Form 10-Q

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, 2012

 

¨

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

(State of incorporation)

  LOGO  

72-0487776

(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

49,823,682 shares of Tidewater Inc. common stock $.10 par value per share were outstanding on October 26, 2012. Registrant has no other class of common stock outstanding.

 

1


PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

TIDEWATER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and par value data)

     

 

 

ASSETS

    
 
September 30,
2012
  
  
    
 
March 31,
2012
  
  

 

 

Current assets:

     

Cash and cash equivalents

   $ 136,729            320,710      

Trade and other receivables, net

     333,284            309,468      

Marine operating supplies

     56,131            53,850      

Other current assets

     15,637            10,072      

 

 

Total current assets

     541,781            694,100      

 

 

Investments in, at equity, and advances to unconsolidated companies

     50,108            46,077      

Properties and equipment:

     

Vessels and related equipment

     4,063,067            3,952,468      

Other properties and equipment

     93,893            93,107      

 

 
     4,156,960            4,045,575      

Less accumulated depreciation and amortization

     1,144,937            1,139,810      

 

 

Net properties and equipment

     3,012,023            2,905,765      

 

 

Goodwill

     297,822            297,822      

Other assets

     120,354            117,854      

 

 

Total assets

   $ 4,022,088            4,061,618      

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

 

 

Current liabilities:

     

Accounts payable

     89,560            74,115      

Accrued expenses

     144,446            134,953      

Accrued property and liability losses

     3,395            3,636      

Other current liabilities

     26,040            26,225      

 

 

Total current liabilities

     263,441            238,929      

 

 

Long-term debt

     890,000            950,000      

Deferred income taxes

     214,515            214,627      

Accrued property and liability losses

     3,436            3,150      

Other liabilities and deferred credits

     130,419            128,555      

Commitments and Contingencies (Note 7)

     

Stockholders’ equity:

     

Common stock of $0.10 par value, 125,000,000 shares authorized, issued 49,823,682 shares at September 30, 2012 and 51,250,995 shares at March 31, 2012

     4,982            5,125      

Additional paid-in capital

     112,606            102,726      

Retained earnings

     2,421,991            2,437,836      

Accumulated other comprehensive loss

     (19,302)           (19,330)     

 

 

Total stockholders’ equity

     2,520,277            2,526,357      

 

 

Total liabilities and stockholders’ equity

   $ 4,022,088            4,061,618      

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2


TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In thousands, except share and per share data)                          

 

 
     Quarter Ended
September 30,
     Six Months Ended
September 30,
 
     2012     2011         2012     2011      

 

 

Revenues:

         

Vessel revenues

   $ 309,822        248,412            599,916        501,727       

Other marine revenues

     2,096        2,482            6,450        3,774       

 

 
     311,918        250,894            606,366        505,501       

 

 

Costs and expenses:

         

Vessel operating costs

     177,055        161,290            342,883        313,592       

Costs of other marine revenues

     1,585        2,031            5,108        3,262       

Depreciation and amortization

     36,047        33,807            71,831        67,556       

Goodwill impairment

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

General and administrative

     41,867        37,773            82,531        75,354       

Gain on asset dispositions, net

     (1,833     (9,458)           (2,671     (11,175)      

 

 
     254,721        256,375            499,682        479,521       

 

 

Operating income (loss)

     57,197        (5,481)           106,684        25,980       

Other income (expenses):

         

Foreign exchange gain (loss)

     529        1,659            (1,222     2,473       

Equity in net earnings of unconsolidated companies

     3,357        3,456            5,720        5,945       

Interest income and other, net

     1,128        766            1,847        1,956       

Interest and other debt costs

     (7,148     (4,766)           (14,735     (8,827)      

 

 
     (2,134     1,115            (8,390     1,547       

 

 

Earnings (loss) before income taxes

     55,063        (4,366)           98,294        27,527       

Income tax expense

     13,707        510            24,082        7,845       

 

 

Net earnings (loss)

   $ 41,356        (4,876)           74,212        19,682       

 

 

Basic earnings (loss) per common share

   $ 0.84        (0.10)           1.49        0.38       

 

 

Diluted earnings (loss) per common share

   $ 0.83        (0.10)           1.48        0.38       

 

 

Weighted average common shares outstanding

     49,392,973        51,296,924            49,792,212        51,287,644       

Dilutive effect of stock options and restricted stock

     232,097        ---            214,291        ---       

 

 

Adjusted weighted average common shares

     49,625,070        51,296,924            50,006,503        51,287,644       

 

 

Cash dividends declared per common share

   $ 0.25        0.25            0.50        0.50       

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except share and per share data)  

 

 
      Quarter Ended
September 30,
     Six Months Ended
September 30,
 
     2012        2011      2012      2011     

 

 

Net earnings

   $ 41,356           (4,876      74,212         19,682      

Other comprehensive income/(loss):

             

Unrealized gains/(losses) on available-for-sale securities

     419           (980      (205      (1,001)     

Amortization of loss on derivative contract

     117           117         233         233      

 

 

Total comprehensive income

   $         41,892           (5,739      74,240         18,914      

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4


TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)              

 

 
     Six Months Ended
September 30,
 
     2012      2011     

 

 

Operating activities:

     

Net earnings

   $ 74,212          19,682      

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

     

Depreciation and amortization

     71,831          67,556      

Provision (benefit) for deferred income taxes

     (4,372)         (20,819)     

Gain on asset dispositions, net

     (2,671)         (11,175)     

Goodwill impairment

     ---          30,932      

Equity in earnings of unconsolidated companies, net of dividends

     (4,031)         629      

Compensation expense - stock-based

     10,320          4,944      

Excess tax benefits on stock options exercised

     (95)         (124)     

Changes in assets and liabilities, net:

     

Trade and other receivables

     (20,707)         (15,008)     

Marine operating supplies

     (2,281)         (2,769)     

Other current assets

     (5,565)         (4,653)     

Accounts payable

     16,195          (1,751)     

Accrued expenses

     6,176          8,204      

Accrued property and liability losses

     (241)         (21)     

Other current liabilities

     1,134          7,272      

Other liabilities and deferred credits

     3,508          2,639      

Other, net

     2,846          1,644      

 

 

Net cash provided by operating activities

     146,259          87,182      

 

 

Cash flows from investing activities:

     

Proceeds from sales of assets

     9,977          23,392      

Additions to properties and equipment

     (189,826)         (155,058)     

Other

     (1,338)         1,224      

 

 

Net cash used in investing activities

     (181,187)         (130,442)     

 

 

Cash flows from financing activities:

     

Principal payments on debt

     (60,000)         (40,000)     

Debt borrowings

     ---          165,000      

Debt issuance costs

     ---          (234)     

Proceeds from exercise of stock options

     938          725      

Cash dividends

     (25,058)         (25,889)     

Excess tax benefits on stock options exercised

     95          124      

Stock repurchases

     (65,028)         ---      

 

 

Net cash (used in) provided by financing activities

     (149,053)         99,726      

 

 

Net change in cash and cash equivalents

     (183,981)         56,466      

Cash and cash equivalents at beginning of period

     320,710          245,720      

 

 

Cash and cash equivalents at end of period

   $         136,729          302,186      

 

 

Supplemental disclosure of cash flow information:

     

Cash paid during the period for:

     

Interest

   $ 19,259          19,605      

Income taxes

   $ 27,075          24,444      

Non-cash investing activities:

     

Additions to properties and equipment

   $ 6,724          11,833      

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5


TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(Unaudited)

(In thousands)                                

 

 
          Common
    stock
    Additional
paid-in
capital
     Retained
earnings
    Accumulated
other
comprehensive
loss
    Total  

Balance at March 31, 2012

   $ 5,125        102,726           2,437,836        (19,330     2,526,357      

Total comprehensive income

     ---        ---           74,212        28        74,240      

Stock option activity

     3        2,148           ---        ---        2,151      

Cash dividends declared

     ---        ---           (25,169     ---        (25,169)     

Retirement of common stock

     (140     ---           (64,888     ---        (65,028)     

Amortization/cancellation of restricted stock units

     ---        3,867           ---        ---        3,867      

Amortization/cancellation of restricted stock

     (6     3,865           ---        ---        3,859      

 

 

Balance at September 30, 2012

   $ 4,982        112,606           2,421,991        (19,302     2,520,277      

 

 

Balance at March 31, 2011

   $ 5,188        90,204           2,436,736        (18,184     2,513,944      

Total comprehensive income

     ---        ---           19,682        (768     18,914      

Issuance of restricted stock

     2        ---           ---        ---        2      

Stock option activity

     ---        2,882           ---        ---        2,882      

Cash dividends declared

     ---        ---           (25,944     ---        (25,944)     

Amortization/cancellation of restricted stock

     ---        2,762           ---        ---        2,762      

 

 

Balance at September 30, 2011

   $ 5,190        95,848           2,430,474        (18,952     2,512,560      

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6


TIDEWATER INC.

NOTES TO 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 unaudited condensed consolidated financial statements 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, 2012, filed with the SEC on May 21, 2012.

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

The company made certain reclassifications to prior period amounts to conform to the current year presentation. These reclassifications did not have a material effect on the consolidated statement of financial position, results of operations or cash flows.

(2)    STOCKHOLDERS’ EQUITY

Common Stock Repurchase Program

On May 17, 2012, the company’s Board of Directors authorized the company to spend up to $200.0 million to repurchase shares of its common stock in open-market or privately-negotiated transactions. The effective period for this authorization is July 1, 2012 through June 30, 2013. 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 evaluates share repurchase opportunities relative to other investment opportunities and in the context of current conditions in the credit and capital markets. At September 30, 2012, the entire $200.0 million remains available to repurchase shares under the May 2012 share repurchase program.

In May 2011, the Board of Directors replaced its then existing July 2009 share repurchase program with a $200.0 million repurchase program that was in effect through June 30, 2012. The company was authorized to repurchase shares of its common stock in open-market or privately-negotiated transactions. The authorization of the May 2011 repurchase program ended on June 30, 2012, and the company utilized $100.0 million of the $200.0 million authorized.

The aggregate cost of common stock repurchased, along with number of shares repurchased, and average price paid per share is as follows:

 

                                                                                   
     Quarter Ended
September 30,
     Six Months Ended
September 30,
 
(In thousands, except share and per share data)    2012      2011          2012      2011      

 

 

Aggregate cost of common stock repurchased

   $       ---         ---             65,028         ---       

Shares of common stock repurchased

     ---         ---             1,400,500         ---       

Average price paid per common share

   $ ---         ---             46.43         ---       

 

 

 

7


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Dividends

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

 

                                                                           
       Quarter Ended
September 30,
       Six Months Ended
September 30,
 
(In thousands, except dividend per share)              2012        2011                    2012        2011          

 

 

Dividends declared

     $ 12,544           12,975               25,169           25,944           

Dividend per share

       0.25           0.25               0.50           0.50           

 

 

(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 quarters and the six-month periods ended September 30, is as follows:

 

                                                                           
       Quarter Ended
September 30,
       Six Months Ended
September 30,
 
               2012      2011                     2012     2011           

 

 

Effective tax rate applicable to pre-tax earnings

       24.9      11.7%             24.5     28.5%         

 

 

The effective tax rate was lower during the six months ended September 30, 2012, as compared to the six months ended September 30, 2011, primarily because of the current expected mix of pre-tax earnings between the company’s United States (U.S.) and international businesses and an expectation for lower estimated operating margin in certain jurisdictions that tax on the basis of deemed profits. In addition, the 24.5% effective tax rate for the six months ended September 30, 2012 is lower than the U.S. statutory income tax rate of 35% primarily because the company has not recognized a U.S. deferred tax liability associated with temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration.

The company’s balance sheet at September 30, 2012 reflects the following in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes:

 

(In thousands)              September 30,
          2012
 

 

 

Tax liabilities for uncertain tax positions

   $             15,970           

Income tax payable

     21,899           

 

 

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

Unrecognized tax benefits, which would lower the effective tax rate if realized at September 30, 2012, are as follows:

 

(In thousands)              September 30,
          2012
 

 

 

Unrecognized tax benefit related to state tax issues

   $             8,736           

Interest receivable on unrecognized tax benefit related to state tax issues

     64           

 

 

With limited exceptions, the company is no longer subject to tax audits by U.S. federal, state, local or foreign taxing authorities for years prior to 2005. 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.

 

8


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(4)    EMPLOYEE BENEFIT PLANS

U.S. Defined Benefit Pension Plan

The company has a defined benefit pension plan (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 have provided the company with 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 quarters and six-month periods ended September 30, 2012 and 2011, and does not expect to contribute to the plan during the remaining quarters of fiscal 2013.

Supplemental Executive Retirement Plan

The company also offers a non-contributory, defined benefit supplemental executive retirement plan (supplemental plan) that provides pension benefits to certain employees in excess of those allowed under the company’s tax-qualified pension plan. A Rabbi Trust has been established for the benefit of participants in the supplemental plan. The Rabbi Trust assets, which are invested in a variety of marketable securities (none of which is Tidewater stock), 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 supplemental plan is a non-qualified plan and, as such, the company is not required to make contributions to the supplemental plan. The company did not contribute to the supplemental plan during the quarters and six-month periods ended September 30, 2012 and 2011.

As a result of the May 31, 2012 retirement of Dean E. Taylor, former President and Chief Executive Officer of Tidewater Inc., Mr. Taylor is expected to receive in December 2012 an estimated $12.6 million lump sum distribution in full settlement and discharge of his supplemental executive retirement plan benefit. A settlement loss, which is currently estimated to be $4.4 million, will be recorded at the time of distribution.

Investments held in a Rabbi Trust for the benefit of participants in the supplemental plan are included in other assets at fair value. The following table summarizes the carrying value of the trust assets, including unrealized gains or losses at September 30, 2012 and March 31, 2012:

 

(In thousands)    September 30,
    2012
     March 31,    
2012    
 

 

 

Investments held in Rabbi Trust

   $         16,904                 17,366       

Unrealized gains (losses) in fair value of trust assets

     46                 251       

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

     25                 135       

Obligations under the supplemental plan

     32,063                 30,633       

 

 

The unrealized gains or losses in the fair 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.

 

9


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 payments as benefits are required.

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)      2012         2011         2012         2011       

 

 

Pension Benefits:

                   

Service cost

     $ 273            219            546            438        

Interest cost

       1,072            1,103            2,144            2,206        

Expected return on plan assets

       (687)           (644)           (1,374)           (1,288)       

Amortization of prior service cost

       12            12            24            24        

Recognized actuarial loss

       448            440            896            880        

 

 

Net periodic benefit cost

     $     1,118            1,130            2,236            2,260        

 

 

Other Benefits:

                   

Service cost

     $ 119            139            238            278        

Interest cost

       309            345            618            690        

Amortization of prior service cost

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

Recognized actuarial (gain) loss

       ---             (1)           ---             (2)       

 

 

Net periodic benefit cost

     $ (80)           (25)           (160)           (50)       

 

 

(5)    INDEBTEDNESS

Revolving Credit and Term Loan Agreement

Borrowings under the company’s $575 million amended and restated revolving credit facility (“credit facility”), which includes a $125 million term loan (“term loan”) and a $450 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 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. In January 2012, the company elected to borrow the entire $125 million available under the term loan facility and used the proceeds to fund working capital and for general corporate purposes. Principal repayments on the 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. Approximately $140 million of principal repayments due in the quarter ending September 30, 2013 are classified as long term debt in the accompanying balance sheet at September 30, 2012 because the company has the ability and intent to fund this with the revolver.

 

10


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The company has $125 million in term loan borrowings outstanding at September 30, 2012 (whose fair value approximates the carrying value because the borrowings bear interest at variable Eurodollar rates plus a margin on leverage), and the entire $450 million of the revolver was available for future financing needs, with no outstanding borrowings at September 30, 2012, or March 31, 2012 (Level 2 inputs as defined in the accounting guidance).

Senior Debt Notes

The determination of fair value includes an estimated credit spread between our long term debt and treasuries with similar matching expirations. The credit spread is determined based on comparable publicly traded companies in the oilfield service segment with similar credit ratings (Level 2 inputs as defined in the accounting guidance).

August 2011 Senior Notes

On August 15, 2011, the company issued $165 million of senior unsecured notes to a group of institutional investors. A summary of these notes outstanding at September 30, 2012 and March 31, 2012, is as follows:

 

(In thousands, except weighted average data)        September 30,
        2012
     March 31,
2012
 

 

 

Aggregate debt outstanding

   $     165,000                165,000           

Weighted average remaining life in years

     8.1                8.6           

Weighted average coupon rate on notes outstanding

     4.42%             4.42%       

Fair value of debt outstanding

     181,716                166,916           

 

 

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 million of senior unsecured notes, and the sale of an additional $115 million of notes was completed on December 30, 2010. A summary of the aggregate amount of these notes outstanding at September 30, 2012 and March 31, 2012, is as follows:

 

(In thousands, except weighted average data)        September 30,
    2012
     March 31,
2012
 

 

 

Aggregate debt outstanding

   $     425,000                  425,000           

Weighted average remaining life in years

     7.1                  7.6           

Weighted average coupon rate on notes outstanding

     4.25%               4.25%        

Fair value of debt outstanding

     463,344                  430,339           

 

 

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, 2012 and March 31, 2012, is an after-tax loss of $3.1 million ($4.8 million pre-tax), and $3.3 million ($5.1 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.

 

11


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

July 2003 Senior Notes

In July 2003, the company completed the sale of $300 million of senior unsecured notes. A summary of the aggregate amount of remaining senior unsecured notes that were issued in July 2003 and outstanding at September 30, 2012 and March 31, 2012, is as follows:

 

(In thousands, except weighted average data)        September 30,
    2012
     March 31,
2012
 

 

 

Aggregate debt outstanding

   $     175,000                 235,000         

Weighted average remaining life in years

     1.2                 1.4         

Weighted average coupon rate on notes outstanding

     4.47%              4.43%     

Fair value of debt outstanding

     180,332                 240,585        

 

 

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%.

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 quarters and the six-month periods ended September 30, are as follows:

 

     Quarter Ended
September 30,
       Six Months Ended
September 30,
 
(In thousands)    2012        2011            2012        2011          

 

 

Interest and debt costs incurred, net of interest capitalized

   $ 7,148           4,766               14,735           8,827           

Interest costs capitalized

     2,913           4,188               5,736           8,598           

 

 

Total interest and debt costs

   $         10,061           8,954               20,471           17,425           

 

 

(6)    EARNINGS PER SHARE

The components of basic and diluted earnings per share for the quarters and the six-month periods ended September 30, are as follows:

 

     Quarter Ended
September 30,
     Six Months Ended
September 30,
 
(In thousands, except share and per share data)    2012      2011           2012      2011          

 

 

Net Income available to common shareholders (A)

   $ 41,356         (4,876)             74,212         19,682           

Weighted average outstanding shares of
common stock, basic (B)

     49,392,973         51,296,924               49,792,212         51,287,644           

Dilutive effect of options and restricted stock
awards and units

     232,097         ---               214,291         ---           

 

 

Weighted average common stock and equivalents (C)

     49,625,070         51,296,924               50,006,503         51,287,644           

Earnings per share, basic (A/B)

   $ 0.84         (0.10)             1.49         0.38           

Earnings per share, diluted (A/C)

   $ 0.83         (0.10)             1.48         0.38           

Additional information:

           

Antidilutive incremental options and restricted
stock awards and units

     54,694         281,129               51,864         298,328           

 

 

 

12


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(7)    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, 2012:

 

(In thousands, except vessel count)    Number
of
Vessels
         

Total    

Cost    

             Invested
        Through
         09/30/12
             Remaining  
        Balance 
         09/30/12 
 

 

 

Vessels under construction:

              

Deepwater platform supply vessels

     17            $ 541,596         188,160         353,436      

Towing-supply/supply

     4              75,072         13,811         61,261      

Crewboats and other

     7              72,692         41,760         30,936      

 

 

Total vessels under construction

     28              688,854         243,731         445,633      

 

 

Vessels to be purchased:

              

Deepwater platform supply vessels

     2              47,476         7,043         40,433      

 

 

Total vessels to be purchased

     2              47,476         7,043         40,433      

 

 

Total vessel commitments

     30            $         736,840         250,774         485,066      

 

 

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. The deepwater vessels under construction range between 3,000 and 6,360 deadweight tons (DWT) of cargo capacity, while the towing supply/supply vessels under construction have 7,100 brake horsepower (BHP). Scheduled delivery for the new-build vessels will begin in October 2012, with delivery of the final new-build vessel expected in January 2015.

Regarding the vessels to be purchased, the company took possession of both PSVs in October 2012. The first PSV has 3,500 DWTs of cargo capacity and the second PSV has 3,100 DWTs of cargo capacity. As of September 30, 2012, the company had invested $7.0 million to acquire these two vessels.

With its commitment to modernizing its fleet through its vessel construction and acquisition program over the past decade, the company is replacing its older fleet of vessels with fewer, larger and more efficient vessels, while also enhancing the size and capabilities of the company’s fleet. These efforts will continue, with the company anticipating that it will use its 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 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 has suspended construction on the vessel and both parties continue to pursue that arbitration. The company has third party credit support in the form of insurance coverage for 90% of the progress payments made on this vessel, or all but approximately $2.4 million of the carrying value of the accumulated costs through September 30, 2012.

The company generally requires shipyards to provide third party credit support in the event that vessels are not completed and delivered timely and 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

 

13


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 by minimizing pre-delivery payments and through other contract terms with the shipyard.

Two vessels under construction at a domestic shipyard have fallen substantially behind schedule. The shipyard notified the company that the shipyard should be entitled to a delay in the delivery dates and an increase in the contract price for both vessels because the company was late in completing and providing the shipyard with detailed design drawings of the vessel. The detailed design drawings were developed for the company by a third party designer. While the company believes that other factors also contributed to the delay, the company and the shipyard reached an agreement during the quarter ended September 30, 2012 which includes an increase in the contract price of each vessel, one or more change orders for each hull, among other modifications to the contract terms and the extension of the delivery dates of the two vessels by approximately seven and eight months, respectively.

Merchant Navy Officers Pension Fund

A 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 $4.1 million and $6.7 million at September 30, 2012 and March 31, 2012, respectively, all of which has been accrued. No additional liabilities were recorded during the six months ended September 30, 2012, and $2.5 million of payments were made during the six months ended September 30, 2012. Payments totaling $2.0 million were made into the fund during the quarter ended September 30, 2011.

In the future, the fund’s Trustee may claim that the company owes additional amounts for various reasons, including negative fund investment returns 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. The company objected to that decision and has reached an agreement with the Trustee to pay the total remaining assessments (aggregating to $4.1 million as of September 30, 2012) in installments through October 2014.

Sonatide Joint Venture

The company has previously disclosed that its existing Sonatide joint venture agreement with Sonangol had been extended to December 31, 2012 to allow ongoing joint venture restructuring negotiations to continue.

The company is continuing discussions with Sonangol to restructure the existing joint venture and overall commercial relationship, although important and fundamental issues in the parties’ efforts to restructure the existing relationship remain outstanding and unresolved. While the parties had several constructive meetings during the quarter ended September 30, 2012, the parties did not make significant progress during the quarter in resolving those issues. If negotiations relating to the Sonatide joint venture are ultimately unsuccessful, the company will work toward an orderly wind up of the joint venture, and the company is preparing itself for that possibility. Based on prior conduct between the parties during this period of uncertainty, we believe that the joint venture would be allowed to honor existing vessel charter agreements through their contract terms. Even though the global market for offshore supply vessels is currently reasonably well balanced, with offshore vessel supply approximately equal to offshore vessel demand, there would likely be negative financial impacts associated with the wind up of the existing joint venture and the possible redeployment of vessels to other markets, including mobilization costs and costs to redeploy Tidewater shore-based employees to other areas,

 

14


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

in addition to lost revenues associated with potential downtime between vessel contracts. These financial impacts could, individually or in the aggregate, be material to our results of operations and cash flows for the periods when such costs would be absorbed. If there is a need to redeploy vessels which are currently deployed in Angola to other international markets, Tidewater believes that there is sufficient demand for these vessels at prevailing market day rates.

Sonangol continues to express a willingness to consider some further contracting activity by the Sonatide joint venture. During the quarter ended September 30, 2012, the Sonatide joint venture entered into two short term contracts, both of which have now expired.

During the nine months ended September 30, 2012, the company redeployed vessels from its Angolan operations to other markets and also transferred vessels into its Angolan operations from other markets. The net reduction in the number of vessels operating in its Angolan operations during this nine month period was not significant. The vessels that were redeployed outside its Angolan operations during the nine months ended September 30, 2012 were chartered at new day rates that were comparable to, or higher than their respective expiring contracts in Angola, in part because of generally improving markets for these vessels.

For the six months ended September 30, 2012, Tidewater’s Angolan operations generated vessel revenues of approximately $134.3 million, or 22%, of its consolidated vessel revenue, from an average of approximately 86 Tidewater-owned vessels that are marketed through the Sonatide joint venture (11 of which were stacked on average during the six months ended September 30, 2012), and, for the six months ended September 30, 2011, generated vessel revenues of approximately $127.8 million, or 25%, of consolidated vessel revenue, from an average of approximately 95 Tidewater-owned vessels (13 of which were stacked on average during the six months ended September 30, 2011). For the year ended March 31, 2012, Tidewater’s Angolan operations generated vessel revenues of approximately $254 million, or 24%, of its consolidated vessel revenue, from an average of approximately 93 Tidewater-owned vessels (14 of which were stacked on average in fiscal 2012), and, for the year ended March 31, 2011, generated vessel revenues of approximately $237 million, or 23%, of consolidated vessel revenue, from an average of approximately 97 vessels (13 of which were stacked on average in fiscal 2011).

In addition to the company’s Angolan operations, which reflect the results of Tidewater-owned vessels marketed through the Sonatide joint venture (owned 49% by Tidewater), ten vessels and other assets are owned by the Sonatide joint venture. As of September 30, 2012 and March 31, 2012, the carrying value of Tidewater’s investment in the Sonatide joint venture, which is included in “Investments in, at equity, and advances to unconsolidated companies,” is approximately $50 million and $46 million, respectively.

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 of 155.0 million Brazilian reais (approximately $76.4 million as of September 30, 2012). The assessment of these fines is for the alleged failure of these subsidiaries to obtain import licenses with respect to 17 Tidewater vessels that provided Brazilian offshore vessel services to Petrobras, the Brazilian national oil company, over a three-year period ending December 2009. After consultation with its Brazilian tax advisors, 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 applicable law or regulations, 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 Customs Office. After consultation with its Brazilian tax advisors, 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 neither 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. In December 2011,

 

15


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

an administrative appeals board issued a decision that disallowed 149.0 million Brazilian reais (approximately $73.4 million as of September 30, 2012) of the total fines sought by the Macae Customs Office. The full decision is subject to further administrative appellate review, and the company understands that this further full review by a secondary appellate board is ongoing. The company is contesting the decision with respect to the remaining 6.0 million Brazilian reais (approximately $3.0 million as of September 30, 2012) in fines. The company believes that the ultimate resolution of this matter 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.

The company’s two Brazilian subsidiaries 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 were 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 within the territory of 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 two vessels to start new charters in Brazil, the company filed two suits on August 22, 2011 and April 5, 2012, respectively, against the Brazilian state and judicially deposited the respective state tax for these newly imported vessels. As of September 30, 2012, 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. 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. 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 recorded a $43.7 million charge in fiscal 2010 to account for the vessel seizures, net of insurance recoveries, and provides for accounts receivables due from PDVSA and Petrosucre.

As a result of these actions, the company filed with the International Centre for Settlement of Investment Disputes (ICSID) a Request for Arbitration against the Republic of Venezuela seeking compensation for the

 

16


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

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 a briefing and hearing schedule related to jurisdictional issues. The briefing and hearings on jurisdiction concluded on March 1, 2012. The company expects the arbitration tribunal to issue a written ruling on jurisdictional issues prior to the end of calendar 2012. To the extent that the arbitration tribunal finds a basis for jurisdiction over this dispute, the company intends to continue diligently to prosecute its claim in the arbitration. While the company believes, after consultation with its advisors, that it is entitled to full reparation for the losses suffered as a result of the actions taken by the Republic, there can be no assurances that the company will prevail in the arbitration.

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 an 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 has reported to the Department of Justice (DOJ) and the Securities and Exchange Commission the results of the investigation, and the company has entered into separate agreements with these two U.S. agencies to resolve the matters reported by special counsel. The company subsequently also entered into an agreement with the Federal Government of Nigeria (FGN) to resolve similar issues with the FGN. The company has previously reported the principal terms of these three agreements. Certain aspects of the agreement with the DOJ are set forth below.

Tidewater Marine International Inc. (“TMII”), a wholly-owned subsidiary of the company organized in the Cayman Islands, and the DOJ entered into a Deferred Prosecution Agreement (“DPA”). Pursuant to the DPA, the DOJ deferred criminal charges against TMII for a period of three years and seven days from the date of judicial approval of the Agreement, in return for: (a) TMII’s acceptance of responsibility for, and agreement not to contest or contradict the truthfulness of, the statement of facts and allegations contained in a three-count criminal information to be filed concurrently with the DPA; (b) TMII’s payment of a $7.35 million fine (which has been paid), (c) TMII’s and Tidewater Inc.’s compliance with certain undertakings relating to compliance with the FCPA and other applicable laws in connection with the company’s operations, and cooperation with domestic and foreign authorities in connection with the matters that are the subject of the DPA; (d) TMII’s and Tidewater Inc.’s agreement to continue to address any deficiencies in the company’s internal controls, policies and procedures relating to compliance with the FCPA and other applicable anti-corruption laws, if and to the extent not already addressed; and (e) Tidewater Inc.’s agreement to report to the DOJ in writing annually for the term of the DPA regarding remediation of the matters that are the subject of the DPA, the implementation of any enhanced internal controls, and any evidence of improper payments the company may have discovered during the term of the DPA. Tidewater submitted its first annual report to the DOJ in November 2011.

If TMII and Tidewater Inc. comply with the DPA during its term, the DOJ will not bring the charges set out in the information. In the event TMII or Tidewater Inc. breaches the DPA, the DOJ has discretion to extend its term for up to a year, or bring certain criminal charges against TMII as outlined in the DPA. A federal district court accepted the DPA on November 9, 2010.

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.

 

17


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(8)    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

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, 2012:

 

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

Significant
unobservable
inputs

(Level 3)

 

Equity securities:

           

Common stock

   $ 7,976          7,976              ---         ---       

Preferred stock

     11          11              ---         ---       

Foreign stock

     620          620              ---         ---       

American depository receipts

     1,943          1,893              50         ---       

Preferred American depository receipts

             9              ---         ---       

Real estate investment trusts

     90          90              ---         ---       

Debt securities:

           

Government debt securities

     2,833          1,069              1,764         ---       

Open ended mutual funds

     2,649          2,649              ---         ---       

Cash and cash equivalents

     883          (40)             923         ---       

 

 

Total

   $ 17,014          14,277              2,737         ---       

Other pending transactions

     (110)         (110)             ---         ---       

 

 

Total fair value of plan assets

   $         16,904          14,167              2,737         ---       

 

 

 

18


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

The following table provides the fair value hierarchy for the plan assets measured at fair value as of March 31, 2012:

 

(In thousands)    Total      

Quoted prices in

active markets
(Level 1)

     Significant
observable
inputs
(Level 2)
    

Significant
unobservable
inputs

(Level 3)

     

 

Equity securities:

             

Common stock

   $ 8,248          8,248              ---         ---     

Preferred stock

     12          12              ---         ---     

Foreign stock

     542          542              ---         ---     

American depository receipts

     2,166          2,108              58         ---     

Preferred American depository receipts

             8                

Real estate investment trusts

     139          139              ---         ---     

Debt securities:

             

Government debt securities

     2,891          1,219              1,672         ---     

Open ended mutual funds

     2,690          2,690              ---         ---     

Cash and cash equivalents

     922          401              521         ---     

 

Total

   $ 17,618          15,367              2,251         ---     

Other pending transactions

     (252)         (252)             ---         ---     

 

Total fair value of plan assets

   $         17,366          15,115              2,251         ---     

 

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 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 seven foreign exchange spot contracts outstanding at September 30, 2012 which totaled an aggregate notional value of $1.6 million. These seven spot contracts settled by October 2, 2012. The company had one foreign exchange spot contract outstanding at March 31, 2012, which totaled a notional value of $1.0 million. The one spot contract settled by April 2, 2012.

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. Forward contracts are valued using counterparty quotations, and we validate the information obtained from the counterparties in calculating the ultimate fair values using the market approach and obtaining broker quotations. As such, these derivative contracts are classified as Level 2.

At September 30, 2012, the company had four 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 (7) and elsewhere in this document. The forward contracts have

 

19


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

expiration dates between March 20, 2013 and September 30, 2013. The combined change in fair value of the forward contracts was approximately $0.1 million, all of which was recorded as a foreign exchange gain during the six months ended September 30, 2012, 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, 2012, the company had four British pound forward contracts outstanding, which were generally intended to hedge the company’s foreign exchange exposure relating to its MNOPF liability as disclosed in Note (7) and elsewhere in this document. The forward contracts expire at various times through March 2013. The combined change in fair value of the forward contracts was approximately $0.1 million, all of which was recorded as a foreign exchange gain during the fiscal year ended March 31, 2012, because the forward contracts did not qualify as hedge instruments. All changes in fair value of the forward contracts were recorded in earnings.

The following table provides the fair value hierarchy for the company’s other financial instruments measured as of September 30, 2012:

 

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

Significant    
unobservable    
inputs    

(Level 3)    

 

 

 

Cash equivalents

   $     77,439         77,439               ---         ---         

Long-term British pound forward derivative contracts

     4,571         ---                4,571         ---         

 

 

Total fair value of assets

   $ 82,010         77,439               4,571         ---         

 

 

The following table provides the fair value hierarchy for the company’s other financial instruments measured as of March 31, 2012:

 

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

Significant    
unobservable    
inputs    

(Level 3)    

 

 

 

Cash equivalents

   $     288,446         288,446               ---           ---         

Long-term British pound forward derivative contracts

     7,042         ---               7,042           ---         

 

 

Total fair value of assets

   $ 295,488         288,446               7,042           ---         

 

 

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. The company reviews the vessels in its active fleet for impairment whenever events occur or changes in circumstances indicate that the carrying amount of an asset group 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. With respect to vessels that have not been stacked, we group together for impairment testing purposes vessels with similar operating and marketing characteristics. We also subdivide our groupings of assets with similar operating and marketing characteristics between our older vessels and newer vessels.

The company estimates cash flows based upon historical data adjusted for the company’s best estimate of expected future market performance, which, in turn, is based on industry trends. If an asset group fails the undiscounted cash flow test, 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, as defined by ASC 360) 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.

In addition to the periodic review of its active long-lived assets for impairment when circumstances warrant, the company also performs a review of its stacked vessels and vessels withdrawn from service every six months or whenever changes in circumstances indicate that the carrying amount of a vessel may not be

 

20


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

recoverable. Management estimates each stacked vessel’s fair value by considering items such as the vessel’s age, length of time stacked, likelihood of a return to active service, actual recent sales of similar vessels, among others, which are unobservable inputs. In certain situations we obtain an estimate of the fair value of the stacked vessel from third-party appraisers or brokers. The company records an impairment charge when the carrying value of a vessel withdrawn from service or a stacked vessel exceeds its estimated fair value. The estimates of fair value of stacked vessels are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future.

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, 2012 and 2011, 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)    2012          2011          2012          2011      

 

 

Amount of impairment incurred

   $ 790             256             3,564             2,570       

Combined fair value of assets incurring impairment

         1,192             —             8,602             3,913       

 

 

(9) OTHER ASSETS, ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES AND DEFERRED CREDITS

A summary of other assets at September 30, 2012 and March 31, 2012 is as follows:

 

(In thousands)    September 30,
  2012
     March 31,    
2012    
 

 

 

Recoverable insurance losses

   $ 3,436                 3,150           

Deferred income tax assets

     68,350                 64,090           

Deferred finance charges

     5,935                 6,797           

Savings plans and supplemental plan

     29,564                 29,538           

Noncurrent tax receivable

     9,106                 9,106           

Other

     3,963                 5,173           

 

 
   $     120,354                 117,854           

 

 

A summary of accrued expenses at September 30, 2012 and March 31, 2012 is as follows:

 

(In thousands)        September 30,
    2012
     March 31,    
2012    
 

 

 

Payroll and related payables

   $ 31,392                 31,729           

Commissions payable

     15,390                 14,309           

Accrued vessel expenses

     83,900                 76,078           

Accrued interest expense

     8,085                 8,095           

Other accrued expenses

     5,679                 4,742           

 

 
   $       144,446                 134,953           

 

 

A summary of other current liabilities at September 30, 2012 and March 31, 2012 is as follows:

 

(In thousands)            September 30,
        2012
     March 31,    
2012    
 

 

 

Taxes payable

   $ 24,608                 23,791           

Deferred credits - current

     1,165                 2,278           

Dividend payable

     267                 156           

 

 
   $           26,040                 26,225           

 

 

 

21


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

A summary of other liabilities and deferred credits at September 30, 2012 and March 31, 2012 is as follows:

 

(In thousands)                September 30,
             2012
     March 31,    
2012    
 

 

 

Postretirement benefits liability

   $ 27,946                27,809           

Pension liabilities

     43,150                40,875           

Deferred gain on vessel sales

     39,568                39,568           

Other

     19,755                20,303           

 

 
   $             130,419                128,555           

 

 

(10)    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 September 2011, the FASB issued guidance on ASC 350, Intangibles-Goodwill and Other, for testing goodwill for impairment. The new guidance provides a company the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company’s assessment determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized for that reporting unit, if any. If the company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. The guidance became effective for us on April 1, 2012. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations, or cash flows.

In June 2011, the FASB issued guidance on ASC 220, Comprehensive Income, regarding the presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. Instead, a company is required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance also requires companies to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. In December 2011, the FASB issued guidance which indefinitely defers the guidance related to the presentation of reclassification adjustments. The guidance became effective for us on April 1, 2012. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations, or cash flows.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The guidance became effective for us on January 1, 2012. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations, or cash flows.

(11)    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.

 

22


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

We manage and measure our business performance in four distinct operating segments: Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe. These 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.

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, 2012 and 2011. 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      Six Months Ended  
                    September 30,                      September 30,          
(In thousands)                   2012                      2011                      2012                     2011        

 

 

Revenues:

              

Vessel revenues:

              

Americas

     $           82,316               81,892               159,966               162,569         

Asia/Pacific

        45,738               29,127               97,480               64,626         

Middle East/N. Africa

        32,051               24,810               64,501               50,867         

Sub-Saharan Africa/Europe

        149,717               112,583               277,969               223,665         

 

 
        309,822               248,412               599,916               501,727         

Other operating revenues

        2,096               2,482               6,450               3,774         

 

 
     $         311,918               250,894               606,366               505,501         

 

 

Vessel operating profit:

              

Americas

     $         9,506               9,530               19,698               21,384         

Asia/Pacific

        7,826               (4,776)              22,734               494         

Middle East/N. Africa

        6,280               (996)              12,562               (968)        

Sub-Saharan Africa/Europe

        44,330               21,631               71,426               43,855         

 

 
        67,942               25,389               126,420               64,765         

Corporate expenses

        (12,484)              (9,361)              (22,951)              (18,882)        

Goodwill impairment

           (30,932)                 (30,932)        

Gain on asset dispositions, net

        1,833               9,458               2,671               11,175         

Other operating expense

        (94)              (35)              544               (146)        

 

 

Operating income (loss)

     $         57,197               (5,481)              106,684               25,980         

 

 

Foreign exchange gain (loss)

        529               1,659               (1,222)              2,473         

Equity in net earnings of unconsolidated companies

        3,357               3,456               5,720               5,945         

Interest income and other, net

        1,128               766               1,847               1,956         

Interest and other debt costs

        (7,148)              (4,766)              (14,735)              (8,827)        

 

 

Earnings (loss) before income taxes

     $         55,063               (4,366)              98,294               27,527         

 

 

Depreciation and amortization:

              

Americas

     $         10,629               9,800               20,721               19,294         

Asia/Pacific

        4,833               5,039               9,946               10,153         

Middle East/N. Africa

        4,388               4,138               8,467               8,740         

Sub-Saharan Africa/Europe

        15,309               13,849               30,802               27,595         

Corporate

        888               981               1,895               1,774         

 

 
     $         36,047               33,807               71,831               67,556         

 

 

Additions to properties and equipment:

              

Americas

     $         25,118               2,072               41,896               4,318         

Asia/Pacific

        5,071               277               5,165               857         

Middle East/N. Africa

        721               705               1,795               1,153         

Sub-Saharan Africa/Europe

        36,659               2,540               48,534               6,822         

Corporate (A)

        44,194               91,645               88,285               153,741         

 

 
     $         111,763               97,239               185,675               166,891         

 

 

 

(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.

 

23


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

The following table provides a comparison of total assets at September 30, 2012 and March 31, 2012:

 

           September 30,            March 31,  
(In thousands)              2012            2012      

 

 

Total assets:

     

Americas

   $       1,023,442                 1,031,962       

Asia/Pacific

     613,480                 654,357       

Middle East/North Africa

     449,452                 405,625       

Sub-Saharan Africa/Europe

     1,456,216                 1,519,124       

 

 
     3,542,590                 3,611,068       

Investments in, at equity, and advances to unconsolidated companies

     50,108                 46,077       

 

 
     3,592,698                 3,657,145       

Corporate (A)

     429,390                 404,473       

 

 
   $ 4,022,088                 4,061,618       

 

 

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, 2012 and March 31, 2012, $242.8 million and $249.4 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, 2012 and 2011:

 

          Quarter Ended      Six Months Ended  
Revenue by vessel class         September 30,      September 30,  
(In thousands)         2012       %       2011       %        2012       %       2011       %  

 

 

Americas fleet:

                  

Deepwater vessels

  $          44,747              14%        36,639            15%         81,027            14%        73,044            15%   

Towing-supply/supply

      31,109              10%        36,648            15%         65,461            11%        72,334            14%   

Other

      6,460              2%        8,605            3%         13,478            2%        17,191            3%   

Total

  $          82,316              27%        81,892            33%         159,966            27%        162,569            32%   

Asia/Pacific fleet:

                  

Deepwater vessels

  $          24,592              8%        12,264            5%         49,929            8%        28,193            6%   

Towing-supply/supply

      20,229              7%        15,870            6%         45,729            8%        34,314            7%   

Other

      917              <1%        993            <1%         1,822            <1%        2,119            <1%   

Total

  $          45,738              15%        29,127            12%         97,480            16%        64,626            13%   

Middle East/N. Africa fleet:

                  

Deepwater vessels

  $          12,275              4%        11,782            5%         23,559            4%        22,533            4%   

Towing-supply/supply

      18,859              6%        11,616            5%         38,859            6%        25,090            5%   

Other

      917              <1%        1,412            1%         2,083            <1%        3,244            1%   

Total

  $          32,051              10%        24,810            10%         64,501            10%        50,867            10%   

Sub-Saharan Africa/Europe fleet:

                  

Deepwater vessels

  $          67,696              22%        45,605            18%         130,311            22%        84,111            17%   

Towing-supply/supply

      63,548              20%        48,698            20%         112,560            20%        101,324            20%   

Other

      18,473              6%        18,280            7%         35,098            6%        38,230            8%   

Total

  $          149,717              48%        112,583            45%         277,969            47%        223,665            45%   

Worldwide fleet:

                  

Deepwater vessels

  $          149,310              48%        106,290            43%         284,826            47%        207,881            41%   

Towing-supply/supply

      133,745              43%        112,832            45%         262,609            44%        233,062            46%   

Other

      26,767              9%        29,290            12%         52,481            9%        60,784            12%   

Total

  $          309,822              100%        248,412            100%         599,916            100%        501,727            100%   

 

 

 

24


TIDEWATER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(12)    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.

During fiscal 2012, 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 was assigned to the Americas segment. Goodwill of approximately $279.4 million historically assigned to the International segment was 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 as prescribed in ASC 350, Intangibles-Goodwill and Other (ASC 350) and determined on the basis of the step one of the goodwill impairment test that the carrying value of its Middle East/North Africa unit exceeded its fair value thus triggering the second step of the goodwill analysis as then prescribed by ASC 350. An estimated goodwill impairment charge of $30.9 million was recorded during the quarter ended September 30, 2011. Step two of the assessment was completed during the quarter ended December 31, 2011 and there was no further adjustment to goodwill.

Goodwill by reportable segment at September 30, 2012 and at March 31, 2012 is as follows:

 

         September 30,      March 31,  
(In thousands)        2012      2012  

 

 

Americas

   $ 114,237                   114,237       

Asia/Pacific

     56,283                   56,283       

Middle East/N. Africa

     ---                   ---       

Sub-Saharan Africa/Europe

     127,302                   127,302       

 

 
   $         297,822                   297,822       

 

 

(13)    SUBSEQUENT EVENTS

During October 2012, the company elected to repurchase, for a total $8.4 million, a platform supply vessel that it had sold and leased back during fiscal 2006. Please refer to the “Off-Balance Sheet Arrangements” section of Management Discussion and Analysis in Item 2 of this report for a discussion on the company’s sale/leaseback vessels.

 

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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, 2012, and the related condensed consolidated statements of earnings, comprehensive income, cash flows, and stockholders’ equity for the three-month and six-month periods ended September 30, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Pubic 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, 2012, 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 21, 2012, 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, 2012 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 6, 2012

 

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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 reflected by such forward-looking statements. 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 political risk countries where we operate; foreign currency fluctuations; labor changes proposed by international conventions; increased regulatory burdens and oversight; 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, 2012, filed with the Securities and Exchange Commission (SEC) on May 21, 2012, 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 may 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, 2012, filed with the SEC on May 21, 2012.

About Tidewater

We provide 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. We operate vessels in most of the world’s significant offshore crude oil and natural gas

 

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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 over the last six decades. At September 30, 2012, the company had 333 vessels (of which 10 were owned by joint ventures, 61 were stacked and two were withdrawn from service) available to serve 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 offshore vessel 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, ROV operations, and seismic and subsea 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 many other energy service companies, our business activity is largely dependent on the level of drilling and exploration activity of 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.

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

Principal Factors That Drive Our Operating Costs

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

Fleet size, fleet composition, geographic areas of operation, supply and demand for marine personnel, and local labor requirements are the major factors which affect overall crew costs in all segments. In addition, the company’s newer, more technologically sophisticated anchor handling towing supply vessels (AHTS) and platform supply vessels (PSVs) generally require a greater number of specially trained, more highly compensated fleet personnel than the company’s older, smaller and less sophisticated vessels. Competition for skilled crew personnel has intensified as new-build support vessels currently under construction increase the number of technologically sophisticated offshore vessels operating worldwide. It is expected that crew cost will likely increase as competition for skilled personnel intensifies.

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. The company will generally incur drydocking costs only if economically justified, 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, it stacks and occasionally sells the vessel because it 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, vessel downtime associated with drydockings and major repairs and maintenance can have a significant effect on the company’s revenues and operating costs.

 

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At times, vessel drydockings take on an increased significance to the company and its financial performance. Older vessels may 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 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 vessel 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 over 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 ongoing 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

We operate 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 eliminate entirely the foregoing risks, though the wide geographic dispersal of the company’s vessels helps reduce the 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.

 

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Sonatide Joint Venture

The company has previously disclosed that its existing Sonatide joint venture agreement with Sonangol had been extended to December 31, 2012 to allow ongoing joint venture restructuring negotiations to continue.

The company is continuing discussions with Sonangol to restructure the existing joint venture and overall commercial relationship, although important and fundamental issues in the parties’ efforts to restructure the existing relationship remain outstanding and unresolved. While the parties had several constructive meetings during the quarter ended September 30, 2012, the parties did not make significant progress during the quarter in resolving those issues. If negotiations relating to the Sonatide joint venture are ultimately unsuccessful, the company will work toward an orderly wind up of the joint venture, and the company is preparing itself for that possibility. Based on prior conduct between the parties during this period of uncertainty, we believe that the joint venture would be allowed to honor existing vessel charter agreements through their contract terms. Even though the global market for offshore supply vessels is currently reasonably well balanced, with offshore vessel supply approximately equal to offshore vessel demand, there would likely be negative financial impacts associated with the wind up of the existing joint venture and the possible redeployment of vessels to other markets, including mobilization costs and costs to redeploy Tidewater shore-based employees to other areas, in addition to lost revenues associated with potential downtime between vessel contracts. These financial impacts could, individually or in the aggregate, be material to our results of operations and cash flows for the periods when such costs would be absorbed. If there is a need to redeploy vessels which are currently deployed in Angola to other international markets, Tidewater believes that there is sufficient demand for these vessels at prevailing market day rates.

Sonangol continues to express a willingness to consider some further contracting activity by the Sonatide joint venture. During the quarter ended September 30, 2012, the Sonatide joint venture entered into two short term contracts, both of which have now expired.

During the nine months ended September 30, 2012, the company redeployed seven vessels from its Angolan operations to other markets and also transferred vessels into its Angolan operations from other markets. The net reduction in the number of vessels operating in its Angolan operations during this nine month period was not significant. The vessels that were redeployed outside its Angolan operations during the nine months ended September 30, 2012 were chartered at new day rates that were comparable to, or higher than their respective expiring contracts in Angola, in part because of generally improving markets for these vessels.

For the six months ended September 30, 2012, Tidewater’s Angolan operations generated vessel revenues of approximately $134.3 million, or 22% of its consolidated vessel revenue, from an average of approximately 86 Tidewater-owned vessels that are marketed through the Sonatide joint venture (11 of which were stacked on average during the six months ended September 30, 2012), and, for the six months ended September 30, 2011, generated vessel revenues of approximately $127.8 million, or 25% of consolidated vessel revenue, from an average of approximately 95 Tidewater-owned vessels (13 of which were stacked on average during the six months ended September 30, 2011). For the year ended March 31, 2012, Tidewater’s Angolan operations generated vessel revenues of approximately $254 million, or 24% of its consolidated vessel revenue, from an average of approximately 93 Tidewater-owned vessels (14 of which were stacked on average in fiscal 2012), and, for the year ended March 31, 2011, generated vessel revenues of approximately $237 million, or 23% of consolidated vessel revenue, from an average of approximately 97 vessels (13 of which were stacked on average in fiscal 2011).

In addition to the company’s Angolan operations, which reflect the results of Tidewater-owned vessels marketed through the Sonatide joint venture (owned 49% by Tidewater), ten vessels and other assets are owned by the Sonatide joint venture. As of September 30, 2012 and March 31, 2012, the carrying value of Tidewater’s investment in the Sonatide joint venture, which is included in “Investments in, at equity, and advances to unconsolidated companies,” is approximately $50 million and $46 million, respectively.

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

 

30


of employment, health and other benefits for all ships (and the seafarers on those ships) that are engaged in commercial activities. This Convention has now exceeded the requisite 30 countries needed for ratification.

The 32 countries that have ratified are: Antigua and Barbuda, Australia, the Bahamas, Benin, Bosnia and Herzegovina, Bulgaria, Canada, Croatia, Cyprus, Denmark, Gabon, Kiribati, Latvia, Liberia, Luxembourg, Marshall Islands, Marocco, Netherlands, Norway, Palau, Panama, Philippines, Poland, Russian Federation, Saint Kitts and Nevis, St. Vincent and the Grenadines, Singapore, Spain, Sweden, Switzerland, Togo and Tuvalu. Notably, although Gabon has submitted instruments of ratification, its registration for Member state social protection benefits is still pending. The aforementioned 32 countries represent more than 50% of the world’s vessel tonnage, and, as such the requisites for ratification were met in August of 2012 for this Convention to become law in August 2013 in those ratifying countries. Because the company maintains that this Convention is unnecessary in light of existing international labor laws that offer substantial equivalency to the labor provisions of the Convention, the company continues to work with flag state and industry representatives to object to further ratifications of this Convention. The company continues to assess its global seafarer labor relationships and to review its fleet operational practices in light of the Convention requirements. Where the Convention will apply, the company and its customers’ operations may be negatively affected by future compliance costs which cannot be reasonably estimated at this time.

Macroeconomic Environment and Outlook

The primary driver of our business (and 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).

Crude oil prices trended upward during the quarter ended September 30, 2012 because of renewed optimism that governmental economic stimulus plans that were initiated during the quarter in the U.S., the Euro-Zone and in China will provide the stimulation needed to lead to stronger economic growth globally (which, in turn, should increase demand for crude oil) and because of geopolitical tensions in the Middle East that have renewed concerns over potential oil shortages due to supply disruption if the tensions escalate. However, by the end of the September 2012 quarter, crude oil price volatility emerged as renewed concerns regarding prolonged levels of relatively high unemployment in the U.S. and other advanced economies, along with a worsening financial uncertainty in certain Euro-zone countries (despite reduced debt burdens in ailing European countries resulting from the sovereign debt purchases by the European Central Bank), and inflation risks in emerging economies creating market concerns that global demand for crude oil in the near term will soften. In addition, the Organization of Petroleum Exporting Companies (OPEC), expressed at its meeting held in June 2012 that it will strive to meet consumer demand, stabilize the crude oil market, and ensure a balanced global supply of crude oil by responding quickly to market developments as the long-term demand for crude oil is expected to grow. Tidewater anticipates that its longer-term utilization and day rate trends for its vessels will continue to be correlated with demand for, and the price of, crude oil, which in mid-October 2012, was trading around $91 per barrel for West Texas Intermediate (WTI) crude and around $114 per barrel for Intercontinental Exchange (ICE) Brent, up from $87 per barrel for WTI and $103 for ICE in mid-July 2012. 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. Conversely, downward pricing trends result in lower E&P expenditures by our customers, and accordingly, lower demand for the company’s vessels.

Natural gas prices continue to be relatively 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 oversupplied natural gas market. The price of natural gas continued to trend higher during the quarter ended September 30, 2012 as the supply and demand balance for natural gas tightened due to increased demand

 

31


for natural gas as a result of the industrial sector switching from coal to gas. In addition, some production shut-ins of natural gas dry wells occurred, but to date such shut-ins have not yet had a significant impact on natural gas pricing, in part because a considerable amount of natural gas is being derived as a byproduct of drilling crude oil and natural gas liquids-oriented wells in liquid rich basins onshore, which is contributing to an oversupplied market. As of mid-October 2012, natural gas was trading in the U.S. in the $3.40 to $3.60 per Mcf range which is up from the $2.85 to $2.95 range in mid-July 2012. Oversupplied natural gas inventories in the U.S. exert downward pricing pressures on natural gas prices in the U.S. Prolonged periods of oversupply of natural gas (whether from conventional or unconventional natural gas production or gas produced as a byproduct of crude oil production) will likely continue to suppress prices for natural gas, although over the longer term, relatively low natural gas prices may also lead to increased demand for the resource. High onshore gas production along with a prolonged downturn in natural gas prices can negatively impact the offshore exploration and development plans of E&P companies, which in turn, would suppress demand for offshore support vessel services, primarily in the Americas segment (specifically our U.S. operations where natural gas is the more prevalent exploitable hydrocarbon resource).

Deepwater activity continues to be a significant segment of the global offshore crude oil and natural gas markets, and deepwater activity has also been 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 lower shipyard construction and financing costs. Reports published by IHS-Petrodata in mid-October 2012 indicate that the worldwide movable offshore drilling rig count (currently estimated at approximately 862, approximately 45% of which are designed to operate in deeper waters), will increase as approximately 200 new-build offshore rigs that are currently on order and under construction, most of which will be delivered within the next three years. Of the estimated 862 movable offshore rigs worldwide, approximately 630 are currently working. It is further estimated that approximately 54% 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 to nearly 50% of the market. Investment is also being made in the floating production unit market, with approximately 72 new floating production units currently under construction and expected to be delivered primarily over the next three years to supplement the current approximately 354 floating production units worldwide.

According to IHS-Petrodata, the global offshore supply vessel market in mid-October 2012 had 439 new-build offshore support vessels (platform supply vessels and anchor handlers only) under construction, most of which are expected to be delivered to the worldwide offshore vessel market within the next two and one half years. The current worldwide fleet of these classes of vessels is estimated at 2,808 vessels, of which Tidewater estimates more than 10% are stacked.

An increase in worldwide vessel capacity without a corresponding increase in vessel demand would tend to have the effect of lowering charter rates. The effects of vessel oversupply are particularly acute when reduced market prices for oil lead to lower levels of exploration, field development and production activity. The worldwide offshore marine vessel industry, however, also has a large number of aged vessels including over 700 vessels, or approximately 26%, of the worldwide offshore fleet, that are at least 25 years old and nearing or exceeding original expectations of their estimated economic lives. These older vessels, up to fifty percent of which Tidewater estimates are already stacked, 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 certainty, the company believes that the retirement of a sizeable portion of these aged vessels could mitigate the potential combined negative effects of new-build vessels on vessel utilization and vessel pricing. Additional vessel demand could also be created by 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.

 

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Fiscal 2013 Second Quarter Business Highlights

During the first half of fiscal 2013, 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, or 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.

At September 30, 2012, the company had 321 owned or chartered vessels (excluding joint-venture vessels and vessels withdrawn from service) in its fleet with an average age of 12.9 years. The average age of 222 newer vessels that have been acquired or constructed since calendar year 2000 as part of the company’s new-build and acquisition program is 5.6 years. The remaining 99 vessels have an average age of 29.4 years. During the six months ended September 30, 2012 and 2011, the company’s newer vessels generated $547.9 million and $422.1 million, respectively, of revenue and accounted for 97%, or $248.2 million, and 91%, or $171.5 million, respectively, of total vessel margin (vessel revenues less vessel operating costs). Vessel operating costs associated with the company’s new vessels exclude depreciation of $61.3 million and $53.0 million, respectively, during the same comparative periods.

The company’s consolidated net earnings for the first half of fiscal 2013 increased 277%, or $54.5 million, as compared to the same period in fiscal 2012, primarily due to an approximate 20% increase in total revenues, which was partially offset by a 9%, or $29.3 million, increase in vessel operating costs, and a $16.2 million, or 207%, increase in income tax expense as a result of incurring higher earnings before taxes during the comparative periods as disclosed in Note (3) of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. In addition, a $30.9 million non-cash goodwill impairment ($22.1 million after-tax, or $0.43 per share) was recorded during the second quarter of fiscal year 2012 on the company’s Middle East/North Africa segment as disclosed in Note (12) of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. The company recorded $606.4 million in revenues during the first half of fiscal 2013, which is an increase of $100.9 million over the revenue earned during the same period of fiscal 2012, due to a 17% increase in our total average day rates and an approximate seven percentage point increase in total vessel utilization. Increases in average day rates is attributable to higher demand for our vessels as a result of increased E&P activity by our customers due to upward trending oil prices as well as the operation of newer, more sophisticated vessels.

Vessel revenues generated by the company’s Americas segment decreased 2%, or $2.6 million, during the first half of fiscal 2013 as compared to the revenues earned during the same period in fiscal 2012, primarily due to a $6.9 million and $3.7 million decrease in revenues earned on the towing supply/supply and other classes of vessels, respectively. These decreases in revenue were partially offset by an $8.0 million increase in revenue generated by the deepwater vessels during the same comparable periods. Americas-based vessel operating costs decreased a modest 1%, or $0.9 million, during the first half of fiscal 2013 as compared to the same period in fiscal 2012.

Vessel revenues generated by our Asia/Pacific segment increased 51%, or $32.9 million, during the first six months of fiscal 2013 as compared to the revenues earned during the same period in fiscal 2012, due to a 22 percentage point increase in utilization rates and a 73% increase in average day rates on the deepwater vessels (providing a $21.7 million increase in deepwater vessel revenues) along with a 10% increase in average day rates on the towing supply/supply vessels (which provided an $11.4 million increase in revenue on this class). Vessel operating costs for the Asia/Pacific segment increased 21%, or $9.8 million, during the same comparative periods.

Vessel revenues generated by our Middle East/North Africa segment increased 27%, or $13.6 million, during the first six months of fiscal 2013 as compared to the revenues earned during the same period in fiscal 2012, primarily due to a 20 percentage point increase in utilization rates and a 22% increase in the average day rates on the towing supply/supply vessels operating in this segment. During the first half of fiscal 2013, vessel operating costs for the Middle East/North Africa segment decreased 4%, or $1.4 million, as compared to the same period in fiscal year 2012.

 

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Vessel revenues generated by our Sub-Saharan Africa/Europe segment increased 24%, or $54.3 million, during the first six months of fiscal 2013 as compared to the revenues earned during the same period in fiscal 2012, primarily due to a $46.2 million increase in deepwater vessel revenue as a result of a 17% increase in average day rates and an increase in the number of deepwater vessels operating in this segment resulting from the addition of new vessels and vessels mobilizing into this segment. Also included in the fiscal 2013 second quarter revenues are retroactive rate increases (retroactive to January 1, 2012) on certain vessel charter agreements for which the company recognized a total of $7.4 million of revenues related to services provided during the six-months ended June 30, 2012. Revenue on the towing supply/supply class of vessel contributed $11.2 million to the increase of revenue during the same comparative periods due to a 12% increase in average day rates. Vessel operating costs for the Sub-Saharan Africa/Europe segment increased 17%, or $21.8 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

We manage and measure our business performance in four distinct operating segments which are based on our geographical organization: Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe. The following table compares vessel revenues and vessel operating costs (excluding general and administrative expenses, depreciation expense, and gains on asset dispositions, net) for the company’s owned and operated vessel fleet and the related percentage of vessel revenue for the quarters and the six-month periods ended September 30, 2012 and 2011 and for the quarter ended June 30, 2012:

 

                                                                  Quarter  
          Quarter Ended      Six Months Ended      Ended  
          September 30,      September 30,      June 30,  
(In thousands)         2012      %      2011      %      2012      %      2011      %      2012      %      

 

 

Vessel revenues:

                              

  Americas

  $          82,316         27%         81,892         33%         159,966         27%         162,569         32%         77,650         27%       

  Asia/Pacific

      45,738         15%         29,127         12%         97,480         16%         64,626         13%         51,742         18%       

  Middle East/N. Africa

      32,051         10%         24,810         10%         64,501         11%         50,867         10%         32,450         11%       

  Sub-Saharan Africa/Europe

      149,717         48%         112,583         45%         277,969         46%         223,665         45%         128,252         44%       

 

 
  $          309,822         100%         248,412         100%         599,916         100%         501,727         100%         290,094         100%       

 

 

Vessel operating costs:

                              

  Crew costs

  $          90,811         29%         78,364         31%         178,115         30%         159,488         32%         87,304         30%       

  Repair and maintenance

      32,754         11%         27,149         11%         59,978         10%         49,209         10%         27,224         9%       

  Insurance and loss reserves

      3,810         1%         5,374         2%         9,161         2%         10,671         2%         5,351         2%       

  Fuel, lube and supplies

      19,269         6%         21,394         9%         37,012         6%         37,761         7%         17,743         6%       

  Vessel operating leases

      4,403         1%         4,491         2%         8,895         1%         8,983         2%         4,492         2%       

  Other

      26,008         9%         24,518         10%         49,722         8%         47,480         9%         23,714         8%       

 

 
  $          177,055         57%         161,290         65%         342,883         57%         313,592         62%         165,828         57%       

 

 

 

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The following table compares other operating revenues and costs related to third-party activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related activities for the quarters and the six-month periods ended September 30, 2012 and 2011 and for the quarter ended June 30, 2012:

 

                                     Quarter      
         Quarter Ended              Six Months Ended              Ended      
         September 30,          September 30,          June 30,      
(In thousands)    2012      2011          2012      2011          2012      

 

 

Other operating revenues

   $         2,096         2,482             6,450         3,774             4,354       

Costs of other operating revenues

     1,585         2,031             5,108         3,262             3,523       

 

 

The following table presents vessel operating costs by the company’s segments, the related segment vessel operating costs as a percentage of segment vessel revenues, total vessel operating costs and the related total vessel operating costs as a percentage of total vessel revenues for the quarters and the six-month periods ended September 30, 2012 and 2011 and for the quarter ended June 30, 2012.

 

                                                                  Quarter  
          Quarter Ended      Six Months Ended      Ended  
          September 30,      September 30,      June 30,  
(In thousands)         2012      %      2011      %      2012      %      2011      %      2012      %      

 

 

Vessel operating costs:

                              

Americas:

                              

Crew costs

  $          29,610         36%         28,766         35%         57,357         36%         58,616         36%         27,747         36%       

Repair and maintenance

      10,725         13%         9,069         11%         18,837         12%         17,337         11%         8,112         10%       

Insurance and loss reserves

      761         1%         2,042         2%         2,189         1%         3,320         2%         1,428         2%       

Fuel, lube and supplies

      5,108         6%         5,388         7%         10,320         6%         9,174         6%         5,212         7%       

Vessel operating leases

      822         1%         910         1%         1,733         1%         1,821         1%         911         1%       

Other

      6,008         7%         5,925         7%         9,551         6%         10,574         7%         3,543         5%       

 

 
      53,034         64%         52,100         63%         99,987         62%         100,842         63%         46,953         60%       

Asia/Pacific:

                              

Crew costs

  $          19,793         43%         12,502         43%         38,322         39%         26,320         41%         18,529         36%       

Repair and maintenance

      3,019         7%         4,150         14%         5,627         6%         6,079         9%         2,608         5%       

Insurance and loss reserves

      425         1%         609         2%         527         1%         1,229         2%         102         <1%       

Fuel, lube and supplies

      3,274         7%         4,844         17%         6,447         7%         7,588         12%         3,173         6%       

Other

      2,289         5%         2,432         8%         4,743         5%         4,668         7%         2,454         5%       

 

 
      28,800         63%         24,537         84%         55,666         58%         45,884         71%         26,866         52%       

Middle East/N. Africa:

                              

Crew costs

  $          9,241         29%         8,024         32%         18,901         29%         16,179         32%         9,660         30%       

Repair and maintenance

      2,911         9%         4,657         19%         5,470         8%         7,196         14%         2,559         8%       

Insurance and loss reserves

      625         2%         725         3%         1,531         2%         2,034         4%         906         3%       

Fuel, lube and supplies

      2,925         9%         2,925         12%         5,027         8%         7,208         14%         2,102         6%       

Vessel operating leases

      507         2%         506         2%         1,013         2%         872         2%         506         2%       

Other

      1,690         5%         2,182         9%         4,522         7%         4,396         9%         2,832         9%       

 

 
      17,899         56%         19,019         77%         36,464         56%         37,885         75%         18,565         57%       

Sub-Saharan Africa/Europe:

                              

Crew costs

  $          32,167         21%         29,072         26%         63,535         23%         58,373         26%         31,368         24%       

Repair and maintenance

      16,099         11%         9,273         8%         30,044         11%         18,597         8%         13,945         11%       

Insurance and loss reserves

      1,999         1%         1,998         2%         4,914         2%         4,088         2%         2,915         2%       

Fuel, lube and supplies

      7,962         5%         8,237         7%         15,218         5%         13,791         6%         7,256         6%       

Vessel operating leases

      3,074         2%         3,075         3%         6,149         2%         6,290         3%         3,075         2%       

Other

      16,021         11%         13,979         12%         30,906         11%         27,842         12%         14,885         12%       

 

 
      77,322         51%         65,634         58%         150,766         54%         128,981         57%         73,444         57%       

 

 

Total operating costs

  $          177,055         57%         161,290         64%         342,883         57%         313,592         62%         165,828         57%       

 

 

 

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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, 2012 and 2011 and for the quarter ended June 30, 2012.

 

                                                            Quarter  
          Quarter Ended      Six Months Ended      Ended  
          September 30,      September 30,      June 30,  
(In thousands)         2012     %     2011     %      2012     %     2011     %      2012     %    

 

 

Vessel operating profit:

                       

Americas

  $          9,506        3%        9,530        4%         19,698        3%        21,384        4%         10,192        3%     

Asia/Pacific

      7,826        3%        (4,776     (2%      22,734        4%        494        <1%         14,908        5%     

Middle East/N. Africa

      6,280        2%        (996     (<1%      12,562        2%        (968     (<1%      6,282        2%     

Sub-Saharan Africa/Europe

      44,330        14%        21,631        9%         71,426        12%        43,855        9%         27,096        9%     

 

 
      67,942        22%        25,389        10%         126,420        21%        64,765        13%         58,478        20%     

Corporate expenses

      (12,484     (4%     (9,361     (4%      (22,951     (4%     (18,882     (4%      (10,467     (4%)   

Goodwill impairment

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

Gain on asset dispositions, net

      1,833        1%        9,458        4%         2,671        <1%        11,175        2%         838        <1%     

Other operating expenses

      (94     <1%        (35     (<1%      544        <1%        (146     (<1%      638        <1%     

 

 

Operating income (loss)

      57,197        18%        (5,481     (2%      106,684        17%        25,980        5%         49,487        17%     

 

 

Foreign exchange gain (loss)

      529        <1%        1,659        1%         (1,222     (<1%     2,473        <1%         (1,751     (<1%)   

Equity in net earnings of unconsolidated companies

      3,357        1%        3,456        1%         5,720        1%        5,945        1%         2,363        1%     

Interest income and other, net

      1,128        <1%        766        <1%         1,847        <1%        1,956        <1%         719        <1%     

Interest and other debt costs

      (7,148     (2%     (4,766     (2%      (14,735     (2%     (8,827     (2%      (7,587     (3%)   

 

 

Earnings (loss) before income taxes

  $          55,063        18%        (4,366     (2%      98,294        16%        27,527        5%         43,231        15%     

 

 

Americas Segment Operations. Americas-based vessel revenues, during the second quarter of fiscal 2013 were comparable to the second quarter of fiscal 2012. Although Americas-based vessel revenue was comparable during this period, increases in revenues generated by the deepwater vessels were almost offset by lower revenues generated by the towing supply/supply and other vessel classes. Revenues earned on the deepwater vessels increased $8.1 million, or 22%, due to an increased number of vessels operating in this segment as a result of newly-delivered vessels added to the segment and because vessels transferred into the Americas segment from other segments. In addition, average day rates on the deepwater vessels increased 14% during the same comparative periods. Revenue on the towing supply/supply vessels decreased 15%, or $5.5 million, during the same comparative periods, primarily due to 5% lower average day rates and to less vessels operating in the segment due to vessel sales, while the other class of vessels incurred a 25%, or $2.1 million, reduction in revenue, during the same comparative periods, due primarily to a 5% decrease in average day rates on this class of vessel in the segment.

Americas-based vessel revenues during the six-month period ended September 30, 2012, decreased 2%, or $2.6 million, as compared to the six-month period ended September 30, 2011, primarily due to a decrease in revenue on the towing supply/supply vessels and the other vessels. Revenue on the towing supply/supply vessels decreased 10%, or $6.9 million, due to a 2% decrease in average day rates and to a fewer number of towing supply/supply vessels operating in this segment. Revenue on the other vessel class decreased $3.7 million, or 22%, due to a 3% decrease in average day rates and to a fewer number of other vessels operating in this segment due to vessel sales. Increases in deepwater vessel revenue partially offset declines in revenue incurred by the towing supply/supply and other vessels operating in this segment. Deepwater vessel revenue increased 11%, or $8.0 million, during the six-month period ended September 30, 2012 as compared to the same period during fiscal 2012, due to a 6% increase in average day rates and due to an increased number of newly delivered vessels operating in this segment and because vessels transferred into the Americas segment from other segments.

Total utilization rates for the Americas-based vessels increased 5 percentage points, during the first half of fiscal 2013 as compared to the first half in fiscal 2012; however, this increase is primarily a result of the sale of 25 older, stacked vessels from the Americas fleet during the eighteen month period ended September 30, 2012. 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. Within the Americas segment, the company continued to stack, and in

 

36


some cases dispose of, vessels that could not find attractive charters. At the beginning of fiscal 2013, the company had 21 Americas-based stacked vessels. During the first six months of fiscal 2013, the company stacked five additional vessels, sold one vessel from the previously stacked vessel fleet and put one previously stacked vessel back to work resulting in a total of 24 stacked Americas-based vessels as of September 30, 2012.

Operating profit for the Americas-based vessels during the second quarter of fiscal 2013 was comparable to the second quarter of fiscal 2012. Vessel operating profit decreased 8%, or $1.7 million, during the six month period ended September 30, 2012 as compared to the six-month period ended September 30, 2011, due to lower revenues, higher depreciation expense and lower general and administrative expense. General and administrative expenses, during the first six months of fiscal 2013 decreased 7%, or $1.5 million, as compared to the same period in fiscal 2012, due to lower administrative payroll and benefits, professional services and office and property costs during the current period. Depreciation expense increased 7%, or $1.4 million, during the first six months of fiscal 2013 as compared to the same period in fiscal 2012, due to an increased number of vessels operating in this segment as discussed above. Vessel operating costs during the quarters and six-month periods ended September 30, 2012 were comparable to the vessel operating costs incurred during the same periods in fiscal 2012.

Americas-based vessel revenues increased 6%, or $4.7 million, during the second quarter of fiscal 2013 as compared to the first quarter of fiscal 2013, primarily due to a 23%, or $8.5 million, increase in deepwater vessel revenue due to the addition of one new vessel, because four vessels transferred into the Americas segment from other segments, and due to a 10% increase in average day rates. Deepwater vessel revenues were partially offset by a 9%, or $3.2 million, decrease in revenue on the towing supply/supply vessels, during the same comparative periods, due to a five percentage point decrease in utilization rates.

Operating profit for the Americas-based vessels decreased 7%, or $0.7 million, during the second quarter of fiscal 2013 as compared to the first quarter of fiscal 2013, due to 13%, or $6.1 million, higher vessel operating costs (primarily crew costs, repair and maintenance costs, and other vessel costs) and higher depreciation expense. Higher revenues and lower general and administrative expenses partially offset increases in vessel operating costs and higher depreciation expense.

Crew costs increased 7%, or $1.9 million, during the second quarter of fiscal 2013 as compared to the first quarter of fiscal 2013, due to crew wage increases as well as the addition of deepwater vessels operating in the segment. Crew wage pressures in the U.S. GOM have resulted from a shortage of qualified crew personnel for the company’s large, deepwater vessels which require highly skilled and licensed personnel. Crew availability in the U.S. offshore vessel market has, in part, been impacted by drilling operators trying to staff newer generation drilling platforms and drillships, most of which have dynamic positioning (DP) capabilities, with former vessel crew personnel that have DP licenses. This required vessel owning companies, such as ours, to increase crew wages to retain and attract qualified personnel effective June 1 2012. There has also been an increase in the number of deepwater vessels operating in the area as a result of vessels being transferred in from other segments and the addition of a newly delivered vessel. Repair and maintenance costs increased $2.6 million, or 32%, during the same comparative periods, due to a greater number of drydockings being performed during the current period. Depreciation expense increased 5%, or $0.5 million, during the second quarter of fiscal 2013 as compared to the first quarter of fiscal 2013, due to a greater number of vessels operating in this segment. General and administrative expenses decreased12%, or $1.3 million, during the second quarter of fiscal 2013 as compared to the first quarter of fiscal 2013, primarily due to decreases in administrative benefits and other administrative personnel related costs.

 

37


Asia/Pacific Segment Operations. Asia/Pacific-based vessel revenues increased 57% and 51%, or $16.6 million and $32.9 million, respectively, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, respectively, primarily due to higher revenues earned on the deepwater vessels. Deepwater vessel revenue increased a respective $12.3 million and $21.7 million, or 101% and 77%, during the same comparative periods, respectively, due to a 104% and 73% increase in average day rates and a 22 percentage points increase in utilization rates, respectively, as vessels were put to work following the resolution of delays on certain customer projects. Also, revenue on the towing supply/supply vessels increased $4.4 million and $11.4 million, or 27% and 33%, respectively, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, respectively, due to a 16 and 14 percentage points increase in utilization rates, respectively, and 6% and 10% higher average day rates, respectively, a result of stronger demand for this class of vessel in this segment.

Within the Asia/Pacific segment, the company continued dispose of vessels that could not find attractive charters. At the beginning of fiscal 2013, the company had 16 Asia/Pacific-based stacked vessels. During the first six months of fiscal 2013, the company stacked no additional vessels and sold four vessels from the previously stacked vessel fleet, resulting in a total of 12 stacked Asia/Pacific-based vessels as of September 30, 2012.

Asia/Pacific-based vessel operating profit increased $12.6 million, or 264%, and $22.2 million, or 4,502%, during the quarter and six-month period ended September 30, 2012 as compared to same periods in fiscal 2012, respectively, due to higher revenues which were partially offset by $4.3 million and $9.8 million, or 17% and 21%, respectively, increase in vessel operating costs (primarily crew costs) during the same comparative periods. Crew costs increased 58% and 46%, or $7.3 million and $12.0 million, respectively, during the quarter and six-month period ended September 2012 as compared to the same periods during fiscal 2012, due to increases in crew personnel operating in Australia due to an increased number of vessels operating in that area after delays on certain customer projects ended. Also, general and administrative expenses increased 13%, or $1.0 million, during the six months ended September 30, 2012 as compared to the same period in fiscal 2012, due to pay increases for administrative personnel.

Asia/Pacific-based vessel revenues decreased 12%, or $6.0 million, during the quarter ended September 30, 2012 as compared to the quarter ended June 30, 2012, primarily due to the departure of a towing supply/supply vessel from the segment and an 11% decrease in average day rates on the towing supply/supply vessels, which together resulted in a 21%, or $5.3 million, decline in revenue. Additionally, two deepwater vessels were transferred to other operating segments during the current period which caused a 3%, or $0.7 million, decrease in revenue on the deepwater vessels during the quarter ended September 30, 2012 as compared to the quarter ended June 30, 2012.

Operating profit for the Asia/Pacific-based vessels decreased 48%, or $7.1 million, during the quarter ended September 30, 2012 as compared to the quarter ended June 30, 2012, primarily due to lower revenues and 7%, or $1.9 million, higher vessel operating costs (primarily crew costs). Crew costs increased 7%, or $1.3 million, during the same comparative periods, primarily due to increases in crew costs resulting from the accrual of bonuses related to the completion of a project in Australia.

Middle East/North Africa Segment Operations. Middle East/North Africa-based vessel revenues increased 29% and 27%, or $7.2 million and $13.6 million, respectively, during the quarter and the six-month period ended September 30, 2012 as compared to the quarter and the six-month period ended September 30, 2011, respectively. These increases are primarily attributable to increases in revenues from the towing supply/supply vessels of 62% and 55%, or $7.2 million and $13.8 million, respectively, during the same comparative periods, respectively, due to 22 and 20 percentage point increases in utilization rates and a 16% and 22% increase in average day rates, respectively, resulting from the resolution of delays in the acceptance of and cancellations of other vessels as part of a multi-vessel package committed to charter hire contracts with one customer in the Middle East.

 

38


At the beginning of fiscal 2013, the company had seven Middle East/North Africa-based stacked vessels, and during the first six months of fiscal 2013, the company did not add to or sell vessels from the previously stacked vessel fleet, resulting in a total of seven stacked Middle East/North Africa-based vessels as of September 30, 2012.

Middle East/North Africa-based vessel operating profit increased $7.3 million and $13.5 million, or 730% and 1,398%, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, due to higher revenues, $1.1 million and $1.4 million, or 6% and 4%, respectively, lower vessel operating costs, respectively (primarily repairs and maintenance costs during the quarters ended September 30 comparative periods, and primarily repairs and maintenance costs and fuel, lube and supplies costs partially offset by higher crew costs during the comparative six-month periods ended September 30), partially offset by higher general and administrative expenses.

Repairs and maintenance costs decreased by 37% and 24%, or $1.7 million, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, due to fewer drydockings being performed during the current periods.

Fuel, lube and supplies costs decreased by $2.2 million, or 30%, during the six-month period ended September 30, 2012 as compared to the same period in fiscal year 2012, due to a higher number of vessels mobilizing into the segment during the first six months of fiscal 2012 than in the current six-month period. Crew costs increased $2.7 million, or 17%, during the six-month period ended September 30, 2012 as compared to the same period during fiscal 2012, due to an increase in crew personnel assigned to this segment related to the addition of vessels as a result of the scaling up of operations in this segment related to a multi-vessel package committed to charter hire contracts with one customer.

General and administrative expenses increased 32% and 35%, or $0.8 million and $1.8 million, respectively, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, due to an increase in administrative payroll and benefit costs (resulting from an increase in the number of administrative personnel operating in the segment), office and property costs, as well as, travel expenses.

Middle East/North Africa-based vessel revenues and operating profit during the second quarter of fiscal 2013 were comparable to the first quarter of fiscal 2013.

Sub-Saharan Africa/Europe Segment Operations. Sub-Saharan Africa/Europe-based vessel revenues increased 33% and 24%, or $37.1 million and $54.3 million, respectively, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, respectively. The deepwater vessels generated 48% and 55%, or $22.1 million and $46.2 million, respectively, of the revenue increases. In addition, revenues attributable to towing supply/supply vessels increased by 30% and 11%, or $14.9 million and $11.2 million, respectively, during these same comparable periods, respectively, due to a 19% and 11% increase in average day rates, respectively. Revenues on the deepwater vessels and towing supply/supply vessels increased during the same comparative periods, due to an increase in the number of deepwater and towing supply/supply vessels operating in this segment as a result of new vessel deliveries and the transfer of vessels into this segment. Also included in fiscal 2013 second quarter revenues are retroactive rate increases (retroactive to January 1, 2012) on certain vessel charter agreements for which the company recognized a total of $7.4 million of revenues related to services provided during the six-months ended June 30, 2012.

Total utilization rates for the Sub-Saharan Africa/Europe-based vessels increased 4 percentage points during the first half of fiscal 2013 as compared to the first half in fiscal 2012; however, this increase is a result of the sale of 19 older, stacked vessels from the Sub-Saharan Africa/Europe-based vessel fleet during the eighteen month period ended September 30, 2012. Within the Sub-Saharan Africa/Europe segment, the company also continued to stack, and in some cases dispose of, vessels that could not find attractive charters. At the beginning of fiscal 2013, the company had 23 Sub-Saharan Africa/Europe-based stacked vessels. During the

 

39


first six months of fiscal 2013, the company stacked three additional vessels and sold eight vessels from the previously stacked vessel fleet, resulting in a total of 18 stacked Sub-Saharan Africa/Europe-based vessels as of September 30, 2012.

Sub-Saharan Africa/Europe-based vessel operating profit increased $22.7 million and $27.6 million, or 105% and 63%, respectively, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, respectively, primarily due to higher revenues ($7.4 million of which relates to retroactive rate increases noted above) which were partially offset by a respective $11.7 million and $21.8 million, or 18% and 17%, increase in vessel operating costs (primarily crew costs, repair and maintenance costs, and other vessel costs) and higher depreciation expense.

Crew costs increased by 11% and 9%, or $3.1 million and $5.2 million, respectively, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, respectively, due to a greater number of crew personnel assigned to this segment related to an increase in the number of deepwater vessels and towing supply/supply vessels operating in this segment. Repair and maintenance costs increased $6.8 million and $11.4 million, or 74% and 62%, respectively, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, respectively, due to a greater number of drydockings being performed during the current periods. Other vessel costs increased by 15% and 11%, or $2.0 million and $3.1 million, respectively, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, respectively, due to an increase broker commissions and training costs. Depreciation expense increased 11%, or $1.5 million, and 12%, or $3.2 million, during the quarter and six-month period ended September 30, 2012 as compared to the same period during fiscal 2012, respectively, due to an increase in the number of vessels operating in this segment.

Sub-Saharan Africa/Europe-based vessel revenues increased 17%, or $21.5 million, during the second quarter of fiscal 2013 as compared to the first quarter of fiscal 2013 primarily due to a 30%, or $14.5 million, increase in revenue generated by the towing supply/supply vessels due to a 20% increase in average day rates during the same comparable periods. Also included in the fiscal 2013 second quarter revenues are retroactive rate increases (retroactive to January 1, 2012) on certain vessel charter agreements for which the company recognized a total of $7.4 million of revenues related to services provided during the six-months ended June 30, 2012.

Operating profit for the Sub-Saharan Africa/Europe-based vessels increased 64%, or $17.2 million, during the quarter ended September 30, 2012 as compared to the quarter ended June 30, 2012, primarily due to revenue increases. These revenue increases were partially offset by increased vessel operating costs of 5%, or $3.9 million (primarily repair and maintenance costs and other vessel costs). Repair and maintenance costs increased $2.2 million, or 15%, during the quarter ended September 30, 2012 as compared to the quarter ended June 30, 2012, due to an increased number of drydockings. Other vessel costs increased 8%, or $1.1 million, during the same comparative periods, due to an increase in brokers’ commissions.

Other Items. Insurance and loss reserves expense decreased $1.6 million and $1.5 million, or 29% and 14%, respectively, during the quarter and six-month period ended September 30, 2012 as compared to the same periods during fiscal 2012, due to improved safety results and loss management efforts.

Gain on asset dispositions, net for the first half of fiscal 2013 decreased $8.5 million, or 76%, as compared to the same period in fiscal 2012, primarily due to fewer vessels being sold during the first half of fiscal 2013 as compared to the first half of fiscal 2012. Gain on asset dispositions, net was $1.0 million, or 119%, higher during the second quarter of fiscal 2013 as compared to the first quarter of fiscal 2013, because the current quarter incurred a $0.8 million impairment charge as compared to a $2.8 million impairment charge incurred during the quarter ended June 30, 2012. In addition, the current quarter had $1.0 million lower gains earned due to fewer vessels being sold as compared to the prior quarter. Dispositions of vessels can vary from quarter to quarter; therefore, gains on sales of assets may, and usually do fluctuate significantly from period to period.

 

40


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, 2012 and 2011, 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)    2012        2011            2012        2011       

 

 

Amount of impairment incurred

   $ 790           256               3,564           2,570        

Combined fair value of assets incurring impairment

         1,192           ---               8,602           3,913        

 

 

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 may 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. Stacked vessels depress utilization rates because stacked vessels are considered available to work, and as such, are included in the calculation of utilization rates. 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 on all vessels in service (which includes stacked vessels and vessels in drydock) but do not include vessels withdrawn from service (two vessels at September 30, 2012) or vessels owned by joint ventures (10 vessels at September 30, 2012).

 

41


The following tables compare revenues, day-based utilization percentages and average day rates by vessel class and in total for the quarters and the six-month periods ended September 30, 2012 and 2011 and the quarter ended June 30, 2012:

 

          Quarter Ended
September 30,
       Six Months Ended
September 30,
       Quarter
Ended
June 30,
 
          2012      2011            2012        2011            2012    

 

 

REVENUES BY VESSEL CLASS (In thousands):

                     

Americas fleet:

                     

Deepwater vessels

  $          44,747         36,639               81,027           73,044               36,280     

Towing-supply/supply

      31,109         36,648               65,461           72,334               34,352     

Other

      6,460         8,605               13,478           17,191               7,018     

Total

  $          82,316         81,892               159,966           162,569               77,650     

Asia/Pacific fleet:

                     

Deepwater vessels

  $          24,592         12,264               49,929           28,193               25,337     

Towing-supply/supply

      20,229         15,870               45,729           34,314               25,500     

Other

      917         993               1,822           2,119               905     

Total

  $          45,738         29,127               97,480           64,626               51,742     

Middle East/N. Africa fleet:

                     

Deepwater vessels

  $          12,275         11,782               23,559           22,533               11,284     

Towing-supply/supply

      18,859         11,616               38,859           25,090               20,000     

Other

      917         1,412               2,083           3,244               1,166     

Total

  $          32,051         24,810               64,501           50,867               32,450     

Sub-Saharan Africa/Europe fleet:

                     

Deepwater vessels

  $          67,696         45,605               130,311           84,111               62,615     

Towing-supply/supply

      63,548         48,698               112,560           101,324               49,012     

Other

      18,473         18,280               35,098           38,230               16,625     

Total

  $          149,717         112,583               277,969           223,665               128,252     

Worldwide fleet:

                     

Deepwater vessels

  $          149,310         106,290               284,826           207,881               135,516     

Towing-supply/supply

      133,745         112,832               262,609           233,062               128,864     

Other

      26,767         29,290               52,481           60,784               25,714     

Total

  $          309,822         248,412               599,916           501,727               290,094     

 

 

UTILIZATION:

                     

Americas fleet:

                     

Deepwater vessels

      70.7      73.5               72.1           72.2               73.7     

Towing-supply/supply

      48.2         46.9               50.8           45.0               53.4     

Other

      72.5         66.3               76.5           68.4               80.5     

Total

      58.6      56.8               60.9           55.5               63.3     

Asia/Pacific fleet:

                     

Deepwater vessels

      81.2      59.6               87.4           65.5               92.6     

Towing-supply/supply

      52.2         36.3               53.6           39.3               54.9     

Other

      100.0         79.3               74.1           89.6               58.7     

Total

      58.7      42.8               60.7           46.8               62.5     

Middle East/N. Africa fleet:

                     

Deepwater vessels

      91.8      91.6               92.7           83.7               93.6     

Towing-supply/supply

      71.2         49.7               74.2           53.8               77.2     

Other

      34.5         50.0               38.4           56.6               42.2     

Total

      69.9      57.4               72.4           59.6               75.0     

Sub-Saharan Africa/Europe fleet:

                     

Deepwater vessels

      83.0      88.1               83.6           85.0               84.1     

Towing-supply/supply

      67.8         54.6               64.1           55.7               60.3     

Other

      79.9         80.0               78.2           82.0               76.6     

Total

      75.4      69.2               73.3           69.6               71.3     

Worldwide fleet:

                     

Deepwater vessels

      79.8      79.3               81.4           77.5               83.1     

Towing-supply/supply

      59.9         48.1               60.0           49.2               60.0     

Other

      74.7         74.1               74.4           76.7               74.2     

Total

      67.8      60.2               68.1           60.9               68.4     

 

 

 

42


            Quarter Ended
September 30,
       Six Months Ended
September 30,
       Quarter
Ended
June 30,
 
                    2012        2011            2012        2011            2012    

 

 

AVERAGE VESSEL DAY RATES: