SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
For the Quarterly Period Ended June 30, 2005
For the Transition Period From to
Commission file number 1-6311
TIDEWATER INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
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 filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ¨
57,532,156 shares of Tidewater Inc. common stock $.10 par value per share were outstanding on July 8, 2005. Excluded from the calculation of shares outstanding at July 8, 2005 are 3,184,475 shares held by the Registrant’s Grantor Stock Ownership Trust. Registrant has no other class of common stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data)
ASSETS
Current assets:
Cash and cash equivalents
Trade and other receivables, net
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 and amortization
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 60,716,631 shares at June and 60,718,231 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)
Three Months Ended
June 30,
Revenues:
Vessel revenues
Other marine revenues
Costs and expenses:
Vessel operating costs
Costs of other marine revenues
Depreciation and amortization
General and administrative
Gain on sales of assets
Other income (expenses):
Foreign exchange gain
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
(In thousands)
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
(1) Interim Financial Statements
The unaudited condensed consolidated financial statements for the interim periods presented herein have been prepared in conformity with United States generally accepted accounting principles and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated balance sheets and the condensed consolidated statements of earnings and cash flows at the dates and for the periods indicated. 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 2005 Annual Report on Form 10-K.
Certain previously reported amounts have been reclassified to conform to the first quarter fiscal 2005 presentation.
(2) Stockholders’ Equity
At June 30, 2005 and March 31, 2005, 3,186,936 and 3,201,352 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.
(3) Stock-Based Compensation
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 three months ended June 30, 2005 and 2004 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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(4) 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 ended June 30, 2005 and 2004 was 26% and 32%, respectively. The effective tax rate in the current quarter is lower than that of the quarter ended June 30, 2004 as a result of the provisions of the American Jobs Creation Act of 2004 which reduced taxes on earnings of most non-U.S. subsidiaries considered indefinitely reinvested abroad.
(5) Employee Benefit Plans
A defined benefit pension plan 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 addition, the company also offers a supplemental retirement plan (supplemental plan) that provides pension benefits to certain employees in excess of those allowed under the company’s tax-qualified pension plan. The company contributed $0.8 million to the defined benefit pension plan during the quarter ended June 30, 2005 which satisfied its fiscal 2006 annual funding requirement. The company does not expect to make a contribution during the remainder of the fiscal year.
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.
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:
Pension Benefits:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized actuarial loss
Net periodic benefit cost
Other Benefits:
The net periodic benefit cost for the quarter period ended June 30, 2005 includes the implementation of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), which was signed into law in December 2003. The estimated total effect of the Act is expected to reduce annual postretirement benefit expense by approximately $0.5 million, of which $125,000 has been recognized during the three months ended June 30, 2005.
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(6) Contingencies
At the conclusion of its examination of the company’s income tax returns covering fiscal 2001 and 2002, the Internal Revenue Service (IRS) proposed changes to taxable income which, if sustained, would result in additional income tax of $12.8 million. The proposed increase in taxable income results primarily from the IRS disallowance of all claimed deductions from taxable income related to the company’s foreign sales corporation (FSC) as well as all deductions claimed under the Extraterritorial Income Exclusion (ETI). The company has filed a formal protest with the IRS seeking a reconsideration of the position taken. The company has received a final assessment of additional income tax of $1.75 million resulting from the IRS’s earlier examination of the company’s income tax returns for fiscal 1999 and 2000. Such assessment is due to the IRS disallowance of essentially all deductions related to FSC activity during this period. The company has paid the 1999 and 2000 assessment and has begun the process of seeking a refund of the taxes paid through the initiation of legal proceedings. The IRS has notified the company that it will soon begin an examination of its 2003 and 2004 federal income tax returns. The company also has additional ongoing examinations by various state and foreign tax authorities. The company does not believe that the results of these examinations will have a material adverse affect on the company’s financial position or results of operations.
A subsidiary of the company is a participating employer in an industry-wide multi-employer retirement fund in an international area. The company has learned of the fund’s deficit that may ultimately require contributions from the participating employers throughout the industry. The contribution that may be required from the company will depend on a number of factors including a current calculation of the total fund deficit, the number of participating employers, and an allocation of the required contributions to participating employers, among others. The company has engaged the assistance of outside advisors, but is currently unable to determine the outcome of this matter and the related impact it might have on the company’s financial condition and results of operations. The company does not expect a formal demand for contribution, if any, until the end of calendar 2005.
The company has previously disclosed that it is the subject of an informal inquiry by the Securities and Exchange Commission (SEC) related to the $26.5 million impairment charge that it recorded in its fiscal year ended March 31, 2004 that was related to 83 “cold stacked” vessels that had been used in the Gulf of Mexico. The company is in discussions with the SEC in an effort to resolve the matters raised by the inquiry. At this time, the company is unable to predict the timing or ultimate outcome of these discussions.
Various legal proceedings and claims are outstanding which arose in the ordinary course of business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a material adverse effect on the company’s financial position, results of operations, or cash flows.
(7) New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R). This standard requires expensing of stock options and other share-based payments and supersedes SFAS No. 123, Accounting for Stock-Based Compensation and Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance that had allowed companies to choose between expensing stock options or showing proforma disclosure only. This standard, together with a new rule adopted by the Securities and Exchange Commission in April 2005, is effective for the company as of April 1, 2006 and will apply to all awards granted, modified, cancelled or repurchased after that date. The ultimate amount of increased compensation expense will be dependent on the number of option shares granted, their timing and vesting period and the method used to calculate the fair value of the awards, among other factors. The company is currently evaluating the expected impact that the adoption of SFAS 123R will have on its results of operations and cash flows in the future.
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(8) Subsequent Events
In July 2005, the company announced the pending sale of six of its KMAR 404 class of Anchor Handling Towing Supply vessels to Deep Sea Supply ASA for a total cash price of $188.0 million. All conditions precedent to close, including the receipt by Tidewater of a non-refundable 10% deposit and the deposit by the purchaser of the balance of the purchase price being deposited into an escrow account, have been completed and the transaction is expected to close shortly. The culmination of this transaction will result in an approximate $65.9 million pre-tax financial gain, or approximately $42.8 million after tax, or $0.74 per common share. The transaction will result in an approximate $112.0 million taxable gain, but no cash taxes will be due because of the availability of net operating loss carryforwards. The sales agreement also provides the company an opportunity, for an extended period of time, to operate the six vessels on behalf of the new owners for a fixed fee per vessel per day. The company expects to use a portion of the proceeds of the sale to repay $95.0 million of borrowings currently outstanding under the company’s revolving credit agreement.
In July 2005, the company’s board of directors authorized the company to spend up to $120.0 million to repurchase shares of its common stock. Such repurchases will be made through open market or privately-negotiated transactions. The company intends to use its available cash and, when considered advantageous, borrowings under its revolving credit facility to fund the share repurchase. The repurchase program will end when all authorized funds have been expended or on June 30, 2006.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Tidewater Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Tidewater Inc. and subsidiaries as of June 30, 2005, and the related condensed consolidated statements of earnings and cash flows for the three-month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with 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 standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Tidewater Inc. and subsidiaries as of March 31, 2005, and the related consolidated statements of earnings, shareholders’ equity and other comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated June 14, 2005, 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, 2005 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
July 25, 2005
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
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 industry 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, 2005, filed with the Securities and Exchange Commission on June 14, 2005 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.
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.
General Market Conditions and Results of Operations
Offshore service vessels provide a diverse range of services and equipment to the energy industry. The company’s revenues and operating profit are primarily driven by fleet size, vessel utilization and day rates 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 which 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 expenses (excluding general and administrative expense, depreciation expense and gain on sales of assets) for the quarter periods ended June 30, 2005 and 2004 and for the quarter ended March 31, 2005. Vessel revenues and
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operating costs relate to vessels owned and operated by the company while other marine revenues relate to third-party activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related activities.
Quarter Ended
QuarterEndedMarch 31,
2005
Vessel revenues:
United States
International
Operating costs:
Vessel operating costs:
Crew costs
Repair and maintenance
Insurance and loss reserves
Fuel, lube and supplies
Marine support services are conducted worldwide with highly mobile assets. 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 of 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 $3.6 million of billings as of June 30, 2005 ($1.6 million of billings as of March 31, 2005), 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 company’s domestic results of operations for the first quarter of fiscal 2006 benefited from higher utilization and average day rates. During the past year, prospects for growth in the offshore drilling market in the Gulf of Mexico have shown significant improvement because of several positive developments. In August 2004, the Western Gulf of Mexico lease sale received solid bids. Bids for shallow water tracts were up and high bids for deepwater tracts increased from the previous year’s sale. The Texas State Lease Sale, which was held in January 2005, was reported to have had its best showing in six years and the independent exploration and production (E&P) companies were the dominant bidders at the Central Gulf of Mexico lease sales held in March 2005. Offshore rig demand has improved and drilling activity is likely to remain at improved levels for the remainder of calendar year 2005 and into 2006. The E&P companies have contracted offshore drilling rigs for longer durations than in past periods due to concerns over rig availability in the domestic market. The market for offshore support vessels tightened as drilling operators discovered that offshore vessels currently in service are in short supply. The Gulf of Mexico supply boat market still has a significant number of vessels stacked that could resume active status, but only after significant expenditures to drydock and re-certify the vessels.
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Analysts have noted in their mid-year E&P capital spending reports that worldwide E&P expenditures for calendar year 2005 are exceeding original estimates. Domestic E&P expenditures for calendar year 2005 are now forecast to be at approximately 17% over calendar year 2004 spending. On the international front, it is now expected that international E&P spending by the majors, independents and national E&P companies will rise approximately 13% over calendar year 2004 budgets and that increases are not limited to any one major oil and gas region. In addition, industry professionals also estimate that calendar year 2006 E&P spending is poised to be higher than that spent during calendar 2005 due to continuing strong demand for natural resources despite historically high crude oil prices and lofty natural gas prices.
Commodity prices for crude oil and natural gas are critical factors in E&P companies’ development of capital spending budgets. At the present time, commodity prices for natural gas remain at attractive levels despite increases in inventories during May and June 2005 which exceed five-year inventory averages. Domestic results of operations are primarily driven by natural gas exploration and production and, given the increase in inventory levels of natural gas, management cannot predict whether the recent increase in drilling activity will be sustained. Nevertheless, management is pleased by the developing strength in the offshore drilling market.
Historically, the company’s international results of operations have been primarily dependent on the supply and demand relationship for crude oil and, at present, crude oil prices are at historically high levels. The company’s first quarter fiscal 2006 international results of operations benefited from higher average day rates, stable utilization and an increase in the number of vessels operating internationally. Industry analysts are forecasting that demand for crude oil will likely remain strong throughout calendar year 2005 and into 2006 and expect future crude oil commodity prices to remain at attractive levels due to continuing high consumer demand, tight crude oil inventory supplies and continued concerns over possible supply interruptions caused by geopolitical risk in certain countries that are members of the Organization of Petroleum Exporting Countries (OPEC). Management anticipates international vessel demand will continue to improve along with these market conditions.
Marine operating profit (loss) and other components of earnings before income taxes for the quarters ended June 30 and March 31 consists of the following:
Vessel activity:
Impairment of long-lived assets
Other marine services
Operating profit
Corporate general and administrative
Other income
U.S.-based vessel revenues for the first quarter of fiscal 2006 increased approximately 25% and 14% as compared to the first and fourth quarters of fiscal 2005, respectively, due to an increase in utilization and average day rates on the company’s deepwater, towing supply/supply and crew/utility class of vessels. The active towing supply/supply vessels, the company’s major income producing vessel class in the domestic market, generated approximately 86% and 54% of the revenue growth as compared to the first and fourth quarters of fiscal 2005, respectively, while the company’s deepwater
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class of vessels contributed approximately 11% and 19% of revenue growth during the same comparative periods, respectively. Utilization rates on the towing supply/supply vessels increased approximately 23% and 9% as compared to the first and fourth quarters of fiscal 2005, respectively, while average day rates on this same class of vessel increased approximately 29% and 6%, respectively, during the same comparative periods. Utilization rates on the company’s deepwater class of vessels increased approximately 34% and 9% (reaching full capacity) as compared to the first and fourth quarters of fiscal 2005, respectively, while average day rates for the deepwater class of vessels increased approximately 19% and 7% during the same comparative periods, respectively. The company’s crew/utility class of vessels also had impressive results during the first quarter of fiscal 2006 as it experienced an increase in average day rates and utilization of approximately 27% and 18%, respectively, during the current quarter as compared to the first quarter of fiscal 2005. Current quarter utilization rates on the crew/utility class of vessels were comparable to the rates generated in the fourth quarter of fiscal 2005 while average day rates increased approximately 4% as compared to the fourth quarter of fiscal 2005.
Operating profit for the U.S.-based vessels increased approximately $10.8 million during the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 due to higher revenues, lower vessel operating costs and due to a reduction in depreciation expense resulting from fewer vessels operating in the domestic market due to vessel sales and the redeployment of vessels to opportunities in international areas.
U.S.-based operating profit for the current quarter increased approximately 164%, or $4.3 million as compared to the fourth quarter of fiscal 2005 due to higher revenues.
International-based vessel revenues increased approximately 24% in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 due to higher average day rates on all vessel classes, an increase in the number of vessels operating internationally and an increase in utilization rates on the deepwater and towing supply/supply class of vessels. The company’s international deepwater class and towing supply/supply class of vessels generated approximately 36% and 51%, respectively, of the revenue growth during the comparative periods.
International-based vessel operating profit for the first quarter of fiscal 2006 increased approximately 82% as compared to the first quarter of fiscal 2005 due to higher revenues. Higher international-based revenues earned during the current quarter were partially offset by increases in vessel operating costs (primarily crew costs) and depreciation expense resulting from an increase in the number of vessels operating in the international market.
Current quarter international-based vessel revenues were up approximately 5% as compared to the revenue amounts earned in the fourth quarter of fiscal 2005 due to improved average day rates on most classes of international-based vessels. International-based operating profit increased approximately 16% for the first quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005 due to higher revenues and slightly lower general and administrative costs.
Gain on sales of assets for the first quarter of fiscal 2006 were lower than the same period in fiscal 2005 due to receiving lower sales prices on the mix of vessels sold.
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. Vessel utilization rates are calculated by dividing the number of days a vessel works during a reporting period by the number of days the vessel is available to work in the reporting period. Average day rates are calculated by dividing the revenue a vessel earns during a reporting period by
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the number of days the vessel worked in the reporting period. Vessel utilization and average day rates are calculated on active vessels only and, as such, do not include vessels withdrawn from active service or joint venture vessels. The following tables compare day-based utilization percentages and average day rates by vessel class and in total for the quarter periods ended June 30, 2005 and 2004 and for the quarter ended March 31, 2005:
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 quarter periods ended June 30, 2005 and 2004 and for the quarter ended March 31, 2005:
Owned or chartered vessels included in marine revenues
Vessels withdrawn from active service to be disposed
Joint-venture and other
Included in total owned or chartered vessels at June 30, 2005 are 84 vessels that are “cold stacked” by the company. Each of the vessels require a certain level of repairs to return to service and market conditions will dictate the economic viability of returning these vessels to active service. The company continually assesses the market environment and moves vessels into and out of cold stack.
During the first quarter of fiscal 2006, the company took delivery of two anchor handling towing supply vessels and five crewboats and sold one anchor handling towing supply vessel, three platform supply vessels and four other type vessels.
During fiscal 2005, the company purchased three anchor handling towing supply vessels and one platform supply vessel. The company also took delivery of 11 newly-constructed vessels which included six anchor handling towing supply vessels, one platform supply vessel and four crewboats. Also during fiscal 2005, the company sold seven anchor handling towing supply vessels, one platform supply vessel, three offshore tugs, 10 crewboats and two other type vessels.
General and Administrative Expenses
Consolidated general and administrative expenses for the quarters ended June 30 and March 31 consist of the following components:
Personnel
Office and property
Sales and marketing
Professional services
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General and administrative expenses have increased in the quarter ended June 30, 2005 as compared to the first quarter of fiscal 2005 due primarily to the amortization of restricted stock granted in March 2005, costs associated with the Sarbanes-Oxley Act of 2002 and improved international business. Current quarter general and administrative expenses were comparable to the costs incurred in the fourth quarter of fiscal 2005.
Liquidity, Capital Resources and Other Matters
Cash from operations, in combination with the company’s senior unsecured debt and available line of credit, provide the company, in management’s opinion, with adequate resources to satisfy its current financing requirements. At June 30, 2005, $205.0 million of the company’s $300 million revolving line of credit was available for future financing needs. Continued payment of dividends, currently $0.15 per quarter per common share, is subject to declaration by the Board of Directors.
During the first quarter, the company amended its $295 million revolving line of credit agreement. The amended agreement, which expires on May 18, 2010, increased the face amount of the facility from $295 million to $300 million and includes a mechanism for increasing the amount of the facility up to $400 million. Borrowings bear interest at the company’s option, at the greater of prime or Federal Funds rates plus .5% or LIBOR rates plus margins from .50 to 1.125% based on the company’s funded debt to total capitalization ratio. The amended agreement reduced the annual fee on the unused portion of the facility to a range between .10 to .25% and modified certain financial covenants, which would allow for more flexibility in utilizing the facility.
Operating Activities
Net cash provided by operating activities for any quarter will fluctuate according to the level of business activity for the applicable quarter. For the quarter ended June 30, 2005, net cash from operating activities was 27.1% higher, or $7.4 million, than the same period in fiscal 2005 due to higher net earnings partially offset by increases in accounts receivables.
Investing Activities
Investing activities for the quarter ended June 30, 2005 used $40.7 million of cash, which is net of $3.2 million of proceeds from the sale of assets. Additions to properties and equipment comprised of approximately $6.6 million in capitalized major repair costs, $36.2 million for the construction of offshore marine vessels and $1.1 million of other properties and equipment purchases. Investing activities for the quarter ended June 30, 2004 used $61.7 million of cash, which is net of $8.5 million of proceeds from the sale of assets. Additions to properties and equipment comprised of approximately $7.4 million in capitalized major repair costs, $0.4 million for vessel enhancements, $24.3 million for the construction of offshore marine vessels and $38.1 million for the acquisition of three vessels.
Financing Activities
Financing activities for the quarter ended June 30, 2005 provided $6.1 million of cash, which included $30.0 million of credit facility borrowings. Borrowings were offset primarily by repayments of debt of $15.0 million and $8.6 million of cash used for the quarterly payment of common stock dividends of $0.15 per share. Financing activities for the quarter ended June 30, 2004 provided $31.1 million of cash, which included $55.0 million of credit facility borrowings. Borrowings were offset primarily by repayments of debt of $15.0 million and $8.6 million of cash used for the quarterly payment of common stock dividends of $0.15 per share.
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Vessel Construction and Acquisition Expenditures
The company currently has under construction two large anchor handling towing supply vessels that are capable of working in most deepwater markets of the world. A Chinese shipyard is constructing the vessels and scheduled deliveries have been substantially delayed. The shipbuilder has advised the company to expect, and the company expects, the two vessels to be delivered by the end of fiscal 2006. The total estimated cost for the vessels is approximately $79.8 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 June 30, 2005, $68.2 million has been expended on these two vessels.
The Chinese shipyard to date has delivered three deepwater anchor handling towing supply vessels for an approximate cost of $104.6 million. The first China-built deepwater vessel was delivered during the second quarter of fiscal 2005 and is currently fulfilling a charter hire agreement. The second and third deepwater anchor handlers were delivered in March and May 2005, respectively. The two vessels are currently being modified and outfitted by a second shipyard in preparation for long-term contracts that will commence by September 2005.
The company is also constructing eight anchor handling towing supply vessels varying in size from 5,000 brake horsepower (BHP) to 10,000 BHP. Four international shipyards are each constructing two vessels. Scheduled delivery for the eight vessels will begin in August 2005, with the last vessel scheduled for delivery October 2006. As of June 30, 2005, $46.1 million has been expended on the vessels of the total $108.3 million commitment cost.
The company is committed to the construction of two 220-foot, supply vessels for approximately $22.8 million. The company’s shipyard, Quality Shipyard, LLC, is constructing the vessels which are capable of working in certain deepwater markets; however, these vessels will replace older supply vessels. Scheduled delivery of the two vessels is expected in January and July of 2006. As of June 30, 2005, $6.3 million has been expended on the two vessels.
The company is also committed to the construction of one 175-foot, state-of-the-art, fast, crew/supply boat and one water jet crewboat for an approximate total cost of $8.3 million. A U.S. shipyard is constructing the 175-foot crewboat, while a shipyard in Holland is constructing the water jet crew boat. Scheduled delivery of the 175-foot crewboat is expected in June 2006. The water jet crewboat is expected to be delivered in October 2005. As of June 30, 2005, $1.0 million has been expended on the two crewboats.
The table below summarizes the various vessel commitments by vessel class and type as of June 30, 2005:
Vessel class and type
CostCommitment
Deepwater vessels:
Anchor handling towing supply
Replacement Fleet:
Platform supply vessels
Crewboats:
Crewboats – 175-foot
Crewboats – Water Jets
Totals
To date, the company has financed its vessel commitment programs from its current cash balances, its operating cash flow and its $300 million senior unsecured notes and its revolving credit facility. Of
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the total $219.2 million of capital commitments for vessels currently under construction the company has expended $121.6 million as of June 30, 2005.
Interest and Debt Costs
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 $2.1 million interest capitalized for the quarter ended June 30, 2005, was approximately $2.4 million. Interest and debt costs, net of $2.6 million capitalized during the first quarter of fiscal 2005, was approximately $1.4 million. Total interest and debt costs incurred during the first quarter of fiscal 2006 were higher than the same period in fiscal 2005 due to higher debt. The relative-portion of interest cost capitalized during the current quarter was less than the same period in fiscal 2005 due to the reduction in the level of investments in the company’s new construction program during the comparative periods.
Other Liquidity Matters
While the company does not have any other commitments for new-build vessel contracts other than what is discussed in the “Vessel Construction and Acquisitions Expenditures” section above, the company anticipates that over the next several years, it will continue its vessel building and/or new vessel acquisition 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 need to be replaced within the next several years. 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 over the next few years significant capital expenditures, primarily relating to the continuing replacement of the company’s international anchor handling towing supply vessels. These vessels would replace the company’s core international fleet with fewer, larger and more efficient vessels. The company believes that adequate capital resources will be available to maintain the existing fleet and continue its vessel building program.
At the conclusion of its examination of the company’s income tax returns covering fiscal 2001 and 2002, the Internal Revenue Service (IRS) proposed changes to taxable income which, if sustained, would result in additional income tax of $12.8 million. The proposed increase in taxable income results primarily from the IRS disallowance of all claimed deductions from taxable income related to the company’s foreign sales corporation (FSC) as well as all deductions claimed under the Extraterritorial Income Exclusion (ETI). The company has filed a formal protest with the IRS seeking a reconsideration of the position taken. The company has received a final assessment of additional income tax of $1.75 million resulting from the IRS’s earlier examination of the company’s income tax returns for fiscal 1999 and 2000. Such assessment is due to the IRS disallowance of essentially all deductions related to FSC activity during this period. The company has paid the 1999 and 2000 assessment and has begun the process of seeking a refund of the taxes paid through the initiation of legal proceedings. The IRS has notified the company that it will soon begin an examination of its 2003 and 2004 federal income tax returns. The company also has additional ongoing examinations by state and foreign tax authorities. The company does not believe that the results of these examinations will have a material adverse affect on the company’s financial position or results of operations.
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Off-Balance Sheet Arrangements
The company currently does not utilize any off-balance sheet arrangements with unconsolidated entities to enhance its liquidity and capital resource positions, or for any other purpose. Any future transactions involving off-balance sheet arrangements would be analyzed and disclosed by the company’s management.
Critical Accounting Policies and Estimates
The company’s Annual Report on Form 10-K for the year ended March 31, 2005, filed with the Securities and Exchange Commission on June 14, 2005, describes the accounting policies that are critical to reporting the company’s financial position and operating results and that require management’s most difficult, subjective or complex judgments. This Quarterly Report on Form 10-Q should be read in conjunction with the discussion contained in the company’s Annual Report on Form 10-K for the year ended March 31, 2005, regarding these critical accounting policies.
Impairment of Long-Lived Assets
The company reviews long-lived assets 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. The company estimates cash flows based upon historical data adjusted for the company’s best estimate of future market performance that is based on industry trends. If impairment exists, the carrying value of the asset group is reduced to its estimated fair value. Vessels with similar operating and marketing characteristics are grouped for asset impairment testing.
Although the company believes its assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result. Management estimates may vary considerably from actual outcomes due to future adverse market conditions or poor operating results that could result in the inability to recover the current carrying value of an asset group, thereby possibly requiring an impairment charge in the future. As the company’s fleet continues to age, management closely monitors the estimates and assumptions used in the impairment analysis to properly identify evolving trends and changes in market conditions that could impact the results of the impairment evaluation.
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In addition to the periodic review of long-lived assets for impairment when circumstances warrant, the company also performs a review of its stacked vessels every six months. This review considers items such as the vessel’s age, length of time stacked and likelihood of a return to active service, among others. The company records an impairment charge when the carrying value of a stacked vessel that is unlikely to return to active service exceeds its estimated fair value.
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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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.
On May 18, 2005, the company amended its $295 million revolving line of credit agreement. The amended agreement, which expires on May 18, 2010, increased the face amount of the facility from $295 million to $300 million and includes a mechanism for increasing the amount of the facility up to $400 million. Borrowings bear interest at the company’s option, at the greater of prime or Federal Funds rates plus .5% or LIBOR rates plus margins from .50 to 1.125% based on the company’s funded debt to total capitalization ratio. The amended agreement reduced the annual fee on the unused portion of the facility to a range between .10 to .25% and modified certain financial covenants, which would allow for more flexibility in utilizing the facility.
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At June 30, 2005, the company had $395.0 million of debt outstanding of which $95.0 million represents unsecured borrowings from the company’s revolving credit facility. The fair market value of borrowings under the revolving credit facility approximates the carrying value because the borrowings bear interest at variable market rates, which currently range from 3.90 to 4.17 percent. Monies were borrowed under the revolving credit facility to help finance the company’s new-build program previously disclosed. A one percentage point change in the market interest rate on the $95.0 million of borrowings from the company’s revolving credit facility at June 30, 2005 would change the company’s interest costs by approximately $1.0 million annually. The remaining $300 million represents senior unsecured notes 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 and can be retired prior to maturity without penalty. The average interest rate on the notes is 4.35%. The fair value of this debt at June 30, 2005 is estimated to be approximately $293.9 million.
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 does not use derivative contracts for speculative purposes.
The company had four currency spot contracts outstanding at June 30, 2005 totaling approximately $0.8 million that settled on July 1, 2005. The company had no spot contracts outstanding at June 30, 2004. The company had no derivative financial instruments outstanding at June 30, 2005 and 2004 that qualified as a hedge instrument.
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. dollar.
ITEM 4. CONTROLS AND PROCEDURES
CEO and CFO Certificates
Included as exhibits to this Quarterly Report on Form 10-Q are “Certifications” of the Chief Executive Officer and the Chief Financial Officer. The first form of certification is required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Quarterly Report contains the information concerning the controls evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
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 Securities and Exchange Commission rules. However, any control system, no matter
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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, 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.
Changes in Internal Control Over Financial Reporting
There have been no other 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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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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: July 26, 2005
/s/ Dean E. Taylor
Dean E. Taylor
Chairman of the Board, President and
Chief Executive Officer
/s/ J. Keith Lousteau
J. Keith Lousteau
Executive Vice President and
Chief Financial Officer
/s/ Joseph M. Bennett
Joseph M. Bennett
Senior Vice President, Principal Accounting
Officer and Chief Investor Relations Officer
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EXHIBIT INDEX
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