Quarterly Report for the Period Ended September 30, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 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   72-0487776
(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

Not Applicable

(Former name or former address, if changed since last report)

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 of 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 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

51,898,578 shares of Tidewater Inc. common stock $.10 par value per share were outstanding on October 21, 2011. Registrant has no other class of common stock outstanding.

 

1


PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

TIDEWATER INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

 

 
ASSETS    September 30,
2011       
     March 31,   
2011       
 

 

 

Current assets:

     

Cash and cash equivalents

   $ 302,186             245,720       

Trade and other receivables, net

     287,475             272,467       

Marine operating supplies

     53,517             50,748       

Other current assets

     14,865             10,212       

 

 

Total current assets

     658,043             579,147       

 

 

Investments in, at equity, and advances to unconsolidated companies

     38,415             39,044       

Properties and equipment:

     

Vessels and related equipment

     3,881,444             3,910,430       

Other properties and equipment

     92,854             85,589       

 

 
     3,974,298             3,996,019       

Less accumulated depreciation and amortization

     1,185,490             1,294,239       

 

 

Net properties and equipment

     2,788,808             2,701,780       

 

 

Goodwill

     297,822             328,754       

Other assets

     113,119             99,391       

 

 

Total assets

   $ 3,896,207             3,748,116       

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

 

 

Current liabilities:

     

Accounts payable

     55,259             45,177       

Accrued expenses

     131,067             120,869       

Accrued property and liability losses

     3,825             3,846       

Other current liabilities

     21,711             13,697       

 

 

Total current liabilities

     211,862             183,589       

 

 

Long-term debt

     825,000             700,000       

Deferred income taxes

     211,423             216,735       

Accrued property and liability losses

     6,732             5,327       

Other liabilities and deferred credits

     128,630             128,521       

Commitments and Contingencies Note (6)

     

Stockholders’ equity:

     

Common stock of $0.10 par value, 125,000,000 shares authorized, issued 51,898,578 shares at September 30, 2011 and 51,876,038 shares at March 31, 2011

     5,190             5,188       

Additional paid-in capital

     95,848             90,204       

Retained earnings

     2,430,474             2,436,736       

Accumulated other comprehensive loss

     (18,952)            (18,184)      

 

 

Total stockholders’ equity

     2,512,560             2,513,944       

 

 

Total liabilities and stockholders’ equity

   $       3,896,207             3,748,116       

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

2


TIDEWATER INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except share and per share data)

 

 
     Quarter Ended
September 30,
         Six Months Ended
September 30,
 
     2011     2010               2011     2010       

 

 

Revenues:

           

Vessel revenues

   $ 248,412        266,870                501,727        528,866        

Other marine revenues

     2,482        230                3,774        759        

 

 
     250,894        267,100                505,501        529,625        

 

 

Costs and expenses:

           

Vessel operating costs

     161,290        169,892                313,592        324,475        

Costs of other marine revenues

     2,031        203                3,262        698        

Depreciation and amortization

     33,807        35,832                67,556        70,795        

Goodwill impairment

     30,932        ---                30,932        ---        

General and administrative

     37,773        37,919                75,354        70,694        

Gain on asset dispositions, net

     (9,458     (3,638)               (11,175     (9,196)       

 

 
     256,375        240,208                479,521        457,466        

 

 

Operating income

     (5,481     26,892                25,980        72,159        

Other income (expenses):

           

Foreign exchange gain (loss)

     1,659        (436)               2,473        1,174        

Equity in net earnings of unconsolidated companies

     3,456        2,785                5,945        5,475        

Interest income and other, net

     766        2,029                1,956        2,407        

Interest and other debt costs

     (4,766     (1,686)               (8,827     (2,759)       

 

 
     1,115        2,692                1,547        6,297        

 

 

Earnings (loss ) before income taxes

     (4,366     29,584                27,527        78,456        

Income tax expense

     510        10,181                7,845        19,222        

 

 

Net earnings (loss)

   $ (4,876     19,403                19,682        59,234        

 

 

Basic earnings (loss) per common share

   $ (0.10     0.38                0.38        1.16        

 

 

Diluted earnings (loss) per common share

   $ (0.09     0.38                0.38        1.15        

 

 

Weighted average common shares outstanding

     51,296,924        51,003,348                51,287,644        51,165,791        

Dilutive effect of stock options and restricted stock

     281,129        153,819                298,328        193,872        

 

 

Adjusted weighted average common shares

     51,578,053        51,157,167                51,585,972        51,359,663        

 

 

Cash dividends declared per common share

   $ 0.25        0.25                0.50        0.50        

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3


TIDEWATER INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 
          Six Months Ended
September  30,
 
          2011        2010      

 

 

Operating activities:

        

Net earnings

    $        19,682           59,234       

Adjustments to reconcile net earnings to net cash provided by operating activities:

        

Depreciation and amortization

      67,556           70,795       

Provision (benefit) for deferred income taxes

      (20,819        (10,660)      

Gain on asset dispositions, net

      (11,175        (9,196)      

Goodwill impairment

      30,932           ---       

Equity in earnings of unconsolidated companies, net of dividends

      629           8,283       

Compensation expense - stock-based

      4,944           6,115       

Excess tax benefits on stock options exercised

      (124        (195)      

Changes in assets and liabilities, net:

        

Trade and other receivables

      (15,008        2,219       

Marine operating supplies

      (2,769        (2,285)      

Other current assets

      (4,653        (7,245)      

Accounts payable

      (1,751        522       

Accrued expenses

      8,204           15,412       

Accrued property and liability losses

      (21        (887)      

Other current liabilities

      7,272           17,003       

Other liabilities and deferred credits

      2,639           3,085       

Other, net

      1,644           1,159       

 

 

Net cash provided by operating activities

      87,182           153,359       

 

 

Cash flows from investing activities:

        

Proceeds from sales of assets

      24,616           18,368       

Proceeds from insurance settlements on Venezuela seized vessels

      ---           8,150       

Additions to properties and equipment

      (155,058        (391,463)      

 

 

Net cash used in investing activities

      (130,442        (364,945)      

 

 

Cash flows from financing activities:

        

Principal payments on debt

      (40,000        (75,000)      

Debt borrowings

      165,000           165,000       

Debt issuance costs

      (234        (6,184)      

Proceeds from exercise of stock options

      725           1,919       

Cash dividends

      (25,889        (25,773)      

Excess tax benefits on stock options exercised

      124           195       

Stock repurchases

      ---           (19,988)      

 

 

Net cash provided by financing activities

      99,726           40,169       

 

 

Net change in cash and cash equivalents

      56,466           (171,417)      

Cash and cash equivalents at beginning of period

      245,720           223,070       

 

 

Cash and cash equivalents at end of period

    $        302,186           51,653       

 

 

Supplemental disclosure of cash flow information:

        

Cash paid during the period for:

        

Interest

    $        19,605           8,463       

Income taxes

    $        24,444           23,649       

Non-cash investing activities:

        

Additions to properties and equipment

    $        11,833           ---       

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(1)

INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements for the interim periods presented herein have been prepared in conformity with United States generally accepted accounting principles and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated balance sheets and the condensed consolidated statements of earnings and cash flows at the dates and for the periods indicated as required by Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (SEC). Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the company’s Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 19, 2011.

The unaudited condensed consolidated financial statements include the accounts of Tidewater Inc. and its subsidiaries. Intercompany balances and transactions are eliminated in consolidation. The company uses the equity method to account for equity investments over which the company exercises significant influence but does not exercise control and is not the primary beneficiary. All per share information included in this document is on a diluted earnings per share basis.

Reclassifications

In connection with a change in reportable segments, certain prior period amounts have been reclassified to conform to the September 30, 2011 presentation of our segments with no effect on net earnings or retained earnings. Please refer to Note (10) – Segment and Geographical Distributions of Operations to these Unaudited Condensed Consolidated Financial Statements.

 

(2)

STOCKHOLDERS’ EQUITY

Common Stock Repurchase Program

In May 2011, the company’s Board of Directors replaced its then existing July 2009 share repurchase program with a new $200.0 million repurchase program that is in effect 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. 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 will evaluate share repurchase opportunities relative to other investment opportunities and in the context of current conditions in the credit and capital markets. At September 30, 2011, the entire $200.0 million authorization remains available to repurchase shares under the May 2011 share repurchase program.

In July 2009, the Board of Directors had previously authorized the company to repurchase up to $200.0 million in shares of its common stock in open-market or privately-negotiated transactions. The authorization of the July 2009 repurchase program ended in May 2011.

The value of common stock repurchased, along with number of shares repurchased, and average price paid per share are as follows:

 

     Quarter Ended
    September 30,    
                  Six Months Ended         
September 30,
 
(In thousands, except share and per share data)    2011      2010                   2011      2010       

 

 

Value of common stock repurchased

   $         ---         ---                ---         20,000        

Shares of common stock repurchased

     ---         ---                ---         486,800        

Average price paid per common share

   $ ---         ---                ---         41.06        

 

 

 

5


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Dividends

The Board of Directors declared the following dividends for the quarters and six-month periods ended September 30, 2011 and 2010, respectively. The declaration of dividends is at the discretion of the company’s Board of Directors.

 

     Quarter Ended
            September 30,        
              Six Months Ended    
September 30,
 
(In thousands, except dividend per share)    2011      2010               2011      2010      

 

 

Dividends declared

   $     12,975         12,849                25,944         25,792       

Dividend per share

     0.25         0.25                0.50         0.50       

 

 

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period. The components of comprehensive income (loss), net of related tax, are as follows:

 

     Quarter Ended
September 30,
                      Six Months Ended             
September 30,
 
(In thousands)    2011     2010               2011     2010      

 

 

Net income (loss)

   $         (4,876     19,403                19,682        59,234       

Other comprehensive income (loss):

            

Unrealized (loss) gain on available-for-sale securities

     (980     (138)               (1,001     (218)      

Qualifying derivatives

     ---        (3,974)               ---        (3,974)      

Amortization of loss on derivative contract

     117        ---                233        ---       

 

 

Comprehensive income (loss)

   $ (5,739     15,291                18,914        55,042       

 

 

 

(3)

INCOME TAXES

Income tax expense for interim periods is based on estimates of the effective tax rate for the entire fiscal year. The effective tax rate applicable to pre-tax earnings, for the quarter and the six-month periods ended September 30, 2011 and 2010, are as follows:

 

     Quarter Ended
            September 30,        
              Six Months Ended    
September 30,
 
     2011      2010             2011      2010          

 

 

Effective tax rate applicable to pre-tax earnings

     11.7%         34.4%            28.5%         24.5%         

 

 

The effective tax rate was higher during the six months ended September 30, 2011, as compared to the six months ended September 30, 2010, primarily because of the current expected mix of pre-tax earnings between the company’s U.S. and international businesses and an expectation for lower estimated operating margin in certain jurisdictions that tax on the basis of deemed profits.

The company’s balance sheet at September 30, 2011 reflects the following in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes:

 

(In thousands)    September 30,
2011        
 

 

 

Tax liabilities for uncertain tax positions

   $         20,626           

Income tax payable

     16,807           

 

 

The tax liabilities for uncertain tax positions are attributable to a permanent establishment issue related to a foreign joint venture and a tax audit of a foreign subsidiary. Penalties and interest related to income tax liabilities are included in income tax expense. Income tax payable is included in other current liabilities.

 

6


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Unrecognized tax benefits at September 30, 2011, which would lower the effective tax rate if realized, are as follows:

 

(In thousands)          September 30,
2011
 

 

 

Unrecognized tax benefit related to state tax issues

    $         8,591           

Interest receivable on unrecognized tax benefit related to state tax issues

       31           

 

 

With limited exceptions, the company is no longer subject to tax audits by United States (U.S.) federal, state, local or foreign taxing authorities for years prior to 2004. The company has ongoing examinations by various U.S. federal, state and foreign tax authorities and does not believe that the results of these examinations will have a material adverse effect on the company’s financial position or results of operations.

 

(4)

EMPLOYEE BENEFIT PLANS

U.S. Defined Benefit Pension Plan

The company has a defined benefit pension plan that covers certain U.S. citizen employees and employees who are permanent residents of the United States. Benefits are based on years of service and employee compensation. In December 2009, the Board of Directors amended the pension plan to discontinue the accrual of benefits once the plan was frozen on December 31, 2010. On that date, previously accrued pension benefits under the pension plan were frozen for the approximately 60 active employees who participated in the plan. This change did not affect benefits earned by participants prior to January 1, 2011. The active employees who participated in the pension plan have become participants in the company’s defined contribution retirement plan effective January 1, 2011. These changes are providing the company more predictable retirement plan costs and cash flows. By changing to a defined contribution plan and freezing the benefits accrued under the predecessor defined benefit plan, the company’s future benefit obligations and requirements for cash contributions for the frozen pension plan are reduced. Losses associated with the curtailment of the pension plan were immaterial. The company did not contribute to the defined benefit pension plan during the quarter and six-month periods ended September 30, 2011 and 2010, and does not expect to contribute to the plan during the remaining quarters of fiscal 2012.

Supplemental Executive Retirement Plan

The company offers a supplemental retirement plan (supplemental plan) that provides pension benefits to certain employees in excess of those allowed under the company’s tax-qualified pension plan. Assets of this non-contributory defined benefit plan are held in a Rabbi Trust, invested in a variety of marketable securities, none of which is Tidewater stock. The Rabbi Trust assets, which are included in “other assets” in the company’s consolidated balance sheet, are recorded at fair value with unrealized gains or losses included in other comprehensive income. Effective March 4, 2010, the supplemental plan was closed to new participation. The company did not contribute to the supplemental plan during the quarters and six-month periods ended September 30, 2011 and 2010, and does not expect to contribute to the plan during the remaining quarters of fiscal 2012. The supplemental plan is a non-qualified plan and, as such, the company is not required to make contributions to the supplemental plan.

Investments held in a Rabbi Trust for the benefit of participants in the supplemental plan are included in other assets. The following table summarizes the carrying value of the trust assets, including unrealized gains or losses at September 30, 2011 and March 31, 2011:

 

(In thousands)          September 30,
2011
       March 31,
2011
 

 

 

Investments held in Rabbi Trust

    $         16,758                   18,043         

Unrealized (losses) gains in carrying value of trust assets

       (479)                  523         

Unrealized (losses) gains in carrying value of trust assets are net of income tax expense of

       (257)                  281         

Obligations under the supplemental plan

       27,542                   26,197         

 

 

 

7


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The unrealized gains or losses in the carrying value of the trust assets, net of income tax expense, 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. The company’s obligations under the supplemental plan are included in ‘accrued expenses’ and ‘other liabilities and deferred credits’ on the consolidated balance sheet.

Postretirement Benefit Plan

Qualified retired employees currently are covered by a program which provides limited health care and life insurance benefits. Costs of the program are based on actuarially determined amounts and are accrued over the period from the date of hire to the full eligibility date of employees who are expected to qualify for these benefits. This plan is funded through company payments as benefits are paid out.

Net Periodic Benefit Costs

The net periodic benefit cost for the company’s U.S. defined benefit pension plan and the supplemental plan (referred to collectively as “Pension Benefits”) and the postretirement health care and life insurance plan (referred to collectively as “Other Benefits”) is comprised of the following components:

 

     Quarter Ended
            September 30,        
                  Six Months Ended         
September 30,
 
(In thousands)    2011      2010               2011      2010      

 

 

Pension Benefits:

              

Service cost

   $ 219          230                  438           460       

Interest cost

     1,103          1,115                  2,206           2,230       

Expected return on plan assets

     (644)         (620)                 (1,288)          (1,240)      

Amortization of prior service cost

     12          4                  24           8       

Recognized actuarial loss

     440          425                  880           850       

 

 

Net periodic benefit cost

   $     1,130          1,154                  2,260           2,308       

 

 

Other Benefits:

              

Service cost

   $ 139          145                  278           290       

Interest cost

     345          365                  690           730       

Amortization of prior service cost

     (508)         (508)                 (1,016)          (1,016)      

Recognized actuarial (gain) loss

     (1)         (5)                 (2)          (10)      

 

 

Net periodic benefit cost

   $ (25)         (3)                 (50)          (6)      

 

 

 

(5)

INDEBTEDNESS

Revolving Credit and Term Loan Agreement

Borrowings under the company’s $575.0 million amended and restated revolving credit facility (“credit facility”), which includes a $125.0 million term loan (“term loan”) and a $450.0 million revolving line of credit (“revolver”) 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 facilities range from 0.15 to 0.35% based on the company’s funded debt to total capitalization ratio. The facilities provide for a maximum ratio of consolidated debt to consolidated total capitalization of 55% 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. 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 company’s amended and restated revolving credit facility matures in January 2016.

In July 2011, the credit facility was amended to allow 365 days (originally 180 days) from the closing date (“delayed draw period”) to make multiple draws under the term loan. Principal repayments of any term loan borrowings are payable in quarterly installments beginning in the quarter ending September 30, 2013 in amounts equal to 1.25% of the total outstanding borrowings as of July 26, 2013.

 

8


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

There were no borrowings outstanding under available credit facilities at September 30, 2011, and the full $575.0 million of such credit facilities was available at September 30, 2011 for future financing needs.

Senior Debt Notes

August 2011 Senior Notes

On August 15, 2011, the company issued $165.0 million of senior unsecured notes to a group of institutional investors. A summary of the aggregate amount of senior unsecured notes outstanding at September 30, 2011 that were issued to a group of institutional investors in August 2011 are as follows:

 

(In thousands, except weighted average data)        September 30,
2011      
 

 

 

Aggregate debt outstanding

  $      165,000         

Weighted average remaining life in years

       9.1         

Weighted average coupon rate on notes outstanding

       4.42%     

Fair value of debt outstanding

       173,272         

 

 

The multiple series of notes were originally issued with maturities ranging from approximately eight to 10 years. The notes may be retired before their respective scheduled maturity dates subject only to a customary make-whole provision. The terms of the notes require that the company maintain a minimum ratio of debt to consolidated total capitalization that does not exceed 55%.

September 2010 Senior Notes

On October 15, 2010, the company completed the sale of $310.0 million of senior unsecured notes, and the sale of an additional $115.0 million of the notes was completed on December 30, 2010. A summary of the aggregate amount of senior unsecured notes outstanding at September 30, 2011 and March 31, 2011 that were issued to a group of institutional investors in September 2010 are as follows:

 

(In thousands, except weighted average data)         September 30,    
2011           
     March 31,    
2011       
 

Aggregate debt outstanding

  $      425,000                    425,000          

Weighted average remaining life in years

       8.1                    8.6          

Weighted average coupon rate on notes outstanding

       4.25%                 4.25%       

Fair value of debt outstanding

       445,828                    404,352          

 

 

The multiple series of these notes were originally issued with maturities ranging from five to 12 years. The notes may be retired before their respective scheduled maturity dates subject only to a customary make-whole provision. The terms of the notes require that the company maintain a minimum ratio of debt to consolidated total capitalization that does not exceed 55%.

Included in accumulated other comprehensive income at September 30, 2011 and March 31, 2011, is an after-tax loss of $3.5 million ($5.5 million pre-tax), and $3.8 million ($5.8 million pre-tax), respectively, 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.

 

9


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

July 2003 Senior Notes

In July 2003, the company completed the sale of $300.0 million of senior unsecured notes. A summary of the aggregate amount of remaining senior unsecured notes outstanding at September 30, 2011 and March 31, 2011 that were issued in July 2003 are as follows:

 

(In thousands, except weighted average data)           September 30,    
2011              
     March 31,    
2011       
 

Aggregate debt outstanding

    $         235,000                275,000          

Weighted average remaining life in years

       1.9                2.1          

Weighted average coupon rate on notes outstanding

       4.43%             4.39%       

Fair value of debt outstanding

       244,104                285,478          

 

 

The multiple series of notes were originally issued with maturities ranging from seven to 12 years. 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 customary make-whole premium. The terms of the notes provide for a maximum ratio of consolidated debt to total capitalization of 55%.

Notes totaling $40.0 million matured in July 2011 but were not classified as current maturities of long-term debt because the company had the ability to fund this maturity with its credit facility. Notes totaling $60.0 million will mature in July 2012 but are not classified as current maturities of long-term debt because the company has the ability, if necessary, to fund this maturity with its credit facility.

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 the quarter and the six-month periods ended September 30, 2011 and 2010 are as follows:

 

           Quarter Ended
September 30,
          Six Months Ended      
September 30,
 
(In thousands)          2011      2010             2011      2010  

 

 

Interest and debt costs incurred, net of interest capitalized

    $         4,766         1,686              8,827         2,759   

Interest costs capitalized

       4,188         3,316              8,598         6,958   

 

 

Total interest and debt costs

    $         8,954         5,002              17,425         9,717   

 

 

 

(6)

COMMITMENTS AND CONTINGENCIES

Vessel Commitments

The table below summarizes the company’s various vessel commitments to acquire and construct new vessels, by vessel type, as of September 30, 2011:

 

(In thousands, except vessel count)    Number
of
Vessels
    

Total

Cost

     Invested
Through
9/30/11
     Remaining    
Balance    
09/30/11    
 

Vessels under construction:

           

Anchor handling towing supply

     6         $         107,323         86,808         20,515       

Platform supply vessels

     17           530,913         207,662         323,251       

Crewboats

     5           22,128         10,776         11,352       

 

 

Total vessels under construction

     28           660,364         305,246         355,118       

 

 

Vessels to be purchased:

           

Anchor handling towing supply

     10           136,625         19,565         117,060       

Platform supply vessels

     2           38,035         7,501         30,534       

 

 

Total vessels to be purchased

     12           174,660         27,066         147,594       

 

 

Total vessel commitments

     40         $ 835,024         332,312         502,712       

 

 

 

10


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The total cost of the various vessel new-build commitments includes contract costs and other incidental costs. The company has vessels under construction 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.). The anchor handling towing supply vessels under construction range between 5,150 and 8,200 brake horsepower (BHP), while the platform supply vessels under construction range between 1,900 and 6,360 deadweight tons of cargo capacity. Scheduled delivery for the new-build vessels began in October 2011, with delivery of the final new-build vessel expected in July 2013.

Regarding the vessels to be purchased, the company took possession of two of the 10 anchor handling towing supply vessels in October 2011 for a total cost of $23.7 million. The two acquired vessels are 5,150 BHP anchor handling towing supply vessels. The company will acquire the remaining eight anchor handling towing supply vessels (six of which have 5,150 BHP and two of which have 9,000 BHP), for a total aggregate cost of $113.0 million at various times during the remaining months of fiscal 2012. The company plans to take possession of the two platform supply vessels, which have 3,500 deadweight tons of cargo capacity, in February and April of 2012 for a total aggregate cost of $38.0 million.

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.

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 continues to pursue that arbitration.

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.

Completion of Internal Investigation and Settlements with United States and Nigerian Agencies

The company has previously reported that special counsel engaged by the company’s Audit Committee had completed its internal investigation into certain Foreign Corrupt Practices Act (FCPA) matters and reported its findings to the Audit Committee. The substantive areas of the internal investigation have been reported publicly by the company in prior filings.

Special counsel reported to the Department of Justice (DOJ) and to the SEC the results of the investigation, and the company entered into separate agreements with the two agencies to resolve the matters reported by special counsel. Both of these agreements were approved by a federal district court judge in fiscal 2011 and the principal terms and conditions of the agreements with these two agencies are described in the company’s 10-K for the fiscal year ended March 31, 2011.

 

11


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The company also 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 the company’s Nigerian operations in 2007 and prior years that were among the matters covered by the company’s previous settlements with the DOJ and SEC. Pursuant to the settlement agreement, the FGN terminated its investigation and agreed not to bring any criminal charges or civil claims against the company or any associated persons arising from these allegations. The other terms and conditions of the agreement between the company and the FGN are described in the company’s Form 10-K for the fiscal year ended March 31, 2011.

Merchant Navy Officers Pension Fund

A current subsidiary of the company is a participating employer 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 amount payable to MNOPF based on assessments was $7.5 million at September 30, 2011 and $9.6 million at March 31, 2011, all of which has been accrued. Payments totaling $2.0 million were made into the fund during the quarter ended September 30, 2011. During the quarter ended September 30, 2010, the company recorded an additional liability of $6.0 million and made payments totaling $0.9 million into the fund. In the future, the fund’s trustee may claim that the company owes additional amounts for various reasons, including negative fund investment returns as reflected in a preliminary future actuarial valuation, or the inability of other assessed participating employers to contribute their share of respective allocations, failing which, the company and other solvent participating employers will be asked for additional contributions. In October 2010, the Trustee advised the company of its intention to accelerate previously agreed installment payments for the company and other participating employers in the scheme. This means that the company is either required to pay the outstanding deficit contribution of approximately $7.5 million at September 30, 2011 immediately or to provide security in a form to be agreed by the Trustee. In discussions with the Trustee, the company was advised that pursuant to the Trustee’s broad discretion, it was reviewing the installment option for all participating employers and that any agreement for payments to be made by installments must be supported by security. The company has objected to that decision. In the interim, the company continues its historical practice to pay the installments as and when they fall due.

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, since that date, agreed several times to extend out the expiration date of the joint venture agreement. The joint venture has never had an interruption in its operations or service. The most recent extension extends the expiration date to December 31, 2011. Tidewater views its continuing ability to obtain contract extensions, the most recent of which is for five months, as a promising indicator that the parties are making progress in the negotiation of a 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

 

12


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

more revenue is derived from our operations in Angola than in or from any of Tidewater’s other countries of operation.

As was the case in prior contract extensions, Sonangol and Tidewater have agreed to continue the Sonatide joint venture past its extended expiration date, on a charter by charter basis, to the extent required to fulfill several new or renewed charterparty agreements with customers in Angola that extend well beyond December 31, 2011. These charterparty agreements cover a substantial portion of our vessels in Angola. Over the course of the last few months, a number of new or renewed charters have been entered into on this basis.

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 ended 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 thus exempt from the import license requirement. 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 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 is vigorously contesting 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 administrative 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.

Potential for Future Brazilian State Tax Assessment

The company is aware that a Brazilian state in which the company has operations has notified two of the company’s competitors that they are liable for unpaid taxes (and penalties and interest thereon) for failure to pay state import taxes with respect to vessels that such competitors operate within the coastal waters of such state pursuant to charter agreements. The import tax being asserted is equal to a percentage (which could be as high as 16% for vessels entering that state’s waters prior to December 31, 2010 and 3% thereafter) of the affected vessels’ declared values. The company understands that the two companies involved are contesting the assessment through administrative proceedings before the taxing authority.

To date, the company’s two Brazilian subsidiaries, as well as vessels for all other competitors (more than a hundred competitors) have not been similarly notified by the Brazilian state that it has an import tax liability related to its vessel activities imported through that state. Although the company has been advised by its Brazilian tax counsel that substantial defenses would be available if a similar tax claim was asserted against the company, if an import tax claim were to be asserted, it could be for a substantial amount given that the company has had substantial and continuing operations through the state (although the amount could fluctuate significantly depending on the administrative determination of the taxing authority as to the rate to apply, the vessels subject to the levy and the time periods covered). In addition, under certain circumstances, the company might be required to post a bond or other adequate security in the amount of the assessment (plus any interest and penalties) if it became necessary to challenge the assessment in a Brazilian court. The statute of limitations for the Brazilian state to levy an assessment of the import tax is five years from the date of a vessel’s entry into Brazil. The company has not yet determined the potential tax assessment and according to the Brazilian tax counsel chances of defeating a possible claim/notification from the State authorities in court are probable. To obtain legal certainty and predictability for future charter agreements and because the company was importing a vessel to start a new charter in Brazil, the company filed a suit on

 

13


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

August 22, 2011 against the Brazilian state and judicially deposited the respective state tax for this newly imported vessel. As of September 30, 2011, no accrual has been recorded for any liability associated with any potential future assessment for previous periods based on management’s assessment, after consultation with Brazilian counsel, that a liability for such taxes was not probable.

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.

The company has previously reported the balance sheet and income statement effect of the Venezuela asset seizure in fiscal 2010. 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 (including the filing of pleadings in accordance with the briefing schedule). 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.

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.

 

(7)

FAIR VALUE MEASUREMENTS

The company follows the provisions of ASC 820, Fair Value Measurements and Disclosures, for financial assets and liabilities that are measured and reported at fair value on a recurring basis. ASC 820 establishes a hierarchy for inputs used in measuring fair value. Fair value is calculated based on assumptions that market participants would use in pricing assets and liabilities and not on assumptions specific to the entity. The statement requires that each asset and liability carried at fair value be classified into one of the following categories:

 

Level 1:

  

Quoted market prices in active markets for identical assets or liabilities

Level 2:

  

Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3:

  

Unobservable inputs that are not corroborated by market data

 

14


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The company measures on a recurring basis and records at fair value investments held by participants in a supplemental executive retirement plan. The following table provides the fair value hierarchy for the plan assets measured at fair value as of September 30, 2011:

 

(In thousands)    Total     Quoted prices in
active markets
(Level 1)
     Significant
observable
inputs
(Level 2)
    

Significant      
unobservable    
inputs      

(Level 3)      

 

Equity securities:

          

Common stock

   $ 7,499        7,499             ---         ---       

Preferred stock

     12        12             ---         ---       

Foreign stock

     443        443             ---         ---       

American depository receipts

     2,101        2,071             30         ---       

Real estate investment trusts

     130        130             ---         ---       

Debt securities:

          

Government debt securities

     3,065        1,306             1,759         ---       

Open ended mutual funds

     2,729        2,729             ---         ---       

Cash and cash equivalents

     1,033        148             885         ---       

 

 

Total

   $ 17,012        14,338             2,674         ---       

Other pending transactions

     (254     (254)            ---         ---       

 

 

Total fair value of plan assets

   $         16,758        14,084             2,674         ---       

 

 

The following table provides the fair value hierarchy for the plan assets measured at fair value as of March 31, 2011:

 

(In thousands)    Total     Quoted prices in
active markets
(Level 1)
     Significant
observable
inputs
(Level 2)
    

Significant      
unobservable    
inputs      

(Level 3)      

 

Equity securities:

          

Common stock

   $ 8,785        8,785             ---         ---       

Preferred stock

     12        12             ---         ---       

Foreign stock

     355        355             ---         ---       

American depository receipts

     2,401        2,384             17         ---       

Real estate investment trusts

     111        111             ---         ---       

Debt securities:

          

Government debt securities

     2,571        1,270             1,301         ---       

Open ended mutual funds

     2,651        2,651             ---         ---       

Cash and cash equivalents

     1,448        362             1,086         ---       

 

 

Total

   $         18,334        15,930             2,404         ---       

Other pending transactions

     (291     (291)            ---         ---       

 

 

Total fair value of plan assets

   $ 18,043        15,639             2,404         ---       

 

 

Other Financial Instruments

The company’s primary financial instruments consist of cash and cash equivalents, trade receivables and trade payables with book values that are considered to be representative of their respective fair values. The company periodically utilizes derivative financial instruments to hedge against foreign currency denominated assets and liabilities, currency commitments, or to lock in desired interest rates. These transactions are generally spot or forward currency contracts or interest rate swaps that are entered into with major financial institutions. Derivative financial instruments are intended to reduce the company’s exposure to foreign currency exchange risk and interest rate risk. The company enters into derivative instruments only to the extent considered necessary to address its risk management objectives and does not use derivative contracts for speculative purposes. The derivative instruments are recorded at fair value using quoted prices and quotes obtainable from the counterparties to the derivative instruments.

Cash Equivalents. The company’s cash equivalents, which are securities with maturities less than 90 days, are held in money market funds or time deposit accounts with highly rated financial institutions. The carrying

 

15


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

value for cash equivalents is considered to be representative of its fair value due to the short duration and conservative nature of the cash equivalent investment portfolio.

Spot Derivatives. Spot derivative financial instruments are short-term in nature and generally settle within two business days. The fair value of spot derivatives approximates the carrying value due to the short-term nature of this instrument, and as a result, no gains or losses are recognized.

The company had two foreign exchange spot contracts outstanding at September 30, 2011, which totaled an aggregate notional value of $1.5 million. The two spot contracts settled by October 3, 2011. The company had nine foreign exchange spot contracts outstanding at March 31, 2011, which totaled an aggregate notional value of $3.6 million. All nine spot contracts settled by April 4, 2011.

Forward Derivatives. Forward derivative financial instruments are generally longer-term in nature but generally do not exceed one year. The accounting for gains or losses on forward contracts is dependent on the nature of the risk being hedged and the effectiveness of the hedge.

At September 30, 2011, the company had two British pound forward contracts outstanding, which are generally intended to hedge the company’s foreign exchange exposure relating to its MNOPF liability as disclosed in Note (6) and elsewhere in this document. The forward contracts have expiration dates between March 2012 and June 2012. The combined change in fair value of the forward contracts was approximately $0.1 million, which was recorded as a foreign exchange gain during the six months ended September 30, 2011, because the forward contracts did not qualify as hedge instruments. All changes in fair value of the forward contracts were recorded in earnings.

At March 31, 2011, the company had three British pound forward contracts outstanding, related to the company’s foreign exchange exposure on its MNOPF liability. The combined change in fair value of these forward contracts at March 31, 2011 was approximately $0.3 million, all of which was recorded as a foreign exchange gain during the fiscal year ended March 31, 2011, because the forward contracts did not qualify as hedge instruments.

The following table provides the fair value hierarchy for the company’s other financial instruments measured as of September 30, 2011:

 

(In thousands)    Total      Quoted prices in
active markets
(Level 1)
     Significant
observable
inputs
(Level 2)
    

Significant
unobservable
inputs

(Level 3)

 

 

 

Money market cash equivalents

   $         255,217              255,217             ---         ---     

Long-term British pound forward derivative contracts

     7,674              ---             7,674         ---     

 

 

Total fair value of assets

   $ 262,891              255,217             7,674         ---     

 

 

The following table provides the fair value hierarchy for the company’s other financial instruments measured as of March 31, 2011:

 

(In thousands)    Total      Quoted prices in
active markets
(Level 1)
     Significant
observable
inputs
(Level 2)
    

Significant
unobservable
inputs

(Level 3)

 

 

 

Money market cash equivalents

   $         222,673              222,673             ---         ---     

Long-term British pound forward derivative contracts

     8,179              ---             8,179         ---     

 

 

Total fair value of assets

   $ 230,852              230,852             8,179         ---     

 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Asset Impairments

The company accounts for long-lived assets in accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets, and reviews long-lived assets for impairment whenever events occur or changes in

 

16


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

circumstances indicate that the carrying amount of assets may not be recoverable. In such evaluation the estimated future undiscounted cash flows generated by an asset group are compared with the carrying amount of the asset group to determine if a write-down may be required. The company estimates cash flows based upon historical data adjusted for the company’s best estimate of future market performance that is based on industry trends. The company uses the discounted cash flow method to determine the estimated fair value of each asset group and compares such estimated fair value, considered Level 3, to the carrying value of each asset group in order to determine if impairment exists. If impairment exists, the carrying value of the asset group is reduced to its estimated fair value. Vessels with similar operating and marketing characteristics are grouped for asset impairment testing.

The below table summarizes the combined fair value of the assets that incurred impairments during the quarters and the six-month periods ended September 30, 2011 and 2010, along with the amount of impairment. The impairment charges were recorded in gain on asset dispositions, net.

 

         Quarter Ended
September 30,
          Six Months Ended      
September 30,    
 
(In thousands, except number of assets)        2011      2010           2011      2010      

 

 

Amount of impairment incurred

  $      256         1,785            2,570         3,093       

Combined fair value of assets incurring impairment

       ---         1,800            3,913         6,295       

 

 

 

(8)

OTHER ASSETS, ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES AND DEFERRED CREDITS

A summary of other assets at September 30, 2011 and March 31, 2011 are as follows:

 

(In thousands)         September 30,
2011      
     March 31,
2011    
 

Recoverable insurance losses

  $      6,732               5,327       

Deferred income tax assets

       57,951               42,444       

Deferred finance charges

       7,625               8,232       

Savings plans and supplemental plan

       28,952               31,263       

Noncurrent tax receivable

       7,743               7,737       

Other

       4,116               4,388       

 

 
  $      113,119               99,391       

 

 

A summary of accrued expenses at September 30, 2011 and March 31, 2011 are as follows:

 

(In thousands)         September 30,
2011      
     March 31,
2011    
 

Payroll and related payables

  $      35,707               37,239       

Commissions payable

       15,510               15,639       

Accrued vessel expenses

       69,328               55,920       

Accrued interest payable

       6,239               9,393       

Other accrued expenses

       4,283               2,678       

 

 
  $      131,067               120,869       

 

 

A summary of other current liabilities at September 30, 2011 and March 31, 2011 are as follows:

 

(In thousands)         September 30,
2011      
     March 31,
2011    
 

Income tax payables

  $      17,575               11,187       

Deferred credits - current

       4,034               2,463       

Dividend payable

       102               47       

 

 
  $      21,711               13,697       

 

 

 

17


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

A summary of other liabilities and deferred credits at September 30, 2011 and March 31, 2011 are as follows:

 

(In thousands)          September 30,
2011
     March 31,
2011
 

 

 

Postretirement benefits liability

    $         26,829                 27,032        

Pension liability

       39,829                 39,085        

Deferred gain on vessel sales

       39,568                 39,568        

Income taxes

       5,779                 5,295        

Other

       16,625                 17,541        

 

 
    $         128,630                 128,521        

 

 

 

(9)

ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued by the FASB that are adopted by the company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the company’s consolidated financial statements upon adoption.

In January 2010, the Financial Accounting Standards Board (FASB) issued ASU No. 2010-06, which amends ASC Topic 820, Fair Value Measurements and Disclosures, to add new disclosure requirements about recurring and nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance was effective for reporting periods beginning after December 15, 2009, except for the Level 3 reconciliation disclosures which were effective for reporting periods beginning after December 15, 2010. The guidance became effective for us on April 1, 2011. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations, or cash flows.

In December 2010, the FASB issued an update to ASC 805, Business Combinations, which requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. The guidance is effective for annual reporting periods beginning on or after December 15, 2010. The guidance became effective for us on April 1, 2011. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations, or cash flows.

 

(10)

SEGMENT AND GEOGRAPHIC DISTRIBUTION OF OPERATIONS

The company follows the disclosure requirements of ASC 280, Segment Reporting. Operating business segments are defined as a component of an enterprise for which separate financial information is available and is evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

During the quarter ended September 30, 2011, our International and United States segments were reorganized to form four new operating segments. We now manage and measure our business performance in four distinct operating segments: Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe. The new segments are reflective of how the company’s Chief Operating Decision Maker (CODM) reviews operating results for the purposes of allocating resources and assessing performance. The company’s CODM is its Chief Executive Officer. Moreover, management decided to reorganize its reporting segments because the company’s Sub-Saharan Africa/Europe and Latin American business regions gained greater significance as a percentage of consolidated revenues and operating profit, while our former United

 

18


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

States segment decreased in its significance to consolidated revenues and operating profit. Prior period disclosures have been adjusted to reflect the change in reportable segments.

The following table provides a comparison of revenues, vessel operating profit, depreciation and amortization, and additions to properties and equipment for the quarters and the six-month periods ended September 30, 2011 and 2010. Vessel revenues and operating costs relate to vessels owned and operated by the company while other operating revenues relate to the activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related businesses.

 

            Quarter Ended
September 30,
          Six Months Ended
September 30,
 
(In thousands)            2011      2010            2011      2010  

Revenues:

                 

Vessel revenues:

                 

Americas

   $           81,892              95,033                 162,569              189,132        

Asia/Pacific

        29,127              42,665                 64,626              85,292        

Middle East/N. Africa

        24,810              22,943                 50,867              44,094        

Sub-Saharan Africa/Europe

        112,583              106,229                 223,665              210,348        

 

 
        248,412              266,870                 501,727              528,866        

Other operating revenues

        2,482              230                 3,774              759        

 

 
   $           250,894              267,100                 505,501              529,625        

 

 

Vessel operating profit:

                 

Americas

   $           9,530              13,050                 21,384              24,670        

Asia/Pacific

        (4,776)             (627)                494              6,854        

Middle East/N. Africa

        (996)             5,257                 (968)             9,806        

Sub-Saharan Africa/Europe

        21,631              18,596                 43,855              43,535        

 

 
        25,389              36,276                 64,765              84,865        

Corporate expenses

        (9,111)             (12,864)                (18,632)             (21,627)       

Goodwill impairment

        (30,932)             —                  (30,932)             —         

Gain on asset dispositions, net

        9,208              3,638                 10,925              9,196        

Other operating expense

        (35)             (158)                (146)             (275)       

 

 

Operating income (loss)

   $           (5,481)             26,892                 25,980              72,159        

 

 

Foreign exchange gain (loss)

        1,659              (436)                2,473              1,174        

Equity in net earnings of unconsolidated companies

        3,456              2,785                 5,945              5,475        

Interest income and other, net

        766              2,029                 1,956              2,407        

Interest and other debt costs

        (4,766)             (1,686)                (8,827)             (2,759)       

 

 

Earnings (loss) before income taxes

   $           (4,366)             29,584                 27,527              78,456        

 

 

Depreciation and amortization:

                 

Americas

   $           9,800              11,783                 19,294              24,033        

Asia/Pacific

        5,039              6,832                 10,153              12,960        

Middle East/N. Africa

        4,138              3,316                 8,740              6,682        

Sub-Saharan Africa/Europe

        13,849              13,246                 27,595              25,907        

Corporate

        981              655                 1,774              1,213        

 

 
   $           33,807              35,832                 67,556              70,795        

 

 

Additions to properties and equipment:

                 

Americas

   $           2,072              2,793                 4,318              6,815        

Asia/Pacific

        277              1,305                 857              1,831        

Middle East/N. Africa

        705              219                 1,153              280        

Sub-Saharan Africa/Europe

        2,540              328                 6,822              1,932        

Corporate (A)

        91,645              234,696                 153,741              380,605        

 

 
   $           97,239              239,341                 166,891              391,463        

 

 

Note A: Included in Corporate are additions to properties and equipment relating to vessels currently under construction which have not yet been assigned to a non-corporate reporting segment as of the dates presented.

 

19


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table provides a comparison of total assets at September 30, 2011 and March 31, 2011:

 

(In thousands)           September 30,
2011      
       March 31,
2011      
 

Total assets:

         

Americas

    $         1,033,968               975,269       

Asia/Pacific

       589,092               583,569       

Middle East/N. Africa

       388,826               369,122       

Sub-Saharan Africa/Europe

       1,334,111               1,286,554       

 

 
       3,345,997               3,214,514       

Investments in, at equity, and advances to unconsolidated companies

       38,415               39,044       

 

 
       3,384,412               3,253,558       

Corporate (A)

       511,795               494,558       

 

 
  $           3,896,207               3,748,116       

 

 

Note A: Included in Corporate are vessels currently under construction which have not yet been assigned to a non-corporate reporting segment. The vessel construction costs will be reported in Corporate until the earlier of the vessels being assigned to a non-corporate reporting segment or the vessels’ delivery. At September 30, 2011 and March 31, 2011, $324.4 million and $355.3 million, respectively, of vessel construction costs are included in Corporate.

The following table discloses the amount of revenue by segment, and in total for the worldwide fleet, along with the respective percentage of total vessel revenue for the quarters and the six-month periods ended September 30, 2011 and 2010:

 

Revenue by vessel class         

Quarter Ended

September 30,

         

Six Months Ended

September 30,

 
(In thousands)          2011      %      2010      %           2011      %      2010      %  

 

 

Americas fleet:

                            

Deepwater vessels

    $         36,639         15%         49,635         19%            73,044         15%         100,937         19%   

Towing-supply/supply

       36,648         15%         37,631         14%            72,334         14%         72,689         14%   

Crew/utility

       8,044         3%         7,166         3%            16,054         3%         14,322         3%   

Offshore tugs

       561         <1%         601         <1%            1,137         <1%         1,184         <1%   

Total

    $         81,892         33%         95,033         36%            162,569         32%         189,132         36%   

Asia/Pacific fleet:

                            

Deepwater vessels

    $         12,264         5%         17,957         7%            28,193         6%         37,073         7%   

Towing-supply/supply

       15,870         6%         23,595         9%            34,314         7%         46,005         9%   

Crew/utility

       144         <1%         246         <1%            387         <1%         489         <1%   

Offshore tugs

       850         <1%         867         <1%            1,733         <1%         1,725         <1%   

Total

    $         29,127         12%         42,665         16%            64,626         13%         85,292         16%   

Middle East/N. Africa fleet:

                            

Deepwater vessels

    $         11,782         5%         6,035         2%            22,533         4%         13,589         3%   

Towing-supply/supply

       11,616         5%         15,165         6%            25,090         5%         27,068         5%   

Offshore tugs

       1,411         1%         1,743         1%            3,243         1%         3,437         1%   

Total

    $         24,810         10%         22,943         9%            50,867         10%         44,094         8%   

Sub-Saharan Africa/Europe fleet:

                            

Deepwater vessels

    $         45,605         18%         31,238         12%            84,111         17%         59,909         11%   

Towing-supply/supply

       49,338         20%         56,596         21%            102,641         20%         113,693         21%   

Crew/utility

       12,734         5%         12,829         5%            26,747         5%         24,972         5%   

Offshore tugs

       4,906         2%         5,566         2%            10,166         2%         11,774         2%   

Total

    $         112,583         45%         106,229         40%            223,665         45%         210,348         40%   

Worldwide fleet:

                            

Deepwater vessels

    $         106,290         43%         104,865         39%            207,881         41%         211,508         40%   

Towing-supply/supply

       113,472         46%         132,987         50%            234,379         47%         259,455         49%   

Crew/utility

       20,922         8%         20,241         8%            43,188         9%         39,783         8%   

Offshore tugs

       7,728         3%         8,777         3%            16,279         3%         18,120         3%   

Total

    $         248,412         100%         266,870         100%            501,727         100%         528,866         100%   

 

 

 

20


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(11)

GOODWILL

The company tests goodwill for impairment annually at the reporting unit level using carrying amounts as of December 31 or more frequently if events and circumstances indicate that goodwill might be impaired. The company uses the two-step method for evaluating goodwill for impairment as prescribed in ASC 350, Intangibles-Goodwill and Other (ASC 350). Step one involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference. The company performed its annual impairment test as of December 31, 2010 on its then existing International and United States reporting units, and the test determined there was no goodwill impairment.

As discussed in Note (10), the company changed its reportable segments during the quarter ended September 30, 2011 from International and United States to Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe. The company performed an interim goodwill impairment assessment prior to changing its reportable segments and determined there was no goodwill impairment.

Goodwill of approximately $49.4 million historically assigned to the United States segment has been assigned to the Americas segment. Goodwill of approximately $279.4 million historically assigned to the International segment has been allocated among the new reportable segments based on their relative fair values.

The company also performed an interim goodwill impairment assessment on the new reporting units using September 30, 2011 carrying values and determined on the basis of the step one impairment test that the carrying value of its Middle East/North Africa unit exceeded its fair value thus triggering the second step of the analysis as prescribed by ASC 350. Although the company has not completed step two of the impairment assessment, an estimated goodwill impairment of $30.9 million was recorded during the quarter ended September 30, 2011. Step two of the assessment will be completed in the quarter ending December 31, 2011 and goodwill will be adjusted if necessary.

Following the impairment discussed above, goodwill at September 30, 2011 consists of the following:

 

 (In thousands)   

September 30,

2011        

 

Americas

   $             114,237       

Asia/Pacific

     56,283       

Middle East/N. Africa

     —       

Sub-Saharan Africa/Europe

     127,302       

 

 
   $ 297,822       

 

 

 

(12)

SUBSEQUENT EVENTS

During October 2011, the company took delivery of two anchor handling towing supply vessels and acquired two anchor handling towing supply vessels. Please refer to Note (6) – Commitment and Contingencies for a more complete discussion on the company’s vessel commitment program.

During October 2011, the company entered into an agreement to purchase two and construct one deepwater, platform supply vessels for an aggregate cost of approximately $84.0 million. One of the platform supply vessels will be constructed by the company’s wholly-owned shipyard Quality Shipyards, L.L.C. The vessels are expected to be delivered during the quarters ended March and June of 2012 and August of 2013.

 

21


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Tidewater Inc.

New Orleans, Louisiana

We have reviewed the accompanying condensed consolidated balance sheet of Tidewater Inc. and subsidiaries (the “Company”) as of September 30, 2011, and the related condensed consolidated statements of earnings for the three-month and six-month periods ended September 30, 2011 and 2010, and of cash flows for the six-month periods ended September 30, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Tidewater Inc. and subsidiaries as of March 31, 2011, and the related consolidated statements of earnings, stockholders’ equity and other comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated May 19, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

New Orleans, Louisiana

November 4, 2011

 

22


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS

FORWARD-LOOKING STATEMENT

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that this Quarterly Report on Form 10-Q 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 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 Items 1, 1A, 2 and 7 included in the company’s Annual Report on Form 10-K for the year ended March 31, 2011, filed with the Securities and Exchange Commission (SEC) on May 19, 2011, and elsewhere in the Form 10-Q. 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.

The following information contained in this Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and related disclosures and the company’s Annual Report on Form 10-K for the year ended March 31, 2011, filed with the SEC on May 19, 2011.

Our Business

The company 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. Tidewater manages and measures its business performance in four distinct operating segments: Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe, and has one of the broadest global operating footprints in the offshore energy industry. Operations are conducted in most of the world’s significant offshore 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 having operated in many countries throughout the world

 

23


over the last six decades. At September 30, 2011, the company had 350 vessels (including joint-venture vessels and vessels withdrawn from service) servicing the global energy industry. The size and composition of the 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 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.

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 in April 2010, the level of drilling activity off the continental shelf of the United States (U.S.) Gulf Of Mexico (GOM) 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. 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.

During the quarter ended September 30, 2011, our International and United States segments were reorganized to form four new operating segments. We now manage and measure our business performance in four distinct operating segments: Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe. The company’s revenues in all its segments are driven primarily by the company’s fleet size, vessel utilization and day rates.

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 all 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 and less sophisticated vessels. The company believes that competition for skilled crew personnel may again intensify, particularly in non-United States 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 drydockings mandated by regulatory agencies. A certain number of periodic drydockings are required 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, contractual obligations, current customer requirements and future marketability. When the company elects to forego a required drydocking, the vessel is stacked and occasionally sold, because 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 costs, but also continues to incur vessel operating and depreciation costs. 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 costs), can also require expensive drydockings, even in the

 

24


early years of a vessel’s useful life, due to the larger relative size and greater relative complexity of these vessels. 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, 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) have 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 pricing in the insurance markets, 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 potential liabilities stemming from third-party losses with limits that it believes are reasonable for its operations. 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, the number of active vessels off charter, drydockings, and changes in fuel prices.

The company also incurs vessel operating costs that are aggregated as “other” vessel operating costs. These costs consist of brokers’ commissions, training costs and other miscellaneous costs. Brokers’ commissions are incurred primarily in the company’s non-United States 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, temporary vessel importation fees and any fines or penalties.

Challenges We Confront as a Global 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 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, 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 dispersal 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.

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

 

25


its terms on July 31, 2010; however, representatives of Sonangol and Tidewater have, since that date, agreed several times to extend out the expiration date of the joint venture agreement. The joint venture has never had an interruption in its operations or service. The most recent extension extends the expiration date to December 31, 2011. Tidewater views its continuing ability to obtain contract extensions, the most recent of which is for five months, as a promising indicator that the parties are making progress in the negotiation of a 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.

As was the case in prior contract extensions, Sonangol and Tidewater have agreed to continue the Sonatide joint venture past its extended expiration date, on a charter by charter basis, to the extent required to fulfill several new or renewed charterparty agreements with customers in Angola that extend well beyond December 31, 2011. These charterparty agreements cover a substantial portion of our vessels 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 16 countries, namely, Antigua and Barbuda, the Bahamas, Benin, Bosnia and Herzegovina, Bulgaria, Canada, Croatia, Liberia, Luxembourg, Marshall Islands, Norway, Panama, St. Vincent and the Grenadines, Singapore, Spain and Switzerland. Instruments of ratification and registrations are pending for three additional countries: Denmark, Gabon and Latvia. The foregoing 19 countries represent more than 50% of the world’s vessel tonnage. If 30 Member States ratify the Convention, then, within 12 months thereof, the Convention will become law. 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.

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 various international markets or the U.S. GOM, with the various international markets being largely driven by supply and demand for crude oil, and the U.S. GOM being influenced both by the supply and demand for natural gas (primarily in regards to shallow water activity) and the supply and demand for crude oil (primarily in regards to deepwater activity).

During the quarter ended September 30, 2011, crude oil prices continued to be volatile because of concerns that the demand for crude oil will likely decrease if the global economic recovery continues to lose momentum due to a prolonged level of high unemployment and lackluster consumer spending in the U.S., and fiscal and financial uncertainty in the U.S. and certain European countries. In addition, the perception that crude oil demand will ease in the near-term comes at a time when additional crude oil will be supplied to the global market as Libya revives crude oil production that was significantly curtailed due to political tensions and civil war. Analysts anticipate that the Organization of Petroleum Exporting Companies (OPEC) ministers will likely

 

26


decide at their next meeting, which is scheduled in December 2011, to reduce current production targets, in order to support strong crude oil prices. The company anticipates that its longer-term utilization and day rate trends for its vessels will be correlated with the price of crude oil, which in mid-October 2011, was trading around $87 per barrel for West Texas Intermediate crude and around $111 per barrel for Intercontinental Exchange (ICE) Brent crude. High crude oil prices generally bode well for increases in drilling and exploration activity, which would support increases in demand for the company’s vessels, both in the various global markets and the deepwater sectors of the U.S. GOM (assuming the pace of permits increases).

Prices for natural gas continue to be weak due to the rise in production of unconventional gas resources in North America (in part due to increases in onshore shale production resulting from technological advancements in horizontal drilling and hydraulic fracturing) and the commissioning of a number of new, large Liquefied Natural Gas (LNG) exporting facilities around the world, which have contributed to an over-supplied natural gas market. 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. The price of natural gas trended lower during the quarter ended September 30, 2011 and as of mid-October 2011, natural gas was trading in the $3.40 to $3.55 per Mcf range down from the $4.20 to $4.33 range at the start of the quarter. The price for natural gas trended lower as inventories for the resource trended higher. Natural gas inventories in the U.S. continue to be well over-supplied. This dynamic exerts downward pricing pressures on natural gas prices. Prolonged increases in the supply of natural gas, whether the supply comes from conventional or unconventional production, will likely restrain prices for natural gas. Increases in onshore gas production along with a very slow offshore drilling and exploration permitting process in the U.S. GOM and 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 Americas segment (specifically our U.S. operations), where natural gas is a more predominant exploitable hydrocarbon resource.

Deepwater activity has been a growing part of the global offshore crude oil and natural gas markets, and it is also a source of growth for the company. Deepwater activity in non-U.S. markets 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, field 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 and low shipyard and financing costs. Reports published during the most recently completed quarter suggest that over the next five and a half years, the worldwide movable drilling rig count (currently estimated at approximately 847 movable offshore rigs worldwide, approximately 40% of which are designed to operate in deeper waters) will increase as approximately 153 new-build offshore rigs that are currently on order and under construction are delivered. Of the estimated 847 movable offshore rigs worldwide, approximately 596 are currently working. It is further estimated that approximately 50% of the new build rigs are being 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 62 new floating production units currently under construction and are expected to be delivered over the next six and a half years to supplement the current approximately 428 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 at September 30, 2011 has approximately 455 new-build offshore support vessels (platform supply vessels and anchor handlers only), under construction that are expected to be delivered to the worldwide offshore vessel market primarily over the next five and a half years. The current worldwide fleet of these classes of vessels is estimated at approximately 2,670 vessels, of which we estimate 10% or more of these vessels 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

 

27


industry, however, also has a large number of aging vessels, including more than 725 vessels, or approximately 27% of the worldwide offshore fleet, that are at least 25 years old and 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 determined with absolute certainty, 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.

Fiscal 2012 Business Highlights

At September 30, 2011, the company had 338 owned or chartered vessels (excluding joint-venture vessels and vessels withdrawn from service) in its fleet with an average age of 14.7 years. The average age of 201 newer vessels that have been acquired or constructed since calendar year 2000 as part of the company’s new build and acquisition program is 5.2 years. The remaining 137 vessels have an average age of 28.7 years. During the first half of fiscal 2012 and 2011, the company’s newer vessels generated $422.1 million and $414.3 million, respectively, of revenue and accounted for 91%, or $171.5 million, and 87%, or $181.1 million, respectively, of total vessel margin (vessel revenues less vessel operating costs). Vessel operating costs exclude depreciation on the company’s new vessels of $53.0 million and $47.0 million, respectively, during the same comparative periods.

During the first half of fiscal 2012, 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 increase future earnings capacity while removing from active service certain older, more traditional vessels that currently have fewer market opportunities. 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, minimizing unscheduled downtime, and maintaining disciplined cost control.

The company’s consolidated net earnings for the first half of fiscal 2012 decreased 67%, or $39.6 million, as compared to the same period in fiscal 2011, due to an approximate 5% decrease in total revenues and because a $30.9 million non-cash goodwill impairment ($22.1 million after-tax, or $0.43 per share) was recorded during the quarter ended September 30, 2011 on the company’s Middle East/North Africa segment as disclosed in Note (11) of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. The company recorded $505.5 million in revenues during the first half of fiscal 2012, which is a decrease of approximately $24.1 million over the revenue earned during the same period of fiscal 2011. The company’s consolidated revenues during the first half of fiscal 2012 include day rate increases with an effective date of January 1, 2011 on certain vessel charter agreements. As the negotiations related to such rate increases were completed in the quarter ended June 30, 2011, approximately $2.0 million of vessel revenue recognized in the first half of fiscal 2012 relate to services provided in the quarter ended March 31, 2011. Partially offsetting revenue declines and goodwill impairment was an approximate 3%, or $10.9 million reduction in consolidated vessel operating costs.

Vessel revenues generated by the company’s Americas segment decreased approximately 14%, or $26.6 million, during the first half of fiscal 2012 as compared to the revenues earned during the first half of fiscal 2011, primarily due to an eight percentage point decrease in utilization rates and an approximate 8% decrease in average day rates on the deepwater vessels operating in this segment. Vessel operating costs for the Americas segment decreased approximately 17%, or $19.9 million, during the same comparative periods.

Vessel revenues generated by the company’s Asia/Pacific segment decreased approximately 24%, or $20.7 million, during the first half of fiscal 2012 as compared to the revenues earned during the first half of fiscal 2011, primarily due to a nine percentage point decrease in utilization rates and an approximate 2% and 11% decrease in average day rates on the towing supply/supply and deepwater class of vessels operating in this segment, respectively. Vessel operating costs for the Asia/Pacific segment decreased approximately 22%, or $13.0 million, during the first half of fiscal 2012 as compared to the same period in fiscal 2011.

 

28


Vessel revenues generated by the company’s Middle East/North Africa segment increased approximately 15%, or $6.8 million, during the first half of fiscal 2012 as compared to the revenues earned during the first half of fiscal 2011, primarily due to an approximate 7% increase in average day rates on the deepwater vessels operating in this segment. Vessel operating costs for the Middle East/North Africa segment increased approximately 59%, or $14.1 million, during the first half of fiscal 2012 as compared to the same period in fiscal 2011.

Vessel revenues generated by the company’s Sub-Saharan Africa/Europe segment increased approximately 6%, or $13.3 million, during the first half of fiscal 2012 as compared to the revenues earned during the first half of fiscal 2011, primarily due to an increase in the number of deepwater vessels operating in the segment resulting from new vessel additions, vessels mobilizing to this segment, and because of an approximate 6% increase in average day rates on the deepwater vessels. Vessel operating costs for the Sub-Saharan Africa/Europe segment increased approximately 7%, or $7.9 million, during the same comparative periods.

Other operating revenues increased approximately $3.0 million, during the same comparative periods, while costs of other operating revenues increased approximately $2.6 million during the same comparative periods.

A more complete discussion of each of the above segment highlights is included in the “Results Of Operations” section below.

Results of Operations

During the quarter ended September 30, 2011, our International and United States segments were reorganized to form four new operating segments. We now manage and measure our business performance in four distinct operating segments: Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe. The following table compares revenues and operating costs (excluding general and administrative expense, depreciation expense, and gain on asset dispositions, net) for the company’s vessel fleet and the related percentage of total revenue for the quarters and the six-month periods ended September 30, 2011 and 2010 and for the quarter ended June 30, 2011. Vessel revenues and operating costs relate to vessels owned and operated by the company, while other operating revenues relate to third-party activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related activities.

 

         Quarter Ended
September 30,
          Six Months Ended
September 30,
          Quarter
Ended
June 30,
 
(In thousands)        2011      %      2010      %           2011      %      2010      %           2011      %    

 

 

Revenues:

                                     

Vessel revenues:

                                     

Americas

 

$  

     81,892         33%         95,033         36%            162,569         32%         189,132         36%            80,677         32%     

Asia/Pacific

       29,127         12%         42,665         16%            64,626         13%         85,292         16%            35,499         14%     

Middle East/N. Africa

       24,810         10%         22,943         9%            50,867         10%         44,094         8%            26,057         10%     

Sub-Saharan Africa/Europe

       112,583         45%         106,229         40%            223,665         44%         210,348         40%            111,082         44%     

 

 
       248,412         99%         266,870         100%            501,727         99%         528,866         100%            253,315         99%     

Other operating revenues

       2,482         1%         230         <1%            3,774         <1%         759         <1%            1,292         1%     

 

 
 

$  

     250,894         100%         267,100         100%            505,501         100%         529,625         100%            254,607         100%     

 

 

Operating costs:

                                     

Vessel operating costs:

                                     

Crew costs

 

$  

     78,364         31%         89,941         34%            159,488         32%         170,633         32%            81,124         32%     

Repair and maintenance

       27,149         11%         31,791         12%            49,209         10%         58,884         11%            22,060         9%     

Insurance and loss reserves

       5,374         2%         4,513         2%            10,671         2%         8,923         2%            5,297         2%     

Fuel, lube and supplies

       21,394         9%         16,437         6%            37,761         7%         31,358         6%            16,367         6%     

Vessel operating leases

       4,491         2%         4,490         2%            8,983         2%         8,980         2%            4,492         2%     

Other

       24,518         10%         22,720         9%            47,480         9%         45,697         9%            22,962         9%     

 

 
       161,290         64%         169,892         64%            313,592         62%         324,475         61%            152,302         60%     

Costs of other marine revenues

       2,031         1%         203         <1%            3,262         1%         698         <1%            1,231         <1%     

 

 
 

$  

     163,321         65%         170,095         64%            316,854         63%         325,173         61%            153,533         60%     

 

 

 

29


The following table subdivides vessel operating costs presented above by the company’s segments and its related percentage of total revenue for the quarters and the six-month periods ended September 30, 2011 and 2010 and for the quarter ended June 30, 2011.

 

         Quarter Ended
September 30,
          Six Months Ended
September 30,
          Quarter
Ended
June 30,
 
(In thousands)        2011      %      2010                2011      %      2010                2011      %    

 

 

Vessel operating costs:

                                     

Americas:

                                     

Crew costs

 

$  

     28,766         11%         33,774         13%             58,616         12%         66,379         13%             29,850         12%     

Repair and maintenance

       9,069         4%         13,751         5%             17,337         3%         27,389         5%             8,268         3%     

Insurance and loss reserves

       2,042         1%         1,836         1%             3,320         1%         3,575         1%             1,278         1%     

Fuel, lube and supplies

       5,388         2%         4,097         2%             9,174         2%         7,613         1%             3,786         1%     

Vessel operating leases

       910         <1%         1,048         <1%             1,821         <1%         2,096         <1%             911         <1%     

Other

       5,925         2%         5,781         2%             10,574         2%         13,706         3%             4,649         2%     

 

 
       52,100         21%         60,287         23%             100,842         20%         120,758         23%             48,742         19%     

Asia/Pacific:

                                     

Crew costs

 

$  

     12,502         5%         18,434         7%             26,320         5%         33,669         6%             13,818         5%     

Repair and maintenance

       4,150         2%         6,664         2%             6,079         1%         11,411         2%             1,929         1%     

Insurance and loss reserves

       609         <1%         684         <1%             1,229         <1%         1,362         <1%             620         <1%     

Fuel, lube and supplies

       4,844         2%         4,935         2%             7,588         2%         8,366         2%             2,744         1%     

Other

       2,432         1%         2,170         1%             4,668         1%         4,047         1%             2,236         1%     

 

 
       24,537         10%         32,887         12%             45,884         9%         58,855         11%             21,347         8%     

Middle East/N. Africa:

                                     

Crew costs

 

$  

     8,024         3%         6,963         3%             16,179         3%         12,162         2%             8,155         3%     

Repair and maintenance

       4,657         2%         2,167         1%             7,196         1%         4,049         1%             2,539         1%     

Insurance and loss reserves

       725         <1%         342         <1%             2,034         <1%         661         <1%             1,309         1%     

Fuel, lube and supplies

       2,925         1%         1,258         <1%             7,208         1%         3,684         1%             4,283         2%     

Vessel operating leases

       506         <1%                 <1%             872         <1%                 <1%             366         <1%     

Other

       2,182         1%         1,768         1%             4,396         1%         3,230         1%             2,214         1%     

 

 
       19,019         8%         12,498         5%             37,885         7%         23,786         4%             18,866         7%     

Sub-Saharan Africa/Europe:

                                     

Crew costs

 

$  

     29,072         12%         30,770         12%             58,373         12%         58,423         11%             29,301         12%     

Repair and maintenance

       9,273         4%         9,209         3%             18,597         4%         16,035         3%             9,324         4%     

Insurance and loss reserves

       1,998         1%         1,651         1%             4,088         1%         3,325         1%             2,090         1%     

Fuel, lube and supplies

       8,237         3%         6,147         2%             13,791         3%         11,695         2%             5,554         2%     

Vessel operating leases

       3,075         1%         3,442         1%             6,290         1%         6,884         1%             3,215         1%     

Other

       13,979         6%         13,001         5%             27,842         6%         24,714         5%             13,863         5%     

 

 
       65,634         26%         64,220         24%             128,981         26%         121,076         23%             63,347         25%     

 

 

Total operating costs

 

$  

     161,290         64%         169,892         64%             313,592         62%         324,475         61%             152,302         60%     

 

 

The following table compares operating income and other components of earnings before income taxes and its related percentage of total revenue for the quarters and the six-month periods ended September 30, 2011 and 2010 and for the quarter ended June 30, 2011.

 

         Quarter Ended
September 30,
         Six Months Ended
September 30,
         Quarter
Ended
June 30,
 
(In thousands)        2011      %      2010      %          2011      %      2010               2011      %    

 

 

Vessel operating profit:

                                   

Americas

 

$  

     9,530         4%         13,050         5%           21,384         4%         24,670         5%           11,854         5%    

Asia/Pacific

       (4,776      (2%      (627      (<1%        494         <1%         6,854         1%           5,270         2%    

Middle East/N. Africa

       (996      (<1%      5,257         2%           (968      (<1%      9,806         2%           28         <1%    

Sub-Saharan Africa/Europe

       21,631         9%         18,596         7%           43,855         9%         43,535         8%           22,224         9%    

 

 
       25,389         10%         36,276         14%           64,765         13%         84,865         16%           39,376         15%    

Corporate expenses

       (9,111      (4%      (12,864      (5%        (18,632      (4%      (21,627      (4%        (9,521      (4%)   

Goodwill impairment

       (30,932      (12%                        (30,932      (6%                                  

Gain on asset dispositions, net

       9,208         4%         3,638         1%           10,925         2%         9,196         2%           1,717         1%    

Other operating expenses

       (35      (<1%      (158      (<1%        (146      (<1%      (275      (<1%        (111      (<1%)   

 

 

Operating income (loss)

       (5,481      (2%      26,892         10%           25,980         5%         72,159         14%           31,461         12%    

 

 

Foreign exchange gain (loss)

       1,659         1%         (436      (<1%        2,473         <1%         1,174         <1%           814         <1%    

Equity in net earnings of unconsolidated companies

       3,456         1%         2,785         1%           5,945         1%         5,475         1%           2,489         1%    

Interest income and other, net

       766         <1%         2,029         1%           1,956         <1%         2,407         <1%           1,190         <1%    

Interest and other debt costs

       (4,766      (2%      (1,686      (1%        (8,827      (2%      (2,759      (1%        (4,061      (2%)   

 

 

Earnings (loss) before income taxes

 

$  

     (4,366      (2%      29,584         11%           27,527         5%         78,456         15%           31,893         13%    

 

 

 

30


Americas Segment Operations

Americas-based vessel revenues decreased approximately 14%, or $13.1 million and $26.6 million, respectively, during the quarter and the six-month periods ended September 30, 2011, respectively, as compared to the same periods in fiscal 2011, primarily due to a respective six and eight percentage point decrease in utilization rates and an approximate 9% and 8% decrease in average day rates, respectively, on the deepwater vessels operating in the Americas because of fewer vessels operating in the segment resulting from the transfer of deepwater vessels to other segments.

Total utilization rates for the Americas-based vessels increased six percentage points, during the quarter and the six-month periods ended September 30, 2011, respectively, as compared to the same periods in fiscal 2011; however, the increase is primarily a result of the sale of 26 older, stacked vessels from the Americas fleet during the comparative periods. 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. As such, stacked vessels depressed 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 continues to stack and remove vessels that could not find attractive charter contracts from its Americas-based active fleet. At the beginning of fiscal 2012, the company had 39 Americas-based stacked vessels. During the first half of fiscal 2012, the company stacked four additional vessels and sold 14 vessels from the previously stacked vessel fleet, resulting in a total of 29 stacked Americas-based vessels as of September 30, 2011.

Vessel operating profit for the Americas-based vessels decreased approximately 27% and 13%, or $3.5 million and $3.3 million, respectively, during the quarter and the six-month periods ended September 30, 2011, respectively, as compared to the same periods during fiscal 2011, primarily due to lower revenues and higher general and administrative expenses. Declines in revenues were partially offset by 14% and 17%, or $8.2 million and $19.9 million, respectively, decrease in vessel operating costs (primarily crew costs and repair and maintenance costs) and a decrease in depreciation expense during the same comparative periods.

Depreciation expense decreased approximately 17% and 20%, or $2.0 million and $4.7 million, respectively, during the quarter and the six-month periods ended September 30, 2011, as compared to the same periods during fiscal 2011, because of the transfer of vessels to other segments and because of vessel sales. Crew costs decreased approximately 15% and 12%, or $5.0 million and $7.8 million, respectively, during the comparative periods, due to reductions in crew personnel at our U.S. GOM operations as a result of fewer vessels operating in the U.S. GOM market due to the continued aftereffects of the drilling moratorium and because the prior year included an allocated $2.1 million charge associated with the company’s participation in the Merchant Navy Officers Pension Fund (MNOPF) as disclosed in Note (6) of Notes to Unaudited Condensed Consolidated Financial Statements. Repair and maintenance costs decreased approximately 34% and 37%, or $4.7 million and $10.1 million, respectively, during the same comparative periods, due to a fewer number of drydockings being performed during the comparative periods. General and administrative costs increased 6% and 7%, or $0.5 million and $1.4 million, respectively, during the same comparative periods, due to pay raises for the administrative personnel, higher professional services costs related to the Brazilian Customs and Brazilian State Tax Assessment claims as disclosed in Note (6) of Notes to Unaudited Condensed Consolidated Financial Statements, and an increase in costs associated with foreign assigned administrative employees (specifically foreign income taxes paid by the company on behalf of expatriate employees).

Americas-based vessel revenues increased approximately 2%, or $1.2 million, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, due to the transfer of two deepwater vessels to the segment in mid-June 2011 and to an approximate 5% increase in average day rates on our towing supply/supply class of vessels due to stronger demand for this class of vessels in the Americas segment.

Vessel operating profit for the Americas-based vessels decreased approximately 20%, or $2.3 million, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, primarily due to an approximately 7%, or $3.4 million, increase in vessel operating costs (primarily repair and maintenance costs, insurance and loss reserves, fuel, lube and supplies costs and other vessel costs) and approximately 3%, or $0.3 million, higher depreciation expense.

 

31


Depreciation expense increased due to an increase in the number of vessels operating in the Americas, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, due to vessel transfers. Repair and maintenance costs increased approximately 10%, or $0.8 million, during the same comparative periods, due to a greater number of drydockings being performed during the current quarter as compared to the prior quarter. Fuel, lube and supply costs were higher by approximately 42%, or $1.6 million, during the comparative periods, due to vessels being mobilized to/within the Americas and an increase in the number of vessels operating in the Americas. Other vessel costs increased approximately 27%, or $1.3 million, during the comparative periods, primarily due to customs and taxation fees for the importation of equipment and penalties associated with the late deliveries of vessels to customers.

Asia/Pacific Segment Operations

Asia/Pacific-based vessel revenues decreased approximately 32% and 24%, or $13.5 million and $20.7 million, respectively, during the quarter and the six-month periods ended September 30, 2011, respectively, as compared to the same periods in fiscal 2011, due to a respective 10 and nine percentage point decrease in utilization rates and an approximate 7% and 2% decrease in average day rates, respectively, on the towing supply/supply class of vessels operating in this segment as a result of weaker demand for this class of vessel in this segment. Revenues also declined during the same comparative periods due to a respective two and nine percentage point decrease in utilization rates and an approximate 17% and 11% decrease in average day rates on the deepwater vessels operating in this segment.

The company also continues to stack and remove vessels that could not find attractive charter contracts from its Asia/Pacific-based active fleet. At the beginning of fiscal 2012, the company had 19 Asia/Pacific-based stacked vessels. During the first half of fiscal 2012, the company stacked two additional vessels and sold two vessels from the previously stacked vessel fleet, resulting in a total of 19 stacked Asia/Pacific-based vessels as of September 30, 2011.

Asia/Pacific-based vessel operating profit decreased approximately $4.1 million and $6.4 million, during the quarter and the six-month periods ended September 30, 2011, respectively, as compared to the same periods in fiscal 2011, primarily due to lower revenues and higher G&A costs. Declines in revenues were partially offset by an approximate 25% and 22%, or $8.4 million and $13.0 million, respectively, decrease in vessel operating costs (primarily crew costs and repair and maintenance costs) and also to a decrease in depreciation expense during the same comparative periods.

Crew costs decreased approximately 32% and 22%, or $5.9 million and $7.3 million, respectively, during the quarter and the six-month periods ended September 30, 2011, as compared to the same periods during fiscal 2011, due to reductions in crew personnel related to the transfer of deepwater vessels to other segments and because the prior year included an allocated $1.0 million charge associated with the company’s participation in the Merchant Navy Officers Pension Fund (MNOPF) as disclosed in Note (6) of Notes to Unaudited Condensed Consolidated Financial Statements. Repair and maintenance costs decreased approximately 38% and 47%, or $2.5 million and $5.3 million, respectively, during the same comparative periods, due to a fewer number of drydockings being performed during the comparative periods. Depreciation expense decreased approximately 26% and 22%, or $1.8 million and $2.8 million, respectively, during the same comparative periods, primarily because of the transfer of deepwater vessels to other segments and because of vessel sales. General and administrative expenses increased approximately 21% and 22%, or $0.8 million and $1.5 million, respectively, due to pay raises for the administrative personnel, an increase in office and property costs, and an increase in costs associated with foreign assigned administrative employees (specifically foreign income taxes paid by the company on behalf of expatriate employees).

Asia/Pacific-based vessel revenues decreased approximately 18%, or $6.4 million, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, due to a 12 percentage point decrease in utilization rates and an approximate 4% decrease in average day rates on our deepwater vessels which together resulted in a $3.7 million decline in revenue, and a six percentage point decrease in utilization and an approximate 4% decrease in average day rates on the towing supply/supply class of vessels which together resulted in a $2.6 million decrease in revenue. Utilization and average day rates on the deepwater vessels decreased, during the comparative periods, because on a net basis, one deepwater vessel transferred out of the segment, while utilization and average day rates on the towing supply/supply class of vessels decreased due to a weaker demand for this class of vessels.

 

32


Vessel operating profit for the Asia/Pacific-based vessels decreased approximately $10.0 million, or 191%, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, due to lower revenues, approximately 15%, or $3.2 million, higher vessel operating costs (primarily repair and maintenance costs, and fuel, lube and supplies costs) and approximately 15%, or $0.6 million, higher general and administrative expenses.

Repair and maintenance costs increased approximately 115%, or $2.2 million, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, due to a greater number of drydockings being performed during the current quarter as compared to the prior quarter. Fuel, lube and supply costs were higher by approximately 77%, or $2.1 million, during the same comparative periods, due to vessel mobilizations. General and administrative expenses were higher, during the same comparative periods, due to an increase in professional service related costs and an increase in costs associated with foreign assigned administrative employees (specifically foreign income taxes paid by the company on behalf of expatriate employees).

Middle East/North Africa Segment Operations

Middle East/North Africa-based vessel revenues increased approximately 8% and 15%, or $1.9 million and $6.8 million, respectively, during the quarter and the six-month periods ended September 30, 2011, respectively, as compared to the same periods in fiscal 2011, primarily due to an approximate 8% and 7% increase in average day rates, respectively, on the deepwater vessels operating in this segment, which resulted in a $5.7 million and $8.9 million increase in deepwater vessel revenues, because two deepwater vessels were transferred in to the region from other segments during the comparative periods. Revenues on the towing supply/supply class of vessels decreased approximately $3.5 million and $2.0 million, during the same comparative periods, respectively, primarily due to a respective 22 and 15 point decrease in utilization rates resulting from delays with the acceptance of some vessels that are part of a package committed to charter hire contracts with Saudi Aramco.

The company also continues to stack and remove vessels that could not find attractive charter contracts from its Middle East/North Africa-based active fleet. At the beginning of fiscal 2012, the company had six Middle East/North Africa-based stacked vessels. During the first half of fiscal 2012, the company stacked two additional vessels and sold five vessels from the previously stacked vessel fleet, resulting in a total of three stacked Middle East/North Africa-based vessels as of September 30, 2011.

Middle East/North Africa-based vessel operating profit decreased approximately $6.3 million and $10.8 million, or 119% and 110% respectively, during the quarter and the six-month periods ended September 30, 2011, respectively, as compared to the same periods in fiscal 2011, primarily due to an approximate 52% and 59%, or $6.5 million and $14.1 million, respectively, increase in vessel operating costs (primarily crew costs, repair and maintenance costs, fuel, lube and supplies costs, and vessel operating leases); an approximate 25% and 31%, or $0.8 million and $2.1 million, respectively, increase in depreciation expense; and an approximate 42% and 36%, or $0.8 million and $1.4 million, respectively, increase in general and administrative expenses.

Depreciation expense increased, during the quarter and the six-month periods ended September 30, 2011, as compared to the same periods during fiscal 2011, primarily because of the additional vessels transferred to the segment related to a nine vessel package committed to charter hire contracts with Saudi Aramco. Crew costs increased approximately 15% and 33%, or $1.1 million and $4.0 million, respectively, during the same comparative periods, due to an increase in crew personnel related to the addition of vessels to the segment. Repair and maintenance costs increased approximately $2.5 million and $3.1 million, or 115% and 78%, respectively, during the same comparative periods, due to an increase in the number of drydockings being performed. Fuel, lube and supply costs increased approximately $1.7 million and $3.5 million, or 133% and 96%, respectively, during the same comparative periods, due to an increase in the number of vessels operating in the segment and to vessel mobilizations. Vessel operating leases increased approximately $0.5 million and $0.8 million, during the same comparative periods, respectively, because one vessel operating under a lease arrangement transferred to the segment. General and administrative expenses increased, during the same comparative periods, due to an increase in administrative personnel, an increase in office and property costs, and an increase in costs associated with foreign assigned administrative employees.

 

33


Middle East/North Africa-based vessel revenues decreased approximately 5%, or $1.2 million, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, primarily due to an eight percentage point decrease in the utilization rates on our towing supply/supply vessels, which resulted in a $1.9 million decline in revenue during the comparative periods. Increases in revenues earned by the deepwater vessels partially offset the revenue declines incurred by the towing supply/supply vessels during the same comparative periods. Revenues on the Middle East/North Africa-based deepwater vessels increased approximately 10%, or $1.0 million, during the same comparative periods, due to a 15 percentage point increase in utilization rates, despite an approximate 4% decrease in average day rates for this class of vessel which resulted from the transfer of one deepwater vessel in mid-June 2011 to a different segment.

Vessel operating profit for the Middle East/North Africa-based vessels decreased approximately $1.0 million, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, primarily because of lower revenues.

Sub-Saharan Africa/Europe Segment Operations

Sub-Saharan Africa/Europe-based vessel revenues increased approximately 6%, or $6.4 million and $13.3 million, respectively, during the quarter and the six-month periods ended September 30, 2011, respectively, as compared to the same periods in fiscal 2011, primarily due to an increase in the number of deepwater vessels operating in the segment resulting from new vessel additions and vessels mobilizing into this segment. Deepwater vessel revenue also increased, during the same comparative periods, because of an approximate 7% and 6% increase in average day rates, respectively. Revenue increases generated by the deepwater vessels were partially offset by a decline in revenue experienced by the towing supply/supply class of vessels. Vessel revenue on the towing supply/supply vessels decreased approximately 13% and 10%, or $7.3 million and $11.1 million, respectively, during the same comparative periods, respectively, due to a seven and six percentage point decrease in utilization rates, respectively.

The company also continues to stack and remove vessels that could not find attractive charter contracts from its Sub-Saharan Africa/Europe-based active fleet. At the beginning of fiscal 2012, the company had 26 Sub-Saharan Africa/Europe-based stacked vessels. During the first half of fiscal 2012, the company stacked five additional vessels and sold four vessels from the previously stacked vessel fleet, resulting in a total of 27 stacked Sub-Saharan Africa/Europe-based vessels as of September 30, 2011.

Sub-Saharan Africa/Europe-based vessel operating profit increased approximately 16% and 1%, or $3.0 million and $0.3 million, respectively, during the quarter and the six-month periods ended September 30, 2011, respectively, as compared to the same periods in fiscal 2011, primarily due to higher revenues, which were partially offset by an approximate 2% and 7%, or $1.4 million and $7.9 million, respectively, increase in vessel operating costs (primarily repair and maintenance costs, fuel, lube and supplies costs and other vessel costs); an increase in depreciation expense; and an increase in general and administrative expenses during the same comparative periods.

Repair and maintenance costs, during the quarter ended September 30, 2011, were comparable to the costs incurred during the same period in fiscal 2011. Repair and maintenance costs increased approximately 16%, or $2.6 million, during the six-month period ended September 30, 2011, as compared to the same period in fiscal 2011, due to an increase in the number of drydockings being performed during the current period. Fuel, lube and supply costs were higher by approximately 34% and 18%, or $2.1 million during each period, respectively, during the same comparative periods, due to vessel mobilizations. Crew costs decreased approximately 6%, or $1.7 million, during the quarter ended September 30, 2011, as compared to the same period in fiscal 2011, because the prior year included an allocated $2.4 million charge associated with the company’s participation in the Merchant Navy Officers Pension Fund (MNOPF) as disclosed in Note (6) of Notes to Unaudited Condensed Consolidated Financial Statements. Crew costs during the six months ended September 30, 2011 were comparable to the costs incurred during the same period in fiscal 2011.

Depreciation expense increased approximately 5% and 7%, or $0.6 million and $1.7 million, respectively, during the quarter and the six-month periods ended September 30, 2011, as compared to the same periods during fiscal 2011, primarily because of new vessel additions and vessels mobilizing into the segment during the comparative periods. General and administrative expenses increased 13% and 17%, or $1.3 million and $3.4 million, respectively, during the same comparative periods, due to pay raises for the administrative

 

34


personnel, an increase in office and property costs (primarily office rent and information technology cost), an increase in travel costs, and an increase in costs associated with foreign assigned administrative employees.

Sub-Saharan Africa/Europe-based vessel revenues increased a modest 1%, or $1.5 million, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, primarily due to a seven percentage point increase in the utilization rates on the deepwater vessels and to an increase in the number of deepwater vessels operating in this segment. Revenue increases generated by the deepwater vessels were partially offset by declines in revenue experienced by the towing supply/supply and crewboat class of vessels. Revenue on the towing supply/supply class of vessels decreased approximately 7%, or $4.0 million, during the same comparative periods, due to a two percentage point decrease in utilization rates, an approximate 1% decrease in average day rates and because of fewer towing supply/supply vessels operating in the segment due to vessel transfers and sales. Revenues generated by crewboats decreased approximately 9%, or $1.3 million, during the same comparative periods, due to a six percentage point decrease in utilization rates and an approximate 5% decrease in average day rates.

Vessel operating profit for the Sub-Saharan Africa/Europe-based vessels decreased approximately 3%, or $0.6 million, during the quarter ended September 30, 2011 as compared to the quarter ended June 30, 2011, primarily due to an approximate 4%, or $2.3 million, increase in vessel operating costs (primarily fuel, lube and supplies costs). Fuel, lube and supply costs increased approximately 48%, or $2.7 million, during the same comparative periods, due to vessel mobilizations resulting from the addition of new vessels to the segment.

Other Items

Insurance and loss reserves expense increased approximately $1.7 million, or 20%, during the first half of fiscal 2012 as compared to the same period in fiscal 2011, due to lower premiums and favorable adjustments to loss reserves during fiscal 2011 resulting from good safety results and loss management efforts.

Gain on asset dispositions, net for the first half of fiscal 2012 increased approximately $2.0 million, or 22%, as compared to the same period in fiscal 2011, due to more vessel sales and lower impairment expense charged during the first half of fiscal 2012. Gain on asset dispositions, net was approximately $7.5 million, higher during the second quarter of fiscal 2012 as compared to the first quarter of fiscal 2012, due to a higher number of vessel sales and because the quarter ended September 30, 2011 incurred only $0.3 million in impairment charges as compared to $2.3 million during the quarter ended June 30, 2011. Dispositions of vessels can vary from quarter to quarter; therefore, gains on sales of assets may fluctuate significantly from period to period. The below table summarizes the combined fair value of the assets that incurred impairments during the quarters and the six-month periods ended September 30, 2011 and 2010, along with the amount of impairment. The impairment charges were recorded in gain on asset dispositions, net.

 

   

              Quarter Ended         
              September 30,        

                Six Months Ended    
             September 30,        
 
(In thousands, except number of assets)   2011              2010               2011                2010      

 

 

Amount of impairment incurred

   $      256                 1,785                2,570                   3,093       

Combined fair value of assets incurring impairment

    ---                 1,800                3,913                   6,295       

 

 

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 (two vessels at September 30, 2011) or vessels owned by joint ventures (10 vessels at September 30, 2011). The following three tables compare revenues, day-based

 

35


utilization percentages and average day rates by vessel class and in total for the quarters and the six-month periods ended September 30, 2011 and 2010 and the quarter ended June 30, 2011.

 

           Quarter Ended
September 30,
          Six Months Ended
September 30,
         

  Quarter
  Ended

    June 30,

     
           2011     2010               2011      2010               2011      

 

REVENUES BY VESSEL CLASS (In thousands):

                       

Americas fleet:

                       

Deepwater vessels

  $           36,639        49,635                73,044         100,937                36,405     

Towing-supply/supply

       36,648        37,631                72,334         72,689                35,686     

Crew/utility

       8,044        7,166                16,054         14,322                8,010     

Offshore tugs

       561        601                1,137         1,184                576     

Total

  $           81,892        95,033                162,569         189,132                80,677     

Asia/Pacific fleet:

                       

Deepwater vessels

  $           12,264        17,957                28,193         37,073                15,929     

Towing-supply/supply

       15,870        23,595                34,314         46,005                18,444     

Crew/utility

       144        246                387         489                243     

Offshore tugs

       850        867                1,733         1,725                883     

Total

  $           29,127        42,665                64,626         85,292                35,499     

Middle East/N. Africa fleet:

                       

Deepwater vessels

  $           11,782        6,035                22,533         13,589                10,751     

Towing-supply/supply

       11,616        15,165                25,090         27,068                13,474     

Offshore tugs

       1,411        1,743                3,243         3,437                1,832     

Total

  $           24,810        22,943                50,867         44,094                26,057     

Sub-Saharan Africa/Europe fleet:

                       

Deepwater vessels

  $           45,605        31,238                84,111         59,909                38,506     

Towing-supply/supply

       49,338        56,596                102,641         113,693                53,303     

Crew/utility

       12,734        12,829                26,747         24,972                14,013     

Offshore tugs

       4,906        5,566                10,166         11,774                5,260     

Total

  $           112,583        106,229                223,665         210,348                111,082     

Worldwide fleet:

                       

Deepwater vessels

  $           106,290        104,865                207,881         211,508                101,591     

Towing-supply/supply

       113,472        132,987                234,379         259,455                120,907     

Crew/utility

       20,922        20,241                43,188         39,783                22,266     

Offshore tugs

       7,728        8,777                16,279         18,120                8,551     

Total

  $           248,412        266,870                501,727         528,866                253,315     

 

UTILIZATION:

                       

Americas fleet:

                       

Deepwater vessels

       73.5  %      79.2                72.2         79.8                70.8     

Towing-supply/supply

       46.9        42.7                45.0         40.9                43.3     

Crew/utility

       80.2        53.5                82.7         50.8                85.3