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EX-31.1 - EX-31.1 - TIDEWATER INCd788252dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

    

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 2014

 

¨

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

For the transition period from             to             .

Commission file number: 1-6311

Tidewater Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State of incorporation)

  LOGO  

72-0487776

(I.R.S. Employer Identification No.)

601 Poydras St., Suite 1500

New Orleans, Louisiana             70130

(Address of principal executive offices) (zip code)

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

Not Applicable

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

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

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

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

 

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

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

49,728,092 shares of Tidewater Inc. common stock $.10 par value per share were outstanding on October 24, 2014. Registrant has no other class of common stock outstanding.

 

1


PART I.  FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

TIDEWATER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and par value data)              
ASSETS   September 30,
2014        
    March 31, 
2014     
 

Current assets:

   

Cash and cash equivalents

  $ 124,315            60,359     

Trade and other receivables, net

    276,425            252,421     

Due from affiliate

    407,995            429,450     

Marine operating supplies

    63,531            57,392     

Other current assets

    24,639            20,587     

Total current assets

    896,905            820,209     

Investments in, at equity, and advances to unconsolidated companies

    70,803            63,928     

Properties and equipment:

   

Vessels and related equipment

    4,564,784            4,521,102     

Other properties and equipment

    98,965            97,714     
    4,663,749            4,618,816     

Less accumulated depreciation and amortization

    1,013,762            997,208     

Net properties and equipment

    3,649,987            3,621,608     

Goodwill

    283,699            283,699     

Other assets

    101,071            96,385     

Total assets

  $           5,002,465                4,885,829     
   

LIABILITIES AND EQUITY

               

Current liabilities:

   

Accounts payable

  $ 63,346            74,515     

Accrued expenses

    144,135            157,302     

Due to affiliate

    127,287            86,154     

Accrued property and liability losses

    3,238            3,631     

Current portion of long term debt

    10,020            9,512     

Other current liabilities

    73,953            70,567     

Total current liabilities

    421,979            401,681     

Long-term debt

    1,496,203            1,505,358     

Deferred income taxes

    111,312            108,929     

Accrued property and liability losses

    7,553            5,286     

Other liabilities and deferred credits

    188,694            179,204     

Commitments and Contingencies (Note 7)

   

Equity:

   

Common stock of $0.10 par value, 125,000,000 shares authorized, issued 49,728,092 shares at September 30, 2014and 49,730,442 shares at March 31, 2014

    4,973            4,973     

Additional paid-in capital

    153,513            142,381     

Retained earnings

    2,623,636            2,544,255     

Accumulated other comprehensive loss

    (11,728)           (12,225)    

Total stockholders’ equity

    2,770,394            2,679,384     

Noncontrolling Interests

    6,330            5,987     

Total equity

    2,776,724            2,685,371     

Total liabilities and equity

  $ 5,002,465            4,885,829     
   

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

 

2


TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In thousands, except share and per share data)                                 
        Quarter Ended
    September 30,
        Six Months Ended
    September 30,
 
                2014           2013           2014            2013  

Revenues:

         

Vessel revenues

  $     390,952             363,668             772,462             695,298       

Other operating revenues

        6,572             4,269             10,739             6,724       
          397,524             367,937             783,201             702,022       

Costs and expenses:

         

Vessel operating costs

      212,819             195,316             430,063             391,477       

Costs of other operating revenues

      6,560             4,040             11,221             6,060       

General and administrative

      46,762             46,038             97,822             96,518       

Vessel operating leases

      6,542             3,971             13,082             8,002       

Depreciation and amortization

      43,708             42,056             86,819             82,164       

Gain on asset dispositions, net

        (3,590)            (49)            (6,533)            (2,189)      
          312,801             291,372             632,474             582,032       

Operating income

      84,723             76,565             150,727             119,990       

Other income (expenses):

         

Foreign exchange gain

      5,408             3,017             4,119             2,928       

Equity in net earnings of unconsolidated companies

      3,821             3,781             9,104             8,201       

Interest income and other, net

      499             538             1,121             1,278       

Loss on early extinguishment of debt

      ---             (4,144)            ---             (4,144)      

Interest and other debt costs, net

        (12,559)            (9,918)            (25,688)            (18,831)      
          (2,831)            (6,726)            (11,344)            (10,568)      

Earnings before income taxes

      81,892             69,839             139,383             109,422       

Income tax expense

        21,067             15,667             34,859             25,167       

Net earnings

  $     60,825             54,172             104,524             84,255       

Less: Net earnings attributable to
      noncontrolling interests

  $     (82)            ---             (56)            ---       

Net earnings attributable to Tidewater Inc.

  $     60,907             54,172             104,580             84,255       

Basic earnings per common share

  $     1.23             1.10             2.11             1.71       
           

Diluted earnings per common share

  $     1.22             1.09             2.10             1.70       
           

Weighted average common shares outstanding

      49,582,086             49,274,816             49,581,707             49,253,409       

Dilutive effect of stock options and restricted stock

        230,841             448,303             219,607             395,983       

Adjusted weighted average common shares

        49,812,927             49,723,119             49,801,314             49,649,392       
           

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

 

3


TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)                                
         Quarter Ended          Six Months Ended  
         September 30,          September 30,  
      2014          2013           2014      2013       

Net earnings

   $       60,825             54,172              104,524         84,255        

Other comprehensive income/(loss):

           

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

net of tax of $17, $(93), $71 and $(33)

     32             (173)             133         (62)       

Amortization of loss on derivative contract,

net of tax of $63, $62, $125 and $125

     117             116              233         233        

Change in other benefit plan minimum liability,

net of tax of $0, $0, $70 and $0

     ---             ---              131         ---        

Total comprehensive income

   $       60,974             54,115              105,021         84,426        
   

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

 

4


TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)                       
               Six Months Ended
      September 30,
 
             2014      2013      

Operating activities:

         

Net earnings

  $        104,524                     84,255       

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

         

Depreciation and amortization

         86,819         82,164       

Provision (benefit) for deferred income taxes

         1,287         (10,215)      

Gain on asset dispositions, net

         (6,533      (2,189)      

Equity in earnings of unconsolidated companies, less dividends

         (6,875      (6,167)      

Compensation expense - stock-based

         11,075         10,999       

Excess tax benefit on stock options exercised

         ---         (341)      

Changes in assets and liabilities, net:

         

Trade and other receivables

         (24,258      776       

Changes in due to/from affiliate, net

         62,555         (131,974)      

Marine operating supplies

         (6,139      9,363       

Other current assets

         (4,052      (10,666)      

Accounts payable

         (15,652      (3,893)      

Accrued expenses

         (13,358      (10,390)      

Accrued property and liability losses

         (393      39       

Other current liabilities

         450         276       

Other liabilities and deferred credits

         (1,245      (531)      

Other, net

           (2,916      (1,678)      

Net cash provided by operating activities

           185,289         9,828       

Cash flows from investing activities:

         

Proceeds from sales of assets

         3,999         7,646       

Proceeds from sale/leaseback of assets

         32,751         65,550       

Additions to properties and equipment

         (128,411      (220,309)      

Payments for acquisition, net of cash acquired

         ---         (127,737)      

Other

           (13      (687)      

Net cash used in investing activities

           (91,674      (275,537)      

Cash flows from financing activities:

         

Debt issuance costs

         ---         (3,845)      

Principal payment on long-term debt

         (25,996      (691,615)      

Debt borrowings

         20,000         986,262       

Proceeds from exercise of stock options

         1,025         4,421       

Cash dividends

         (25,038      (24,890)      

Excess tax benefit on stock options exercised

         ---         341       

Other

           350         ---       

Net cash (used in) provided by financing activities

           (29,659      270,674       

Net change in cash and cash equivalents

         63,956         4,965       

Cash and cash equivalents at beginning of period

           60,359         40,569       

Cash and cash equivalents at end of period

  $            124,315         45,534       
   

Supplemental disclosure of cash flow information:

         

Cash paid during the period for:

         

Interest, net of amounts capitalized

  $        26,328         23,338       

Income taxes

  $        32,414         32,144       

Supplemental disclosure of non-cash investing activities:

         

Additions to properties and equipment

  $        3,845         4,157       

Increase in receivables due to sale of shipyard

  $        ---         6,500       
   

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

 

5


TIDEWATER INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

 

(Unaudited)

(In thousands)                                               
          Common
    stock
     Additional
paid-in
capital
         Retained
    earnings
    Accumulated
other
comprehensive
loss
     Non
controlling
interest
     Total  

Balance at March 31, 2014

   $ 4,973                  142,381             2,544,255        (12,225)               5,987               2,685,371   

Total comprehensive income

     ---                  ---             104,580        497                (56)              105,021   

Exercise of stock options

     3                  1,022             ---        ---                ---               1,025   

Cash dividends declared ($.50 per share)

     ---                  ---             (25,199     ---                ---               (25,199

Amortization of restricted stock units

     1                  8,320             ---        ---                ---               8,321   

Amortization/cancellation of restricted stock

     (4)                 1,790             ---        ---                ---               1,786   

Cash received from noncontrolling interests

     ---                  ---             ---        ---                449               449   

Cash paid to noncontrolling interests

     ---                  ---             ---        ---                (50)              (50

Balance at September 30, 2014

   $ 4,973                  153,513             2,623,636        (11,728)               6,330               2,776,724   
                     
                                                      

Balance at March 31, 2013

   $           4,949                  119,975             2,453,973        (17,141)               ---               2,561,756   

Total comprehensive income

     ---                  ---             84,255        171                ---               84,426   

Exercise of stock options

     12                  4,763             ---        ---                ---               4,775   

Cash dividends declared ($.50 per share)

     ---                  ---             (25,035     ---                ---               (25,035

Amortization of restricted stock units

     ---                  6,220             ---        ---                ---               6,220   

Amortization/cancellation of restricted stock

     (3)                 2,428             ---        ---                ---               2,425   

Balance at September 30, 2013

   $ 4,958                  133,386             2,513,193        (16,970)               ---               2,634,567   
                                                      

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

 

6


 

 

(1)

INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements for the interim periods presented herein have been prepared in conformity with United States generally accepted accounting principles and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the unaudited condensed consolidated financial statements at the dates and for the periods indicated as required by Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (SEC). Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the company’s Annual Report on Form 10-K for the year ended March 31, 2014, filed with the SEC on May 21, 2014.

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

The company made certain reclassifications to prior period amounts to conform to the current year presentation. These reclassifications did not have a material effect on the condensed consolidated statements of earnings, balance sheets or cash flows.

 

(2)

STOCKHOLDERS’ EQUITY

Common Stock Repurchase Program

In May 2014, the company’s Board of Directors authorized the company to spend up to $200.0 million to repurchase shares of its common stock in open-market or privately-negotiated transactions. The effective period for this authorization is July 1, 2014 through June 30, 2015. The company uses its available cash and, when considered advantageous, borrowings under its revolving credit facility or other borrowings, to fund any share repurchases. The company evaluates share repurchase opportunities relative to other investment opportunities and in the context of current conditions in the credit and capital markets. No shares have been repurchased under the May 2014 program.

In May 2013, the company’s Board of Directors authorized the company to spend up to $200 million to repurchase shares of its common stock in open-market or privately-negotiated transactions. The effective period for this authorization was July 1, 2013 through June 30, 2014. No shares were repurchased under the May 2013 program.

Dividends

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

 

                                                                   
         Quarter Ended
      September 30,
           Six Months Ended
      September 30,
 
(In thousands, except dividend per share)    2014                  2013            2014                  2013      

Dividends declared

   $ 12,611         12,536               25,199         25,035       

Dividend per share

     0.25         0.25               0.50         0.50       

 

7


Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive income by component, net of tax for the quarters and six month periods ended September 30, 2014 and 2013 are as follows:

 

    For the quarter ended September 30, 2014   For the six months ended September 30, 2014
    Balance
at
 

Gains/(losses)

recognized

  Reclasses
from OCI to
  Net
period
  Remaining
balance
  Balance
at
 

Gains/(losses)

recognized

 

Reclasses

from OCI to

  Net
period
  Remaining  
balance  
(in thousands)   6/30/14   in OCI   net income   OCI   9/30/14   3/31/14   in OCI   net income   OCI   9/30/14  

Available for sale securities

      193         (35 )       67         32         225         92         (3 )       136         133         225     

Currency translation adjustment

      (9,811 )       ---         ---         ---         (9,811 )       (9,811 )       ---         ---         ---         (9,811)     

Pension/Post-retirement benefits

      15         ---         ---         ---         15         (116 )       131         ---         131         15     

Interest rate swaps

      (2,274 )       ---         117         117         (2,157 )       (2,390 )       ---         233         233         (2,157)     

Total

      (11,877 )       (35 )       184         149         (11,728 )       (12,225 )       128         369         497         (11,728)     
                                                               
    For the quarter ended September 30, 2013   For the six months ended September 30, 2013
    Balance
at
 

Gains/(losses)

recognized

  Reclasses
from OCI to
  Net
period
  Remaining
balance
  Balance
at
 

Gains/(losses)

recognized

 

Reclasses

from OCI to

  Net
period
  Remaining  
balance  
(in thousands)   6/30/13   in OCI   net income   OCI   9/30/13   3/31/13   in OCI   net income   OCI   9/30/13  

Available for sale securities

      (10 )       (237 )       64         (173 )       (183 )       (121 )       (206 )       144         (62 )       (183)     

Currency translation adjustment

      (9,811 )       ---         ---         ---         (9,811 )       (9,811 )       ---         ---         ---         (9,811)     

Pension/Post-retirement benefits

      (4,353 )       ---         ---         ---         (4,353 )       (4,353 )       ---         ---         ---         (4,353)     

Interest rate swaps

      (2,739 )       ---         116         116         (2,623 )       (2,856 )       ---         233         233         (2,623)     

Total

      (16,913 )       (237 )       180         (57 )       (16,970 )       (17,141 )       (206 )       377         171         (16,970)     
                                                               

The following table summarizes the reclassifications from accumulated other comprehensive loss to the condensed consolidated statement of income for the quarters and six month periods ended September 30, 2014 and 2013:

 

         Quarter Ended      Six Months Ended     
             September 30,              September 30,        Affected line item in the condensed
(In thousands)         2014    2013      2014    2013    consolidated statements of income

Realized gains on available for sale securities

      $           103          99            209          222      Interest income and other, net

Amortization of interest rate swap

                 180          178            358          358      Interest and other debt costs

Total pre-tax amounts

           283          277            567          580     

    Tax effect

                 99          97            198          203       

Total gains for the period, net of tax

      $           184          180            369          377       
        

 

(3)

INCOME TAXES

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

 

                                                   
     Quarter Ended
        September 30,        
   Six Months Ended
        September 30,        
      2014    2013    2014    2013

 

Effective tax rate applicable to pre-tax earnings

   25.7%    22.4%    25.0%    23.0%

The effective tax rates for the six months ended September 30, 2014 and 2013 are lower than the U.S. statutory income tax rate of 35% primarily because the company has not recognized a U.S. deferred tax liability associated with temporary differences related to investments in foreign subsidiaries that are essentially permanent in duration.

 

8


The company’s balance sheet at September 30, 2014 reflects the following in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes:

 

                        
(In thousands)       September 30,
    2014
 

Tax liabilities for uncertain tax positions

  $             20,154               

Income tax payable

    38,287               

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

Unrecognized tax benefits, which would lower the effective tax rate if realized at September 30, 2014, are as follows:

 

                        
(In thousands)       September 30,
    2014
 

Unrecognized tax benefit related to state tax issues

  $             11,230               

Interest receivable on unrecognized tax benefit related to state tax issues

    28               

With limited exceptions, the company is no longer subject to tax audits by U.S. federal, state, local or foreign taxing authorities for years prior to 2007. The company has ongoing examinations by various U.S. federal, state and foreign tax authorities and does not believe that the results of these examinations will have a material adverse effect on the company’s financial position, results of operations, or cash flows.

 

(4)

EMPLOYEE BENEFIT PLANS

U.S. Defined Benefit Pension Plan

The company has a defined benefit pension plan (pension plan) that covers certain U.S. citizen employees and other employees who are permanent residents of the United States. Effective April 1, 1996, the pension plan was closed to new participation. In December 2009, the Board of Directors amended the pension plan to discontinue the accrual of benefits once the plan was frozen on December 31, 2010. This change did not affect benefits earned by participants prior to January 1, 2011. The company did not contribute to the defined benefit pension plan during the quarters and six months ended September 30, 2014 and 2013, and does not expect to contribute to the plan during the remaining quarters of fiscal 2015.

Supplemental Executive Retirement Plan

The company also maintains a non-contributory, defined benefit supplemental executive retirement plan (supplemental plan) that provides pension benefits to certain employees in excess of those allowed under the company’s tax-qualified pension plan. A Rabbi Trust has been established for the benefit of participants in the supplemental plan. Assets of the Rabbi Trust are invested in a variety of marketable securities (but not Tidewater stock) and are recorded at fair value with unrealized gains or losses included in other comprehensive income. Effective March 4, 2010, the supplemental plan was closed to new participation. The supplemental plan is a non-qualified plan and, as such, the company is not required to make contributions to the supplemental plan. The company did not contribute to the supplemental plan during the quarters and six months ended September 30, 2014 and 2013, and does not expect to contribute to the plan during the remaining quarters of fiscal 2015.

 

9


Investments held in a Rabbi Trust for the benefit of participants in the supplemental plan are included in other assets at fair value. The following table summarizes the carrying value of the trust assets, including unrealized gains or losses at September 30, 2014 and March 31, 2014:

 

         September 30,      March 31,      
(In thousands)         2014      2014      

Investments held in Rabbi Trust

  $      10,284                 10,285       

Unrealized gains in fair value of trust assets

       225                 92       

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

       121                 49       

Obligations under the supplemental plan

         22,789                 21,918       

The unrealized gains or losses in the fair value of the trust assets, net of income tax expense, are included in accumulated other comprehensive income. To the extent that trust assets are liquidated to fund benefit payments, gains or losses, if any, will be recognized at that time. The company’s obligations under the supplemental plan are included in ‘accrued expenses’ and ‘other liabilities and deferred credits’ on the consolidated balance sheet.

Postretirement Benefit Plan

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

Net Periodic Benefit Costs

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

 

    Quarter Ended
September 30,
     Six Months Ended    
September 30,    
 
(In thousands)             2014                 2013                  2014                  2013        

Pension Benefits:

            

Service cost

  $      206        198               412          396        

Interest cost

       968        895               1,936          1,790        

Expected return on plan assets

       (685     (718)              (1,370)         (1,436)       

Amortization of prior service cost

       12        12               24          24        

Recognized actuarial loss

       247        276               494          552        
            

Net periodic benefit cost

  $      748        663               1,496          1,326        
            
            

Other Benefits:

            

Service cost

  $      68        101               136          202        

Interest cost

       226        262               452          524        

Amortization of prior service cost

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

Recognized actuarial (gain) loss

       (325     (99)              (650)         (198)       
            

Net periodic benefit cost

  $      (539     (244)              (1,078)         (488)       
            
            

 

10


(5)

INDEBTEDNESS

Senior Notes, Revolving Credit and Term Loan Agreement

A summary of debt outstanding at September 30, 2014 and March 31, 2014, are as follows:

 

         September 30,      March 31,  
(In thousands, except weighted average data)         2014        2014  

Credit facility:

             

Term loan agreement (A)

    $            300,000                   300,000           

Revolving line of credit (A) (B)

           ---                   ---           

September 2013 senior unsecured notes:

             

Aggregate debt outstanding

    $            500,000                   500,000           

Weighted average remaining life in years

           8.9                   9.4           

Weighted average coupon rate on notes outstanding

           4.86%               4.86%       

Fair value of debt outstanding (Level 2)

    $            525,860                   520,979           

August 2011 senior unsecured notes:

             

Aggregate debt outstanding

    $            165,000                   165,000           

Weighted average remaining life in years

           6.1                   6.6           

Weighted average coupon rate on notes outstanding

           4.42%               4.42%       

Fair value of debt outstanding (Level 2)

    $            170,438                   168,653           

September 2010 senior unsecured notes:

             

Aggregate debt outstanding

    $            425,000                   425,000           

Weighted average remaining life in years

           5.1                   5.6           

Weighted average coupon rate on notes outstanding

           4.25%               4.25%       

Fair value of debt outstanding (Level 2)

    $            437,951                   436,264           

July 2003 senior unsecured notes:

             

Aggregate debt outstanding

    $            35,000                   35,000           

Weighted average remaining life in years

           0.8                   1.3           

Weighted average coupon rate on notes outstanding

           4.61%               4.61%       

Fair value of debt outstanding (Level 2)

    $            35,699                   36,018           

(A) Fair values approximate carrying values because the borrowings bear interest at variable rates.

(B) $600 million was available under the revolver at September 30, 2014 and March 31, 2014.

Norwegian Kroner Denominated Debt

A summary of the Norwegian Kroner (NOK) denominated borrowings outstanding at September 30, 2014 and March 31, 2014, and their U.S. dollar equivalents are as follows:

 

         September 30,      March 31,  
(In thousands)         2014      2014  

3.81% January 2014 notes:

       

NOK denominated

       287,500                 300,000           

U.S. dollar equivalent

  $      46,434                 50,028           

Fair value in U.S. dollar equivalent (Level 2)

       46,442                 50,044           

5.38% May 2012 notes:

       

NOK denominated

       170,400                 178,920           

U.S. dollar equivalent

  $      27,521                 29,867           

Fair value in U.S. dollar equivalent (Level 2)

       27,267                 29,588           

Variable rate borrowings:

       

June 2013 borrowing agreement (C)

       

NOK denominated

       25,000                 25,000           

U.S. dollar equivalent

  $      4,038                 4,168           

May 2012 borrowing agreement (C)

       

NOK denominated

       20,000                 35,000           

U.S. dollar equivalent

  $      3,230                 5,837           

(C) Fair values approximate carrying values because the borrowings bear interest at variable rates.

During the second quarter of fiscal 2014, the company repaid prior to maturity 500 million Norwegian Kroner (NOK) denominated (approximately $82.1 million) public bonds (plus accrued interest) that had been issued by Troms Offshore in April 2013. The repayment of these bonds, at an average price of approximately 105.0% of par value, resulted in the recognition of a loss on early extinguishment of debt of approximately 26.0 million NOK (or $4.1 million). The bonds, which were due to mature in April 2016, bore interest based on the three month Norwegian Interbank Offered Rate (“NIBOR”) plus 5.40%.

 

11


Debt Costs

The company capitalizes a portion of its interest costs incurred on borrowed funds used to construct vessels. Interest and debt costs incurred, net of interest capitalized, for the quarters and six-month periods ended September 30, are as follows:

 

     Quarter Ended
September 30,
     Six Months Ended
September 30,
 
(In thousands)    2014                  2013            2014                  2013        

Interest and debt costs incurred, net of interest capitalized

   $     12,559                     9,918               25,688                     18,831         

Interest costs capitalized

     3,410                     2,636               6,282                     5,598         

 

Total interest and debt costs

   $     15,969                     12,554               31,970                     24,429         
                                     
   

 

(6)

EARNINGS PER SHARE

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

 

     Quarter Ended
September 30,
     Six Months Ended
September 30,
 
(In thousands, except share and per share data)    2014              2013            2014            2013        

Net Income available to common shareholders (A)

     $    60,907                 54,172               104,580               84,255         

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

     49,582,086                 49,274,816               49,581,707               49,253,409         

Dilutive effect of options and restricted stock awards and units

     230,841                 448,303               219,607               395,983         

Weighted average common stock and equivalents (C)

     49,812,927                 49,723,119               49,801,314               49,649,392         

Earnings per share, basic (A/B)

     $        1.23                 1.10               2.11               1.71         

Earnings per share, diluted (A/C)

     $        1.22                 1.09               2.10               1.70         

Additional information:

           

Antidilutive incremental options and restricted stock awards and units

     27,138                 2,854               27,138               2,854         

 

(7)

COMMITMENTS AND CONTINGENCIES

Vessel and Other Commitments

The table below summarizes the company’s various vessel commitments to acquire and construct new vessels and ROVs, by vessel type, as of September 30, 2014:

 

(In thousands, except vessel count)    Number
of
Vessels/ROVs  
   Total
Cost
     Invested
Through
9/30/14
     Remaining    
Balance    
9/30/14    
 

Vessels under construction:

           

Deepwater PSVs

   23      $         772,194               235,138          537,056         

Towing-supply vessels

   6      112,885               63,690          49,195         

Other

   1      8,014               8,014          ---         

Total vessel commitments

   30        893,093               306,842          586,251         

Total ROV commitments

   2      14,818               4,511          10,307         

Total commitments

   32      $ 907,911               311,353          596,558         
   

The total cost of the various vessel new-build commitments includes contract costs and other incidental costs. The company has vessels under construction at a number of different shipyards around the world. The deepwater PSVs under construction range between 3,000 and 6,360 deadweight tons (DWT) of cargo capacity while the towing-supply vessels under construction are AHTS vessels that have 7,145 brake horsepower (BHP). The new-build vessels are estimated to deliver starting in November 2014, with delivery of the final new-build vessel expected in June 2016. The company also has new-build commitments for two ROVs at September 30, 2014 with delivery dates in November of 2014.

 

12


With its commitment to modernizing its fleet through its vessel construction and acquisition program over the past decade, the company has successfully replaced the vast majority of the older vessels of its fleet with fewer, larger and more efficient vessels that have a more extensive range of capabilities. These efforts are expected to continue through the delivery of the 30 vessels currently under construction, with the company anticipating that it will use some portion of its future operating cash flows and existing borrowing capacity as well as possible new borrowings or lease finance arrangements in order to fund current and future commitments in connection with the completion of the fleet renewal and modernization program. The company continues to evaluate its fleet renewal program, whether through new construction or acquisitions, relative to other investment opportunities and uses of cash, including the current share repurchase authorization, and in the context of current conditions in the credit and capital markets.

Currently the company is continuing to experience substantial delay with one fast supply boat under construction in Brazil that was originally scheduled to be delivered in September 2009. On April 5, 2011, pursuant to the vessel construction contract, the company sent the subject shipyard a letter initiating arbitration in order to resolve disputes of such matters as the shipyard’s failure to achieve payment milestones, its failure to follow the construction schedule, and its failure to timely deliver the vessel. The company has suspended construction on the vessel and both parties continue to pursue that arbitration. The company has third party credit support in the form of insurance coverage for 90% of the progress payments made on this vessel, or all but approximately $2.4 million of the carrying value of the accumulated costs through September 30, 2014. The company had committed and invested $8.0 million as of September 30, 2014.

In December 2013, the company took delivery of the second of two deepwater PSVs constructed in a U.S. shipyard. In connection with the delivery of those vessels, the company and the shipyard agreed to hold $11.7 million in escrow with a financial institution pending resolution of disputes over whether all or a portion of those funds are due to the shipyard as the shipyard has claimed. In October 2014, the parties resolved their pending disputes subject to a confidentiality provision and agreed on the split of the funds held in escrow. The amounts to be returned from the escrow to the company will result in a reduction in the cost of the two acquired vessels, one of which was subsequently sold to an unaffiliated financial institution in connection with a sale/lease transaction that closed in the third quarter of fiscal 2014. The portion of the returned funds attributed to the vessel that was sold will be recorded as a deferred gain that will be amortized over the 10-year lease term

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

Merchant Navy Officers Pension Fund

On July 15, 2013, a subsidiary of the company was placed into administration in the United Kingdom. Joint administrators were appointed to administer and distribute the subsidiary’s assets to the subsidiary’s creditors. The vessels owned by the subsidiary had become aged and were no longer economical to operate, which has caused the subsidiary’s main business to decline in recent years. Only one vessel generated revenue as of the date of the administration. As part of the administration, the company agreed to acquire seven vessels from the subsidiary (in exchange for cash) and to waive certain intercompany claims. The purchase price valuation for the vessels, all but one of which were stacked, was based on independent, third party appraisals of the vessels.

The company previously reported that a subsidiary of the company is a participating employer in an industry-wide multi-employer retirement fund in the United Kingdom, known as the Merchant Navy Officers Pension Fund (MNOPF). The subsidiary that participates in the MNOPF is the entity that was placed into administration in the U.K. The MNOPF is that subsidiary’s largest creditor, and has claimed as an unsecured creditor in the

 

13


administration. The Company believed that the administration was in the best interests of the subsidiary and its principal stakeholders, including the MNOPF. The MNOPF indicated that it did not object to the insolvency process and that, aside from asserting its claim in the subsidiary’s administration and based on the company’s representations of the financial status and other relevant aspects of the subsidiary, the MNOPF will not pursue the subsidiary in connection with any amounts due or which may become due to the fund.

In December 2013, the administration was converted to a liquidation. That conversion allowed for an interim cash liquidation distribution to be made to the MNOPF. The conversion is not expected to have any impact on the company and the liquidation is expected to be completed in this fiscal year. The company believes that the liquidation will resolve the subsidiary’s participation in the MNOPF. The company also believes that the ultimate resolution of this matter will not have a material effect on the consolidated financial statements.

Sonatide Joint Venture

As previously reported, in November 2013, a subsidiary of the company and its joint venture partner in Angola, Sonangol Holdings Lda. (“Sonangol”), executed a new joint venture agreement for their joint venture, Sonatide. The new joint venture agreement is currently effective and will expire, unless extended, two years after an Angolan entity, which is intended to be one of the Sonatide group of companies, has been incorporated. The Angolan entity is expected to be incorporated in early 2015 after certain Angolan regulatory approvals have been obtained.

The challenges for the company to successfully operate in Angola remain significant. As the company has previously reported, on July 1, 2013, elements of new legislation (the “forex law”) became effective that generally require oil companies participating in concessions that engage in exploration and production activities offshore Angola to pay for goods and services provided by foreign exchange residents in Angolan kwanzas that are initially deposited into an Angolan bank account. The forex law also imposes documentation and other requirements on service companies such as Sonatide in order to effect payments that are denominated in currencies other than Angolan kwanzas. The forex law has resulted in, and will likely continue to result in, substantial customer payments to Sonatide being made in Angolan kwanzas. Such a result has been and could continue to be, unfavorable because the conversion of Angolan kwanzas into U.S. dollars and the subsequent expatriation of the funds may result in payment delays, currency devaluation risk prior to conversion of kwanzas to dollars, additional costs to convert kwanzas into dollars and potentially additional taxes.

In response to the new forex law, Tidewater and Sonangol negotiated an agreement (the “consortium agreement”) that is intended to allow the Sonatide joint venture to enter into contracts with customers that allocate billings for services provided by Sonatide between (i) billings for local services that are provided by a foreign exchange resident (that must be paid in kwanzas), and (ii) billings for services provided by offshore residents (that can be paid in dollars). Discussions regarding the consortium agreement are still pending between Tidewater and Sonangol.

In October 2014, the National Bank of Angola issued new regulations controlling the sale of foreign currency. These regulations require oil companies to sell U.S. dollars to the National Bank of Angola to buy kwanzas that are required to be used to pay for goods and services provided by oilfield service companies, which, in turn, are required to then source dollars in order to pay for goods and services provided offshore. The regulations continue to permit tripartite agreements among oil companies, commercial banks and service companies that provide for the sale of U.S. dollars by an oil company to a commercial bank in exchange for kwanzas and the subsequent on-sale of those dollars by the commercial bank to the service company. The implementing regulations do, however, place constraints on those tripartite agreements that did not previously exist. If tripartite agreements or similar arrangements are not available to service companies in Angola that have a need for dollars, then such service companies will be required to source dollars exclusively through the National Bank of Angola. Given the recent issuance of the guidance, the company has not yet formed a view on the impact of these implementing regulations on the willingness of commercial banks and oil companies to enter into new tripartite forex agreements.

 

14


As of September 30, 2014, the company had approximately $408 million in amounts due from Sonatide, largely reflecting unpaid vessel revenue (billed and unbilled) related to services performed by the company through the Sonatide joint venture. These amounts began to accumulate in late calendar 2012, when the initial provisions of the forex law relating to payments for goods and services provided by foreign exchange residents took effect (and payments were required to be paid into local bank accounts). Beginning in July 2013, when the second provision of the forex law took effect (and the local payments had to be made in kwanza), Sonatide generally accrued for but did not deliver invoices to customers for vessel revenue related to Sonatide and the company’s collective Angolan operations in order to minimize the exposure that Sonatide would be paid for a substantial amount of charter hire in kwanzas and into an Angolan bank. In the interim, the company has been using its credit facility and other arrangements to fund the substantial working capital requirements related to its Angola operations.

In the first quarter of fiscal 2015, Sonatide began sending invoices to those customers who have insisted on paying U.S. dollar denominated invoices in kwanza. As invoices are paid in kwanza, Sonatide is seeking to convert those kwanzas into U.S. dollars and subsequently utilize those U.S. dollars to pay the amounts that Sonatide owes the company. This conversion and expatriation process is subject to those risks and considerations set forth above. In addition, since February 2014, Sonatide has been entering into customer agreements that contain split dollar/kwanza payments (typically 70% dollars and 30% kwanzas). While the company is confident, based on advice of counsel, that these split payment contracts comply with current Angolan law, it is not clear if this type of contracting will be available to Sonatide over the longer term. To the extent the National Bank of Angola issues further clarifying interpretations of the forex law or standard market practices develop in Angola in regards to split payment contracts without objection by the National Bank of Angola, the company expects that Sonatide will more broadly utilize split payment contracts.

For the six months ended September 30, 2014, the company collected (primarily through Sonatide) approximately $186 million from Angolan customers, which represents slightly more than the approximately $179 million in revenue generated for the same period. Of the $186 million collected, approximately $104 million represented U.S., dollars initially received by Sonatide on behalf of the company or dollars collected from other customers. The balance of $82 million collected resulted from Sonatide’s converting kwanzas into dollars and subsequent payment to Tidewater. The company believes that the process for converting kwanzas is functioning reasonably well given that the conversion process is still developing.

For the six months ended September 30, 2014, Tidewater’s Angolan operations generated vessel revenues of approximately $179 million, or 23%, of its consolidated vessel revenue, from an average of approximately 83 Tidewater-owned vessels that are marketed through the Sonatide joint venture (five of which were stacked on average during the six months ended September 30, 2014), and, for the six months ended September 30, 2013, generated vessel revenues of approximately $168 million, or 24%, of consolidated vessel revenue, from an average of approximately 86 Tidewater-owned vessels (11 of which were stacked on average during the six months ended September 30, 2013).

The Sonatide joint venture owns ten vessels (four of which are currently stacked) and certain other assets, in addition to earning commission income from Tidewater-owned vessels marketed through the Sonatide joint venture (owned 49% by Tidewater). As of September 30, 2014 and March 31, 2014, the carrying value of Tidewater’s investment in the Sonatide joint venture, which is included in “Investments in, at equity, and advances to unconsolidated companies,” is approximately $70 million and $62 million, respectively.

Due from affiliate at September 30, 2014 and March 31, 2014 of approximately $408 million and $430 million, respectively, represents cash received by Sonatide from customers and due to the company, costs paid by Tidewater on behalf of Sonatide and, finally, amounts due from customers that are expected to be remitted to the company through Sonatide.

Due to affiliate at September 30, 2014 and March 31, 2014 of approximately $127 million and $86 million, respectively, represents amounts due to Sonatide for commissions payable (approximately $48 million and $43 million, respectively) and other costs paid by Sonatide on behalf of the company.

 

15


A new presidential decree regulating maritime transportation activities was enacted in Angola earlier this year. Following recent discussions with port state authorities, the company understands that the authorities will likely interpret the decree to require one hundred percent Angolan ownership of local vessel operators such as Sonatide. This interpretation will therefore likely result in the need to work with Sonangol to further restructure our Sonatide joint venture operations in Angola. The authorities have suggested that a grace period will extend until approximately the end of the calendar year for foreign vessel operators to comply. The company believes the authorities will further extend the grace period for foreign vessel operators so long as the operators demonstrate continuing good faith efforts to become compliant. The company is seeking further clarification of the new decree and is exploring potential alternative structures in order to comply.

Management continues to explore ways to profitably participate in the Angolan market while looking for opportunities to reduce the overall level of exposure to the increased risks that the company believes currently characterize the Angolan market. Included among mitigating measures taken by the company to address these risks is the redeployment of vessels from time to time to other markets where demand for the company’s vessels remains strong. During the year ended March 31, 2014, the company redeployed vessels from its Angolan operations to other markets and also transferred vessels into its Angolan operations from other markets resulting in a net increase of one vessel operating in the area. Redeployment of vessels to other markets in the period beginning April 1, 2014 through September 30, 2014 has been more pronounced (net 10 vessels transferred out of Angola, including four smaller crewboats that were stacked outside of Angola) than in prior periods.

Although our customers’ near term offshore spending plans and the level of newbuild vessel activity both remain in flux, we still believe that the global market for offshore support vessels is currently reasonably well balanced, with offshore vessel supply approximately equal to offshore vessel demand. If the company were to consider redeployment of a substantial number of vessels from Angola to other markets, however, there would likely be negative financial impacts associated with such redeployment, including mobilization costs and costs to redeploy Tidewater shore-based employees to other areas, in addition to lost revenues associated with potential downtime between vessel contracts. These financial impacts could, individually or in the aggregate, be material to our results of operations and cash flows for the periods when such costs would be incurred. If there is a need to redeploy vessels which are currently deployed in Angola to other international markets, Tidewater believes that there is sufficient demand for a majority of these vessels (particularly the larger and more sophisticated vessels) at prevailing market day rates.

Brazilian Customs

In April 2011, two Brazilian subsidiaries of Tidewater were notified by the Customs Office in Macae, Brazil that they were jointly and severally being assessed fines of 155.0 million Brazilian reais (approximately $63.6 million as of September 30, 2014). The assessment of these fines is for the alleged failure of these subsidiaries to obtain import licenses with respect to 17 Tidewater vessels that provided Brazilian offshore vessel services to Petrobras, the Brazilian national oil company, over a three-year period ending December 2009. After consultation with its Brazilian tax advisors, Tidewater and its Brazilian subsidiaries believe that vessels that provide services under contract to the Brazilian offshore oil and gas industry are deemed, under applicable law and regulations, to be temporarily imported into Brazil, and thus exempt from the import license requirement. The Macae Customs Office has, without a change in the underlying applicable law or regulations, taken the position that the temporary importation exemption is only available to new, and not used, goods imported into Brazil and therefore it was improper for the company to deem its vessels as being temporarily imported. The fines have been assessed based on this new interpretation of Brazilian customs law taken by the Macae Customs Office.

After consultation with its Brazilian tax advisors, the company believes that the assessment is without legal justification and that the Macae Customs Office has misinterpreted applicable Brazilian law on duties and customs. The company is vigorously contesting these fines (which it has neither paid nor accrued) and, based on the advice of its Brazilian counsel, believes that it has a high probability of success with respect to the overturn of the entire amount of the fines, either at the administrative appeal level or, if necessary, in Brazilian courts. In December 2011, an administrative board issued a decision that disallowed 149.0 million Brazilian reais (approximately $61.1 million as of September 30, 2014) of the total fines sought by the Macae Customs Office. In two separate proceedings in 2013, a secondary administrative appeals board considered fines totaling 127.0 million Brazilian reais (approximately $52.1 million as of September 30, 2014) and rendered

 

16


decisions that disallowed all of those fines. The remaining fines totaling 28.0 million Brazilian reais (approximately $11.5 million as of September 30, 2014) are still subject to a secondary administrative appeals board hearing, but the company believes that both decisions will be helpful in that upcoming hearing. The secondary board decisions disallowing the fines totaling 127.0 million Brazilian reais are, however, still subject to the possibility of further administrative appeal by the authorities that imposed the initial fines. The company believes that the ultimate resolution of this matter will not have a material effect on the consolidated financial statements.

Potential for Future Brazilian State Tax Assessment

The company has previously reported that a Brazilian state in which the company operates had notified the company and certain of the company’s competitors that they were liable for unpaid taxes (and penalties and interest thereon) for failure to pay state import taxes with respect to vessels operating within the coastal waters of such state pursuant to charter agreements. To obtain legal certainty and predictability for future charter agreements and because the company had imported several vessels to start new charters in Brazil, the company filed several suits in 2011, 2012, 2013 and 2014 against the Brazilian state and had deposited the respective state tax for these newly imported vessels.

In September 2014, the Brazil Supreme Court decided that Brazilian states cannot legally impose this type of import tax. As a result, the company (a) does not believe that it has exposure for any such tax for the period prior to August 2011 when the first suit was brought (and tax deposit made) by the company and (b) expects eventually to receive the return of all tax deposits made to date in connection with these suits. The aggregate amount of these tax deposits is approximately $5.3 million. The timing for return of these deposits is uncertain.

Nigeria Marketing Agent Litigation

On March 1, 2013, Tidewater filed suit in the London Commercial Court against Tidewater’s Nigerian marketing agent for breach of the agent’s obligations under contractual agreements between the parties. The alleged breach involves actions of the Nigerian marketing agent to discourage various affiliates of TOTAL S.A. from paying approximately $19 million (including Naira and U.S. dollar denominated invoices) due to the company for vessel services performed in Nigeria. Shortly after the London Commercial Court filing, TOTAL commenced interpleader proceedings in Nigeria naming the Nigerian agent and the company as respondents and seeking an order which would allow TOTAL to deposit those monies with a Nigerian court for the respondents to resolve. On April 25, 2013, Tidewater filed motions in the Nigerian Federal High Court to stop the interpleader proceedings in Nigeria or alternatively stay them until the resolution of the suit filed in London. The company will continue to actively pursue the collection of those monies. On April 30, 2013, the Nigerian marketing agent filed a separate suit in the Nigerian Federal High Court naming Tidewater and certain TOTAL affiliates as defendants. The suit seeks various declarations and orders, including a claim for the monies that are subject to the above interpleader proceedings, and other relief. The company is seeking dismissal of this suit and otherwise intends to vigorously defend against the claims made. The company has not reserved for this receivable and believes that the ultimate resolution of this matter will not have a material effect on the consolidated financial statements.

In October, 2012, Tidewater had notified the Nigerian marketing agent that it was discontinuing its relationship with the Nigerian marketing agent. The company has entered into a new strategic relationship with a different Nigerian counterparty that it believes will better serve the company’s long term interests in Nigeria. This new strategic relationship is currently functioning as the company intended.

Venezuelan Operations

On February 16, 2010, Tidewater and certain of its subsidiaries (collectively, the “Claimants”) filed with the International Centre for Settlement of Investment Disputes (“ICSID”) a Request for Arbitration against the Bolivarian Republic of Venezuela. As previously reported by Tidewater, in May 2009 Petróleos de Venezuela, S.A. (“PDVSA”), the national oil company of Venezuela, took possession and control of (a) eleven of the Claimants’ vessels that were then supporting PDVSA operations in Lake Maracaibo, (b) the Claimants’ shore-based headquarters adjacent to Lake Maracaibo, (c) the Claimants’ operations in Lake Maracaibo, and (d) certain other related assets. The company also previously reported that in July 2009 Petrosucre, S.A., a subsidiary of PDVSA, took possession and control of the Claimants’ four vessels, operations, and related

 

17


assets in the Gulf of Paria. It is Tidewater’s position that, through those measures, the Republic of Venezuela directly or indirectly expropriated the Claimants’ investments, including the capital stock of the Claimants’ principal operating subsidiary in Venezuela.

The Claimants alleged in the Request for Arbitration that each of the measures taken by the Republic of Venezuela against the Claimants violates the Republic of Venezuela’s obligations under the bilateral investment treaty with Barbados and rules and principles of Venezuelan law and international law. An arbitral tribunal was constituted under the ICSID Convention to resolve the dispute. The tribunal first addressed the Republic of Venezuela’s objections to the tribunal’s jurisdiction over the dispute. A hearing on jurisdiction was held in Washington, D.C. on February 29 and March 1, 2012.

On February 8, 2013, the tribunal issued its decision on jurisdiction. The tribunal found that it has jurisdiction over the claims under the Venezuela-Barbados bilateral investment treaty, including the claim for compensation for the expropriation of Tidewater’s principal operating subsidiary, but that it does not have jurisdiction based on Venezuela’s investment law. The practical effect of the tribunal’s decision is to exclude from the case the claims for expropriation of the fifteen vessels described above.

While the tribunal determined that it does not have jurisdiction over the claim for the seizure of the fifteen vessels, Tidewater received during fiscal 2011 insurance proceeds for the insured value of those vessels (less an additional premium payment triggered by those proceeds). Tidewater believes that the claims remaining in the case, over which the tribunal upheld jurisdiction, represent the most substantial portion of the overall value lost as a result of the measures taken by the Republic of Venezuela. Tidewater has discussed the nature of the insurance proceeds received for the fifteen vessels in previous quarterly and annual filings.

The tribunal has concluded the briefing and hearings to determine the merits of the claims over which the tribunal has jurisdiction. The final hearings on the merits were held in Washington, D.C. on June 9 - 12, 2014. The merits phase will determine whether the Republic of Venezuela violated the Venezuela-Barbados bilateral investment treaty and will value the property expropriated by Venezuela. At the time of the expropriation, the principal operating subsidiary had sizeable accounts receivable from PDVSA and Petrosucre, denominated in both U.S. Dollars and Venezuelan Bolivars.

The next step is for the tribunal to issue its written determination on the merits. The time frame for issuance of that written determination by the tribunal is uncertain.

Legal Proceedings

Various legal proceedings and claims are outstanding which arose in the ordinary course of business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions, will not have a material adverse effect on the company’s financial position, results of operations, or cash flows. For additional information on certain of our ongoing legal proceedings, see Part II, Item 1: Legal Proceedings.

 

(8)

FAIR VALUE MEASUREMENTS

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

 

  Level

1:    Quoted market prices in active markets for identical assets or liabilities

 

  Level

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

 

  Level

3:    Unobservable inputs that are not corroborated by market data

 

18


Assets and Liabilities Measured at Fair Value on a Recurring Basis

The company measures on a recurring basis and records at fair value investments held by participants in a supplemental executive retirement plan. The following table provides the fair value hierarchy for the plan assets measured at fair value as of September 30, 2014:

 

(In thousands)   Total     Quoted prices in
active markets
(Level 1)
   

Significant
observable
inputs

(Level 2)

   

Significant        
unobservable        
inputs         

(Level 3)        

 

Equity securities:

       

Common stock

  $ 4,178        4,178            ---        ---           

Preferred stock

    ---        ---            ---        ---           

Foreign stock

    201        201            ---        ---           

American depository receipts

    1,774        1,774            ---        ---           

Preferred American depository receipts

    14        14            ---        ---           

Real estate investment trusts

    45        45            ---        ---           

Debt securities:

       

Government debt securities

    1,895        1,309            586        ---           

Open ended mutual funds

    1,878        1,878            ---        ---           

Cash and cash equivalents

    403        69            334        ---           

Total

  $ 10,388        9,468            920        ---           

Other pending transactions

    (104     (104)          ---        ---           

Total fair value of plan assets

  $         10,284        9,364            920        ---           
   

The following table provides the fair value hierarchy for the plan assets measured at fair value as of March 31, 2014:

 

(In thousands)   Total     Quoted prices in
active markets
(Level 1)
   

Significant
observable
inputs

(Level 2)

   

Significant        
unobservable        
inputs         

(Level 3)        

 

Equity securities:

       

Common stock

  $ 4,141        4,141            ---        ---           

Preferred stock

    ---        ---            ---        ---           

Foreign stock

    231        231            ---        ---           

American depository receipts

    1,809        1,809            ---        ---           

Preferred American depository receipts

    15        15            ---        ---           

Real estate investment trusts

    38        38            ---        ---           

Debt securities:

       

Government debt securities

    1,975        1,363            612        ---           

Open ended mutual funds

    1,797        1,797            ---        ---           

Cash and cash equivalents

    369        57            312        ---           

Total

  $ 10,375        9,451            924        ---           

Other pending transactions

    (90     (90)           ---        ---           

Total fair value of plan assets

  $         10,285        9,361            924        ---           
   

Other Financial Instruments

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

 

19


Cash Equivalents. The company’s cash equivalents, which are securities with maturities less than 90 days, are held in money market funds or time deposit accounts with highly rated financial institutions. The carrying value for cash equivalents is considered to be representative of its fair value due to the short duration and conservative nature of the cash equivalent investment portfolio.

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

The company had no foreign exchange spot contracts outstanding at September 30, 2014. The company had four foreign exchange spot contracts outstanding at March 31, 2014, which had a notional value of $2.3 million and settled by April 2, 2014.

Forward Derivatives. Forward derivative financial instruments are generally longer-term in nature but generally do not exceed one year. The accounting for gains or losses on forward contracts is dependent on the nature of the risk being hedged and the effectiveness of the hedge. Forward contracts are valued using counterparty quotations, and we validate the information obtained from the counterparties in calculating the ultimate fair values using the market approach and obtaining broker quotations. As such, these derivative contracts are classified as Level 2.

The company did not have any forward contracts outstanding at September 30, 2014 and March 31, 2014.

The following table provides the fair value hierarchy for the company’s other financial instruments measured as of September 30, 2014:

 

(In thousands)    Total          Quoted prices in    
active markets
(Level 1)
    

Significant    
    observable        
inputs    

(Level 2)    

    

Significant    
unobservable    
inputs    

(Level 3)    

 

Money market cash equivalents

   $         3,851         3,851                 ---                 ---         

Total fair value of assets

   $ 3,851         3,851                 ---                 ---         
   

The following table provides the fair value hierarchy for the company’s other financial instruments measured as of March 31, 2014:

 

(In thousands)    Total          Quoted prices in    
active markets
(Level 1)
    

Significant    
    observable        
inputs    

(Level 2)    

    

Significant    
unobservable    
inputs    

(Level 3)    

 

Money market cash equivalents

   $         16,559         16,559                 ---                 ---         

Total fair value of assets

   $ 16,559         16,559                 ---                 ---         
   

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Asset Impairments

The company accounts for long-lived assets in accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets. The company reviews the vessels in its active fleet for impairment whenever events occur or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. In such evaluation the estimated future undiscounted cash flows generated by an asset group are compared with the carrying amount of the asset group to determine if a write-down may be required. Active, non-stacked vessels are grouped together for impairment testing purposes with vessels of similar operating and marketing characteristics. Active vessel groupings are also subdivided between older vessels and newer vessels.

The company estimates cash flows based upon historical data adjusted for the company’s best estimate of expected future market performance, which, in turn, is based on industry trends. If an asset group fails the undiscounted cash flow test, the company uses the discounted cash flow method to determine the estimated fair value of each asset group and compares such estimated fair value (considered Level 3, as defined by ASC 360) to the carrying value of each asset group in order to determine if impairment exists. If impairment exists, the carrying value of the asset group is reduced to its estimated fair value.

 

20


In addition to the periodic review of its active long-lived assets for impairment when circumstances warrant, the company also performs a review of its stacked vessels and vessels withdrawn from service every six months or whenever changes in circumstances indicate that the carrying amount of a vessel may not be recoverable. Management estimates each stacked vessel’s fair value by considering items such as the vessel’s age, length of time stacked, likelihood of a return to active service, actual recent sales of similar vessels, which are unobservable inputs. In certain situations we obtain an estimate of the fair value of the stacked vessel from third-party appraisers or brokers. The company records an impairment charge when the carrying value of a vessel withdrawn from service or a stacked vessel exceeds its estimated fair value. The estimates of fair value of stacked vessels are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future.

The below table summarizes the combined fair value of the assets that incurred impairments during the quarters and six-month periods ended September 30, 2014 and 2013, along with the amount of impairment. The impairment charges were recorded in gain on asset dispositions, net.

 

             Quarter Ended    
        September  30,    
             Six Months Ended    
         September 30,    
 
(In thousands)    2014      2013          2014      2013        

Amount of impairment incurred

   $     910         175             1,860         4,047         

Combined fair value of assets incurring impairment

     500         161             720         4,466         

 

(9)

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

A summary of other assets at September 30, 2014 and March 31, 2014 is as follows:

 

                                     
(In thousands)   

    September 30,

      2014

       March 31,
  2014
 

Recoverable insurance losses

   $ 7,486                 5,219       

Deferred income tax assets

     35,367                 34,376       

Deferred finance charges

     7,884                 8,728       

Savings plans and supplemental plan

     23,563                 23,212       

Noncurrent tax receivable

     9,106                 9,106       

Other

     17,665                 15,744       
     $         101,071                 96,385       
   

A summary of accrued expenses at September 30, 2014 and March 31, 2014 is as follows:

 

                                     
(In thousands)        September 30,
      2014
       March 31,
  2014
 

Payroll and related payables

   $ 32,035                 27,248       

Commissions payable

     7,079                 8,263       

Accrued vessel expenses

     83,399                 96,468       

Accrued interest expense

     12,911                 14,816       

Other accrued expenses

     8,711                 10,507       
     $         144,135                 157,302       
   

A summary of other current liabilities at September 30, 2014 and March 31, 2014 is as follows:

 

                                     
(In thousands)        September 30,
      2014
       March 31,
  2014
 

Taxes payable

   $ 56,600                 56,080       

Deferred gain on vessel sales - current

     16,701                 13,996       

Other

     652                 491       
     $           73,953                 70,567       
   

 

21


A summary of other liabilities and deferred credits at September 30, 2014 and March 31, 2014 is as follows:

 

(In thousands)        September 30,
      2014
     March 31,
2014
 

Postretirement benefits liability

   $ 21,680                 23,185       

Pension liabilities

     34,759                 35,234       

Deferred gain on vessel sales

     95,599                 85,316       

Other

     36,656                 35,469       
     $         188,694                 179,204       
   

 

(10)

ACCOUNTING PRONOUNCEMENTS

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

In May 2014, the FASB issued Accounting Standard Update (ASU) 2014-09 Revenue from Contracts with Customers. ASU 2014-09 supersedes prior revenue recognition guidance and provides a five step recognition framework that will require entities to recognize the amount of revenue to which it expects to be entitled for the transfer of goods and services. This new revenue recognition guidance is effective for the company in the first quarter of fiscal 2018 and may be implemented retrospectively to all years presented or in the period of adoption through a cumulative adjustment. The company believes that the impact of the implementation of this new guidance on its consolidated financial statements and disclosures will not be significant.

In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements - Going Concern(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to assess the entity’s ability to continue as a going concern, and to provide related disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning after December 15, 2016. The company believes that the impact of the implementation of this new guidance on its consolidated financial statements and disclosures will not be significant.

 

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(11)  

SEGMENT AND GEOGRAPHIC DISTRIBUTION OF OPERATIONS

The following table provides a comparison of segment revenues, vessel operating profit, depreciation and amortization, and additions to properties and equipment for the quarters and six-month periods ended September 30, 2014 and 2013. Vessel revenues and operating costs relate to vessels owned and operated by the company while other operating revenues relate to the activities of the company’s shipyards (the remainder of which the company disposed of in the quarter ended June 30, 2013), remotely operated vehicles (ROVs), brokered vessels and other miscellaneous marine-related businesses.

 

              Quarter Ended      
        September 30,        
       Six Months Ended
September 30,
 
(In thousands)        2014        2013             2014        2013       

Revenues:

                  

Vessel revenues:

                  

Americas

  $     134,013           101,929                253,996           192,173        

Asia/Pacific

      45,989           37,430                86,238           80,386        

Middle East/North Africa

      48,837           45,370                104,376           86,583        

Sub-Saharan Africa/Europe

        162,113           178,939                327,852           336,156        
      390,952           363,668                772,462           695,298        

Other operating revenues

        6,572           4,269                10,739           6,724        
    $     397,524           367,937                783,201           702,022        
   

Vessel operating profit:

                  

Americas

  $     36,778           23,675                66,986           43,976        

Asia/Pacific

      7,414           4,807                6,443           15,096        

Middle East/North Africa

      7,367           13,446                19,160           23,569        

Sub-Saharan Africa/Europe

        41,446           47,261                79,048           64,780        
      93,005           89,189                171,637           147,421        

Other operating profit (loss)

        (2,093        218                (4,516        (174)       
      90,912           89,407                167,121           147,247        

Corporate general and administrative expenses

      (8,943        (12,102)               (21,275        (27,947)       

Corporate depreciation

        (836        (789)               (1,652        (1,499)       

Corporate expenses

      (9,779        (12,891)               (22,927        (29,446)       

Gain on asset dispositions, net

        3,590           49                6,533           2,189        

Operating income

  $     84,723           76,565                150,727           119,990        

Foreign exchange gain

      5,408           3,017                4,119           2,928        

Equity in net earnings of unconsolidated companies

      3,821           3,781                9,104           8,201        

Interest income and other, net

      499           538                1,121           1,278        

Loss on early extinguishment of debt

      ---           (4,144)               ---           (4,144)       

Interest and other debt costs, net

        (12,559        (9,918)               (25,688        (18,831)       

Earnings before income taxes

  $     81,892           69,839                139,383           109,422        
   

Depreciation and amortization:

                  

Americas

  $     12,390           10,833                23,798           20,943        

Asia/Pacific

      4,421           4,122                8,807           8,647        

Middle East/North Africa

      6,785           5,731                13,367           11,337        

Sub-Saharan Africa/Europe

        18,378           20,581                37,427           39,736        
      41,974           41,267                83,399           80,663        

Other

      898           ---                1,768           2        

Corporate

        836           789                1,652           1,499        
    $     43,708           42,056                86,819           82,164        
   

Additions to properties and equipment:

                  

Americas

  $     15,397           8,845                31,635           12,039        

Asia/Pacific

      23,138           453                23,211           968        

Middle East/North Africa

      805           770                1,235           909        

Sub-Saharan Africa/Europe (A)

        11,339           8,086                13,914           344,557        
      50,679           18,154                69,995           358,473        

Other

      4,689           ---                8,725           ---        

Corporate (B)

        31,733           49,747                53,479           111,597        
    $             87,101           67,901                132,199           470,070        
   

 

(A)

Included in Sub-Saharan Africa/Europe for the six months ended September 30, 2013 is $245.6 million related to vessels acquired through the acquisition of Troms Offshore.

 

(B)

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

 

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The following table provides a comparison of total assets at September 30, 2014 and March 31, 2014:

 

         September 30,            March 31,  
(In thousands)        2014            2014  

Total assets:

       

Americas

   $ 1,127,132                   1,017,736         

Asia/Pacific

     471,702                   421,379         

Middle East/North Africa

     620,638                   613,303         

Sub-Saharan Africa/Europe

     2,210,363                   2,383,507         
     4,429,835                   4,435,925         

Other

     40,747                   31,545         
     4,470,582                   4,467,470         

Investments in, at equity, and advances to unconsolidated companies

     70,803                   63,928         
     4,541,385                   4,531,398         

Corporate (A)

     461,080                   354,431         
     $         5,002,465                   4,885,829         
   

Note A: Included in Corporate are vessels currently under construction which have not yet been assigned to a non-corporate reporting segment. A vessel’s construction costs are reported in Corporate until the earlier of the date the vessels is assigned to a non-corporate reporting segment or the date it is delivered. At September 30, 2014 and March 31, 2014, $250.0 million and $228.9 million, respectively, of vessel construction costs are included in Corporate.

The following table discloses the amount of revenue by segment, and in total for the worldwide fleet, along with the respective percentage of total vessel revenue for the quarters and six-month periods ended September 30, 2014 and 2013:

 

     Quarter Ended        Six Months Ended  
Revenue by vessel class    September 30,        September 30,  
(In thousands)    2014      %      2013      %        2014      %      2013      %  

Americas fleet:

                         

Deepwater

   $ 91,403         23%         61,811         17%           173,685         23%         116,843         17%   

Towing-supply

     34,387         9%         30,861         8%           63,904         8%         58,531         8%   

Other

     8,223         2%         9,257         3%           16,407         2%         16,799         3%   

Total

   $     134,013         34%         101,929         28%           253,996         33%         192,173         28%   

Asia/Pacific fleet:

                         

Deepwater

   $ 27,675         7%         19,923         5%           51,917         7%         44,215         6%   

Towing-supply

     17,338         5%         16,559         5%           32,375         4%         34,281         5%   

Other

     976         <1%         948         <1%           1,946         <1%         1,890         <1%   

Total

   $ 45,989         12%         37,430         10%           86,238         11%         80,386         11%   

Middle East/North Africa fleet:

                         

Deepwater

   $ 19,254         5%         15,732         5%           38,721         5%         31,584         5%   

Towing-supply

     28,715         7%         28,763         8%           63,994         9%         53,260         8%   

Other

     868         <1%         875         <1%           1,661         <1%         1,739         <1%   

Total

   $ 48,837         12%         45,370         13%           104,376         14%         86,583         13%   

Sub-Saharan Africa/Europe fleet:

                         

Deepwater

   $ 89,193         23%         106,541         29%           180,884         23%         193,792         28%   

Towing-supply

     54,617         14%         56,772         16%           110,053         14%         111,632         16%   

Other

     18,303         5%         15,626         4%           36,915         5%         30,732         4%   

Total

   $ 162,113         42%         178,939         49%           327,852         42%         336,156         48%   

Worldwide fleet:

                         

Deepwater

   $ 227,525         58%         204,007         56%           445,207         58%         386,434         56%   

Towing-supply

     135,057         35%         132,955         37%           270,326         35%         257,704         37%   

Other

     28,370         7%         26,706         7%           56,929         7%         51,160         7%   

Total

   $ 390,952         100%         363,668         100%           772,462         100%         695,298         100%   
                                         
                                         

 

 

24


(12)

GOODWILL

The company tests goodwill for impairment annually at the reporting unit level using carrying amounts as of December 31 or more frequently if events and circumstances indicate that goodwill might be impaired.

The company performed its most recent annual goodwill impairment assessment during the quarter ended December 31, 2013 and determined that the carrying value of its Asia/Pacific unit exceeded its fair value as a result of the general decline in the level of business and, therefore, expected future cash flow for the company in this region. The Asia/Pacific region continues to be challenged with excess vessel capacity as a result of the significant number of vessels that have been built in this region over the past 10 years. These additional newbuilds have not been met by a commensurate increase in exploration, development or other activity within the region. In recent years, the company has disposed of older vessels that had worked in the region and transferred vessels out of the region to other regions where market opportunities are currently more robust. In accordance with ASC 350 goodwill is not reallocated based on vessel movements. A goodwill impairment charge of $56.3 million was recorded during the quarter ended December 31, 2013.

During the first quarter of fiscal 2014, $42.2 million of goodwill related to the acquisition of Troms Offshore was allocated to the Sub-Saharan Africa/Europe segment.

Goodwill by reportable segment at September 30, 2014 and 2013 is as follows:

 

             March 31,                        September 30,  
(In thousands)             2014      Goodwill acquired      Impairments      2014      

Americas

 

$    

     114,237             ---             ---             114,237       

Sub-Saharan Africa/Europe

         169,462             ---             ---             169,462       

Total carrying amount (A)

 

$    

     283,699             ---             ---             283,699       
             March 31,                        September 30,  
(In thousands)             2013      Goodwill acquired      Impairments      2013      

Americas

 

$    

     114,237             ---             ---             114,237       

Asia/Pacific

       56,283             ---             ---             56,283       

Sub-Saharan Africa/Europe

         127,302             42,160             ---             169,462       

Total carrying amount (B)

 

$    

     297,822             42,160             ---             339,982       

 

  (A)

The total carrying amount of goodwill at September 30, 2014 is net of accumulated impairment charges $30.9 million and $56.3 million related to the Middle East/North Africa and Asia/Pacific segments, respectively.

 

  (B)

The total carrying amount of goodwill at September 30, 2013 is net of accumulated impairment charges $30.9 million related to the Middle East/North Africa segment.

 

(13)

SALE/LEASEBACK ARRANGEMENTS

During the second quarter of fiscal 2015, the company sold one vessel to an unrelated third party, and simultaneously entered into bareboat charter agreements with the purchaser. The sale/leaseback transaction resulted in proceeds to the company of $19.4 million and a deferred gain of $11.2 million. The carrying value of the vessel was $8.2 million at the date of sale. The lease will expire in the quarter ending March 2023. Under the sale/leaseback agreement the company has the right to re-acquire the vessel at 47% of the original sales price in the middle of the eighth year, deliver the vessel to the owner at the end of the lease term, purchase the vessel at its then fair market value at the end of the lease term or extend the lease for 24 months at mutually agreeable lease rates.

During the first quarter of fiscal 2015, the company sold one vessel to an unrelated third party, and simultaneously entered into bareboat charter agreements with the purchaser. The sale/leaseback transaction resulted in proceeds to the company of $13.4 million and a deferred gain of $9.4 million. The carrying value of the vessel was $4.0 million at the date of sale. The lease will expire in the quarter ending June 2021. Under the sale/leaseback agreement the company has the right to re-acquire the vessel at 61% of the original sales price at the end of the sixth year, deliver the vessel to the owner at the end of the lease term, purchase the vessel at its then fair market value at the end of the lease term or extend the lease for 24 months at mutually agreeable lease rates.

 

25


The company is accounting for these transactions as sale/leasebacks with operating lease treatment and will expense lease payments over the lease term. The deferred gains will be amortized to gain on asset dispositions, net ratably over the respective lease term. Any deferred gain balance remaining upon the repurchase of the vessels would reduce the vessels’ stated cost if the company elects to exercise the purchase options.

As of September 30, 2014, the future minimum lease payments for the sale/leasebacks are as follows:

 

     Amount      
Fiscal year ending    (In thousands)      

Remaining six-months of 2015

   $ 1,436           

2016

     2,875           

2017

     2,875           

2018

     2,994           

2019

     3,213           

Thereafter

     11,433           

Total future lease payments

   $     24,826           
   

 

(14)

ACQUISITION

Troms Offshore Supply AS

On June 4, 2013, the company, through a subsidiary, acquired Troms Offshore Supply AS, a Norwegian company (Troms Offshore). At the time of the acquisition, Troms Offshore owned four deepwater PSVs, and had two additional deepwater PSVs under construction, one delivered shortly after the acquisition and the other delivered in January 2014. The purchase price (not including transaction costs) consisted of a $150.0 million cash payment to the shareholders of Troms Offshore and the assumption of approximately $261.3 million of combined Troms Offshore obligations, comprised of net interest-bearing debt and the remaining installment payments due on vessels under construction. The company has performed a fair value analysis and the purchase price was allocated to the acquired assets and liabilities based on their fair values resulting in $42.2 million of goodwill, all of which was allocated to our Sub-Saharan Africa/Europe segment.

The following table summarizes the allocation of the purchase price for the acquisition of Troms Offshore:

 

(In thousands)        

Cash

   $ 22,263         

Trade receivables and other current assets

     9,816         

Vessels (A)

     245,605         

Goodwill

     42,160         

Payable and other liabilities

     (13,020)       

Notes payable

             (156,824)       

Total purchase price

   $ 150,000         
   

 

  (A)

Includes $10.7 million in costs attributed to vessels under construction.

 

26


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Tidewater Inc.

New Orleans, Louisiana

We have reviewed the accompanying condensed consolidated balance sheet of Tidewater Inc. and subsidiaries (the “Company”) as of September 30, 2014, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and six-month periods ended September 30, 2014 and 2013, and of cash flows and statement of equity for the six-month periods ended September 30, 2014 and 2013. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Tidewater Inc. and subsidiaries as of March 31, 2014, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated May 21, 2014, 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, 2014 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

New Orleans, Louisiana

November 4, 2014

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS

FORWARD-LOOKING STATEMENT

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that this Quarterly Report on Form 10-Q and the information incorporated herein by reference contain certain forward-looking statements which reflect the company’s current view with respect to future events and future financial performance. All such forward-looking statements are subject to risks and uncertainties, and the company’s future results of operations could differ materially from its historical results or current expectations reflected by such forward-looking statements. Some of these risks are discussed in this report and include, without limitation, volatility in worldwide energy demand and oil and gas prices; consolidation of our customer base: fleet additions by competitors and industry overcapacity; changes in capital spending by customers in the energy industry for offshore exploration, field development and production; loss of a major customer: changing customer demands for vessel specifications, which may make some of our older vessels technologically obsolete for certain customer projects or in certain markets; delays and other problems associated with vessel construction and maintenance: uncertainty of global financial market conditions and difficulty in accessing credit or capital; acts of terrorism and piracy; integration of acquired businesses and entry into new lines of business; disagreements with our joint venture partners; significant weather conditions; unsettled political conditions, war, civil unrest and governmental actions, such as expropriation or enforcement of customs or other laws that are not well developed or consistently enforced, or requirements that services provided locally be paid in local currency, in each case especially in higher political risk countries where we operate; foreign currency fluctuations; labor changes proposed by international conventions; increased regulatory burdens and oversight; changes in laws governing the taxation of foreign source income; retention of skilled workers; and enforcement of laws related to the environment, labor and foreign corrupt practices.

Forward-looking statements, which can generally be identified by the use of such terminology as “may,” “can,” “potential,” “expect,” “project,” “target,” “anticipate,” “estimate,” “forecast,” “believe,” “think,” “could,” “continue,” “intend,” “seek,” “plan,” and similar expressions contained in this Annual Report on Form 10-K, are not guarantees of future performance or events. Any forward-looking statements are based on the company’s assessment of current industry, financial and economic information, which by its nature is dynamic and subject to rapid and possibly abrupt changes, which the company may or may not be able to control. Further, the company may make changes to its business plans that could or will affect its results. While management believes that these forward-looking statements are reasonable when made, there can be no assurance that future developments that affect us will be those that we anticipate and have identified. The forward-looking statements should be considered in the context of the risk factors listed above and discussed in Items 1, 1A, 2 and 7 included in the company’s Annual Report on Form 10-K for the year ended March 31, 2014, filed with the Securities and Exchange Commission (SEC) on May 21, 2014, and elsewhere in this Quarterly Report on Form 10-Q. Investors and prospective investors are cautioned not to rely unduly on such forward-looking statements, which speak only as of the date hereof. Management disclaims any obligation to update or revise any forward-looking statements contained herein to reflect new information, future events or developments.

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

The following information contained in this Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and related disclosures and the company’s Annual Report on Form 10-K for the year ended March 31, 2014, filed with the SEC on May 21, 2014.

 

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About Tidewater

The company’s vessels and associated vessel services provide support of all phases of offshore exploration, field development and production. These services include towing of, and anchor handling for, mobile offshore drilling units; transporting supplies and personnel necessary to sustain drilling, workover and production activities; offshore construction, ROV operations, and seismic and subsea support; and a variety of specialized services such as pipe and cable laying. The company’s offshore support vessel fleet includes vessels that are operated under joint ventures, as well as vessels that have been stacked or withdrawn from service. At September 30, 2014, the company owned or chartered 286 vessels (of which 11 were owned by joint ventures and 15 were stacked) and 6 ROVs available to serve the global energy industry.

The company has one of the broadest geographic operating footprints in the offshore energy industry with operations in most of the world’s significant offshore crude oil and natural gas exploration and production offshore regions. Our global operating footprint allows us to react to changing local market conditions and to respond to the changing requirements of the many customers with which we believe we have strong relationships. The company is also one of the most experienced international operators in the offshore energy industry with over five decades of international experience.

Principal Factors That Drive Our Revenues

The company’s revenues, net earnings and cash flows from operations are largely dependent upon the activity level of its offshore marine vessel fleet. As is the case with the many other vessel operators in our industry, our business activity is largely dependent on the level of exploration, field development and production activity of our customers. Our customers’ business activity, in turn, is dependent on crude oil and natural gas prices, which fluctuate depending on expected future levels of supply and demand for crude oil and natural gas, and on estimates of the cost to find, develop and produce reserves.

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

Principal Factors That Drive Our Operating Costs

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

Fleet size, fleet composition, geographic areas of operation, supply and demand for marine personnel, and local labor requirements are the major factors which affect overall crew costs in all segments. In addition, the company’s newer, more technologically sophisticated PSVs and AHTS vessels generally require a greater number of specially trained, more highly compensated fleet personnel than the company’s older, smaller and less sophisticated vessels. Competition for skilled crew has intensified, and may increase further, with the delivery of an increasing number of technologically sophisticated offshore rigs and support vessels operating worldwide. It is expected that crew cost will likely continue to increase as competition for skilled personnel intensifies. This trend of increasing personnel costs will also be affected by the company’s commencement of the operation of ROVs, which generally require more highly compensated personnel than the company’s vessel fleet.

The timing and amount of repair and maintenance costs are influenced by expectations of future customer demand for our vessels, as well as vessel age and drydockings and other major repairs and maintenance mandated by regulatory agencies. A certain number of periodic drydockings (typically twice every five years) are required to meet regulatory requirements. The company will generally incur drydocking and other major repairs and maintenance costs only if economically justified, taking into consideration the vessel’s age, physical condition, contractual obligations, current customer requirements and future marketability. When the company elects to forego a required regulatory drydock or major or repairs and maintenance, it stacks and occasionally sells the vessel because it is not permitted to work without valid regulatory certifications. When the company

 

29


drydocks a productive vessel, the company not only foregoes vessel revenues and incurs drydocking and other major repairs and maintenance costs, but it also generally continues to incur vessel operating and depreciation costs. In any given period, vessel downtime associated with drydockings and major repairs and maintenance can have a significant effect on the company’s revenues and operating costs.

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

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

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

Fuel and lube costs can also fluctuate in any given period depending on the number and distance of vessel mobilizations, the number of active vessels off charter, drydockings, and changes in fuel prices.

The company also incurs vessel operating costs that are aggregated as “other” vessel operating costs. These costs consist of brokers’ commissions, including commissions paid to unconsolidated joint venture companies, training costs and other miscellaneous costs. Brokers’ commissions are incurred primarily in the company’s non-United States operations where brokers sometimes assist in obtaining work for the company’s vessels. Brokers generally are paid a percentage of day rates and, accordingly, commissions paid to brokers generally fluctuate in accordance with vessel revenue. Other costs include, but are not limited to, satellite communication fees, agent fees, port fees, canal transit fees, vessel certification fees, temporary vessel importation fees and any fines or penalties.

Challenges We Confront as a Global Offshore Vessel Company

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

 

30


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

Sonatide Joint Venture

As previously reported, in November 2013, a subsidiary of the company and its joint venture partner in Angola, Sonangol Holdings Lda. (“Sonangol”), executed a new joint venture agreement for their joint venture, Sonatide. The new joint venture agreement is currently effective and will expire, unless extended, two years after an Angolan entity, which is intended to be one of the Sonatide group of companies, has been incorporated. The Angolan entity is expected to be incorporated in early 2015 after certain Angolan regulatory approvals have been obtained.

The challenges for the company to successfully operate in Angola remain significant. As the company has previously reported, on July 1, 2013, elements of new legislation (the “forex law”) became effective that generally require oil companies participating in concessions that engage in exploration and production activities offshore Angola to pay for goods and services provided by foreign exchange residents in Angolan kwanzas that are initially deposited into an Angolan bank account. The forex law also imposes documentation and other requirements on service companies such as Sonatide in order to effect payments that are denominated in currencies other than Angolan kwanzas. The forex law has resulted in, and will likely continue to result in, substantial customer payments to Sonatide being made in Angolan kwanzas. Such a result has been and could continue to be, unfavorable because the conversion of Angolan kwanzas into U.S. dollars and the subsequent expatriation of the funds may result in payment delays, currency devaluation risk prior to conversion of kwanzas to dollars, additional costs to convert kwanzas into dollars and potentially additional taxes.

In response to the new forex law, Tidewater and Sonangol negotiated an agreement (the “consortium agreement”) that is intended to allow the Sonatide joint venture to enter into contracts with customers that allocate billings for services provided by Sonatide between (i) billings for local services that are provided by a foreign exchange resident (that must be paid in kwanzas), and (ii) billings for services provided by offshore residents (that can be paid in dollars). Discussions regarding the consortium agreement are still pending between Tidewater and Sonangol.

In October 2014, the National Bank of Angola issued new regulations controlling the sale of foreign currency. These regulations require oil companies to sell U.S. dollars to the National Bank of Angola to buy kwanzas that are required to be used to pay for goods and services provided by oilfield service companies, which, in turn, are required to then source dollars in order to pay for goods and services provided offshore. The regulations continue to permit tripartite agreements among oil companies, commercial banks and service companies that provide for the sale of U.S. dollars by an oil company to a commercial bank in exchange for kwanzas and the subsequent on-sale of those dollars by the commercial bank to the service company. The implementing regulations do, however, place constraints on those tripartite agreements that did not previously exist. If tripartite agreements or similar arrangements are not available to service companies in Angola that have a need for dollars, then such service companies will be required to source dollars exclusively through the National Bank of Angola. Given the recent issuance of the guidance, the company has not yet formed a view on the impact of these implementing regulations on the willingness of commercial banks and oil companies to enter into new tripartite forex agreements.

As of September 30, 2014, the company had approximately $408 million in amounts due from Sonatide, largely reflecting unpaid vessel revenue (billed and unbilled) related to services performed by the company through the Sonatide joint venture. These amounts began to accumulate in late calendar 2012, when the initial provisions of the forex law relating to payments for goods and services provided by foreign exchange residents took effect (and payments were required to be paid into local bank accounts). Beginning in July 2013, when the second provision of the forex law took effect (and the local payments had to be made in kwanza), Sonatide generally accrued for but did not deliver invoices to customers for vessel revenue related to Sonatide and the company’s collective Angolan operations in order to minimize the exposure that Sonatide would be paid for a substantial

 

31


amount of charter hire in kwanzas and into an Angolan bank. In the interim, the company has been using its credit facility and other arrangements to fund the substantial working capital requirements related to its Angola operations.

In the first quarter of fiscal 2015, Sonatide began sending invoices to those customers who have insisted on paying U.S. dollar denominated invoices in kwanza. As invoices are paid in kwanza, Sonatide is seeking to convert those kwanzas into U.S. dollars and subsequently utilize those U.S. dollars to pay the amounts that Sonatide owes the company. This conversion and expatriation process is subject to those risks and considerations set forth above. In addition, since February 2014, Sonatide has been entering into customer agreements that contain split dollar/kwanza payments (typically 70% dollars and 30% kwanzas). While the company is confident, based on advice of counsel, that these split payment contracts comply with current Angolan law, it is not clear if this type of contracting will be available to Sonatide over the longer term. To the extent the National Bank of Angola issues further clarifying interpretations of the forex law or standard market practices develop in Angola in regards to split payment contracts without objection by the National Bank of Angola, the company expects that Sonatide will more broadly utilize split payment contracts.

For the six months ended September 30, 2014, the company collected (primarily through Sonatide) approximately $186 million from Angolan customers, which represents slightly more than the approximately $179 million in revenue generated for the same period. Of the $186 million collected, approximately $104 million represented U.S., dollars initially received by Sonatide on behalf of the company or dollars collected from other customers. The balance of $82 million collected resulted from Sonatide’s converting kwanzas into dollars and subsequent payment to Tidewater. The company believes that the process for converting kwanzas is functioning reasonably well given that the conversion process is still developing.

For the six months ended September 30, 2014, Tidewater’s Angolan operations generated vessel revenues of approximately $179 million, or 23%, of its consolidated vessel revenue, from an average of approximately 83 Tidewater-owned vessels that are marketed through the Sonatide joint venture (five of which were stacked on average during the six months ended September 30, 2014), and, for the six months ended September 30, 2013, generated vessel revenues of approximately $168 million, or 24%, of consolidated vessel revenue, from an average of approximately 86 Tidewater-owned vessels (11 of which were stacked on average during the six months ended September 30, 2013).

The Sonatide joint venture owns ten vessels (four of which are currently stacked) and certain other assets, in addition to earning commission income from Tidewater-owned vessels marketed through the Sonatide joint venture (owned 49% by Tidewater). As of September 30, 2014 and March 31, 2014, the carrying value of Tidewater’s investment in the Sonatide joint venture, which is included in “Investments in, at equity, and advances to unconsolidated companies,” is approximately $70 million and $62 million, respectively.

Due from affiliate at September 30, 2014 and March 31, 2014 of approximately $408 million and $430 million, respectively, represents cash received by Sonatide from customers and due to the company, costs paid by Tidewater on behalf of Sonatide and, finally, amounts due from customers that are expected to be remitted to the company through Sonatide.

Due to affiliate at September 30, 2014 and March 31, 2014 of approximately $127 million and $86 million, respectively, represents amounts due to Sonatide for commissions payable (approximately $48 million and $43 million, respectively) and other costs paid by Sonatide on behalf of the company.

A new presidential decree regulating maritime transportation activities was enacted in Angola earlier this year. Following recent discussions with port state authorities, the company understands that the authorities will likely interpret the decree to require one hundred percent Angolan ownership of local vessel operators such as Sonatide. This interpretation will therefore likely result in the need to work with Sonangol to further restructure our Sonatide joint venture operations in Angola. The authorities have suggested that a grace period will extend until approximately the end of the calendar year for foreign vessel operators to comply. The company believes the authorities will further extend the grace period for foreign vessel operators so long as the operators demonstrate continuing good faith efforts to become compliant. The company is seeking further clarification of the new decree and is exploring potential alternative structures in order to comply.

 

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Management continues to explore ways to profitably participate in the Angolan market while looking for opportunities to reduce the overall level of exposure to the increased risks that the company believes currently characterize the Angolan market. Included among mitigating measures taken by the company to address these risks is the redeployment of vessels from time to time to other markets where demand for the company’s vessels remains strong. During the year ended March 31, 2014, the company redeployed vessels from its Angolan operations to other markets and also transferred vessels into its Angolan operations from other markets resulting in a net increase of one vessel operating in the area. Redeployment of vessels to other markets in the period beginning April 1, 2014 through September 30, 2014 has been more pronounced (net 10 vessels transferred out of Angola, including four smaller crewboats that were stacked outside of Angola) than in prior periods.

Although our customers’ near term offshore spending plans and the level of newbuild vessel activity both remain in flux, we still believe that the global market for offshore support vessels is currently reasonably well balanced, with offshore vessel supply approximately equal to offshore vessel demand. If the company were to consider redeployment of a substantial number of vessels from Angola to other markets, however, there would likely be negative financial impacts associated with such redeployment, including mobilization costs and costs to redeploy Tidewater shore-based employees to other areas, in addition to lost revenues associated with potential downtime between vessel contracts. These financial impacts could, individually or in the aggregate, be material to our results of operations and cash flows for the periods when such costs would be incurred. If there is a need to redeploy vessels which are currently deployed in Angola to other international markets, Tidewater believes that there is sufficient demand for a majority of these vessels (particularly the larger and more sophisticated vessels) at prevailing market day rates.

International Labour Organization’s Maritime Labour Convention

The International Labour Organization’s Maritime Labour Convention, 2006 (the “Convention”) seeks to mandate globally, among other things, seafarer working conditions, ship accommodations, wages, conditions of employment, health and other benefits for all ships (and the seafarers on those ships) that are engaged in commercial activities.

As of August 20, 2012, more than 50% of the world’s vessel tonnage ratified the Convention meeting the requisites for the Convention to become law, beginning one year from signatory countries’ respective dates of ratification. To date, the Convention has become law in 48 of the 64 countries that ratified the Convention, with more dates of enforcement continuing in the forthcoming months. Generally, ratifications are concentrated in the European and Asia Pacific markets with a more diverse footprint for the remaining ratifications. We continue to note that, although Bangladesh, Fiji, Gabon, and Lebanon have submitted instruments of ratification, their respective registrations for Member state social protection benefits are still pending.

The company continues to work with its flag states to seek substantial equivalencies to comparable national and industry laws that meet the intent of the Convention. The company continues Convention certification on its vessels on an “as needed” priority basis linked to dates of enforcement by countries, drydock transits, or ocean voyages.

The company continues to assess its global seafarer labor relationships and to review its fleet operational practices as dates of enforcement of the Convention continue. In those countries where the Convention does apply, and as effective enforcement progresses, the company and its customers’ operations may be negatively affected by future compliance, which cannot be reasonably estimated at this time.

Macroeconomic Environment and Outlook

The primary driver of our business (and revenues) is the level of our customers’ capital and operating expenditures for offshore oil and natural gas exploration, field development and production. These expenditures, in turn, generally reflect our customers’ expectations for future oil and natural gas prices, economic growth, hydrocarbon demand, estimates of current and future oil and natural gas production, the relative cost of exploring, developing and producing onshore and offshore oil and natural gas, and our customers’ ability to access exploitable oil and natural gas resources. The prices of crude oil and natural gas are critical factors in our customers’ investment and spending decisions, including their decisions to contract

 

33


drilling rigs and offshore support vessels in support of offshore exploration, field development and production activities in the various global geographic markets, most of which the company already operates.

The price of crude oil has declined over the last twelve months, primarily due to a less optimistic forecast of worldwide economic growth and higher than expected U.S. oil and gas production. Some analysts believe that lower oil prices and increased volatility in commodity markets in recent months also reflects the impact of speculators reducing their long positions in futures markets. During the most recent quarter the global economy experienced modest growth led by China, the U.S. and India; however, some analysts have scaled back their original growth forecasts as a result of a slower than expected Euro-zone recovery, recent developments in Russia, and continuing geopolitical concerns in the Middle-East. The demand for crude oil typically follows economic growth expectations. As analysts have scaled back their growth forecasts they have generally revised their worldwide crude oil demand forecasts downward (by approximately 0.05 million barrels per day).

Tidewater anticipates that its longer-term utilization and day rate trends for its vessels will be correlated with demand for, and the price of, crude oil, which during October 2014, was trading around $83 per barrel for West Texas Intermediate (WTI) crude and around $84 per barrel for Intercontinental Exchange (ICE) Brent crude. The current pricing outlook and recent trend in regards to crude oil prices could adversely affect additional drilling and exploration activity as prices for WTI and ICE Brent are near or below the average prices per barrel reportedly used in exploration and production (E&P) companies’ capital expenditure budgets as reported in 2014 E&P spending surveys.

The continuing rise in production of unconventional gas resources in North America and the commissioning of a number of new, large, Liquefied Natural Gas (LNG) export facilities around the world have contributed to an oversupplied natural gas market. Earlier in the year, natural gas inventories in the U.S. declined from historic highs primarily due to increased consumption during a colder than average winter. More recently, however, natural gas inventories have risen, once again exerting downward pressure on natural gas prices in the U.S. Prolonged periods of oversupply of natural gas (whether from conventional or unconventional natural gas production or gas produced as a byproduct of conventional or unconventional crude oil production) will likely continue to suppress prices for natural gas, although over the longer term, relatively low natural gas prices may also lead to increased demand for the resource. High levels of onshore gas production along with a prolonged downturn in natural gas prices would be expected over the short and intermediate term to negatively impact the offshore exploration and development plans of energy companies, which in turn would suppress demand for offshore support vessel services. The impact of lower gas prices in recent years has been most pronounced in our Americas segment and specifically in our U.S. operations where natural gas is a more prevalent, exploitable hydrocarbon resource. In October 2014, natural gas was trading in the U.S. at approximately $3.90 per Mcf which is slightly higher than $3.70 per Mcf in October 2013.

Deepwater activity continues to be a significant segment of the global offshore crude oil and natural gas markets, and it is also a source of potential growth for the company. Deepwater oil and gas development typically involves significant capital investment and multi-year development plans. Such projects are generally underwritten by the participating exploration, field development and production companies using relatively conservative assumptions relating to crude oil and natural gas prices. These projects are, therefore, considered to be less susceptible to short-term fluctuations in the price of crude oil and natural gas though it is possible that the recent pullback in crude oil prices may cause E&P companies to reevaluate their future capital expenditures in regards to deepwater projects.

Reports published by IHS-Petrodata in October of 2014 indicate that the worldwide movable offshore drilling rig count, is estimated at approximately 950 rigs, of which approximately 700 offshore rigs were working as of October 2014. While the supply of and demand for offshore drilling rigs that meet the technical requirements of end user exploration and development companies may be key drivers of pricing for contract drilling services, the company believes that the number of rigs working offshore rather than the total population of moveable offshore drilling rigs is a better indicator of overall offshore activity levels and the demand for offshore support vessel services.

Of the estimated 950 movable rigs worldwide, approximately 35%, or approximately 330 rigs, are designed to operate in deeper waters. Of the approximately 700 working offshore rigs in October 2014, approximately 250 rigs are designed to operate in deeper waters. As of October 2014, the number of working rigs that are

 

34


designed to operate in deeper waters decreased by approximately 2%, or five rigs, from the number of deepwater rigs working a year ago. It is further estimated that approximately 35% of the approximate 250 new-build rig total, or 90 rigs, are being built to operate in deeper waters.

We believe investment in additional rigs capable of operating in deeper waters highlights offshore rig owner’s longer-term expectation for high levels of activity in regards to deepwater exploration and development. Recognizing that 90 newbuild rigs designed to operate in deeper waters also represent approximately 35% of the approximate 250 deepwater rigs working in October 2014, there is some uncertainty as to whether the deepwater rigs currently under construction will, at least in the near to intermediate-term, increase the working fleet or merely replace older, less productive drilling units. As a result, it is not clear what impact the delivery within the next several years of additional rigs (deepwater and otherwise) will have on the working rig count.

Investment is also being made in the floating production unit market, with approximately 85 new floating production units under construction and expected to be delivered primarily over the next three years to supplement the approximately 350 floating production units already installed worldwide.

In addition to the increase in deepwater drilling activity, worldwide shallow-water exploration and production activity has also increased during the last twelve months. According to IHS-Petrodata, with approximately 420 working jack-up rigs as of October 2014, the number of working jack-up rigs represents an increase of approximately 6%, or 22 rigs, from the number of jack-up rigs working a year ago. Orders for new jack-up rigs have also increased nearly 19% over the last twelve months to approximately 140 jack-up rigs, nearly all of which are scheduled for delivery in the next three years. As discussed above with regards to the deepwater rig market and recognizing that 140 newbuild jackup rigs represent approximately 33% of the approximately 420 jack up rigs working in October 2014, there is also uncertainty as to how many of the jack-up rigs currently under construction will either increase the working fleet or replace older, less productive jack-up rigs.

Also according to IHS-Petrodata, there are approximately 530 new-build offshore support vessels (deepwater PSVs, deepwater AHTS vessels and towing-supply vessels only) either under construction (450 vessels), on order or planned as of October 2014. Most of the vessels under construction are expected to be delivered to the worldwide offshore vessel market within the next two years. Also as of October 2014, the worldwide fleet of these classes of vessels is estimated at approximately 3,200 vessels, of which Tidewater estimates more than 10% are currently stacked or are not being actively marketed by the vessels’ owners.

An increase in worldwide vessel capacity would tend to have the effect of lowering charter rates, particularly when there are lower levels of exploration, field development and production activity. The worldwide offshore marine vessel industry, however, also has a large number of aged vessels, including approximately 680 vessels, or 21%, of the worldwide offshore fleet, that are at least 25 years old and nearing or exceeding original expectations of their estimated economic lives. These older vessels, of which Tidewater estimates 40% to 50% are already either stacked or are not being actively marketed by the vessels’ owners, could potentially be removed from the market within the next few years if the cost of extending the vessels’ lives is not economically justifiable. Although the future attrition rate of these aging vessels cannot be determined with certainty, the company believes that the retirement of a sizeable portion of these aged vessels could mitigate the potential negative effects of new-build vessels on vessel utilization and vessel pricing. As discussed above, additional vessel demand, which could mitigate the possible negative effects of the new-build vessels being added to the offshore support vessel fleet, could also be created by the delivery of new drilling rigs and floating production units to the extent such new drilling rigs and/or floating production units both become operational and are not offset by the idling or retirement of existing active drilling rigs and floating production units. Excluding the vessels that the company estimates to already be stacked or not actively being marketed by the vessels’ owners, the company estimates that the number of offshore support vessels under construction (450 vessels) represents approximately 15% of the existing worldwide fleet of these vessels.

Fiscal 2015 Second Quarter Business Highlights

During the first half of fiscal 2015 the company continued to focus on enhancing its competitive advantages and its market share in international markets and continued to modernize its vessel fleet to increase future earnings capacity while removing from active service certain older vessels that had more limited market opportunities. Key elements of the company’s strategy continue to be the preservation of its strong financial position and the

 

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maintenance of adequate liquidity to fund the expansion of its fleet of newer vessels and the development of the company’s subsea business. Operating management focused on safe operations, minimizing unscheduled vessel downtime, improving the oversight over major repairs and maintenance projects and drydockings and maintaining disciplined cost control.

At September 30, 2014, the company had 275 owned or chartered vessels (excluding joint-venture vessels and vessels withdrawn from service) in its fleet with an average age of 8.9 years. The average age of 248 newer vessels in the fleet (defined as those that have been acquired or constructed since calendar year 2000 as part of the company’s new build and acquisition program) is approximately 6.8 years.

The company’s consolidated net earnings for the first six months of fiscal 2015 increased 24%, or $20.3 million, as compared to the same period in fiscal 2014, primarily due to a 12% increase in total revenues, which was partially offset by a 10% increase in vessel operating costs, a 6% increase in depreciation expense and a 64% increase in vessel operating lease expense. The company recorded $772.5 million in vessel revenues during the first six months of fiscal 2015, which is an increase of $77.2 million, or 11%, over the vessel revenues earned during the same period in fiscal 2014. The increase in vessel revenues was due to increased utilization from a larger fleet of newer, more sophisticated vessels. In particular, the company experienced a nine percentage point increase in utilization, which includes the impact of the company’s disposition of previously stacked vessels, and a 10% increase in our total worldwide fleet average day rates in the first six months of fiscal 2015 as compared to the same period in fiscal 2014. Our subsea business also began generating revenue during the second quarter of fiscal 2015 and recognized revenue of $1.6 million which is included in other operating revenues.

Vessel revenues generated by our Americas segment increased approximately 32%, or $61.8 million, during the first six months of fiscal 2015 as compared to the vessel revenues earned during the same period in fiscal 2014, primarily due to a $56.8 million increase in revenues earned on the deepwater vessels, reflecting a 16 percentage point increase in utilization and an increase in the number of deepwater vessels operating in the area. Vessel operating costs for the Americas segment also increased 24%, or $25.3 million (inclusive of an 8%, or $1.6 million, increase in repairs and maintenance expense, which includes our major repairs and regulatory drydocking costs), during the same comparative periods.

Vessel revenues generated by our Asia/Pacific segment increased 7%, or $5.9 million, during the first six months of fiscal 2015 as compared to the same period in fiscal 2014, primarily due to a $7.7 million increase in revenues earned on the deepwater vessels reflecting a 6% increase in average day rates and an increase in the number of deepwater vessels operating in the segment. Vessel operating costs for the Asia/Pacific segment increased 30%, or $14.3 million (inclusive of an 88%, or $5.3 million, increase in repairs and maintenance expense, which includes our major repairs and regulatory drydocking costs), during the same comparative periods.

Vessel revenues generated by our Middle East/North Africa segment increased 21%, or $17.8 million, during the first six months of fiscal 2015 as compared to the revenues earned during the same period in fiscal 2014, primarily due to increased revenues from both the deepwater and towing-supply vessel classes. Vessel operating costs for the Middle East/North Africa segment increased 46%, or $19.7 million (inclusive of a 99%, or $6.9 million, increase in repairs and maintenance expense, which includes our major repairs and regulatory drydocking costs), during the same comparative periods.

Vessel revenues generated by our Sub-Saharan Africa/Europe segment decreased 3%, or $8.3 million, during the first six months of fiscal 2015 as compared to the revenues earned during the same period in fiscal 2014, primarily due to a decrease in the number of both deepwater and towing-supply vessels operating in the segment because of vessels transferring to other segments. Vessel operating costs for the Sub-Saharan Africa/Europe segment decreased 11%, or $20.7 million (inclusive of a 26%, or $13.8 million, decrease in repairs and maintenance expense, which includes our major repairs and regulatory drydocking costs), during the same comparative periods.

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

 

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Results of Operations

We manage and measure our business performance in four distinct operating segments that are based on our geographical organization: Americas, Asia/Pacific, Middle East/North Africa, and Sub-Saharan Africa/Europe. The following table compares vessel revenues and vessel operating costs (excluding general and administrative expenses, depreciation expense, and gains on asset dispositions, net) for the company’s owned and operated vessel fleet and the related percentage of vessel revenue for the quarters and six-month periods ended September 30, 2014 and 2013 and for the quarter ended June 30, 2014:

 

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

(In thousands)

             2014         %        2013         %         2014         %         2013         %         2014         %     

Vessel revenues:

                              

Americas

   $          134,013         34%        101,929         28%         253,996         33%         192,173         28%         119,983         31%     

Asia/Pacific

       45,989         12%        37,430         10%         86,238         11%         80,386         12%         40,249         11%     

Middle East/North Africa

       48,837         13%        45,370         13%         104,376         14%         86,583         12%         55,539         15%     

Sub-Saharan Africa/Europe

             162,113         41%        178,939         49%         327,852         42%         336,156         48%         165,739         43%     

Total vessel revenues

   $          390,952         100%        363,668         100%         772,462         100%         695,298         100%         381,510         100%     
                                                                  

Vessel operating costs:

                              

Crew costs

   $          114,634         29%        100,767         28%         225,919         29%         193,999         28%         111,285         29%     

Repair and maintenance

       39,332         10%        38,996         11%         87,064         11%         87,089         13%         47,732         13%     

Insurance and loss reserves

       1,982         1%        3,926         1%         7,376         1%         9,946         1%         5,394         1%     

Fuel, lube and supplies

       22,820         6%        19,354         5%         45,189         6%         38,159         5%         22,369         6%     

Other

             34,051         8%        32,273         9%         64,515         9%         62,284         9%         30,464         8%     

Total vessel operating costs

   $          212,819         54%        195,316         54%         430,063         56%         391,477         56%         217,244         57%     
                                                                  

The following table compares other operating revenues and costs related to third-party activities of the company’s shipyards (the remainder of which the company disposed of in the quarter ended June 30, 2013), brokered vessels, ROVs and other miscellaneous marine-related activities for the quarters and six-month periods ended September 30, 2014 and 2013 and for the quarter ended June 30, 2014:

 

    Quarter Ended
        September 30,        
             Six Months Ended        
September 30,
     Quarter
Ended
    June 30,    
 
(In thousands)   2014      2013          2014      2013        2014         

Other operating revenues

  $       6,572         4,269             10,739         6,724           4,167          

Costs of other operating revenues

    6,560         4,040             11,221         6,060           4,661          

 

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The following table presents vessel operating costs by the company’s segments, the related segment vessel operating costs as a percentage of segment vessel revenues, total vessel operating costs and the related total vessel operating costs as a percentage of total vessel revenues for the quarters and six-month periods ended September 30, 2014 and 2013 and for the quarter ended June 30, 2014:

 

     Quarter Ended
September 30,
     Six Months Ended
September 30,
     Quarter
Ended
June 30,
 
(In thousands)    2014      %      2013      %      2014      %      2013      %      2014      %    

Vessel operating costs:

                             

Americas:

                             

Crew costs

   $       36,949         28%         31,389         31%         73,515         29%         59,230         31%         36,566         31%     

Repair and maintenance

     12,700         10%         11,750         11%         22,222         9%         20,608         11%         9,522         8%     

Insurance and loss reserves

     493         <1%         597         1%         2,094         1%         2,498         1%         1,601         1%     

Fuel, lube and supplies

     7,257         5%         5,901         6%         14,799         6%         9,454         5%         7,542         6%     

Other

     10,034         7%         7,203         7%         18,165         7%         13,673         7%         8,131         7%     
     67,433         50%         56,840         56%         130,795         52%         105,463         55%         63,362         53%     

Asia/Pacific:

                             

Crew costs

   $ 21,388         47%         14,567         39%         39,673         46%         30,221         38%         18,285         45%     

Repair and maintenance

     3,448         7%         3,910         10%         11,290         13%         6,022         8%         7,842         20%     

Insurance and loss reserves

     207         <1%         350         1%         638         1%         1,000         1%         431         1%     

Fuel, lube and supplies

     2,134         5%         2,410         6%         5,892         7%         5,129         6%         3,758         9%     

Other

     2,454         5%         3,211         9%         4,723         5%         5,565         7%         2,269         6%     
     29,631         64%         24,448         65%         62,216         72%         47,937         60%         32,585         81%     

Middle East/North Africa:

                             

Crew costs

   $ 15,734         32%         11,545         25%         32,080         31%         22,009         26%         16,346         29%     

Repair and maintenance

     5,031         11%         3,638         8%         13,811         13%         6,926         8%         8,780         16%     

Insurance and loss reserves

     947         2%         1,216         3%         2,008         2%         2,018         2%         1,061         2%     

Fuel, lube and supplies

     4,866         10%         2,372         5%         7,556         7%         6,240         7%         2,690         5%     

Other

     3,581         7%         3,082         7%         7,255         7%         5,799         7%         3,674         7%     
     30,159         62%         21,853         48%         62,710         60%         42,992         50%         32,551         59%     

Sub-Saharan Africa/Europe:

                             

Crew costs

   $ 40,563         25%         43,266         24%         80,651         25%         82,539         25%         40,088         24%     

Repair and maintenance

     18,153         11%         19,698         11%         39,741         12%         53,533         16%         21,588         13%     

Insurance and loss reserves

     335         1%         1,763         1%         2,636         1%         4,430         1%         2,301         2%     

Fuel, lube and supplies

     8,563         5%         8,671         5%         16,942         5%         17,336         5%         8,379         5%     

Other

     17,982         11%         18,777         11%         34,372         10%         37,247         11%         16,390         10%     
       85,596         53%         92,175         52%         174,342         53%         195,085         58%         88,746         54%     

Total operating costs

   $ 212,819         54%         195,316         54%         430,063         56%         391,477         56%         217,244         57%     
                                                         

 

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The following table compares operating income and other components of earnings before income taxes and its related percentage of total revenue for the quarters and six-month periods ended September 30, 2014 and 2013 and for the quarter ended June 30, 2014:

 

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

(In thousands)

             2014        %        2013        %        2014        %        2013        %        2014        %      

Vessel operating profit:

                      

Americas

   $          36,778        9%        23,675        6%        66,986        9%        43,976        6%        30,208        8%      

Asia/Pacific

       7,414        2%        4,807        1%        6,443        1%        15,096        2%        (971     (1%)     

Middle East/North Africa

       7,367        2%        13,446        4%        19,160        2%        23,569        4%        11,793        3%      

Sub-Saharan Africa/Europe

             41,446        10%        47,261        13%        79,048        10%        64,780        9%        37,602        10%      
       93,005        23%        89,189        24%        171,637        22%        147,421        21%        78,632        20%      

Other operating profit (loss)

             (2,093     (1%     218        <1%        (4,516     (1%     (174     (<1%     (2,423     (1%)     
       90,912        22%        89,407        24%        167,121        21%        147,247        21%        76,209        19%      

Corporate general and administrative expenses

       (8,943     (2%     (12,102     (4%     (21,275     (3%     (27,947     (4%     (12,332     (3%)     

Corporate depreciation

             (836     (<1%     (789     (<1%     (1,652     (<1%     (1,499     (<1%     (816     (<1%)     

Corporate expenses

       (9,779     (2%     (12,891     (4%     (22,927     (3%     (29,446     (4%     (13,148     (3%)     

Gain on asset dispositions, net

             3,590        1%        49        <1%        6,533        1%        2,189        <1%        2,943        1%      

Operating income

   $          84,273        21%        76,565        21%        150,727        19%        119,990        17%        66,004        17%      

Foreign exchange gain (loss)

       5,408        1%        3,017        1%        4,119        1%        2,928        <1%        (1,289     (<1%)     

Equity in net earnings of unconsolidated companies

       3,821        1%        3,781        1%        9,104        1%        8,201        1%        5,283        1%      

Interest income and other, net

       499        <1%        538        <1%        1,121        <1%        1,278        <1%        622        <1%      

Loss on early extinguishment of debt

       ---        ---            (4,144     (1%     ---        ---            (4,144     (<1%     ---        ---         

Interest and other debt costs, net

             (12,559     (3%     (9,918     (3%     (25,688     (3%     (18,831     (3%     (13,129     (3%)     

Earnings before income taxes

   $          81,892        21%        69,839        19%        139,383        18%        109,422        16%        57,491        15%      
                                                   

Americas Segment Operations. Vessel revenues in the Americas segment increased 32%, or $32.1 million and 32%, or $61.8 million, respectively, during the quarter and six month periods ended September 30, 2014, as compared to the same periods in fiscal 2014, due primarily to higher revenues earned on deepwater vessels, which increased 48%, or $29.6 million and 49%, or $56.8 million, during the same comparative periods. The increase in deepwater revenues is primarily the result of an increase in the number of deepwater vessels operating in the Americas segment resulting from new deliveries and vessels which were transferred from other segments. Also contributing to the increase in deepwater revenues in the Americas segment is an increase in utilization rates of 20 and 16 percentage points, respectively, during the same comparative periods, because of the increased demand for deepwater drilling services notably in Brazil and the U.S. GOM. Revenues from the towing-supply vessels increased 11%, or $3.5 million and 9%, or $5.4 million, during the quarter and six month periods ended September 30, 2014, respectively, as compared to the same periods in the prior fiscal year, due to increases in average day rates of 12% and 11%, respectively, as well as increases in utilization rates of 21 and 20 percentage points, respectively.

At the beginning of fiscal 2015, the company had 10 stacked Americas-based vessels. During the first six months of fiscal 2015, the company stacked four additional vessels and sold five vessels from the previously stacked vessel fleet, resulting in a total of nine stacked Americas-based vessels as of September 30, 2014.

Operating profit for the Americas segment increased 55%, or $13.1 million, and 52%, or $23.0 million, during the quarter and six-month period ended September 30, 2014, respectively, as compared to the same periods in fiscal 2014, respectively, primarily due to higher revenues, which were partially offset by a 19%, or $10.6 million, and 24%, or $25.3 million, respective increase in vessel operating costs (primarily crew costs, fuel, lube and supplies costs and other vessel costs), substantial increases in vessel operating lease costs (due to completed sale/lease transactions related to vessels that are operated by the company in the U.S GOM, Trinidad and Mexico), an increase in depreciation expense and an increase in general and administrative expenses.

Crew costs increased 18%, or $5.6 million, and 24%, or $14.3 million; fuel, lube and supplies costs increased 23%, or $1.4 million, and 57%, or $5.3 million; other vessel costs increased 39%, or $2.8 million, and 33%, or $4.5 million; and depreciation expense increased 14%, or $1.5 million, and 14%, or $2.9 million, respectively,

 

39


during the quarter and six-month period ended September 30, 2014, as compared to the same periods in fiscal 2014 due to an increase in the number of deepwater vessels operating in the segment. Vessel operating lease costs increased 540%, or $4.2 million and 470%, or $7.7 million, respectively, during the same comparative periods. General and administrative expenses increased 26%, or $2.6 million and 15%, or $2.9 million, respectively, during the same comparative periods, in order to support the segments growing vessel fleet.

Asia/Pacific Segment Operations. Vessel revenues in the Asia/Pacific segment increased 23%, or $8.6 million, and 7%, or $5.9 million, during the quarter and six month periods ended September 30, 2014, and 2013 respectively, primarily due to higher revenues earned on deepwater vessels. Deepwater vessel revenue increased 39%, or $7.8 million, and 17%, or $7.7 million, respectively, during the same comparative periods, primarily due to a net increase in the number of deepwater vessels operating in the segment primarily in Australia. Revenue increases during the six month period ended September 30, 2014 as compared to the same period in 2013 were partially offset by a decrease in revenues from towing-supply vessels of 6%, or $1.9 million, primarily due to a number of towing-supply vessels transferring out of the non-Australia areas within the Asia/Pacific segment to other segments where charter opportunities for this class of vessel are currently considered by the company to be more attractive.

At the beginning of fiscal 2015, the company did not have any Asia/Pacific-based stacked vessels and it did not stack any vessels during the six month period ended September 30, 2014.

Operating profit for the Asia/Pacific segment increased 54%, or $2.6 million, during the second quarter of fiscal 2015 as compared to the second quarter of fiscal 2014, due to increased revenues, partially offset by a 21%, or $5.2 million, increase in vessel operating costs (primarily Australian crew costs).

Crew costs increased 47%, or $6.8 million, during the second quarter of fiscal 2015 as compared to the second quarter of fiscal 2014, due to vessels transferred into the segment, primarily Australia, from other areas and increased crew on vessels required for certain projects (also in Australia).

Operating profit for the Asia/Pacific segment decreased 57%, or $8.7 million, during the six-month period ended September 30, 2014 as compared to the six-month period ended September 30,2013, due to a 30%, or $14.3 million, increase in vessel operating costs (primarily crew costs and repair and maintenance costs), partially offset by higher revenues.

Crew costs increased 31%, or $9.5 million, during the six-month period ended September 30, 2014 as compared to the six-month period ended September 30, 2013, due to increased crew on vessels manned for certain projects and ramp up of crew for work on new contracts in Australia. Repair and maintenance costs increased 88%, or $5.3 million, during the same comparative periods, due to an increase in the number scheduled drydocks and additional inspections performed to prepare vessels for certain projects also in Australia.

Middle East/North Africa Segment Operations. Vessel revenues in the Middle East/North Africa segment increased 8%, or $3.5 million, and 21%, or $17.8 million, during the quarter and six month periods ended September 30, 2014, respectively, as compared to the same periods during fiscal 2014, due to increased revenues from both the deepwater and towing-supply vessel classes. Deepwater vessel revenue increased 22%, or $3.5 million, and 23%, or $7.1 million, respectively, during the same comparative periods, due to a 4% and 11% respective increase in average day rates as well as an increase in the number of deepwater vessels operating in the segment. Increases in vessel revenues in Middle East/North Africa segment is primarily the result of increased scale of operations in the Mediterranean Sea and offshore Saudi Arabia (which, in turn was primarily driven by an increase in the number of jack up rigs working in this region). Increases in dayrates in Middle East/North Africa reflect the transfer of larger, higher specification vessels from other regions into the Middle East/North Africa region and lump sum mobilization fees. In addition to increased deepwater revenues for the six months ended September 30, 2014, towing-supply vessel revenue also increased 20%, or $10.7 million, during the same comparative periods, due to a 3 percentage point increase in utilization, and an increase in the number of towing-supply vessels operating in the segment.

 

40


At the beginning of fiscal 2015, the company had one stacked Middle East/North Africa-based vessel which was sold during the quarter ended June 30, 2014. There are no stacked vessels in the Middle East/North Africa region as of September 30, 2014.

Operating profit for the Middle East/North Africa segment decreased 45%, or $6.1 million, and 19%, or $4.4 million, during the quarter and six month periods ended September 30, 2014 as compared to the same periods during fiscal 2014, primarily due to a 38%, or $8.3 million, and 46%, or $19.7 million, respective increase in vessel operating costs (primarily crew costs, repair and maintenance costs, which includes major repairs and regulatory drydocking costs, and fuel, lube and supplies costs), an increase in depreciation expense and an increase in general and administrative expenses, partially offset by higher revenues, during the same comparative periods.

Crew costs increased 36%, or $4.2 million, and 46%, or $10.1 million, respectively, during the quarter and six-month periods ended September 30, 2014, as compared to the same periods during fiscal 2014, primarily due to an increase in the number of vessels operating in the segment which was the result of the transfer of vessels from other segments. Repair and maintenance costs increased 38%, or $1.4 million, and 99%, or $6.9 million, respectively, during the same comparative periods, due to an increase in the number of drydockings during the current period and the outfitting of vessels in preparation for the start of new term contracts. Fuel, lube and supplies costs increased 105%, or $2.5 million, and 21%, or $1.3 million, respectively, during the same comparative periods, due to an increase in the number of vessels mobilizing into the segment. Depreciation expense increased 18%, or $1.1 million, and 18%, or $2.0 million, respectively, during the same comparative periods, also due to an increase in the number of vessels operating in the segment. General and administrative expenses increased 18%, or $0.7 million, and 19%, or $1.5 million, respectively during the same comparative periods, due to the increase in shore-based personnel, primarily to support our growing operation in Saudi Arabia and in the Mediterranean Sea.

Sub-Saharan Africa/Europe Segment Operations. Vessel revenues in the Sub-Saharan Africa/Europe segment decreased 9%, or $16.8 million and 3%, or $8.3 million, respectively, during the quarter and six-month periods ended September 30, 2014, as compared to the same periods during fiscal 2014, due to decreased revenues on both the deepwater and towing-supply vessel classes. Revenues from deepwater vessels decreased 16%, or $17.3 million and 7%, or $12.9 million, respectively, during the quarter and six-month periods ended September 30, 2014, as compared to the same periods during fiscal 2014, primarily due to a reduction in the number of deepwater vessels in Sub-Saharan Africa due to transfers of vessels from Sub-Saharan Africa (in particular, Angola) to other regions, somewhat offset by increases in vessel revenues generated by the company’s European operations driven by the acquisition of Troms Offshore. Revenues from other vessel classes increased 17%, or $2.7 million and 20%, or $6.2 million, respectively, during the same comparative periods, primarily due to a 24% and 19% respective increase in average day rates.

At the beginning of fiscal 2015, the company had four stacked Sub-Saharan Africa/Europe-based vessels. During the first half of fiscal 2015, the company stacked six additional vessels and sold four previously stacked vessels, resulting in a total of six stacked Sub-Saharan Africa/Europe-based vessels as of September 30, 2014.

Operating profit for the Sub-Saharan Africa/Europe segment decreased 12%, or $5.8 million, during the second quarter of fiscal 2015 as compared to the second quarter of fiscal 2014, primarily due to decreased revenues, which were partially offset by a 7%, or $6.6 million, decrease in vessel operating costs (primarily crew costs, repair and maintenance costs, insurance costs and other vessel costs), a decrease in vessel operating lease costs and a decrease in depreciation expense.

Crew costs decreased 6%, or $2.7 million, insurance costs decreased 81%, or $1.4 million, and depreciation expense decreased 11%, or $2.2 million, during the second quarter of fiscal 2015 as compared to the second quarter of fiscal 2014, primarily due to a decrease in the number of vessels operating in the segment. Repair and maintenance costs decreased 8%, or $1.5 million, during the second quarter of fiscal 2015 as compared to the second quarter of fiscal 2014, due to a fewer number of drydocks performed in the current period. Vessel operating lease costs decreased 44%, or $1.2 million, during the same comparative periods, as vessels operated under lease arrangements transferred to other segments.

 

41


Although vessel revenues decreased during the same comparative periods, operating profit for the Sub-Saharan Africa/Europe segment increased 22%, or $14.3 million, during the six-month period ended September 30, 2014, as compared to the six-month period ended September 30, 2013, primarily due to an 11%, or $20.7 million, decrease in vessel operating costs (primarily crew costs, repair and maintenance costs and insurance costs) and a decrease in vessel operating lease costs.

Crew costs decreased 2%, or $1.9 million, insurance costs decreased 41%, or $1.8 million, and depreciation expense decreased 6%, or $2.3 million, during the six-month period ended September 30, 2014, as compared to the six-month period ended September 30, 2013, primarily due to a decrease in the number of vessels operating in the segment. Repair and maintenance costs decreased 26%, or $13.8 million, during the same comparative periods, due to a fewer number of drydocks performed in the current period. Vessel operating lease costs decreased 30%, or $1.6 million, during the same comparative periods, as vessels operated under lease arrangements transferred to other segments.

Other Items. Insurance and loss reserves expense decreased 50%, or $1.9 million, and 26%, or $2.6 million during the quarter and six month periods ended September 30, 2014 as compared to comparable periods ended September 30, 2013 primarily due to downward adjustments to case-based and other reserves.

Gain on asset dispositions, net respectively increased $3.5 million and $4.3 million during the quarter and six month periods ended September 30, 2014 as compared to the quarter and six months ended September 30, 2013, primarily due to the amortization of deferred gains related to sale/leaseback vessels. The respective gains were partially offset by impairments to vessels and other assets.

The below table summarizes the combined fair value of the assets that incurred impairments during the quarters and six-month periods ended September 30, 2014 and 2013, along with the amount of impairment. The impairment charges were recorded in gain on asset dispositions, net.

 

     Quarter Ended
September 30,
     Six Months Ended
September 30,
 
(In thousands)            2014                  2013          2014              2013          

Amount of impairment incurred

   $ 910                     175                 1,860                     4,047           

Combined fair value of assets incurring impairment

     500                     161             720                 4,466           

Vessel Class Revenue and Statistics by Segment

Vessel utilization is determined primarily by market conditions and to a lesser extent by drydocking requirements. Vessel day rates are determined by vessel demand (created largely by the level of offshore exploration, field development and production spending by energy companies) relative to the supply of offshore service vessels. Suitability of equipment and the quality of service provided may also influence vessel day rates. Vessel utilization rates are calculated by dividing the number of days a vessel works during a reporting period by the number of days the vessel is available to work in the reporting period. Stacked vessels depress utilization rates because stacked vessels are considered available to work, and as such, are included in the calculation of utilization rates. Average day rates are calculated by dividing the revenue a vessel earns during a reporting period by the number of days the vessel worked in the reporting period.

Vessel utilization and average day rates are calculated on all vessels in service (which includes stacked vessels and vessels in drydock) but do not include vessels withdrawn from service (none at September 30, 2014) or vessels owned by joint ventures (11 vessels at September 30, 2014).

 

42


The following tables compare revenues, day-based utilization percentages and average day rates by vessel class and in total for the quarters and six-month periods ended September 30, 2014 and 2013 and for the quarter ended June 30, 2014:

 

           Quarter Ended
September 30,
     Six Months Ended
September 30,
     Quarter
Ended
June 30,
 
             2014          2013          2014      2013          2014      

REVENUE BY VESSEL CLASS (In thousands):

                

Americas fleet:

                

Deepwater

   $          91,403             61,811             173,685         116,843             82,282     

Towing-supply

       34,387             30,861             63,904         58,531             29,517     

Other

       8,223             9,257             16,407         16,799             8,184     

Total

   $          134,013             101,929             253,996         192,173             119,983     

Asia/Pacific fleet:

                

Deepwater

   $          27,675             19,923             51,917         44,215             24,242     

Towing-supply

       17,338             16,559             32,375         34,281             15,037     

Other

       976             948             1,946         1,890             970     

Total

   $          45,989             37,430             86,238         80,386             40,249     

Middle East/North Africa fleet:

                

Deepwater

   $          19,254             15,732             38,721         31,584             19,467     

Towing-supply

       28,715             28,763             63,994         53,260             35,279     

Other

       868             875             1,661         1,739             793     

Total

   $          48,837             45,370             104,376         86,583             55,539     

Sub-Saharan Africa/Europe fleet:

                

Deepwater

   $          89,193             106,541             180,884         193,792             91,691     

Towing-supply

       54,617             56,772             110,053         111,632             55,436     

Other

       18,303             15,626             36,915         30,732             18,612     

Total

   $          162,113             178,939             327,852         336,156             165,739     

Worldwide fleet:

                

Deepwater

   $          227,525             204,007             445,207         386,434             217,682     

Towing-supply

       135,057             132,955             270,326         257,704             135,269     

Other

       28,370             26,706             56,929         51,160             28,559     

Total

   $          390,952             363,668             772,462         695,298             381,510     
            

UTILIZATION:

                

Americas fleet:

                

Deepwater

       91.9 %         72.3             90.4         74.9             88.7     

Towing-supply

       70.3             49.5             66.5         46.3             62.7     

Other

       76.9             91.6             73.0         86.8             69.3     

Total

       80.9 %         63.9             77.9         62.0             74.8     

Asia/Pacific fleet:

                

Deepwater

       82.4 %         80.1             76.6         86.4             70.6     

Towing-supply

       93.6             73.0             92.1         68.5             90.7     

Other

       100.0             100.0             100.0         100.0             100.0     

Total

       89.6 %         75.8             86.6         73.9             83.5     

Middle East/North Africa fleet:

                

Deepwater

       80.4 %         81.2             76.2         86.1             72.1     

Towing-supply

       71.1             86.1             82.2         79.1             93.6     

Other

       100.0             81.8             96.0         57.9             91.9     

Total

       74.7 %         84.7             81.3         78.9             87.8     

Sub-Saharan Africa/Europe fleet:

                

Deepwater

       85.5 %         88.8             85.9         84.0             86.3     

Towing-supply

       78.5             66.8             76.8         67.2             75.3     

Other

       71.3             72.5             74.7         71.4             78.1     

Total

       77.9 %         75.0             78.7         73.4             79.5     

Worldwide fleet:

                

Deepwater

       87.0 %         81.9             85.4         81.6             83.8     

Towing-supply

       76.2             66.3             77.3         63.5             78.4     

Other

       73.9             77.3             75.4         74.4             76.9     

Total

             79.3 %         73.2             79.5         71.0             79.8     
            

 

43


           Quarter Ended
        September 30,        
       Six Months Ended
        September 30,        
       Quarter
Ended
June 30,
 
             2014        2013          2014        2013          2014        

AVERAGE VESSEL DAY RATES:

                        

Americas fleet:

                        

Deepwater

   $          31,233           31,953             31,206           30,894             31,175         

Towing-supply

       17,309           15,520             16,954           15,348             16,559         

Other

       8,304           7,843             8,570           7,423             8,856         

Total

   $          22,701           19,974             22,578           19,493             22,443         

Asia/Pacific fleet:

                        

Deepwater

   $          39,841           37,812             40,798           38,610             41,948         

Towing-supply

       14,387           12,430             13,717           12,729             13,017         

Other

       10,609           10,300             10,633           10,326             10,658         

Total

   $          23,090           19,184             22,601           19,990             22,066         

Middle East/North Africa fleet:

                        

Deepwater

   $          23,078           22,195             24,044           21,685             25,081         

Towing-supply

       14,171           12,440             13,716           12,498             13,366         

Other

       4,719           4,750             4,730           4,750             4,742         

Total

   $          16,040           14,156             15,749           14,231             15,502         

Sub-Saharan Africa/Europe fleet:

                        

Deepwater

   $          30,928           30,244             30,665           28,950             30,414         

Towing-supply

       16,911           15,737             16,889           15,563             16,867         

Other

       5,937           4,779             5,742           4,830             5,562         

Total

   $          17,628           17,206             17,398           16,617             17,179         

Worldwide fleet:

                        

Deepwater

   $          31,001           30,481             31,030           29,549             31,061         

Towing-supply

       15,987           14,389             15,615           14,364             15,261         

Other

       6,523           5,651             6,412           5,576             6,306         

Total

   $          19,415           17,603             19,056           17,299             18,701         
              

The day-based utilization percentages, average day rates and the average number of the company’s new vessels (defined as vessels acquired or constructed since calendar year 2000 as part of its new build and acquisition program) by vessel class and in total for the quarters and six-month periods ended September 30, 2014 and 2013 and for the quarter ended June 30, 2014:

 

           Quarter Ended
        September 30,        
       Six Months Ended
        September 30,        
       Quarter
Ended
June 30,
 
             2014      2013          2014        2013          2014        

UTILIZATION:

                      

Deepwater vessels

                      

PSVs

       88.6      84.6             87.7           84.3             86.8         

AHTS vessels

       89.0         87.9             86.3           91.9             83.5         

Towing-supply

       80.8         85.7             82.8           83.7             84.9         

Other

       73.6         73.2             75.3           73.3             76.9         

Total

             82.1      82.7             82.9           82.0             83.7         
                         

AVERAGE VESSEL DAY RATES:

                      

Deepwater vessels

                      

PSVs

   $          30,575         31,053             30,686           29,911             30,802         

AHTS vessels

       34,937         28,885             34,542           29,236             34,116         

Towing-supply

       16,235         14,484             15,870           14,538             15,519         

Other

       6,963         5,635             6,833           5,739             6,706         

Total

   $          20,303         18,637             19,964           18,303             19,627         
                         

AVERAGE VESSEL COUNT:

                      

Deepwater vessels