worldwide fleet:

              

Deepwater vessels

   $ 23,129         23,024         22,946         21,619         22,691   

Towing-supply/supply

     11,718         11,653         11,485         11,913         11,689   

Crew/utility

     4,792         4,767         4,828         4,850         4,810   

Offshore tugs

     6,402         6,415         6,665         6,601         6,520   

Total

   $ 12,511         12,366         12,337         12,194         12,352   
   
Fiscal Year 2010    First      Second      Third      Fourth      Year  
   

International-based fleet:

              

Deepwater vessels

   $ 25,522         24,222         24,406         23,924         24,470   

Towing-supply/supply

     12,488         12,399         12,164         12,259         12,340   

Crew/utility

     5,224         4,935         4,642         4,856         4,926   

Offshore tugs

     7,744         7,059         6,654         6,769         7,062   

Other

     9,679                                 9,679   

Total

   $ 12,194         12,177         12,247         12,411         12,251   

United States-based fleet:

              

Deepwater vessels

   $ 24,178         29,792         26,683         25,799         26,511   

Towing-supply/supply

     10,071         9,627         8,417         7,413         8,860   

Crew/utility

     4,997         5,045         4,749         4,757         4,936   

Total

   $ 13,418         16,456         14,375         13,936         14,441   

Worldwide fleet:

              

Deepwater vessels

   $ 25,295         25,000         24,687         24,198         24,763   

Towing-supply/supply

     12,339         12,250         11,921         11,849         12,114   

Crew/utility

     5,210         4,938         4,644         4,853         4,926   

Offshore tugs

     7,744         7,059         6,654         6,769         7,062   

Other

     9,679                                 9,679   

Total

   $ 12,282         12,426         12,380         12,531         12,399   
   
Fiscal Year 2009    First      Second      Third      Fourth      Year  
   

International-based fleet:

              

Deepwater vessels

   $ 24,728         26,841         26,677         27,057         26,364   

Towing-supply/supply

     11,660         12,375         12,723         12,736         12,368   

Crew/utility

     4,965         5,183         5,155         5,316         5,147   

Offshore tugs

     8,931         8,304         8,149         8,454         8,453   

Other

     9,893         10,588         9,066         9,812         9,835   

Total

   $ 11,221         12,048         12,309         12,559         12,026   

United States-based fleet:

              

Deepwater vessels

   $ 24,514         25,239         23,967         24,094         24,492   

Towing-supply/supply

     11,633         12,865         13,951         12,397         12,713   

Crew/utility

     6,010         6,020         5,595         5,357         5,789   

Total

   $ 12,835         13,511         13,520         13,352         13,290   

Worldwide fleet:

              

Deepwater vessels

   $ 24,679         26,517         26,218         26,560         26,006   

Towing-supply/supply

     11,658         12,417         12,826         12,713         12,396   

Crew/utility

     5,114         5,305         5,214         5,321         5,233   

Offshore tugs

     8,931         8,304         8,149         8,454         8,453   

Other

     9,893         10,588         9,066         9,812         9,835   

Total

   $ 11,396         12,201         12,427         12,626         12,151   
   

 

-45-


Table of Contents
Index to Financial Statements

The following tables compare vessel day-based utilization percentages and average day rates for the company’s internationally-based fleet and U.S.-based fleet and in total for the company’s new vessels (defined as vessels acquired or constructed since calendar year 2000 as part of its new build and acquisition program) and its older, more traditional vessels for each of the quarters in the year ended March 31:

 

UTILIZATION:

Fiscal Year 2011

   First     Second      Third      Fourth      Year  
   

International-based fleet:

             

New vessels

     86.5     85.8         87.5         85.8         86.4   

Traditional vessels

     39.7        37.9         37.0         36.0         37.7   

Total International-based fleet

     62.2     62.3         63.7         63.2         62.8   

United States-based fleet:

             

New vessels

     68.9     76.6         69.8         80.2         72.9   

Traditional vessels

     43.0        48.8         45.7         52.1         47.1   

Total U.S.-based fleet

     51.1     57.2         52.0         57.9         54.2   

Worldwide fleet:

             

New vessels

     85.3     85.3         86.8         85.6         85.8   

Traditional vessels

     40.1        39.2         38.1         37.7         38.8   

Total Worldwide Fleet

     61.1     61.8         62.7         62.8         62.1   
   
Fiscal Year 2010    First     Second      Third      Fourth      Year  
   

International-based fleet:

             

New vessels

     86.5     86.8         86.6         85.1         86.2   

Traditional vessels

     65.3        60.5         51.0         43.7         55.7   

Total International-based fleet

     73.2     71.3         66.5         62.7         68.5   

United States-based fleet:

             

New vessels

     66.5     49.2         52.7         57.6         56.7   

Traditional vessels

     41.0        32.7         34.1         40.8         37.1   

Total U.S.-based fleet

     49.0     37.7         39.5         46.0         43.1   

Worldwide fleet:

             

New vessels

     84.7     83.8         84.2         83.1         83.9   

Traditional vessels

     62.6        57.2         49.0         43.3         53.5   

Total Worldwide Fleet

     70.7     67.8         63.8         61.0         65.9   
   
Fiscal Year 2009    First     Second      Third      Fourth      Year  
   

International-based fleet:

             

New vessels

     91.1     91.0         91.9         87.6         90.3   

Traditional vessels

     70.7        69.2         68.5         67.0         68.9   

Total International-based fleet

     76.6     75.8         76.0         74.0         75.6   

United States-based fleet:

             

New vessels

     83.9     82.7         88.1         83.2         84.4   

Traditional vessels

     50.4        49.6         50.6         44.0         48.8   

Total U.S.-based fleet

     63.0     61.4         62.4         56.3         61.0   

Worldwide fleet:

             

New vessels

     89.9     89.8         91.5         87.2         89.6   

Traditional vessels

     68.4        66.9         66.4         64.5         66.6   

Total Worldwide Fleet

     74.8     74.0         74.4         72.1         73.9   
   

 

-46-


Table of Contents
Index to Financial Statements
0000000000 0000000000 0000000000 0000000000 0000000000

AVERAGE DAY RATES:

Fiscal Year 2011

   First      Second      Third      Fourth      Year  
   

International-based fleet:

              

New vessels

   $ 14,587         14,122         14,100         13,608         14,090   

Traditional vessels

     7,787         7,603         7,285         7,561         7,568   

Total International-based fleet

   $ 12,331         12,173         12,230         12,048         12,195   

United States-based fleet:

              

New vessels

   $ 21,248         21,205         20,490         23,603         21,432   

Traditional vessels

     9,597         10,039         10,196         10,788         10,138   

Total U.S.-based fleet

   $ 14,531         14,570         13,806         14,477         14,357   

Worldwide fleet:

              

New vessels

   $ 14,943         14,463         14,317         13,851         14,381   

Traditional vessels

     8,029         7,964         7,712         8,047         7,939   

Total Worldwide Fleet

   $ 12,511         12,366         12,337         12,194         12,352   
   
Fiscal Year 2010    First      Second      Third      Fourth      Year  
   

International-based fleet:

              

New vessels

   $ 16,452         16,160         15,807         15,441         15,946   

Traditional vessels

     8,819         8,193         7,584         7,402         8,120   

Total International-based fleet

   $ 12,194         12,177         12,247         12,411         12,251   

United States-based fleet:

              

New vessels

   $ 17,896         21,955         20,843         20,689         20,122   

Traditional vessels

     10,055         12,874         10,269         9,666         10,633   

Total U.S.-based fleet

   $ 13,418         16,456         14,375         13,936         14,441   

Worldwide fleet:

              

New vessels

   $ 16,554         16,429         16,027         15,705         16,165   

Traditional vessels

     8,910         8,518         7,815         7,678         8,332   

Total Worldwide Fleet

   $ 12,282         12,426         12,380         12,531         12,399   
   
Fiscal Year 2009    First      Second      Third      Fourth      Year  
   

International-based fleet:

              

New vessels

   $ 16,242         17,090         17,124         17,343         16,965   

Traditional vessels

     8,608         9,163         9,288         9,361         9,091   

Total International-based fleet

   $ 11,221         12,048         12,309         12,559         12,026   

United States-based fleet:

              

New vessels

   $ 14,647         14,732         13,669         15,074         14,526   

Traditional vessels

     11,017         12,386         13,400         11,863         12,177   

Total U.S.-based fleet

   $ 12,835         13,511         13,520         13,352         13,290   

Worldwide fleet:

              

New vessels

   $ 16,001         16,775         16,740         17,125         16,666   

Traditional vessels

     8,812         9,445         9,654         9,550         9,351   

Total Worldwide Fleet

   $ 11,396         12,201         12,427         12,626         12,151   
   

 

-47-


Table of Contents
Index to Financial Statements

Vessel Count, Dispositions, Acquisitions and Construction Programs

The average age of the company’s 364 owned or chartered vessel fleet (excluding joint-venture vessels and vessels withdrawn from service) in its fleet at March 31, 2011 is approximately 16.5 years. The average age of 193 newer vessels that have been acquired or constructed since calendar year 2000 as part of the company’s new build and acquisition program (discussed below) is approximately 5.4 years. The remaining 171 vessels have an average age of 29.0 years. The following table compares the average number of vessels by class and geographic distribution during the fiscal years ended March 31 and the actual March 31, 2011 vessel count:

 

    

Actual Vessel

Count at
March 31,

    

Average Number

of Vessels During

Year Ended March 31,

 
   
     2011      2011      2010      2009  
   

International-based fleet:

           

Deepwater vessels

     60               56         44         33     

Towing-supply/supply

     199               203         206         224     

Crew/utility

     56               58         67         71     

Offshore tugs

     26               27         26         33     

Other

     —                               3     
   

Total

     341               344         343         364     
   

United States-based fleet:

           

Deepwater vessels

     5               7         6         7     

Towing-supply/supply

     18               21         26         32     

Crew/utility

     —               3         7         11     
   

Total

     23               31         39         50     
   

Owned or chartered vessels included in marine revenues

     364               375         382         414     

Vessels withdrawn from service

     4               5         8         15     

Joint-venture and other

     10               10         10         13     
   

Total

     378               390         400         442     
   

Included in owned or chartered vessels are vessels that were stacked by the company. The company considers a vessel to be stacked if the vessel crew is disembarked and limited maintenance is being performed on the vessel. The company reduces operating costs by stacking vessels when management does not foresee opportunities to profitably or strategically operate the vessels in the near future. Vessels are added to this list when market conditions warrant, and they are removed from this list when they are returned to active service, sold or otherwise disposed. When economically practical marketing opportunities arise, the stacked vessels can be returned to service by performing any necessary maintenance on the vessel and returning fleet personnel to operate the vessel. Although not currently fulfilling charters, stacked vessels are considered to be in service and are included in the calculation of the company’s utilization statistics. The company had 90, 83 and 61 stacked vessels at March 31, 2011, 2010 and 2009, respectively. The vast majority of vessels stacked at March 31, 2011 are currently being marketed for sale and are not expected to return to the active fleet primarily due to their mature age.

Vessels withdrawn from service represent those vessels that management has determined are unlikely to return to active service and are currently marketed for sale. Vessels withdrawn from service are not included in the company’s utilization statistics.

Vessel Dispositions

The company seeks opportunities to sell and/or scrap its older vessels when market conditions warrant and opportunities arise. The majority of the company’s vessels are sold to buyers who do not compete with the company in the offshore energy industry.

Fiscal 2011. The company disposed of 46 vessels, including 25 anchor handling towing supply vessels, six platform supply vessels, 12 crewboats, one offshore tug vessel and two utility vessels. Fourteen of the 46 vessels disposed of were from the U.S. GOM vessel fleet while 28 vessels were from the international fleet. The remaining four vessels were disposed of from vessels previously withdrawn from service.

Fiscal 2010. The company disposed of 70 vessels during fiscal 2010, including 25 anchor handling towing supply vessels, 21 platform supply vessels, 10 crewboats, seven offshore tugs, five utility vessels and two other

 

-48-


Table of Contents
Index to Financial Statements

type vessels. Five of the 70 vessels disposed of were from the U.S. GOM vessel fleet while 61 vessels were from the international fleet. The remaining four vessels were disposed of from vessels previously withdrawn from service. Six of the platform supply vessels that were disposed of were sold and leased back by subsidiaries of the company during fiscal 2010. A complete discussion regarding the sale/leaseback transactions is disclosed in the Note (9) of Notes to Consolidated Financial Statements included in Item 8 of this report. Included in the above vessel dispositions, are 15 vessels that were expropriated by the Venezuelan government as disclosed in Note (10) of Notes to Consolidated Financial Statements included in Item 8 of this report. Of the 15 expropriated vessels, one was an anchor handling towing supply vessel, three were platform supply vessels, one was a crewboat, five were offshore tugs, three were utility vessels, and two were other type vessels.

Fiscal 2009. The company disposed of 47 vessels during fiscal 2009, including 12 anchor handling towing supply vessels, 11 platform supply vessels, seven crewboats, six utility vessels, eight offshore tugs and three other type vessels. Five of the 47 vessels disposed of were from the U.S. GOM vessel fleet while 33 vessels were from the internationally-based fleet. The remaining nine vessels were disposed of from vessels previously withdrawn from service.

Vessel Deliveries and Acquisitions

The table below summarizes the number of vessels that have been added to the company’s fleet during fiscal 2011, 2010 and 2009 by vessel class and vessel type:

 

     Number of vessels added  
Vessel class and type    2011      2010      2009  
   

Deepwater vessels:

        

Anchor handling towing supply

     1         4         1   

Platform supply vessels

     6         11         3   

Towing-supply/supply vessels:

        

Anchor handling towing supply

     21         8         9   

Platform supply vessels

                       

Crewboats and offshore tugs:

        

Crewboats

     1         1         3   

Offshore tugs

             4         1   
   

Total number of vessels added to the fleet

     29         28         17   
   

Fiscal 2011. The company took delivery of seven newly-built vessels and acquired 22 vessels from third parties. Of the seven newly-built vessels added to the fleet, three were anchor handling towing supply vessels, three were platform supply vessels and one is a fast, crew/supply boat. The anchor handling towing supply vessels were constructed at two different international shipyards for a total aggregate cost of $62.1 million and varied in size from 5,150 to 13,570 brake horsepower (BHP). The three deepwater, platform supply vessels (one 230-foot and two 240-feet) were constructed for a total aggregate cost of $57.9 million and were built by two different international shipyards. The crewboat was constructed at an international shipyard for a total cost of $9.4 million and is a 175-foot fast, crew/supply boat. Of the 22 acquired vessels added to the fleet during fiscal 2011, 19 were anchor handling towing supply vessels (twelve 5,150 BHP, two 8,000 BHP and five 9,500 BHP) and three deepwater, platform supply vessels (one 230-foot, one 240-foot and one 250-foot). The company acquired the 22 vessels for a total aggregate cost of $365.3 million.

Fiscal 2010. The company took delivery of 23 newly-built vessels and acquired five vessels from third parties. Nine of the 23 newly-built vessels were anchor handing towing supply vessels that were constructed at four different international shipyards for a total aggregate cost of $182.8 million, and the vessels varied in size from 5,000 to 13,750 BHP. Eleven of the newly-built vessels are deepwater class platform supply vessels, of which three are 230-foot long, five are 240-foot long, two are 266-foot long and one is 311-foot long in size. Nine of the 11 platform supply vessels were constructed at four different international shipyards for a total aggregate cost of $208.5 million. The two 266-foot deepwater, platform supply vessels, were constructed at the company’s own shipyard, Quality Shipyards, L.L.C., for a total aggregate cost of $60.9 million. The newly-built crewboat was constructed at an international shipyard for a total approximate cost of $1.3 million. The two newly-built offshore tugs were constructed at an international shipyard for a total aggregate cost of $29.3 million. The company also acquired three anchor handling towing supply vessels for a total cost of $42.6 million and two offshore tugs for a total approximate cost of $12.8 million during fiscal 2010.

 

-49-


Table of Contents
Index to Financial Statements

Fiscal 2009. The company took delivery of 17 newly-built vessels. Ten of the newly-built vessels are anchor handling towing supply vessels that varied in size from 5,000 to 13,750 BHP. These vessels were constructed at four different international shipyards for a total aggregate cost $182.0 million. The company also took delivery of two 230-foot and one 240-foot deepwater class platform supply vessels for a total aggregate cost of $44.3 million. Two different international shipyards built the three deepwater class platform supply vessels. The company also took delivery of three water jet crewboats, constructed at an international shipyard, for a total aggregate cost of $4.7 million and one internationally built offshore tug a total cost of $13.4 million.

Vessel Construction and Acquisition Expenditures at March 31, 2011

At March 31, 2011, the company had eight anchor handling towing supply vessels under construction, varying in size from 5,150 to 8,200 BHP, for a total aggregate investment of approximately $143.1 million. Two different international shipyards are constructing the vessels. Scheduled deliveries for the eight vessels will begin in June 2011, with the last vessel scheduled for delivery in March 2012. As of March 31, 2011, the company had expended $100.8 million for the construction of these eight vessels.

The company is also committed to the construction of four 265-foot, one 266-foot, twelve 286-foot and two 300-foot deepwater platform supply vessels for a total aggregate investment of approximately $595.5 million. The company’s shipyard, Quality Shipyards, L.L.C., is constructing the 266-foot deepwater class vessel. One international shipyard is constructing the four 265-foot vessels and a different international shipyard is constructing the twelve 286-foot vessels. One U.S. shipyard is constructing the two 300-foot deepwater platform supply vessels. The four 265-foot deepwater class vessels are expected to be delivered to the market beginning in February 2012, with final delivery of the fourth vessel in April 2013. The 266-foot deepwater class vessel is scheduled for delivery in November 2011. One of the twelve 286-foot deepwater class vessels was delivered in April 2011. The remaining eleven 286-foot deepwater class vessels are expected to be delivered beginning July 2011 with final delivery of the twelfth 286-foot vessel scheduled for October of 2012. The two 300-foot deepwater class vessels are scheduled for delivery in October 2012 and April 2013. As of March 31, 2011, $232.7 million has been expended on these 19 vessels.

The company is also committed to the construction of one 175-foot, fast, crew/supply boat for a cost of approximately $10.0 million. The company is experiencing substantial delay with this vessel under construction in Brazil that was originally scheduled to be delivered in September of 2009. On April 5, 2011, pursuant to the vessel construction contract, the company sent the subject shipyard a letter initiating arbitration in order to resolve disputes of such matters as the shipyard’s failure to achieve payment milestones, its failure to follow the construction schedule, and its failure to timely deliver the vessel. Our current expectation is that the vessel will be delivered in March of 2012. As of March 31, 2011, the company expended $7.7 million for the construction of this vessel.

At March 31, 2011, the company also had agreed to purchase seven anchor handling towing supply vessels and one platform supply vessel. The aggregate approximate purchase price for these eight vessels is $107.9 million. The company expects to take possession of six of the seven anchor handling towing supply vessels throughout calendar year 2011 and the final anchor handling towing supply vessel in February 2012 for an aggregate purchase price of $86.0 million. The company took possession of the platform supply vessel in April 2011 for an approximate purchase price of $21.9 million. As of March 31, 2011, the company had expended $21.8 million for the acquisition of these eight vessels.

 

-50-


Table of Contents
Index to Financial Statements

Vessel Commitments Summary at March 31, 2011

The table below summarizes the various vessel commitments, including vessels under construction and vessel acquisition, by vessel class and type as of March 31, 2011:

 

     International Built      U.S. Built  
Vessel class and type    Number
of
Vessels
    

Total

Cost

     Expended
Through
03/31/11
     Number
of
Vessels
    

Total

Cost

     Expended  
Through  
03/31/11  
 
   
            (In thousands)             (In thousands)  

Deepwater vessels:

                 

Anchor handling towing supply

                                             —     

Platform supply vessels

     17         $482,203         $190,676         3         $135,972         $46,678     

Towing-supply/supply vessels:

                 

Anchor handling towing supply

     15         $229,036         $117,963                         —     

Platform supply vessels

                                             —     

Crewboats

     1         $9,992         $7,708                         —     
   

Totals

     33         $721,231         $316,347         3         $135,972         $46,678     
   

The table below summarizes by vessel class and vessel type the number of vessels expected to be delivered by quarter along with the expected cash outlay (in thousands) of the various vessel commitments as discussed above:

 

     Quarter Period Ended  
Vessel class and type   

 

06/11

     09/11      12/11      03/12      06/12      Thereafter  
   

Deepwater vessels:

                 

Anchor handling towing supply

                                               

Platform supply vessels

     2         2         4         1         3         8   

Towing-supply/supply vessels:

                 

Anchor handling towing supply

     2         4         7         2                   

Platform supply vessels

                                               

Crewboats

                             1                   
   

Totals

     4         6         11         4         3         8   
   
(In thousands)                                          

Expected quarterly cash outlay

   $ 95,900         76,737         140,848         55,000         46,501         79,192 (A)   
   

 

(A)

The $79,192 of ‘Thereafter’ vessel construction obligations is expected to be paid out as follows: $63,354 in the remaining quarters of fiscal 2013 and $15,838 during fiscal 2014.

The company believes it has sufficient liquidity and financial capacity to support the continued investment in new vessels, assuming customer demand, acquisition and shipyard economics and other considerations justify such an investment. The company continues to evaluate its fleet renewal program, whether through new construction or acquisitions, relative to other investment opportunities and uses of cash, including the current share repurchase authorization, and in the context of its financial position and conditions in the credit and capital markets. In recent years, the company has funded vessel additions with available cash, operating cash flow, revolving credit facility borrowings, various leasing arrangements, and funds provided by senior unsecured notes, as disclosed in Note (4) of Notes to Consolidated Financial Statements. The company has approximately $494.2 million of remaining capital commitments on the 28 vessels currently under construction and the eight vessel purchase commitments at March 31, 2011.

 

-51-


Table of Contents
Index to Financial Statements

General and Administrative Expenses

Consolidated general and administrative expenses and its related percentage of total revenues for the years ended March 31 consists of the following components:

 

000000000000 000000000000 000000000000 000000000000 000000000000 000000000000
(In thousands)    2011      %      2010      %      2009      %  
   

Personnel

   $ 80,100         8%                 80,824         7%                 80,051         6%           

Office and property

     20,757         2%                 19,326         2%                 19,452         1%           

Sales and marketing

     8,458         1%                 7,553         1%                 8,226         1%           

Professional services

     17,972         2%                 21,603         2%                 17,137         1%           

Other

     18,167         2%                 20,626         2%                 11,362         1%           
   
   $ 145,454         14%                 149,932         13%                 136,228         10%           
   

General and administrative expenses were lower by approximately 3%, or $4.5 million, during fiscal 2011 as compared to fiscal 2010, due to lower personnel costs (resulting from lower bonus expense); lower legal costs due to the resolution and settlement with the SEC and Department of Justice (DOJ) regarding the internal investigation matter, and lower “Other” general and administrative costs primarily as a result of a release of approximately $2.6 million workers’ compensation reserves because of positive workers’ compensation loss experience. General and administrative costs during fiscal 2011 also reflect a $4.4 million final settlement with the DOJ regarding the internal investigation and a $6.3 million settlement with the Federal Government of Nigeria (FGN) to resolve the previously disclosed investigation by the FGN relating to allegations of improper payments to Nigerian government officials (which is included in “Other” general and administrative costs) as disclosed in Note (10) of Notes to Consolidated Financial Statements. Fiscal 2010 general and administrative cost included a $3.6 million settlement loss related to the July 2009 supplemental retirement plan lump sum distributions as previously disclosed, and an $11.4 million SEC and DOJ settlement provision regarding the internal investigation matter.

General and administrative expenses were higher by approximately $13.7 million, or 10%, during fiscal 2010 as compared to fiscal 2009, primarily due to the previously referenced $3.6 million settlement loss, as disclosed in Note (5) of Notes to Consolidated Financial Statements, to higher legal costs associated with internal investigation matters, to an $11.4 million settlement with the SEC regarding the internal investigation matter, and to the expropriation of the company’s Venezuelan assets as disclosed in Note (10) of Notes to Consolidated Financial Statements, partially offset by lower aviation costs.

Liquidity, Capital Resources and Other Matters

The company’s current ratio, level of working capital and amount of cash flows from operations for any year are primarily related to fleet activity, vessel day rates and the timing of collections and disbursements. Vessel activity levels and vessel day rates are, among other things, dependent upon oil and natural gas production and ultimately the supply/demand relationship for crude oil and natural gas. Variations from year-to-year in these items are primarily the result of market conditions. Cash and cash equivalents, future net cash provided by operating activities and the company’s revolving credit facilities provide the company, in management’s opinion, with adequate resources to meet its current liquidity requirements, including required payments on vessel construction currently in progress and payments required to be made in connection with current vessel purchase commitments.

Indebtedness

Revolving Credit and Term Loan Agreement. In January 2011, the company amended and extended its then existing $450.0 million credit facility (the “previous facility”) and established $575.0 million in new credit facilities (the “new facilities”) for a five year period maturing January 2016. The new facilities include a $125.0 million term loan (“term loan”) and a $450.0 million revolving line of credit (“revolver”). The new facilities revolver and term loan borrowings bear interest at the company’s option at the greater of (i) prime or the federal funds rate plus 0.50 to 1.25%, or (ii) Eurodollar rates plus margins ranging from 1.50 to 2.25%, based on the company’s consolidated funded debt to total capitalization ratio. Commitment fees on the unused portion of the new facilities range from 0.15 to 0.35% based on the company’s funded debt to total capitalization ratio. The new facilities provide for a maximum ratio of consolidated debt to consolidated total capitalization of 0.55 (as

 

-52-


Table of Contents
Index to Financial Statements

compared to a maximum ratio of consolidated debt to total capitalization of 0.45 with the previous facility) and a minimum consolidated interest coverage ratio (essentially consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four prior fiscal quarters to consolidated interest charges for such period) of 3.0 (which is consistent with the previous facility). All other terms, including the financial and negative covenants, are customary for facilities of its type and consistent with the prior agreement in all material respects.

The term loan allows for multiple draws for up to 180 days from the closing date (“delayed draw period”). Principal repayments of any term loan borrowings are payable in quarterly installments beginning after the second anniversary of the first draw in amounts equal to 1.25% of the total outstanding borrowings as of the end of the delayed draw period.

There were no borrowings outstanding under the new facilities at March 31, 2011, and the full $575.0 million was available at March 31, 2011. There were no outstanding borrowings under the company’s previous facility at March 31, 2010.

Borrowings under the company’s previous facility bore interest at the company’s option at the greater of (i) prime or the federal funds rate plus 2.0 to 3.0%, or (ii) Eurodollar rates plus margins ranging from 3.0 to 4.0%, based on the company’s consolidated funded debt to total capitalization ratio. Commitment fees on the unused portion of this facility were in the range of 0.50 to 0.75% based on the company’s funded debt to total capitalization ratio. The previous facility provided for a maximum ratio of consolidated debt to consolidated total capitalization of 0.45.

September 2010 Senior Notes. On September 9, 2010, the company announced that it had entered into a note purchase agreement with a group of institutional investors to place $425.0 million of senior unsecured notes. On October 15, 2010, the company completed the sale of $310.0 million of these notes, and completed the sale of an additional $115.0 million of the notes on December 30, 2010. The notes have maturities ranging from five years to 12 years and have a weighted average life to maturity of 8.6 years. The notes may be retired before their respective scheduled maturity dates subject only to a make-whole provision. The weighted average coupon rate on the notes is 4.25%. The terms of the notes require that the company maintain a minimum ratio of debt to consolidated total capitalization that does not exceed 55%. Proceeds from the note sales were used to repay borrowings under the company’s previous facility, as it existed at December 31, 2010, to fund capital expenditures related to the company’s on-going fleet enhancement program and for general corporate purposes. The fair value of this debt at March 31, 2011 was estimated to be $404.4 million.

Included in accumulated other comprehensive income for the year ended March 31, 2011, is an after-tax loss of $4.0 million ($6.1 million pre-tax) relating to the purchase of interest rate hedges, which are cash flow hedges, in July 2010 in connection with the September 2010 senior notes offering. The interest rate hedges settled in August 2010 concurrent with the pricing of the senior unsecured notes. The hedges met the effectiveness criteria and their acquisition costs are being amortized over the term of the individual notes matching the term of the hedges to interest expense.

July 2003 Senior Notes. At March 31, 2011 and 2010, the company had a respective $275.0 million and $300.0 million outstanding of senior unsecured notes that were issued in July 2003. The multiple series of notes were originally issued with maturities ranging from seven years to 12 years and had a weighted average remaining life of 2.1 years as of March 31, 2011 and 2.85 years as of March 31, 2010. These notes can be retired in whole or in part prior to maturity for a redemption price equal to the principal amount of the notes redeemed plus a make-whole premium. The weighted average coupon rate on the notes outstanding was 4.39% and 4.35% at March 31, 2011 and 2010. The terms of the notes provide for a maximum ratio of consolidated debt to total capitalization of 55%. The fair value of this debt at March 31, 2011 and 2010 was estimated to be $285.5 million and $314.8 million, respectively. Notes totaling $40.0 million will mature in July 2011.

For additional disclosure regarding the company’s debt, refer to Note (4) of Notes to Consolidated Financial Statements included in Item 8 of this report.

 

-53-


Table of Contents
Index to Financial Statements

Interest and Debt Costs

The company capitalizes a portion of its interest costs incurred on borrowed funds used to construct vessels. Interest and debt costs incurred, net of interest capitalized for fiscal 2011, 2010, and 2009 was approximately $10.8 million, $1.7 million, and $0.7 million, respectively. Interest costs capitalized during fiscal 2011, 2010 and 2009 was approximately $14.9 million, $15.6 million, and $13.8 million, respectively.

Total interest and debt costs incurred during fiscal 2011 was higher than fiscal 2010 due to higher commitment fees on the unused portion of the company’s $575.0 million new facilities and higher commitment fees on the unused portion of the company’s previous facility which increased from $300.0 million to $450.0 million in July 2009. Total interest and debt costs incurred during fiscal 2010 was higher than in fiscal 2009 due to higher commitment fees on the unused portion of the company’s previous facility which increased from $300.0 million to $450.0 million in July 2009.

Share Repurchases

In May 2011, the company’s Board of Directors replaced the existing share repurchase program with a new $200.0 million repurchase program that is effective through June 30, 2012. The Board of Directors authorized the company to repurchase shares of its common stock in open-market or privately-negotiated transactions.

In July 2009, the company’s Board of Directors authorized the company to spend up to $200.0 million to repurchase shares of its common stock in open-market or privately-negotiated transactions. The repurchase program was scheduled to expire on June 30, 2010, but the company announced on May 14, 2010 that its Board of Directors had extended this program through June 30, 2011, unless further extended by the Board of Directors. The company uses its available cash and, when considered advantageous, borrowings under its revolving credit facility, or other borrowings, to fund any share repurchases. The company expended $20.0 million for the repurchase and cancellation of 486,800 common shares, at an average price paid per common share of $41.06 during the three-month period ended June 30, 2010, and $180.0 million remains available to repurchase shares under the 2009 share repurchase program at March 31, 2011. The company will continue to evaluate share repurchase opportunities relative to other investment opportunities and in the context of current conditions in the credit and capital markets.

The company’s Board of Directors had previously authorized the company in July 2008 to repurchase up to $200.0 million in shares of its common stock in open-market or privately-negotiated transactions. The Board of Directors’ authorization for this repurchase program expired on June 30, 2009. No amounts were expended from inception of the July 2008 authorized program through its conclusion on June 30, 2009.

During fiscal 2009, the company expended $53.6 million to repurchase and cancel 915,900 common shares, or an average price paid per common share of $58.56 pursuant to a repurchase program authorized by the Board of Directors in July 2007.

Dividends

The Board of Directors declared dividends of $51.5 million, $51.7 million, and $51.5 million, or $1.00 per share, for the years ended March 31, 2011, 2010 and 2009, respectively. The declaration of dividends is at the discretion of the company’s Board of Directors.

Operating Activities

Net cash provided by operating activities for any period will fluctuate according to the level of business activity for the applicable period. Fiscal 2011 net cash from operating activities was $264.2 million. Significant components of cash provided by operating activities during fiscal 2011 include net earnings of $105.6 million, adjusted for non-cash items and gain on disposition of assets, net totalling $136.4 million and changes in working capital balances of $22.2 million.

Fiscal 2010 net cash from operating activities was $328.3 million. Significant components of cash provided by operating activities during fiscal 2010 include net earnings of $259.5 million, adjusted for non-cash items and gain on disposition of assets, net totalling $115.5 million and changes in working capital balances of $46.7 million.

 

-54-


Table of Contents
Index to Financial Statements

Fiscal 2009 net cash from operating activities was $523.9 million. Significant components of cash provided by operating activities during fiscal 2009 include net earnings of $406.9 million, adjusted for non-cash items and gain on asset dispositions, net totalling $113.2 million and changes in working capital balances of $3.8 million.

Investing Activities

Investing activities in fiscal 2011 used $569.9 million of cash, which is attributed to $615.3 million of additions to properties and equipment partially offset by $37.2 million in proceeds from the sales of assets and $8.2 million in proceeds from insurance settlements. Additions to properties and equipment were comprised of approximately $17.3 million in capitalized major repair costs, $588.6 million for the construction and purchase of offshore marine vessels and $9.4 million in other properties and equipment purchases.

Investing activities in fiscal 2010 used $298.5 million of cash, which is attributed to $452.0 million of additions to properties and equipment, offset by approximately $153.5 million in proceeds received from the sales of assets (of which $101.8 million resulted from the sale and leaseback of six vessels). Additions to properties and equipment were comprised of approximately $25.6 million in capitalized major repair costs, $423.4 million for the construction, purchase and/or modification of offshore marine vessels and $3.0 million of other properties and equipment purchases.

Investing activities in fiscal 2009 used $434.1 million of cash, which is attributed to $473.7 million of additions to properties and equipment, offset by approximately $39.4 million in proceeds from the sales of assets. Additions to properties and equipment were comprised of approximately $61.2 million in capitalized major repair costs, $410.6 million for the construction of offshore marine vessels and $1.9 million of other properties and equipment purchases.

Financing Activities

Fiscal 2011 financing activities provided $328.4 million of cash, which included $425.0 million of privately placed unsecured debt borrowings, $165.0 million of credit facility borrowings, $8.7 million of proceeds from the issuance of common stock from stock option exercises and $1.2 million tax benefit on stock options exercised during the period. Proceeds were partially offset by $190.0 million used to repay debt; $51.5 million used for the quarterly payment of common stock dividends of $0.25 per common share; $20.0 million used to repurchase the company’s common stock; and $10.0 million of debt issuance costs incurred in connection with the issuance of the company’s September 2010 senior notes (inclusive of the $6.2 million cost of an interest rate swap) and the amendment and extension of the company’s revolving credit facility as discussed above.

Fiscal 2010 financing activities used $57.5 million of cash, which is primarily the result of $51.7 million used for the payment of common stock dividends of $1.00 per common share and $7.7 million of debt issuance costs related to the company’s new revolving credit agreement. Uses of cash were slightly offset by $1.8 million of proceeds from the issuance of common stock resulting from stock option exercises and $0.1 million tax benefit on stock options exercised during the year.

Fiscal 2009 financing activities used $109.2 million of cash, which is primarily the result of $53.6 million used to repurchase the company’s common stock, $51.5 million used for the payment of common stock dividends of $1.00 per common share, $10.1 million of principal payments on capitalized lease obligations and $0.6 million tax liability on stock option exercises. Uses of cash were partially offset by $6.6 million of proceeds from the issuance of common stock resulting stock option exercises during the year.

Other Liquidity Matters

Vessel Construction. The company’s vessel construction program has been designed to replace over time the company’s older fleet of vessels with fewer, larger and more efficient vessels, while also opportunistically revamping the size and capabilities of the company’s fleet. The company anticipates using future operating cash flows, existing borrowing capacity and new borrowings or lease arrangements to fund current and future commitments in connection with the fleet renewal and modernization program. The company continues to evaluate its fleet renewal program, whether through new construction or acquisitions, relative to other investment opportunities and uses of cash, including the current share repurchase authorization, and in the context of current conditions in the credit and capital markets.

 

-55-


Table of Contents
Index to Financial Statements

At March 31, 2011, the company had approximately $245.7 million of cash and cash equivalents. In addition, there were no borrowings outstanding under available credit facilities at March 31, 2011, and the full $575.0 million of such credit facilities were available at March 31, 2011.

Currently the company is experiencing substantial delay with one fast, crew/supply boat under construction in Brazil that was originally scheduled to be delivered in September of 2009. On April 5, 2011, pursuant to the vessel construction contract, the company sent the subject shipyard a letter initiating arbitration in order to resolve disputes of such matters as the shipyard’s failure to achieve payment milestones, its failure to follow the construction schedule, and its failure to timely deliver the vessel.

The company generally requires shipyards to provide third party credit support in the event that vessels are not completed and delivered in accordance with the terms of the shipbuilding contracts. That third party credit support typically guarantees the return of amounts paid by the company, and generally takes the form of refundment guarantees or standby letters of credit issued by major financial institutions located in the country of the shipyard. While the company seeks to minimize its shipyard credit risk by requiring these instruments, the ultimate return of amounts paid by the company in the event of shipyard default is still subject to the creditworthiness of the shipyard and the provider of the credit support, as well as the company’s ability to successfully pursue legal action to compel payment of these instruments. When third party credit support is not available or cost effective, the company endeavors to limit its credit risk through cash deposits and other contract terms with the shipyard and other counterparties.

Merchant Navy Officers Pension Fund. Certain current and former subsidiaries of the company are, or were, participating employers in an industry-wide multi-employer retirement fund in the United Kingdom, known as the Merchant Navy Officers Pension Fund (MNOPF). The company has been informed by the trustee of the MNOPF that the fund has a deficit that will require contributions from the participating employers. The amount and timing of the company’s share of the fund’s deficit depends on a number of factors, including updated calculations of the total fund deficit, theories of contribution imposed as determined by and within the scope of the Trustee’s authority, the number of then participating solvent employers, and the final formula adopted to allocate the required contribution among such participating employers. The company recorded an additional liability of $6.0 million and made payments totaling $0.9 million into the fund during fiscal 2011. No additional liabilities were recorded during fiscal 2010, and during fiscal 2009, the company recorded a liability of $1.2 million. In the future, the fund’s trustee may claim that the company owes additional amounts for various reasons, including negative fund investment returns in a depressed global market as reflected in a preliminary future actuarial valuation, or the inability of other assessed parties to contribute their share of respective allocations, failing which, the company and other solvent participating employers will be asked for additional contributions. The company is in discussions with the fund’s trustee about the trustee’s recent unilateral decision to accelerate previously agreed installment payments and require the company to pay outstanding deficit contributions of $9.6 million immediately. The company has objected to that decision as there has been no change in circumstances since the last valuation that would justify the decision by the trustee to accelerate the installment payments previously permitted. As of March 31, 2011, $9.6 million remains payable to MNOPF based on current assessments, all of which has been accrued.

Supplemental Retirement Plan. The supplemental plan was amended in December 2008 to allow participants the option to elect a lump sum benefit in lieu of other payment options currently provided by the plan. As a result of the amendment, certain participants received a lump sum distribution in July 2009 in settlement of the supplemental plan obligation. The aggregate payment to those participants electing the lump sum distribution in July 2009 was $8.7 million. A settlement loss of $3.6 million was recorded in general and administrative expenses during the second quarter of fiscal 2010.

Included in other assets at March 31, 2011 and 2010, is $18.0 million and $16.2 million, respectively, of investments held in a Rabbi Trust for the benefit of participants in the supplemental plan. The carrying value of the trust assets at March 31, 2011, includes $0.5 million (net of income tax expense of $0.3 million) of unrealized gains, while the trust assets at March 31, 2010 include $0.8 million (net of income tax expense of $0.5 million) of unrealized losses, both of which are included in accumulated other comprehensive income (other stockholders’ equity). To the extent that trust assets are liquidated to fund benefit payments, gains or losses, if any, will be recognized at that time.

 

-56-


Table of Contents
Index to Financial Statements

Venezuelan Operations. The company has previously reported that in May 2009 the Venezuelan National Assembly enacted a law (the Reserve Law) whereby the Bolivarian Republic of Venezuela (Venezuela) reserved to itself assets and services related to maritime activities on Lake Maracaibo. The company also previously reported that in May 2009, Petróleos de Venezuela, S.A. (PDVSA), the Venezuelan national oil company, invoking the Reserve Law, took possession of (a) 11 of the company’s vessels that were then supporting PDVSA operations in the Lake Maracaibo region, (b) the company’s shore-based facility adjacent to Lake Maracaibo and (c) certain other related assets. The company has also previously reported that in July 2009, Petrosucre, S.A. (Petrosucre), a subsidiary of PDVSA, took control of four additional company vessels. As a consequence of these measures, the company (i) no longer has possession or control of those assets, (ii) no longer operates them or provides support for their operations, and (iii) no longer has any other vessels or operations in Venezuela.

As a result of the May 2009 seizure of the 11 vessels and other assets discussed above, the company recorded a charge of $3.75 million ($2.9 million after tax, or $0.06 per common share), during the quarter ended June 30, 2009, to write off the net book value of the assets seized. As a result of the July 2009 vessel seizures, the company recorded a charge of $0.5 million ($0.4 million after tax, or $0.01 per common share) during the quarter ended September 30, 2009, to write off the net book value of those assets.

As a result of the asset seizures referred to above, the lack of further operations in Venezuela, and the continuing uncertainty about the timing and amount of the compensation that the company may collect in the future (including compensation for the taking of the accounts receivable payable by PDVSA and Petrosucre), the company recorded a $44.8 million ($44.8 million after tax, or $0.87 per common share) provision during the quarter ended June 30, 2009, to fully reserve accounts receivable payable by PDVSA and Petrosucre.

As previously reported by the company, the company has filed with the International Centre for Settlement of Investment Disputes (ICSID) a Request for Arbitration against the Republic of Venezuela seeking compensation for the expropriation of the company’s Venezuelan investments. On January 24, 2011, the arbitration tribunal, appointed under the ICSID Convention to resolve the investment dispute, held its first session on procedural issues in Washington, D.C. The arbitration tribunal established an initial briefing and hearing schedule related to jurisdictional issues that extends through the spring of 2012. The company continues diligently to prosecute its claim in the arbitration. While the company believes, after consultation with its advisors, that it is entitled to full reparation for the losses suffered as a result of the actions taken by the Republic, there can be no assurances that the company will prevail in the arbitration.

On March 31, 2010, the company entered into a Settlement and Release with its marine insurers to resolve the claim the company had made under its marine insurance policy for the total loss of the 15 vessels seized by Venezuela. Under the Settlement and Release, the underwriters paid, subject to certain conditions, $8.2 million (the Settlement Payment) in full and final settlement of the claim. Those conditions include a requirement that the company continue to prosecute its ICSID arbitration claim and reimburse the underwriters the Settlement Payment (less certain expenses) if and when the company receives payment from Venezuela. Under the Settlement and Release, the company continues to retain ownership of the claims in arbitration and the underwriters have waived any and all subrogation rights. The Settlement Payment does not represent full reparation of the losses suffered by the company as a consequence of the expropriation of its investments in Venezuela. The $8.2 million payment by the underwriters triggered an obligation by the company under the company’s insurance program to pay an additional $2.8 million in insurance premium to its underwriters and the company has paid that amount. Both the $8.2 million payment from the underwriters and the $2.8 million payment to the underwriters were made in the first quarter of fiscal 2011.

Brazilian Customs. In April 2011, two Brazilian subsidiaries of Tidewater were notified by the Customs Office in Macae, Brazil that they were jointly and severally being assessed fines amounting to approximately $98.7 million. The assessment of these fines is for the alleged failure of these subsidiaries to obtain import licenses with respect to 17 Tidewater vessels that provided Brazilian offshore vessel services to Petrobras, the Brazilian national oil company, over a three-year period ending December 2009. Tidewater and its Brazilian subsidiaries believe, that vessels that provide services under contract to the Brazilian offshore oil and gas industry are deemed, under applicable law and regulations, to be temporarily imported into Brazil, and making the vessel owners exempt from obtaining import licenses for such vessels. The Macae Customs Office has now, without a change in the underlying law, taken the position that the temporary importation exemption is only available to new, and not used, goods imported into Brazil and therefore it was improper for the company

 

-57-


Table of Contents
Index to Financial Statements

to deem its vessels as being temporarily imported. The fines have been assessed based on this new interpretation of Brazilian customs law taken by the Macae Office. The company believes that the assessment is without legal justification and that the Macae Customs Office has misinterpreted applicable Brazilian law on duties and customs. The company intends to vigorously contest these fines (which it has not paid nor accrued for) and, based on the advice of its Brazilian counsel believes that it has a high probability of success with respect to the overturn of the entire amount of the fines, either at the administration appeal level or, if necessary, in Brazilian courts. The company believes that the ultimate resolution will not have a material effect on the consolidated financial statements.

Legal Proceedings. Various legal proceedings and claims are outstanding which arose in the ordinary course of business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions, will not have a material adverse effect on the company’s financial position, results of operations, or cash flows. Information related to various commitments and contingencies, including legal proceedings, is disclosed in Note (10) of Notes to Consolidated Financial Statements included in Item 8 of this report.

Contractual Obligations and Contingent Commitments

Contractual Obligations

The following table summarizes the company’s consolidated contractual obligations as of March 31, 2011 and the effect such obligations, inclusive of interest costs, are expected to have on the company’s liquidity and cash flows in future periods.

 

0000000000000 0000000000000 0000000000000 0000000000000 0000000000000 0000000000000 0000000000000
   
(In thousands)           Payments Due by Fiscal Year  
   
     Total      2012      2013      2014      2015      2016     

More Than

5 Years

 
   

September 2010 Senior Notes

   $ 425,000                                         42,500         382,500   
   

September 2010 Senior Notes Interest

     158,879         18,041         18,042         18,041         18,041         17,693         69,021   
   

July 2003 Senior Notes

     275,000         40,000         60,000         140,000                 35,000           
   

July 2003 Senior Notes Interest

     25,499         10,970         8,692         3,685         1,614         538           
   

Uncertain tax positions (A)

     18,469         2,195         8,133         2,968         3,077         1,636         460   
   

Operating leases

     11,108         5,227         2,898         1,441         476         188         878   
   

Bareboat charter leases

     63,245         17,626         17,627         17,609         8,079         2,304           
   

Vessel purchase obligations

     86,072         86,072