SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Commission file number 1-6311
TIDEWATER INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (504) 568-1010
Former name, former address and former fiscal year, 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 is an accelerated file (as defined in Rule 12b-2 of the Exchange Act).
YES x NO ¨
56,684,156 shares of Tidewater Inc. common stock $.10 par value per share were outstanding on October 10, 2003. Excluded from the calculation of shares outstanding at October 10, 2003 are 3,890,691 shares held by the Registrant’s Grantor Stock Ownership Trust. Registrant has no other class of common stock outstanding.
PART I. FINANCIAL INFORMATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents
Trade and other receivables
Marine operating supplies
Other current assets
Total current assets
Investments in, at equity, and advances to unconsolidated companies
Properties and equipment:
Vessels and related equipment
Other properties and equipment
Less accumulated depreciation
Net properties and equipment
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
Accrued property and liability losses
Income taxes
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities and deferred credits
Stockholders’ equity:
Common stock of $.10 par value, 125,000,000 shares authorized, issued 60,574,847 shares at September and 60,578,927 shares at March
Other stockholders’ equity
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Unaudited Condensed Consolidated Financial Statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share and per share data)
Revenues:
Vessel revenues
Other marine revenues
Costs and expenses:
Vessel operating costs
Costs of other marine revenues
Depreciation and amortization
General and administrative
Other income (expenses):
Foreign exchange loss
Gain on sales of assets
Equity in net earnings of unconsolidated companies
Minority interests
Interest and miscellaneous income
Interest and other debt costs
Earnings before income taxes
Net earnings
Earnings per common share
Diluted earnings per common share
Weighted average common shares outstanding
Incremental common shares from stock options
Adjusted weighted average common shares
Cash dividends declared per common share
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of assets
Additions to properties and equipment
Net cash used in investing activities
Cash flows from financing activities:
Borrowings
Principal payments on debt
Proceeds from issuance of common stock
Cash dividends
Other
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information for the interim periods presented herein has not been audited by independent accountants, but in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated balance sheets and the condensed consolidated statements of earnings and cash flows at the dates and for the periods indicated have been made. Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years.
Certain previously reported amounts have been reclassified to conform to the quarter and six-month period ended September 30, 2003 financial statement presentation.
At September 30, 2003 and March 31, 2003, 3,892,936 and 3,941,578 shares, respectively, of common stock were held in a grantor stock ownership plan trust for the benefit of stock-based employee benefits programs. These shares are not included in common shares outstanding for earnings per share calculations and transactions between the company and the trust, including dividends paid on the company’s common stock, are eliminated in consolidating the accounts of the trust and the company.
The company measures compensation expense for its stock-based compensation plan using the intrinsic value recognition and measurement principles prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. The company uses the disclosure provision of Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amended the disclosure provision of SFAS No. 123. The following table illustrates the effect on net earnings and earnings per share for the quarter and six-month periods ended September 30 had the company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, “Accounting for Stock-Based Compensation.”
(In thousands, except share data)
Net earnings as reported
Add stock-based employee compensation expense included in reported net earnings, net of related tax effect
Less total stock-based employee compensation expense, under fair value method for all awards, net of tax
Pro forma net earnings
Earnings per common share:
As reported
Pro forma
Diluted earnings per common share:
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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 was 33% for the quarter and six-month period ended September 30, 2003. The effective tax rate applicable to pre-tax earnings for the quarter and six-month period ended September 30, 2002 was 32.5%.
On April 1, 2003, the company paid $79 million in cash to ENSCO International Incorporated to purchase its 27-vessel Gulf of Mexico-based marine fleet. The cash sale was funded by a newly-placed $100 million term loan agreement with a group of banks. The mix of vessels the company acquired consists of five anchor handling towing supply vessels, six stretched 220-foot platform supply vessels and 16 supply vessels. In conjunction with this acquisition, it was also agreed that, for a period of two years and subject to satisfactory performance, the company will provide to ENSCO all of its discretionary vessel requirements in the Gulf of Mexico. The day rates to be charged under the arrangement are based upon predetermined pricing criteria. The acquisition enhances the competitive posture of the company in providing anchor handling and towing-supply services in the Gulf of Mexico and better positions the company for an upturn in the domestic market.
On July 8, 2003, the company completed the issuance and funding of $300 million of senior unsecured notes. The multiple series of notes with maturities ranging from 7 years to 12 years have an average outstanding life to maturity of 9.5 years, although the notes can be paid before maturity. The average interest rate on the notes sold to private institutional investors is 4.35%. The terms of the debt obligation require the company to maintain a minimum ratio of debt to total capitalization. The note proceeds were used to refinance the then-existing $245 million debt outstanding, with the balance of the issue to be used to fund future capital expenditures.
On August 15, 2003, the company signed a new $295 million revolving credit agreement which replaced the existing $200 million revolving credit and term loan agreement. Under the new agreement, borrowings bear interest at the company’s option, at prime or Federal Funds rates plus .5% or LIBOR rates plus margins from ..75% to 1.25% based on the company’s funded debt to total capitalization ratio. The new revolving credit commitment will expire on April 30, 2008. Any borrowings under the agreement are unsecured and the company pays an annual fee of .20% on the unused portion of the facility.
Under the terms of the agreement, the company has agreed to limitations on future levels of investments and aggregate indebtedness, and maintenance of certain debt to capitalization ratios and also debt to earnings ratios. The agreement also limits the company’s ability to encumber its assets for the benefit of others.
During the ongoing examinations of the company’s income tax returns covering fiscal years 1999 and 2000, the Internal Revenue Service (IRS) has informed the company that it intends to raise certain issues concerning the depreciation methods historically utilized by the company and the entire offshore marine support industry. The IRS position, if ultimately proposed and sustained, could result in additional income tax due approximating $28.5 million related to fiscal years 1999 and 2000. Additionally, if the IRS were also to successfully propose a second adjustment covering the cumulative effect of such a depreciation method change, then a further additional income tax of $25.5 million could also be due related to fiscal years prior to 1999.
Such additional taxes due, if any, would result in a reclassification of a previously recorded non-current deferred income tax liability to a current income tax payable. Other than a charge for interest related to amounts due, if any, this issue would have no effect on the company’s statement of earnings. The company
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intends to vigorously contest any audit deficiency when issued by the IRS and believes that any final outcome of this controversy will not have a material adverse effect on its financial position or results of operations.
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, (FIN 46) “Consolidation of Variable Interest Entities.” FIN 46 requires a company to consolidate a variable interest entity (VIE), as defined, when the company will absorb a majority of the variable interest entity’s expected losses, receive a majority of the variable interest entity’s expected residual returns, or both. FIN 46 also requires consolidation of existing, non-controlled affiliates if the VIE is unable to finance its operations without investor support, or where the other investors do not have exposure to the significant risks and rewards of ownership. FIN 46 applies immediately to a VIE created or acquired after January 31, 2003. For a VIE acquired before February 1, 2003, FIN 46 applies in the first fiscal year or interim period ending after December 15, 2003. The company has not completed its assessment of the impact of FIN 46, but does not anticipate a material impact on its financial position and results of operations.
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INDEPENDENT ACCOUNTANTS’ REVIEW REPORT
The Board of Directors and Shareholders
Tidewater Inc.
We have reviewed the accompanying condensed consolidated balance sheet of Tidewater Inc. and subsidiaries as of September 30, 2003, and the related condensed consolidated statements of earnings and cash flows for the three-month and six-month periods ended September 30, 2003 and 2002. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing 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 the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Tidewater Inc. and subsidiaries as of March 31, 2003, and the related consolidated statements of earnings, stockholders’ equity and cash flows for the year then ended, not presented herein, and in our report dated April 21 2003, 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, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
New Orleans, Louisiana
October 17, 2003
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Overview
The company provides services to the global offshore energy industry through the operation of a diversified fleet of marine service vessels. Revenues, net earnings and cash flows from operations are dependent upon the activity level of the vessel fleet, which is ultimately dependent upon oil and natural gas prices which, in turn, are determined by the supply/demand relationship for crude oil and natural gas. 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.
Forward Looking Information and Cautionary 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. Any such forward-looking statements are subject to risks and uncertainties and the company’s future results of operations could differ materially from historical results or current expectations. Some of these risks are discussed in this report, and include, without limitation, fluctuations in oil and gas prices; level of fleet additions by competitors and vessel overcapacity; changes in capital spending by customers in the energy industry for exploration, development and production; changing customer demands for different vessel specifications; acts of terrorism; unsettled political conditions, war, civil unrest and governmental actions, especially in higher risk countries of operations; foreign currency fluctuations; and environmental and labor laws.
Forward-looking statements, which can generally be identified by the use of such terminology as “may,” “expect,” “anticipate,” “estimate,” “forecast,” “believe,” “think,” “could,” “will,” “continue,” “intend,” “seek,” “plan,” “should,” “would” and similar expressions contained in this report, are predictions and not guarantees of future performance or events. Any forward-looking statements are based on current industry, financial and economic information, which the company has assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. The company’s actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. The forward-looking statements should be considered in the context of the risk factors listed above and discussed in Items 1, 2 and 7 included in the company’s Annual Report on Form 10-K for the year ended March 31, 2003, filed with the Securities and Exchange Commission on April 22, 2003 and elsewhere in this Form 10-Q. Investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Management disclaims any obligation to update or revise the forward-looking statements contained herein to reflect new information, future events or developments.
General Market Conditions and Results of Operations
Offshore service vessels provide a diverse range of services and equipment to the energy industry. Fleet size, utilization and vessel day rates primarily determine the amount of revenues and operating profit because operating costs and depreciation do not change proportionally when revenue changes. Operating costs primarily consist of crew costs, repair and maintenance, insurance, fuel, lube oil and supplies. Fleet size and utilization are the major factors that affect crew costs. The timing and amount of repair and maintenance costs are influenced by customer demands, vessel age and scheduled drydockings to satisfy safety and inspection requirements mandated by regulatory agencies. Whenever possible, vessel drydockings are done during seasonally slow periods to minimize any impact on vessel operations and are only done if economically justified, given the vessel’s age and physical condition.
The following table compares revenues and operating costs (excluding general and administrative expense and depreciation expense) for the company’s vessel fleet for the quarters and six-month periods ended
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September 30 and for the quarter ended June 30, 2003. Vessel revenues and operating costs relate to vessels owned and operated by the company while other marine services relate to third-party activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related activities.
Vessel revenues:
United States
International
Operating costs:
Vessel operating costs:
Crew costs
Repair and maintenance
Insurance
Fuel, lube and supplies
Marine support services are conducted worldwide with assets that are highly mobile. Revenues are principally derived from offshore service vessels, which regularly and routinely move from one operating area to another, often to and from offshore operating areas in different continents. Because of this asset mobility, revenues and long-lived assets attributable to the company’s international marine operations in any one country are not “material” as that term is defined by SFAS No. 131.
As a result of the uncertainty of a certain customer to make payment of vessel charter hire, the company has deferred the recognition of approximately $4.6 million of billings as of September 30, 2003 ($5.6 million of billings as of March 31, 2003), which would otherwise have been recognized as revenue. The company will recognize the amounts as revenue as cash is collected or at such time as the uncertainty has been significantly reduced.
The prolonged weakness in the natural gas drilling market in the U.S. Gulf of Mexico continues to negatively impact the company’s domestic results of operations. With the additional vessels acquired from ENSCO on April 1, 2003, domestic-based vessel revenues increased, but utilization rates remained depressed. Strong natural gas commodity prices and tight inventory levels for the resource for the majority of calendar year 2003 have not resulted in an increase in gas drilling in the Gulf of Mexico market. The reasons for the continuing low level of offshore drilling and exploration activity are not fully known. The company believes that general uncertain economic conditions and concerns about the stability of natural gas prices are contributing factors. Natural gas commodity prices have declined in recent weeks as concerns over insufficient natural gas supplies abated because storage levels for the resource rose to near five year averages. Despite this negative trend, many market analysts forecast that natural gas supply and demand will be tight during the winter heating season thus supporting higher commodity pricing later in the year and into calendar year 2004, which are positive indicators for increased drilling activity. Vessel demand in the domestic market is primarily driven by natural gas exploration and production and, at present time, it is unknown how domestic-based vessel demand will be affected by the current market conditions.
International results of operations for the second quarter of fiscal 2004 have been negatively impacted by reduced utilization of the supply and towing supply vessels in certain international markets, particularly in Nigeria, Venezuela and Brazil. Although international results have benefited from stable average day rates,
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the effect was insufficient in alleviating the negative impact lower utilization had on international results of operations. At present time, crude oil commodity prices are at attractive levels and consumer demand for crude oil remains high, which are optimistic gauges for steady international exploration and production.
Marine operating profit (loss) and other components of earnings before income taxes for the quarters and six-month periods ended September 30 and for the quarter ended June 30, 2003 consist of the following:
Vessel activity:
Other marine services
Operating profit
Corporate general and administrative
Other income
U.S.-based vessel revenues for the quarter and six-month period ended September 30, 2003 increased 44% and 33%, respectively, as compared to the same periods in fiscal 2003 due to higher utilization and average day rates. Higher current period revenues were also generated from an increased number of company vessels operating in the domestic market resulting from the addition of several new-build vessels during the second half of fiscal 2003 and the first half of fiscal 2004 and the acquisition of the ENSCO vessels on April 1, 2003. Utilization rates for the towing supply/supply vessels, the company’s major income producing vessel class in the domestic market, increased modestly for the quarter and six-month period ended September 30, 2003, as compared to the same period in fiscal 2003. Average day rates for the towing supply/supply vessels increased slightly for the current quarter but decreased 5% for the current six-month period as compared to the same period in fiscal 2003. The additional ENSCO vessels helped to boost the current six-month period’s utilization rates, but reduced the average day rate for the entire vessel class as these vessels came to the company at day rates lower than Tidewater’s similar vessels. The company’s average day rates still remain at high levels as compared to the average day rates experienced during the last industry downturn. Utilization rates in the U.S. Gulf of Mexico, however, still remain at the lowest level the company has experienced in over a decade due in part to management’s strategic decision to attempt to maintain high average day rates at the expense of lower utilization. Also during the current quarter and six-month period ended September 30, 2003, the company’s offshore tugs operating in the Gulf experienced a large increase in utilization and average day rates versus similar periods last year due to an increase in construction activity for the current quarter and due to an increase in rig moving for ENSCO. In conjunction with the acquisition of ENSCO vessels, it was also agreed that, for a period of two years and subject to satisfactory performance, the company would provide to ENSCO all of its discretionary vessel requirements in the Gulf of Mexico.
U.S.-based operating loss for the quarter ended September 30, 2003 decreased 24% as compared to the same period in fiscal 2003 but increased 37% for the six-month period ended September 30, 2003 as compared to the same period in fiscal 2003. Higher revenues earned during the current quarter and six-month period ended September 30, 2003 were offset by increases in vessel operating costs and depreciation expense as a result of the increase in the number of vessels operating in the domestic market.
Current quarter U.S.-based vessel revenues increased 8% as compared to the previous quarter due primarily to higher utilization rates for the domestic-based deepwater vessels, crewboats and offshore tugs
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and, as a result of higher average day rates for the towing supply/supply vessels, offshore tugs and crewboats. Utilization rates for the towing supply/supply vessels decreased during the current quarter while average day rates for the class of vessel increased. Increases in average day rates for the towing supply/supply vessel class is primarily a result of the mix of vessels working during the period rather than general increases in market rates for the group of vessels. Utilization of the company’s newer, larger, replacement platform supply vessels and stretched vessels, which warrant higher day rates, improved during the current period. Utilization and average day rates for the offshore tugs increased due to an increase in activity related to construction work and an increase in rig moving for ENSCO.
U.S.-based operating loss for the current quarter decreased 45% as compared to the previous quarter due to higher revenues. During the latter part of the current quarter, the company implemented significant cost cutting measures that resulted in the reduction of U.S. shore-based and fleet personnel. The full financial impact of the cost cutting measures is expected to be realized beginning in the third quarter of fiscal 2004.
International-based vessel revenues for the quarter and six-month period ended September 30, 2003 decreased 5% and 4%, respectively, as compared to the same periods in fiscal 2003 due to lower utilization, primarily in Nigeria, Venezuela and Brazil. Average day rates during the current periods increased versus comparative prior year periods but were insufficient to mitigate the negative effects lower utilization had on revenues. Utilization rates, which declined 13% and 9%, respectively, from prior year periods were also impacted by vessel downtime due to a higher level of drydockings and vessel mobilizations.
The company has four deepwater vessels that are currently fulfilling bareboat contractual obligations that existed at the time the vessels were purchased (November 2000). The vessels’ bareboat charter agreements will expire at various times over the next year. In a bareboat charter agreement, the bareboat charterer leases a vessel for a pre-arranged fee and is able to market the vessel and is also responsible for providing the crew and all other operating costs related to the vessel. For the vessels that the company has under bareboat contracts, only revenue and depreciation expense are recorded related to the vessels’ activity. As the company incurs no operating costs related to the vessels, the related bareboat day rates are less than comparable vessels operating under normal charter hire arrangements. For the quarter and six-month period ended September 30, 2003, the four bareboat-chartered deepwater vessels experienced 100% utilization for each respective period and average day rates of approximately $7,400 and $7,300, respectively.
International-based vessel operating profit for the quarter and six-month period ended September 30, 2003 decreased 42% and 26%, respectively, as compared to the same periods in fiscal 2003, due to lower revenues, resulting from reduced vessel utilization, and higher vessel operating costs driven primarily by higher repair and maintenance costs and greater crew costs related to the new vessels added to the fleet since last year.
Current quarter international-based vessel revenues were 3% lower than the revenue amounts earned in the previous quarter due to lower vessel utilization. International-based vessel operating profit for the current quarter decreased 34% as compared to the previous quarter due to lower revenues and higher crew costs resulting from new vessels added to the fleet and to higher repair and maintenance expenses resulting from an increase in vessel drydockings.
Vessel Class Statistics
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 through the level of offshore exploration, development and production spending by energy companies relative to the supply of offshore service vessels. Suitability of equipment and the degree of service provided also influence vessel day rates. The following tables compare day-based utilization percentages and average day rates by vessel class and in total for the quarters and six-month period ended September 30 and for the quarter ended June 30, 2003:
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UTILIZATION:
Domestic-based fleet:
Deepwater vessels
Towing-supply/supply
Crew/utility
Offshore tugs
Total
International-based fleet:
Worldwide fleet:
AVERAGE VESSEL DAY RATES:
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The following table compares the average number of vessels by class and geographic distribution for the quarters and six-month periods ended September 30 and for the quarter ended June 30, 2003:
Owned or chartered vessels included in marine revenues
Vessels held for sale
Joint-venture and other
On April 1, 2003, the company purchased from ENSCO International Incorporated its 27-vessel Gulf of Mexico-based marine fleet. The mix of ENSCO vessels acquired consists of one deepwater anchor handling/towing supply vessel and 26 towing-supply/supply vessels. Also during the current fiscal year, the company took delivery of one large deepwater platform supply vessel, four 220-foot platform supply vessels, one anchor handling towing supply vessel, six crewboats and one offshore tug. The company also sold and/or scrapped five towing-supply/supply vessels, one crewboat and three offshore tugs.
During fiscal 2003, the company took delivery of seven large deepwater platform supply vessels, three 220-foot platform supply vessels, three crewboats and entered into an agreement to bareboat charter one large platform supply vessel. Also during fiscal 2003, the company sold two vessels to one of its 49%-owned unconsolidated joint ventures. Additionally, the company sold and/or scrapped 24 vessels during fiscal 2003. The mix of vessels disposed of includes 12 towing-supply/supply vessels, three offshore tugs, five crew/utility vessels and four other type vessels.
General and Administrative Expenses
Consolidated general and administrative expenses for the quarters and six-month periods ended September 30 and for the quarter ended June 30, 2003 were as follows:
Personnel
Office and property
Sales and marketing
Professional services
Included in the current quarter general and administrative expenses is approximately $200,000 of severance costs related to the reduction of U.S. shore-based and fleet personnel.
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Liquidity, Capital Resources and Other Matters
The company’s current ratio, level of working capital and amount of cash flows from operations for any period are directly related to fleet activity and vessel day rates. Fleet activity and vessel day rates are ultimately determined by the supply/demand relationship for oil and natural gas. Variations from year-to-year in these items are primarily the result of market conditions. Cash from operations, in combination with an available line of credit, provide the company, in management’s opinion, with adequate resources to satisfy its current financing requirements. At September 30, 2003, all of the company’s $295 million revolving line of credit was available for future financing needs. Continued payment of dividends, currently $.15 per quarter per common share, is subject to declaration by the Board of Directors.
During the current quarter, the company signed a new $295 million revolving credit agreement which replaced the existing $200 million revolving credit and term loan agreement. Under the new agreement, borrowings bear interest at the company’s option, at prime or Federal Funds rates plus .5% or LIBOR rates plus margins from .75% to 1.25% based on the company’s funded debt to total capitalization ratio. The new revolving credit commitment will expire on April 30, 2008. Any borrowings under the agreement are unsecured and the company pays an annual fee of .20% on the unused portion of the facility.
On July 8, 2003, the company issued $300 million of senior unsecured debt notes. The multiple series of notes with maturities ranging from 7 years to 12 years have an average outstanding life to maturity of 9.5 years, although the notes can be paid before maturity. The average interest rate on the notes sold to private institutional investors is 4.35%. The note proceeds were used to refinance the then-existing $245 million debt outstanding, with the balance of the issue to be used to fund future capital expenditures.
Net cash provided by operating activities for any period will fluctuate according to the level of business activity for the applicable period. For the six months ended September 30, 2003, net cash from operating activities was less than the same period in fiscal 2003 primarily due to lower accounts receivable collections.
Investing activities for the six months ended September 30, 2003 used $191.0 million of cash, which included $7.9 million from proceeds from the sale of assets. Sale proceeds were offset by additions to properties and equipment, which was comprised of approximately $12.6 million in capitalized repairs, maintenance and vessel enhancements, $.7 million in other properties and equipment purchases, $107.7 million for the construction of offshore marine vessels and $77.8 million for the purchase of 27 ENSCO vessels on April 1, 2003. Investing activities for the six months ended September 30, 2002 used $158.7 million of cash, which included $5.3 million from proceeds from the sale of assets. Sale proceeds were offset by additions to properties and equipment, which was comprised of approximately $7.1 million in capitalized repairs and maintenance, $2.3 million in other properties and equipment purchases and $154.6 million for the construction of offshore marine vessels.
Financing activities for the six months ended September 30, 2003 provided $144.3 million of cash, which included $300 million of privately placed senior unsecured debt borrowings, a $100 million term loan placed with a group of banks primarily to finance the purchase of the ENSCO vessels and $36 million of borrowings from the company’s original revolving and term loan agreement. Borrowings were offset primarily by repayments of debt of $275 million, which consists of the payoff of the $100 million term loan and the payoff of $175 million of outstanding debt under the company’s original revolving and term loan agreement and $17 million of cash used for quarterly cash dividends of $.15 per share. Financing activities for the six months ended September 30, 2002 provided $45.2 million of cash, which included $70 million of credit facility borrowings that were offset primarily by repayments of debt of $15 million and $16.9 million of cash used for quarterly cash dividends of $.15 per share.
On January 10, 2001, the company entered into agreements with a shipyard in Far East Asia for the construction of five large anchor handling towing supply vessels which are capable of working in most deepwater markets of the world. Scheduled deliveries for the five vessels have been delayed. The company expects the first vessel to be delivered to the market early in calendar year 2004 while the remaining four vessels are expected to be delivered throughout calendar year 2004. The total estimated
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cost for the vessels is approximately $175.5 million, which includes shipyard commitments and other incidental costs such as spare parts, management and supervision, and outfitting costs. The company has fixed cost contracts supported by performance bonds with the shipyard and does not anticipate any cost overruns related to these vessels. As of September 30, 2003, $141.5 million has been expended on the vessels.
The company is also constructing eight anchor handling towing supply vessels varying in size from 5,500 brake horsepower (BHP) to 9,000 BHP. Four international shipyards will each construct two vessels. Scheduled delivery of the eight vessels is expected to begin in December 2004 with the last vessel delivered in November 2005. As of September 30, 2003, $10.1 million has been expended on the vessels of the total $115.5 million commitment cost.
The company is also committed to the construction of one large, North Sea-type platform supply vessel (which is being constructed in a Brazilian shipyard) and six next generation supply vessels, ranging in size from 205-foot to 220-foot, for approximately $86.1 million. The company’s shipyard, Quality Shipyard, LLC, is constructing one of the next generation supply vessels and two other shipyards are constructing the remaining five vessels. The six vessels are intermediate in size and are technically capable of working in certain deepwater markets; however, these vessels are being constructed in order to replace older supply vessels. Scheduled delivery of the seven vessels is expected to commence in October 2003 with final delivery in May 2004. As of September 30, 2003, $62.4 million has been expended on these vessels.
In August 2003, the company committed $13.6 million for the construction of two, 175-foot, state-of-the-art, fast, crew/supply boats that blend the speed of a crewboat with the capabilities of a supply vessel. The vessels are being constructed at a U.S. shipyard and are scheduled for delivery in September and December of 2004. As of September 30, 2003, $.7 million has been expended on the two vessels.
The company is also committed to the construction of one 162-foot crewboat and one water jet crewboat. A U.S. shipyard is constructing the 162-foot crewboat and to date no amounts have been expended on this vessel of the total $5.3 million commitment cost, as the crewboat’s purchase price is due upon delivery of the vessel. A shipyard in Holland is constructing the water jet craft, and, as of September 30, 2003, $.5 million has been expended of the total $.9 million commitment cost. The vessels are scheduled for delivery in October and November of 2003.
The table below summarizes the various vessel commitments as discussed above by vessel class and type as of September 30, 2003:
Vessel class and type
Deepwater vessels:
Anchor handling towing supply
Platform supply vessels
Replacement Fleet:
Crewboats:
Crewboats – 162-foot
Crewboats – 175-foot
Crewboats – Water Jet
Totals
The company has been financing its vessel commitment programs from its current cash balances, its operating cash flow and its $300 million senior unsecured debt notes and revolving credit facility. Of the total $396.9 million of capital commitments for vessels currently under construction the company has expended $215.2 million as of September 30, 2003.
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While the company has not formally committed to any future new build vessel contracts at the present time, other than what has been discussed above, the company anticipates over the next several years continuing its vessel building program in order to replace its aging vessels. The majority of the company’s supply and towing supply vessels were constructed between 1976 and 1983. As such, most of this vessel class exceeds 20 years of age and will ultimately need to be replaced. In addition to age, market conditions will also help determine when a vessel is no longer economically viable. The company anticipates using future operating cash flows and borrowing capacities to fund significant capital expenditures over the next several years.
The company is capitalizing a portion of its interest costs incurred on borrowed funds used to construct vessels. Interest and debt costs incurred, net of interest capitalized for the quarter and six-month period ended September 30, 2003, was approximately $1.0 million and $1.2 million, respectively. Interest costs capitalized for the quarter and six-month period ended September 30, 2003 was approximately $2.3 million and $3.4 million, respectively.
Such additional taxes due, if any, would result in a reclassification of a previously recorded non-current deferred income tax liability to a current income tax payable. Other than a charge for interest related to amounts due, if any, this issue would have no effect on the company’s statement of earnings. The company intends to vigorously contest any audit deficiency when issued by the IRS and believes that any final outcome of this controversy will not have a material adverse effect on its financial position or results of operations.
The company tests goodwill impairment annually at a reporting unit level using carrying amounts as of December 31. The company considers its reporting units to be its domestic and international operations.
The company performed its annual impairment test as of December 31, 2002, and the test determined there was no goodwill impairment. Interim testing will be performed when events occur or circumstances indicate that the carrying amount of goodwill may be impaired. A full discussion on the methodology the company uses to test goodwill impairment and examples of the types of events that may occur which would require interim testing is included in Item 7 and in Note 1 of Notes to Consolidated Financial Statements in the company’s Annual Report on Form 10-K for the year ended March 31, 2003, filed with the Securities and Exchange Commission on April 22, 2003. Goodwill as of September 30, 2003 was $328.8 million.
Effects of Inflation
Day-to-day operating costs are generally affected by inflation. However, because the energy services industry requires specialized goods and services, general economic inflationary trends may not affect the company’s operating costs. The major impact on operating costs is the level of offshore exploration, development and production spending by energy exploration and production companies. As this spending increases, prices of goods and services used by the energy industry and the energy services industry will increase. Future increases in vessel day rates may shield the company from the inflationary effects on operating costs.
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Environmental Matters
During the ordinary course of business, the company’s operations are subject to a wide variety of environmental laws and regulations. The company attempts to comply with these laws and regulations in order to avoid costly accidents and related environmental damage. Compliance with existing governmental regulations that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, nor is expected to have, a material effect on the company. The company is proactive in establishing policies and operating procedures for safeguarding the environment against any environmentally hazardous material aboard its vessels and at shore base locations. Whenever possible, hazardous materials are maintained or transferred in confined areas to ensure containment if accidents occur. In addition the company has established operating policies that are intended to increase awareness of actions that may harm the environment.
Market risk refers to the potential losses arising from changes in interest rates, foreign currency fluctuations and exchange rates, equity prices and commodity prices including the correlation among these factors and their volatility. The company is primarily exposed to interest rate risk and foreign currency fluctuations and exchange risk.
Interest Rate Risk. Changes in interest rates may result in changes in the fair market value of the company’s financial instruments, interest income and interest expense. The company’s financial instruments that are exposed to interest rate risk are its cash equivalents and long-term borrowings. Due to the short duration and conservative nature of the cash equivalent investment portfolio, the company does not expect any material loss with respect to its investments. The book value for cash equivalents is considered to be representative of its fair value.
At September 30, 2003, the company had $300 million of debt outstanding, all of which represents senior unsecured debt note borrowings that were issued on July 8, 2003. The multiple series of notes with maturities ranging from 7 years to 12 years have an average outstanding life to maturity of 9.5 years, although the notes can be paid before maturity. The average interest rate on the notes sold is 4.35%. The fair value of this debt at September 30, 2003 approximates its face value.
During the current quarter, the company signed a new $295 million revolving credit agreement which replaced the existing $200 million revolving credit and term loan agreement. There were no cash borrowings against the company’s revolving credit facility as of September 30, 2003. Under the new agreement, borrowings bear interest at the company’s option, at prime or Federal Funds rates plus .5% or LIBOR rates plus margins from .75% to 1.25% based on the company’s funded debt to total capitalization ratio. The new revolving credit commitment will expire on April 30, 2008. Any borrowings under the agreement are unsecured and the company pays an annual fee of .20% on the unused portion of the facility.
Foreign Exchange Risk. The company’s financial instruments that can be affected by foreign currency fluctuations and exchange risks consist primarily of cash and cash equivalents, trade receivables and trade payables denominated in currencies other than the U.S. dollar. The company periodically enters into spot and forward derivative financial instruments as a hedge against foreign currency denominated assets and liabilities and currency commitments.
Spot derivative financial instruments are short-term in nature and settle within two business days. The fair value approximates the carrying value due to the short-term nature of this instrument, and as a result, no gains or losses are recognized. 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. The company enters into derivative instruments only to the extent considered necessary to meet its risk management objectives and
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does not use derivative contracts for speculative purposes. The company had no derivative financial instruments outstanding as of September 30, 2003.
Because of its significant international operations, the company is exposed to currency fluctuations and exchange risk on all contracts in foreign currencies. The company does not hedge against any foreign currency rate fluctuations associated with foreign currency contracts that arise in the normal course of business. To minimize the financial impact of these items the company attempts to contract a majority of its services in United States dollars. The company continually monitors the currency exchange risks associated with all contracts not denominated in U.S. dollars.
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (“Exchange Act”), such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC rules. However, any control system, no matter how well-conceived and followed, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met.
The company evaluated, under the supervision and with the participation of the company’s management, including the company’s Chairman of the Board, President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘Exchange Act’)) as of the end of the period covered by this report. Based on that evaluation, the company’s Chairman of the Board, President and Chief Executive Officer along with the company’s Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be disclosed in the reports the company files and submits under the Exchange Act.
There have been no changes in the company’s internal controls over financial reporting during the period covered by this report that have materially affected or are reasonably likely to materially affect, the company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Name
Nominee or Director
Continuing in Office
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
(Registrant)
Date: October 23, 2003
/s/ DEAN E. TAYLOR
Dean E. Taylor
Chairman of the Board, President and
Chief Executive Officer
/s/ J. KEITHLOUSTEAU
J. Keith Lousteau
Executive Vice President and Chief Financial Officer
/s/ JOSEPH M. BENNETT
Joseph M. Bennett
Vice President and Corporate Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
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