Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - TIDEWATER INCFinancial_Report.xls
EX-15 - EX-15 - TIDEWATER INCd844537dex15.htm
EX-31.1 - EX-31.1 - TIDEWATER INCd844537dex311.htm
EX-31.2 - EX-31.2 - TIDEWATER INCd844537dex312.htm
EX-32.1 - EX-32.1 - TIDEWATER INCd844537dex321.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 December 31, 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)

 

LOGO

Delaware

(State of incorporation)

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

46,885,636 shares of Tidewater Inc. common stock $.10 par value per share were outstanding on January 23, 2015. Registrant has no other class of common stock outstanding.


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TIDEWATER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and par value data)

ASSETS

 
 
December 31,
2014
  
  
 
 
March 31,
2014
  
  

Current assets:

Cash and cash equivalents

$ 77,388      60,359   

Trade and other receivables, net

  301,038      252,421   

Due from affiliate

  421,904      429,450   

Marine operating supplies

  55,284      57,392   

Other current assets

  17,497      20,587   

Total current assets

  873,111      820,209   

Investments in, at equity, and advances to unconsolidated companies

  65,478      63,928   

Properties and equipment:

Vessels and related equipment

  4,630,902      4,521,102   

Other properties and equipment

  98,516      97,714   
    4,729,418      4,618,816   

Less accumulated depreciation and amortization

  1,053,997      997,208   

Net properties and equipment

  3,675,421      3,621,608   

Goodwill

       283,699   

Other assets

  102,616      96,385   

Total assets

$ 4,716,626      4,885,829   
                  

LIABILITIES AND EQUITY

           

Current liabilities:

Accounts payable

$ 49,487      74,515   

Accrued expenses

  149,523      157,302   

Due to affiliate

  157,522      86,154   

Accrued property and liability losses

  3,265      3,631   

Current portion of long term debt

  7,006      9,512   

Other current liabilities

  79,235      70,567   

Total current liabilities

  446,038      401,681   

Long-term debt

  1,484,326      1,505,358   

Deferred income taxes

  42,540      108,929   

Accrued property and liability losses

  8,230      5,286   

Other liabilities and deferred credits

  226,727      179,204   

Commitments and Contingencies (Note 7)

Equity:

Common stock of $0.10 par value, 125,000,000 shares authorized, issued 46,886,453 shares at December 31, 2014 and 49,730,442 shares at March 31, 2014

  4,689      4,973   

Additional paid-in capital

  158,501      142,381   

Retained earnings

  2,351,197      2,544,255   

Accumulated other comprehensive loss

  (11,666   (12,225

Total stockholders’ equity

  2,502,721      2,679,384   

Noncontrolling interests

  6,044      5,987   

Total equity

  2,508,765      2,685,371   

Total liabilities and equity

$ 4,716,626      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

December 31,

 

Nine Months Ended

December 31,

 
  

 

 

   

 

 

 
  2014      2013      2014      2013   

Revenues:

                       

Vessel revenues

$ 378,126      360,713      1,150,588      1,056,011   

Other operating revenues

  9,428      4,535      20,167      11,259   
    387,554      365,248      1,170,755      1,067,270   

Costs and expenses:

Vessel operating costs

  210,365      197,679      640,428      589,156   

Costs of other operating revenues

  8,395      4,097      19,616      10,157   

General and administrative

  46,642      45,723      144,464      142,241   

Vessel operating leases

  7,165      5,757      20,247      13,759   

Depreciation and amortization

  43,331      42,391      130,150      124,555   

Loss (gain) on asset dispositions, net

  1,537      (7,170   (4,996   (9,359

Goodwill impairment

  283,699      56,283      283,699      56,283   
    601,134      344,760      1,233,608      926,792   

Operating income (loss)

  (213,580   20,488      (62,853   140,478   

Other income (expenses):

Foreign exchange gain

  4,334      1,341      8,453      4,269   

Equity in net earnings of unconsolidated companies

       2,671      9,104      10,872   

Interest income and other, net

  434      137      1,555      1,415   

Loss on early extinguishment of debt

                 (4,144

Interest and other debt costs, net

  (12,239   (12,250   (37,927   (31,081
  (7,471   (8,101   (18,815   (18,669

Earnings (loss) before income taxes

  (221,051   12,387      (81,668   121,809   

Income tax (benefit) expense

  (60,070   (196   (25,211   24,971   

Net earnings (loss)

$ (160,981   12,583      (56,457   96,838   

Less: Net loss attributable to
      noncontrolling interests

$ (287        (343     

Net earnings (loss) attributable to Tidewater Inc.

$ (160,694   12,583      (56,114   96,838   

Basic earnings (loss) per common share

$ (3.31   0.25      (1.14   1.96   
                                  

Diluted earnings (loss) per common share

$ (3.31   0.25      (1.14   1.95   
                                  

Weighted average common shares outstanding

  48,481,722      49,347,448      49,213,712      49,302,971   

Dilutive effect of stock options and restricted stock

       482,818           436,758   

Adjusted weighted average common shares

  48,481,722      49,830,266      49,213,712      49,739,729   
                                  

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
December 31,
 

Nine Months Ended

December 31,

 
  

 

 

    

 

 

 
    2014      2013      2014      2013   

Net earnings (loss)

$ (160,981   12,583      (56,457   96,838   

Other comprehensive income/(loss):

Unrealized gains/(losses) on available for sale securities, net of tax of $(29), $218, $43 and $185

  (54   405      79      343   

Amortization of loss on derivative contract, net of tax of $62, $62, $188 and $188

  116      116      349      349   

Change in other benefit plan minimum liability, net of tax of $0, $0, $70 and $0

            131        

Total comprehensive income (loss)

$ (160,919   13,104      (55,898   97,530   
                                   

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)

   Nine Months Ended  
  December 31,  
   2014   2013  

Operating activities:

Net earnings (loss)

$ (56,457   96,838   

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

Depreciation and amortization

  130,150      124,555   

Benefit for deferred income taxes

  (77,278   (18,300

Gain on asset dispositions, net

  (4,996   (9,359

Goodwill impairment

  283,699      56,283   

Equity in earnings of unconsolidated companies, less dividends

  (1,550   (12,072

Compensation expense - stock-based

  16,395      15,130   

Excess tax benefit on stock options exercised

       (433

Changes in assets and liabilities, net:

Trade and other receivables

  (48,876   18,268   

Changes in due to/from affiliate, net

  78,881      (210,576

Marine operating supplies

  1,243      7,396   

Other current assets

  3,090      (6,007

Accounts payable

  (29,052   (9,753

Accrued expenses

  (6,856   17,042   

Accrued property and liability losses

  (366   (288

Other current liabilities

  (437   4,286   

Other liabilities and deferred credits

  (3,025   (1,270

Other, net

  (9,006   (1,911

Net cash provided by operating activities

  275,559      69,829   

Cash flows from investing activities:

Proceeds from sales of assets

  5,160      46,006   

Proceeds from sale/leaseback of assets

  110,694      207,435   

Additions to properties and equipment

  (231,685   (397,458

Payments for acquisition, net of cash acquired

       (127,737

Other

  127      (2,462

Net cash used in investing activities

  (115,704   (274,216

Cash flows from financing activities:

Debt issuance costs

       (4,404

Principal payment on long-term debt

  (27,206   (1,103,054

Debt borrowings

  20,000      1,416,262   

Proceeds from exercise of stock options

  1,025      6,082   

Cash dividends

  (36,997   (37,355

Repurchases of common stock

  (99,999     

Excess tax benefit on stock options exercised

       433   

Other

  351        

Net cash (used in) provided by financing activities

  (142,826   277,964   

Net change in cash and cash equivalents

  17,029      73,577   

Cash and cash equivalents at beginning of period

  60,359      40,569   

Cash and cash equivalents at end of period

$ 77,388      114,146   
                  

Supplemental disclosure of cash flow information:

Cash paid during the period for:

Interest, net of amounts capitalized

$ 48,046      40,938   

Income taxes

$ 57,987      43,245   

Supplemental disclosure of non-cash investing activities:

Additions to properties and equipment

$ 3,386      9,568   
                  

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 (loss)

                        (56,114 )       559         (343 )       (55,898 )

Exercise of stock options

       3         1,022                                  1,025  

Cash dividends declared ($.75 per share)

                        (37,229 )                       (37,229 )

Retirement of common stock

       (284 )                (99,715 )                       (99,999 )

Amortization of restricted stock units

       1         12,495                                  12,496  

Amortization/cancellation of restricted stock

       (4 )       2,603                                  2,599  

Cash received from noncontrolling interests

                                        450         450  

Cash paid to noncontrolling interests

                                        (50 )       (50 )

Balance at December 31, 2014

     $ 4,689         158,501          2,351,197         (11,666 )       6,044         2,508,765  
                                                               

    

                                                             

Balance at March 31, 2013

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

Total comprehensive income

                        96,838         692                 97,530  

Exercise of stock options

       17         6,512                                  6,529  

Cash dividends declared ($.75 per share)

                        (37,431 )                       (37,431 )

Amortization of restricted stock units

               8,677                                  8,677  

Amortization/cancellation of restricted stock

       (4 )       2,931                                  2,927  

Balance at December 31, 2013

     $ 4,962         138,095          2,513,380         (16,449 )               2,639,988  
                                                               

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. At December 31, 2014, $100.0 million remains available to repurchase shares under the May 2014 share repurchase 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.

The aggregate dollar outlay for common stock repurchased, along with the number of shares repurchased, and average price paid per share, for the quarters and nine-month periods ended December 31 is as follows:

 

    

Quarter Ended

   Nine Months Ended
     December 31,    December 31,
(In thousands, except share and per share data)    2014      2013            2014      2013        

Aggregate dollar outlay for common stock repurchased

   $ 99,999                    99,999                   

Shares of common stock repurchased

     2,841,976                    2,841,976              

Average price paid per common share

   $ 35.19                      35.19                

 

7


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 nine-month periods ended December 31:

 

    

Quarter Ended

          Nine Months Ended       
     December 31,           December 31,       
(In thousands, except dividend per share)    2014      2013           2014      2013       

Dividends declared

   $     12,029         12,396            37,229         37,431      

Dividend per share

     0.25         0.25              0.75         0.75        

Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive income by component, net of tax for the quarters and nine month periods ended December 31, 2014 and 2013 are as follows:

 

     For the quarter ended December 31, 2014    For the nine months ended December 31, 2014
(in thousands)   

Balance

at

9/30/14

  

Gains/(losses)
recognized

in OCI

   Reclasses
from OCI to
net income
   Net
period
OCI
   Remaining
balance
12/31/14
   Balance
at
3/31/14
  

Gains/(losses)
recognized

in OCI

   Reclasses
from OCI to
net income
   Net
period
OCI
   Remaining
balance
12/31/14
   

Available for sale securities

    225         (73)        19        (54)        171         92         (76)        155        79        171    

Currency translation adjustment

    (9,811)        —                —         (9,811)        (9,811)        —                       (9,811)   

Pension/Post-retirement benefits

    15         —                —         15         (116)        131                131        15    

Interest rate swaps

    (2,157)        —         116        116         (2,041)        (2,390)        —         349        349        (2,041)   
   

Total

    (11,728)        (73)        135        62         (11,666)        (12,225)        55         504        559        (11,666)   
                                                                                                               
  For the quarter ended December 31, 2013 For the nine months ended December 31, 2013

(in thousands)

Balance

at

9/30/13

Gains/(losses)
recognized

in OCI

Reclasses
from OCI to
net income
Net
period
OCI
Remaining
balance
12/31/13
Balance
at
3/31/13

Gains/(losses)
recognized

in OCI

Reclasses
from OCI to
net income
Net
period
OCI

Remaining

balance
12/31/13

   

Available for sale securities

    (183)       354       51       405       222        (121)       149       194       343       222   

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

    (2,623)             116       116       (2,507)       (2,856)             349       349       (2,507)  
   

Total

    (16,970)       354       167       521       (16,449)       (17,141)       149       543       692       (16,449)  
                                                                                                               

The following table summarizes the reclassifications from accumulated other comprehensive loss to the condensed consolidated statement of income for the quarters and nine month periods ended December 31, 2014 and 2013:

 

     Quarter Ended      Nine Months Ended       
     December 31,      December 31,      Affected line item in the condensed
(In thousands)    2014      2013      2014      2013      consolidated statements of income

Realized gains on available for sale securities

   $ 29         79         238         298       Interest income and other, net

Amortization of interest rate swap

     178         178         537         537       Interest and other debt costs

Total pre-tax amounts

     207         257         775         835      

Tax effect

     72         90         271         292        

Total gains for the period, net of tax

   $ 135         167         504         543      
                                          

 

8


(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 nine-month periods ended December 31, is as follows:

 

 
     Quarter Ended
December 31,
   Nine Months Ended
December 31,
    
      2014    2013    2014    2013      

Effective tax rate applicable to pre-tax earnings

       27.2%           (1.6)%           31.0%           20.5%        

The effective tax rates for the nine months ended December 31, 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.

The company’s balance sheet at December 31, 2014 reflects the following in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes:

 

 
(In thousands)    December 31,
2014

Tax liabilities for uncertain tax positions

     $     15,573         

Income tax payable

       38,301           

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 December 31, 2014, are as follows:

 

 
(In thousands)   

December 31,

2014

Unrecognized tax benefit related to state tax issues

     $     10,961         

Interest receivable on unrecognized tax benefit related to state tax issues

       30           

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 nine months ended December 31, 2014 and 2013, and does not expect to contribute to the plan during the remaining quarter 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

 

9


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 nine months ended December 31, 2014 and 2013, and does not expect to contribute to the plan during the remaining quarter of fiscal 2015.

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 December 31, 2014 and March 31, 2014:

 

     December 31,    March 31,       
(In thousands)    2014           

2014

    

    

Investments held in Rabbi Trust

   $ 10,023            10,285      

Unrealized gains in fair value of trust assets

     263            92      

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

     92            49      

Obligations under the supplemental plan

     23,229              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
December 31,
          Nine Months Ended
December 31,
    
(In thousands)      2014     2013             2014      2013        

Pension Benefits:

                                          

Service cost

       $ 206          198                 618          594       

Interest cost

         968          895                 2,904          2,685       

Expected return on plan assets

         (685 )        (718 )               (2,055 )        (2,154 )     

Amortization of prior service cost

         12          12                 36          36                

Recognized actuarial loss

         247          276                       741          828             

Net periodic benefit cost

       $ 748          663                 2,244          1,989       
                                                                       

Other Benefits:

                                 

Service cost

       $ 68          101                 204          303       

Interest cost

         226          262                 678          786       

Amortization of prior service cost

         (508 )        (508 )               (1,524 )        (1,524 )     

Recognized actuarial (gain) loss

         (325 )        (99 )                     (975 )        (297 )           

Net periodic benefit cost

       $ (539 )        (244 )               (1,617 )        (732 )     
                                                                       

 

10


(5) INDEBTEDNESS

Senior Notes, Revolving Credit and Term Loan Agreement

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

 

     December 31,    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

     8.6           9.4     

Weighted average coupon rate on notes outstanding

     4.86        4.86  

Fair value of debt outstanding (Level 2)

   $ 495,387           520,979     

August 2011 senior unsecured notes:

         

Aggregate debt outstanding

   $ 165,000           165,000     

Weighted average remaining life in years

     5.8           6.6     

Weighted average coupon rate on notes outstanding

     4.42        4.42  

Fair value of debt outstanding (Level 2)

   $ 162,541           168,653     

September 2010 senior unsecured notes:

         

Aggregate debt outstanding

   $ 425,000           425,000     

Weighted average remaining life in years

     4.9           5.6     

Weighted average coupon rate on notes outstanding

     4.25        4.25  

Fair value of debt outstanding (Level 2)

   $ 419,769           436,264     

July 2003 senior unsecured notes:

         

Aggregate debt outstanding

   $ 35,000           35,000     

Weighted average remaining life in years

     0.6           1.3     

Weighted average coupon rate on notes outstanding

     4.61        4.61  

Fair value of debt outstanding (Level 2)

   $ 35,256             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 December 31, 2014 and March 31, 2014.

Norwegian Kroner Denominated Debt

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

 

     December 31,    March 31,
(In thousands)   

2014

          

2014

       

3.81% January 2014 notes:

           

NOK denominated

     287,500            300,000      

U.S. dollar equivalent

   $ 38,575            50,028      

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

     38,581            50,044      

5.38% May 2012 notes:

           

NOK denominated

     161,880            178,920      

U.S. dollar equivalent

   $ 21,720            29,867      

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

     21,634            29,588      

Variable rate borrowings:

           

June 2013 borrowing agreement (C)

           

NOK denominated

     25,000            25,000      

U.S. dollar equivalent

   $ 3,354            4,168      

May 2012 borrowing agreement (C)

           

NOK denominated

     20,000            35,000      

U.S. dollar equivalent

   $ 2,683              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. Capitalized interest is included in properties and equipment. Interest and debt costs incurred, net of interest capitalized, for the quarters and nine-month periods ended December 31, are as follows:

 

    

Quarter Ended

December 31,

    

Nine Months Ended

December 31,

 
  

 

 

    

 

 

 

(In thousands)

     2014         2013         2014         2013   

Interest and debt costs incurred, net of interest capitalized

   $ 12,239         12,250         37,927         31,081   

Interest costs capitalized

     3,638         2,643         9,920         8,241   

Total interest and debt costs

   $ 15,877         14,893         47,847         39,322   
                                     

 

(6) EARNINGS PER SHARE

The components of basic and diluted earnings per share for the quarters and the nine-month periods ended December 31, are as follows:

 

    

Quarter Ended

December 31,

    

Nine Months Ended

December 31,

 
  

 

 

    

 

 

 

(In thousands, except share and per share data)

     2014        2013         2014        2013   

Net Income available to common shareholders (A)

   $ (160,694     12,583         (56,114     96,838   

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

     48,481,722        49,347,448         49,213,712        49,302,971   

Dilutive effect of options and restricted stock awards and units

            482,818                436,758   

Weighted average common stock and equivalents (C)

     48,481,722        49,830,266         49,213,712        49,739,729   

Earnings per share, basic (A/B)

   $ (3.31     0.25         (1.14     1.96   

Earnings per share, diluted (A/C)

   $ (3.31     0.25         (1.14     1.95   

Additional information:

         

Antidilutive incremental options and restricted stock awards and units

     158,575                231,171          

 

(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 December 31, 2014:

 

(In thousands, except vessel count)

   Number
of
Vessels/ROVs
    

 

Total

Cost

  

  

    
 
 
Invested
Through
12/31/14
  
  
  
    
 
 
Remaining
Balance
12/31/14
  
  
  

Vessels under construction:

           

Deepwater PSVs

   21    $ 713,903         258,460         455,443   

Towing-supply vessels

     6      112,284         64,542         47,742   

Other

     1      8,014         8,014           

Total vessel commitments

   28      834,201         331,016         503,185   

Total ROV commitments

     2      13,640         12,940         700   

Total commitments

   30    $   847,841         343,956         503,885   
                                 

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 have 7,145 brake horsepower (BHP). The new-build vessels started delivering in January 2015, with delivery of the final new-build vessel expected in August 2016. The company also has new-build commitments for two ROVs at December 31, 2014 and expects the final assembly and outfitting of these ROVs to be completed within the quarter ending March 31, 2015.

 

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 in 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 28 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.

The company has contracted with a Chinese shipyard for the construction and delivery of several shallow water towing-supply vessels. The shipyard is considerably behind schedule in the construction and delivery of the first two vessels. Progress payments made under the construction contracts are backed by refundment guarantees issued by Bank of China Ltd., Guangdong Branch, which amount to all but approximately $2.5 million of the carrying value of the accumulated costs through December 31, 2014. Several of the remaining vessels are also behind schedule. While the company believes that the shipyard continues to make progress with construction and the shipyard continues to communicate its intention to complete construction of the vessels, the company is evaluating its legal options under the relevant construction contracts.

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 December 31, 2014. The company had committed and invested $8.0 million as of December 31, 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 the escrowed funds were 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 returned from the escrow to the company resulted 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 was recorded as a deferred gain that is being 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,

 

13


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 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 calendar 2015. 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 by mid- 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 that engage in exploration and production activities offshore Angola through governmental concessions 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 being made to Sonatide in Angolan kwanzas. This cumbersome payment process has imposed and could continue to impose a burden on Tidewater’s management of its cash and liquidity, because of the risks that the conversion of Angolan kwanzas into U.S. dollars and the subsequent expatriation of the funds could result in payment delays and currency devaluation prior to conversion of kwanzas to dollars, as well as burden the company with additional operating costs to convert kwanzas into dollars and potentially additional taxes.

In response to the new forex law, Tidewater and Sonangol negotiated and signed an agreement that is set to expire in November 2015 (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). Sonatide successfully converted select customer contracts to this split billing arrangement during the quarter ended December 31, 2014 and continues to discuss this type of billing arrangement with other customers.

In November 2014, the National Bank of Angola issued new regulations controlling the sale of foreign currency. These regulations generally 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 foreign exchange resident oilfield service companies, which, in turn, are required to then source dollars in order to pay for goods and

 

14


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, and the period of time that the tripartite agreements will be allowed remains uncertain. 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. Sonatide has had limited success to date negotiating tripartite agreements with customers but continues its discussions with customers and commercial banks regarding these arrangements.

For the nine months ended December 31, 2014, the company collected (primarily through Sonatide) approximately $271 million from Angolan customers, which approximately equals the revenue generated for the same period. Of the $271 million collected approximately $125 million represented U.S. dollars initially received by Sonatide on behalf of the company or dollars collected from other customers. The balance of $146 million collected resulted from Sonatide’s converting kwanza into dollars and subsequently expatriating the dollars to Tidewater. Additionally, the company received an approximate $10 million dividend payment from the Sonatide joint venture during the nine months ended December 31, 2014.

Though Sonatide experienced a substantially reduced ability to convert kwanzas to dollars during parts of the quarter ended December 31, 2014 (possibly due to holiday season or the newly enhanced role of the National Bank of Angola in the conversion process), the company believes that the process for converting kwanzas has functioned reasonably well for much of calendar 2014, particularly given that the conversion process was still developing. Sonatide continues to press its commercial bank relationships to increase the amount of dollars available to Sonatide.

As of December 31, 2014, the company had approximately $422 million in amounts due from Sonatide, largely reflecting unpaid vessel revenue 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.

Beginning 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, 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 nine months ended December 31, 2014, Tidewater’s Angolan operations generated vessel revenues of approximately $271 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 (four of which were stacked on average during the nine months ended December 31, 2014), and, for the nine months ended December 31, 2013, generated vessel revenues of approximately $261 million, or 25%, of consolidated vessel revenue, from an average of approximately 90 Tidewater-owned vessels (five of which were stacked on average during the nine months ended December 31, 2013).

 

15


The Sonatide joint venture owns nine vessels (three 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). In addition, as of December 31, 2014, Sonatide maintained the equivalent of approximately $95 million of Kwanza-denominated deposits in Angolan banks, largely related to customer receipts that had not yet been converted to U.S. dollars, expatriated and then remitted to the company. As of December 31, 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 $64 million and $62 million, respectively.

Due from affiliate at December 31, 2014 and March 31, 2014 of approximately $422 million and $430 million, respectively, represents cash received by Sonatide from customers and due to the company, amounts due from customers that are expected to be remitted to the company through Sonatide and, finally, reimbursable costs paid by Tidewater on behalf of Sonatide.

Due to affiliate at December 31, 2014 and March 31, 2014 of approximately $158 million and $86 million, respectively, represents amounts due to Sonatide for commissions payable (approximately $58 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 and local counsel, the company is uncertain whether the authorities will interpret the decree to require one hundred percent Angolan ownership of local vessel operators such as Sonatide. This interpretation may result in the need to work with Sonangol to further restructure our Sonatide joint venture and our operations in Angola. The company has been informed by the authorities that the deadline for foreign vessel operators to comply with any rules implementing the decree has been set for June 2015. 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 there is adequate demand for the company’s vessels. 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 Angola. Redeployment of vessels to other markets in the period beginning April 1, 2014 through December 31, 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 continue to believe that the global market for offshore support vessels is 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 temporary negative financial effects 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 $58.3 million as of December 31, 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

 

16


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 $56.1 million as of December 31, 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 $47.8 million as of December 31, 2014) and rendered decisions that disallowed all of those fines. The remaining fines totaling 28.0 million Brazilian reais (approximately $10.5 million as of December 31, 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.

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. On or about December 30, 2014, the company received notice that the Nigerian marketing agent had filed an action in the Nigerian Federal High court seeking to prevent the continuation of the proceedings initiated by Tidewater in the London Commercial Court. The company intends to vigorously defend that action.

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

 

17


subsidiary of PDVSA, took possession and control of the Claimants’ four vessels, operations, and related 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.

 

18


(8) FAIR VALUE MEASUREMENTS

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

 

Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

     $ 3,941         3,941                      

Preferred stock

                                    

Foreign stock

       212         212                      

American depository receipts

       1,695         1,695                      

Preferred American depository receipts

       14         14                      

Real estate investment trusts

       63         63                      

Debt securities:

                    

Government debt securities

       1,668         1,329         339              

Open ended mutual funds

       1,897         1,897                      

Cash and cash equivalents

       670         16         654                

Total

     $ 10,160         9,167         993              

Other pending transactions

       (137 )       (137 )                      

Total fair value of plan assets

     $ 10,023         9,030         993              
                                                 

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                
                                                 

 

19


Other Financial Instruments

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

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

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

The company did not have any foreign exchange spot contracts outstanding at December 31, 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 December 31, 2014 and March 31, 2014.

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

 

     
(In thousands)    Total    

Quoted prices in
active markets

(Level1)

   Significant
observable
inputs
(Level 2)
   Significant
unobservable
inputs
(Level 3)
    

Money market cash equivalents

     $     1,016          1,016                  —                  —      

Total fair value of assets

     $ 1,016          1,016                      
                                                  

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

(Level1)

   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                      
                                                  

 

20


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.

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 nine-month periods ended December 31, 2014 and 2013, along with the amount of impairment. The impairment charges were recorded in gain on asset dispositions, net.

 

    

Quarter Ended

December 31,

      

Nine Months Ended

December 31,

      
  

 

 

      

 

 

(In thousands)

     2014           2013           2014         2013        

Amount of impairment incurred

   $     6,236           3,691           8,096         7,738      

Combined fair value of assets incurring impairment

     3,914           4,308           4,634         8,774        

 

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

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

 

     
(In thousands)          December 31,
      2014
     March 31,
  2014
     

Recoverable insurance losses

     $ 8,163          5,219     

Deferred income tax assets

       45,139          34,376     

Deferred finance charges

       7,308          8,728     

Savings plans and supplemental plan

       23,456          23,212     

Noncurrent tax receivable

       8,887          9,106     

Other

       9,663          15,744       
     $ 102,616          96,385     
                             

 

21


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

 

     
(In thousands)          December 31,
      2014
       March 31,
    2014
     

Payroll and related payables

     $ 33,309          27,248     

Commissions payable

       6,842          8,263     

Accrued vessel expenses

       97,463          96,468     

Accrued interest expense

       2,936          14,816     

Other accrued expenses

       8,973          10,507       
     $ 149,523          157,302     
                             

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

 

     
(In thousands)          December 31,
      2014
       March 31,
    2014
     

Taxes payable

     $ 55,036          56,080     

Deferred gain on vessel sales - current

       23,477          13,996     

Other

       722          491       
     $ 79,235          70,567     
                             

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

 

     
(In thousands)          December 31,
      2014
       March 31,
    2014
     

Postretirement benefits liability

     $ 20,992          23,185     

Pension liabilities

       34,746          35,234     

Deferred gain on vessel sales

       135,044          85,316     

Other

       35,945          35,469       
     $ 226,727          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.

 

22


(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 nine-month periods ended December 31, 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        Nine Months Ended
                 December 31,        December 31,
(In thousands)    2014     2013           2014     2013       

Revenues:

             

Vessel revenues:

             

Americas

   $ 134,554        109,848           388,550        302,021     

Asia/Pacific

     35,046        36,325           121,284        116,711     

Middle East/North Africa

     55,925        51,158           160,301        137,741     

Sub-Saharan Africa/Europe

     152,601        163,382             480,453        499,538       
     378,126        360,713           1,150,588        1,056,011     

Other operating revenues

     9,428        4,535             20,167        11,259       
   $         387,554        365,248           1,170,755        1,067,270     
                                           

Vessel operating profit:

             

Americas

   $ 33,784        25,579           100,770        69,555     

Asia/Pacific

     2,621        5,932           9,064        21,028     

Middle East/North Africa

     12,408        10,927           31,568        34,496     

Sub-Saharan Africa/Europe

     34,120        38,502             113,168        103,282       
     82,933        80,940           254,570        228,361     

Other operating profit (loss)

     (1,032     (233          (5,548     (407    
     81,901        80,707           249,022        227,954     

Corporate general and administrative expenses

     (9,411     (10,323        (30,686     (38,269  

Corporate depreciation

     (834     (783          (2,486     (2,283    

Corporate expenses

     (10,245     (11,106        (33,172     (40,552  

(Loss) gain on asset dispositions, net

     (1,537     7,170           4,996        9,359     

Goodwill impairment

     (283,699     (56,283          (283,699     (56,283    

Operating income (loss)

   $ (213,580     20,488             (62,853     140,478       

Foreign exchange gain

     4,334        1,341           8,453        4,269     

Equity in net earnings of unconsolidated companies

            2,671           9,104        10,872     

Interest income and other, net

     434        137           1,555        1,415     

Loss on early extinguishment of debt

                             (4,144  

Interest and other debt costs, net

     (12,239     (12,250          (37,927     (31,081    

Earnings (loss) before income taxes

   $ (221,051     12,387           (81,668     121,809     
                                           

Depreciation and amortization:

             

Americas

   $ 11,825        11,311           35,623        32,253     

Asia/Pacific

     4,731        4,231           13,538        12,878     

Middle East/North Africa

     7,016        6,405           20,383        17,742     

Sub-Saharan Africa/Europe

     18,067        19,661             55,494        59,397       
     41,639        41,608           125,038        122,270     

Other

     858                  2,626        2     

Corporate

     834        783             2,486        2,283       
   $ 43,331        42,391           130,150        124,555     
                                           

Additions to properties and equipment:

             

Americas

   $ 32,421        45,580           64,057        57,619     

Asia/Pacific

     44,983        652           68,193        1,620     

Middle East/North Africa

     424        805           1,659        1,714     

Sub-Saharan Africa/Europe (A)

     823        52,695             14,736        397,252       
     78,651        99,732           148,645        458,205     

Other

     10,206        22,267           18,931        31,780     

Corporate (B)

     14,198        60,562             67,678        162,646       
   $ 103,055        182,561           235,254        652,631     
                                           

 

(A)

Included in Sub-Saharan Africa/Europe for the nine months ended December 31, 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.

 

23


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

 

        
(In thousands)            December 31,
        2014
           March 31,
        2014
     

Total assets:

            

Americas

     $ 1,030,511          1,017,736     

Asia/Pacific

       434,398          421,379     

Middle East/North Africa

       652,806          613,303     

Sub-Saharan Africa/Europe

       2,013,246          2,383,507       
      
4,130,961
 
       4,435,925     

Other

       52,728          31,545       
      
4,183,689
 
       4,467,470     

Investments in, at equity, and advances to unconsolidated companies

       65,478          63,928       
      
4,249,167
 
       4,531,398     

Corporate (A)

       467,459          354,431       
     $ 4,716,626          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 December 31, 2014 and March 31, 2014, $327.5 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 nine-month periods ended December 31, 2014 and 2013:

 

   
             Quarter Ended                Nine Months Ended
Revenue by vessel class            December 31,                December 31,
(In thousands)    2014    %   2013    %         2014    %   2013    %

Americas fleet:

                                       

Deepwater

     $ 94,298          25 %       72,048          20 %          267,983          23 %       188,891          18 %

Towing-supply

       33,607          9 %       30,451          9 %          97,511          9 %       88,982          9 %

Other

       6,649          2 %       7,349          2 %          23,056          2 %       24,148          2 %

Total

     $         134,554          36 %       109,848          31 %          388,550          34 %       302,021          29 %

Asia/Pacific fleet:

                                       

Deepwater

     $ 20,575          5 %       20,142          6 %          72,492          6 %       64,357          6 %

Towing-supply

       13,487          4 %       15,235          4 %          45,862          4 %       49,516          5 %

Other

       984          <1 %       948          <1 %          2,930          <1 %       2,838          <1 %

Total

     $ 35,046          9 %       36,325          10 %          121,284          10 %       116,711          11 %

Middle East/North Africa fleet:

                                       

Deepwater

     $ 25,615          7 %       18,805          5 %          64,336          6 %       50,389          5 %

Towing-supply

       29,441          8 %       31,481          9 %          93,435          8 %       84,741          8 %

Other

       869          <1 %       872          <1 %          2,530          <1 %       2,611          <1 %

Total

     $ 55,925          15 %       51,158          14 %          160,301          14 %       137,741          13 %

Sub-Saharan Africa/Europe fleet:

                                       

Deepwater

     $ 81,129          21 %       84,866          23 %          262,013          23 %       278,658          26 %

Towing-supply

       52,532          14 %       59,789          17 %          162,585          14 %       171,421          16 %

Other

       18,940          5 %       18,727          5 %          55,855          5 %       49,459          5 %

Total

     $ 152,601          40 %       163,382          45 %          480,453          42 %       499,538          47 %

Worldwide fleet:

                                       

Deepwater

     $ 221,617          58 %       195,861          54 %          666,824          58 %       582,295          55 %

Towing-supply

       129,067          35 %       136,956          39 %          399,393          35 %       394,660          38 %

Other

       27,442          7 %       27,896          7 %          84,371          7 %       79,056          7 %

Total

     $ 378,126          100 %       360,713          100 %          1,150,588          100 %       1,056,011          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.

During the quarter ended December, 31, 2014 the company performed its annual goodwill impairment assessment and determined that the rapid and significant decline in crude oil and natural gas prices (which occurred and accelerated throughout the latter part of the company’s third fiscal quarter), and the expected short to intermediate term effect that the downturn might have on levels of exploration and production activity would likely have a negative effect on average day rates and utilization levels of the company’s vessels. Expected future cash flow analyses using the projected average day rates and utilization levels in this new commodity pricing environment were included in the company’s valuation models and indicated that the carrying value of the Americas and Sub-Saharan Africa/Europe reporting units were less than their respective fair values. A goodwill impairment charge of $283.7 million, to write-off the company’s remaining goodwill, was recorded during the quarter ended December 31, 2014.

During the quarter ended December, 31, 2013 the company performed its annual goodwill impairment assessment 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. At the time of the December 2013 goodwill impairment assessment, the Asia/Pacific region continued to be challenged with excess vessel capacity as a result of the significant number of vessels that had been built in this region over the previous 10 years. These additional newbuilds had 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 December 31, 2014 and 2013 is as follows:

 

(In thousands)              March 31,
    2014
   Goodwill acquired    Impairments    December 31,
      2014

Americas

     $            114,237                     114,237           

Sub-Saharan Africa/Europe

                  169,462                     169,462           

Total carrying amount (A)

     $            283,699                     283,699           

    

                                                      
(In thousands)              March 31,
    2013
   Goodwill acquired    Impairments    December 31,
      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                   283,699  

    

                                                      

 

  (A)

The total carrying amount of goodwill at December 31, 2014 is net of accumulated impairment charges of $370.9 million.

 

  (B)

The total carrying amount of goodwill at December 31, 2013 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.

 

25


(13) SALE/LEASEBACK ARRANGEMENTS

During the third quarter of fiscal 2015, the company sold three vessels to unrelated third parties, and simultaneously entered into bareboat charter agreements with the purchasers. The sale/leaseback transactions resulted in total proceeds to the company of $78.2 million and deferred gains of $45.0 million. The carrying value of the vessels was $33.2 million at the dates of sale. Two leases expire in the quarter ending December 2022 and the third lease expires in the quarter ending December 2023. Under the sale/leaseback agreements the company has the right to re-acquire two vessels at approximately 60% of the original sales price at the end of the seventh year and the third vessel at approximately 60% of the original sales price at the end of the eighth year, deliver the vessel to the owners at the end of the lease term, purchase the vessels at their then fair market values at the end of the lease terms or extend the leases for 24 months at mutually agreeable lease rates.

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.

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.

During the third quarter of fiscal 2015, the company elected to repurchase from its lessor the remaining leased vessel from the sale/leaseback transaction that originated during Fiscal 2006 for $11.2 million. This vessel was then sold and leased back again in December 2014.

As of December 31, 2014, the future minimum lease payments for the vessels under the operating lease terms are as follows:

 

      
Fiscal year ending (In thousands)    Fiscal 2015
Sale/Leasebacks
   Fiscal 2014
Sale/Leasebacks
      Total      

Remaining three months of 2015

     $ 2,043              5,220              7,263     

2016

       8,174              20,879              29,053     

2017

       8,174              20,879              29,053     

2018

       8,293              23,485              31,778     

2019

       8,744              24,800              33,544     

Thereafter

       37,554              65,263              102,817       

Total future lease payments

     $     72,982              160,526              233,508       

    

                                      

For the quarters and nine months ended December 31, 2014 and 2013, the company expensed approximately $7.2 million and $5.8 million and $20.2 million and $13.8 million, respectively, on all of its bareboat charter arrangements.

 

26


(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 (B)

     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.
  (B) Subsequently written off in December 2014

 

27


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 December 31, 2014, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended December 31, 2014 and 2013, and of cash flows and statement of equity for the nine-month periods ended December 31, 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

February 9, 2015

 

28


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 and the potential long-term effects of a depressed level of 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 Quarterly Report on Form 10-Q, 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.

 

29


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 December 31, 2014, the company owned or chartered 286 vessels (of which 10 were owned by joint ventures and 16 were stacked) and six 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

 

30


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.

 

31


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 by mid- 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 that engage in exploration and production activities offshore Angola through governmental concessions 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 being made to Sonatide in Angolan kwanzas. This cumbersome payment process has imposed and could continue to impose a burden on Tidewater’s management of its cash and liquidity, because of the risks that the conversion of Angolan kwanzas into U.S. dollars and the subsequent expatriation of the funds could result in payment delays and currency devaluation prior to conversion of kwanzas to dollars, as well as burden the company with additional operating costs to convert kwanzas into dollars and potentially additional taxes.

In response to the new forex law, Tidewater and Sonangol negotiated and signed an agreement that is set to expire in November 2015 (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). Sonatide successfully converted select customer contracts to this split billing arrangement during the quarter ended December 31, 2014 and continues to discuss this type of billing arrangement with other customers.

In November 2014, the National Bank of Angola issued new regulations controlling the sale of foreign currency. These regulations generally 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 foreign exchange resident 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, and the period of time that the tripartite agreements will be allowed remains uncertain. 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. Sonatide has had limited success to date negotiating tripartite agreements with customers but continues its discussions with customers and commercial banks regarding these arrangements.

For the nine months ended December 31, 2014, the company collected (primarily through Sonatide) approximately $271 million from Angolan customers, which approximately equals the revenue generated for the same period. Of the $271 million collected approximately $125 million represented U.S. dollars initially received by Sonatide on behalf of the company or dollars collected from other customers. The balance of $146 million collected resulted from Sonatide’s converting kwanza into dollars and subsequently expatriating the

 

32


dollars to Tidewater. Additionally, the company received an approximate $10 million dividend payment from the Sonatide joint venture during the nine months ended December 31, 2014.

Though Sonatide experienced a substantially reduced ability to convert kwanzas to dollars during parts of the quarter ended December 31, 2014 (possibly due to holiday season or the newly enhanced role of the National Bank of Angola in the conversion process), the company believes that the process for converting kwanzas has functioned reasonably well for much of calendar 2014, particularly given that the conversion process was still developing. Sonatide continues to press its commercial bank relationships to increase the amount of dollars available to Sonatide.

As of December 31, 2014, the company had approximately $422 million in amounts due from Sonatide, largely reflecting unpaid vessel revenue 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.

Beginning 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, 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 nine months ended December 31, 2014, Tidewater’s Angolan operations generated vessel revenues of approximately $271 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 (four of which were stacked on average during the nine months ended December 31, 2014), and, for the nine months ended December 31, 2013, generated vessel revenues of approximately $261 million, or 25%, of consolidated vessel revenue, from an average of approximately 90 Tidewater-owned vessels (five of which were stacked on average during the nine months ended December 31, 2013).

The Sonatide joint venture owns nine vessels (three 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). In addition, as of December 31, 2014, Sonatide maintained the equivalent of approximately $95 million of Kwanza-denominated deposits in Angolan banks, largely related to customer receipts that had not yet been converted to U.S. dollars, expatriated and then remitted to the company. As of December 31, 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 $64 million and $62 million, respectively.

Due from affiliate at December 31, 2014 and March 31, 2014 of approximately $422 million and $430 million, respectively, represents cash received by Sonatide from customers and due to the company, amounts due from customers that are expected to be remitted to the company through Sonatide and, finally, reimbursable costs paid by Tidewater on behalf of Sonatide.

Due to affiliate at December 31, 2014 and March 31, 2014 of approximately $158 million and $86 million, respectively, represents amounts due to Sonatide for commissions payable (approximately $58 million and $43 million, respectively) and other costs paid by Sonatide on behalf of the company.

 

33


A new presidential decree regulating maritime transportation activities was enacted in Angola earlier this year. Following recent discussions with port state authorities and local counsel, the company is uncertain whether the authorities will interpret the decree to require one hundred percent Angolan ownership of local vessel operators such as Sonatide. This interpretation may result in the need to work with Sonangol to further restructure our Sonatide joint venture and our operations in Angola. The company has been informed by the authorities that the deadline for foreign vessel operators to comply with any rules implementing the decree has been set for June 2015.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 there is adequate demand for the company’s vessels. 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 Angola. Redeployment of vessels to other markets in the period beginning April 1, 2014 through December 31, 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 continue to believe that the global market for offshore support vessels is 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 temporary negative financial effects 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 52 of the 65 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 do note that, although Lebanon has submitted instruments of ratification, its registration for Member state social protection benefits is 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, prioritizing certification on an “as needed” 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.

 

34


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 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, a trend that accelerated sharply in the third fiscal quarter, primarily due to a less optimistic forecast of worldwide economic growth and increased global oil and gas production. In particular, oil and gas production in the U.S. has increased significantly in recent years, but collectively there has been no offsetting production reductions in other countries, including OPEC member countries. Some analysts believe that lower oil prices and increased volatility in commodity markets in recent months also reflect 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 and as analysts have scaled back their economic growth forecasts they have generally revised their worldwide crude oil demand forecasts downward.

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 January 2015, was trading around $48 per barrel for West Texas Intermediate (WTI) crude and around $50 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 significantly below the average prices per barrel reportedly used in exploration and production (E&P) companies’ capital expenditure budgets as reported in 2015 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 January 2015, natural gas was trading in the U.S. at approximately $3.15 per Mcf as compared to $4.20 per Mcf in January 2014.

Certain oil and gas industry analysts have reported in their surveys of estimated 2015 E&P expenditures (both land-based and offshore) that global capital expenditure budgets for E&P companies are forecast to decrease in calendar year 2015 between approximately 5% and 17% from calendar year 2014 levels; however, these analysts recognize that the capital expenditure budgets included in their surveys were based on an approximate $65-$70 WTI average price per barrel of crude oil, with current prices significantly lower and the possibility that actual 2015 oil prices could average well below the prices assumed in their initial capital spending budgets, therefore resulting in even lower levels of capital spending in 2015. These surveys also

 

35


indicate that most E&P companies are assuming an approximate $3.50-$4.00 per Mcf average natural gas price for their 2015 capital budgets. The surveys further note that international capital spending budgets will decrease approximately 2%-15% while North American capital spending budgets are forecast to decrease between 11%-22% as compared to calendar 2014 levels.

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 January of 2015 indicate that the worldwide movable offshore drilling rig count is estimated at approximately 950 rigs, of which approximately 695 offshore rigs were working as of January 2015. 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 320 rigs, are designed to operate in deeper waters. Of the approximately 695 working offshore rigs in January 2015, approximately 255 rigs are designed to operate in deeper waters. As of January 2015, the number of working rigs that are designed to operate in deeper waters was similar to the number of deepwater rigs working a year ago. It is further estimated that approximately 40% of the approximate 230 new-build rig total, or approximately 90 rigs, are being built to operate in deeper waters, suggesting that newbuild deepwater rigs represent 35% of the approximately 255 deepwater rigs working in January 2015.

Recognizing that 90 newbuild rigs designed to operate in deeper waters represent approximately 35% of the approximate 255 deepwater rigs working in January 2015, 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 of additional rigs (deepwater and otherwise) within the next several years will have on the working rig count, especially in an environment of expected reduced E&P spending.

Investment is also being made in the floating production unit market, with approximately 95 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, however, given the current economic environment, the risk of cancellation of some new build contracts or the stacking of installed but underutilized rigs increases.

In addition to the relatively stable deepwater drilling activity levels, worldwide shallow-water exploration and production activity has remained stable during the last twelve months. According to IHS-Petrodata, there were approximately 400 working jack-up rigs as of January 2015, which is approximately the same number of jack-up rigs working a year ago. The construction backlog for new jack-up rigs has increased approximately 5% over the last twelve months to approximately 135 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 135 newbuild jackup rigs represent 34% of the approximately 400 jack up rigs working in January 2015, 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 520 new-build offshore support vessels (deepwater PSVs, deepwater AHTS vessels and towing-supply vessels only) either under construction (455 vessels), on order or planned as of January 2015. Most of the vessels under construction are expected to be delivered to the worldwide offshore vessel market within the next two years.

 

36


Also, as of January 2015, the worldwide fleet of these classes of vessels is estimated at approximately 3,250 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 has a large number of aged vessels, including approximately 670 vessels, or 20%, 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 (455 vessels) represents approximately 15% to 16% of the existing worldwide fleet of these vessels. Excluding all of the 670 vessels that are at least 25 years old, the company estimates that the number of offshore support vessels under construction (455 vessels) represents approximately 18% of the existing worldwide fleet of these vessels.

Although we believe investment in additional rigs, especially those capable of operating in deeper waters, indicates offshore rig owner’s longer-term expectation for high levels of activity, the recent decline in crude oil and natural gas prices, the reduction in spending expectations among E&P companies and the number of new-build vessels which are expected to deliver within the next two years indicates that there may be, at least in the short-term, a period of potential overcapacity in the worldwide offshore support vessel fleet market which may lead to lower utilization and average day rates across the offshore support vessel industry.

Fiscal 2015 Business Highlights

During the first nine months 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 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, maintaining disciplined cost control and identifying potential cost savings that could be realized in the context of lower crude oil prices and reduced spending plans of E&P companies.

At December 31, 2014, the company had 276 owned or chartered vessels (excluding joint-venture vessels and vessels withdrawn from service) in its fleet with an average age of 8.7 years. The average age of 250 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.

 

37


The company’s consolidated net earnings for the first nine months of fiscal 2015 decreased 158%, or $153.0 million, as compared to the same period in fiscal 2014, primarily due to a write off of $283.7 million of goodwill associated with the company’s Americas and SubSaharan Africa/Europe regions, a 9% increase in vessel operating costs, a 5% increase in depreciation expense and a 47% increase in vessel operating lease expense which was partially offset by 10% increase in total revenues.

The company recorded $1,150.6 million in vessel revenues during the first nine months of fiscal 2015, which is an increase of $94.6 million, or 9%, over the vessel revenues earned during the same period in fiscal 2014. The increase in vessel revenues was due to increased utilization from a fleet of newer, more sophisticated vessels. In particular, the company experienced a six 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 nine months of fiscal 2015 as compared to the same period in fiscal 2014. Our subsea business also began generating revenue during fiscal 2015 and recognized revenue of $3.7 million which is included in other operating revenues.

Vessel revenues generated by our Americas segment increased approximately 29%, or $86.5 million, during the first nine months of fiscal 2015 as compared to the vessel revenues earned during the same period in fiscal 2014, primarily due to a $79.1 million increase in revenues earned on the deepwater vessels, reflecting an 11 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 23%, or $38.0 million (inclusive of an 18%, or $6.3 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 Asia/Pacific segment increased 4%, or $4.6 million, during the first nine months of fiscal 2015 as compared to the same period in fiscal 2014, primarily due to an $8.1 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 22%, or $15.4 million (inclusive of a 70%, or $6.5 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 16%, or $22.6 million, during the first nine 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 31%, or $22.3 million (inclusive of a 67%, or $8.2 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 4%, or $19.1 million, during the first nine 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 as vessels were transferred to other segments. Vessel operating costs for the Sub-Saharan Africa/Europe segment decreased 9%, or $24.5 million (inclusive of a 22%, or $15.6 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.

 

38


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 nine-month periods ended December 31, 2014 and 2013 and for the quarter ended September 30, 2014:

 

    

Quarter Ended

December 31,

    

Nine Months Ended

December 31,

    

Quarter

Ended
September 30,

      
  

 

 

    

 

 

    

 

 

(In thousands)

     2014         %         2013         %         2014         %         2013         %         2014         %        

Vessel revenues:

                                

Americas

   $ 134,554         36%         109,848         31%         388,550         34%         302,021         29%         134,013         34%      

Asia/Pacific

     35,046         9%         36,325         10%         121,284         10%         116,711         11%         45,989         12%      

Middle East/North Africa

     55,925         15%         51,158         14%         160,301         14%         137,741         13%         48,837         13%      

Sub-Saharan Africa/Europe

     152,601         40%         163,382         45%         480,453         42%         499,538         47%         162,113         41%        

Total vessel revenues

   $ 378,126         100%         360,713         100%         1,150,588         100%         1,056,011         100%         390,952         100%      
                                                                                                

Vessel operating costs:

                                

Crew costs

   $ 104,167         28%         101,382         28%         330,086         29%         295,381         28%         114,634         29%      

Repair and maintenance

     46,418         12%         40,920         12%         133,481         12%         128,009         12%         39,332         10%      

Insurance and loss reserves

     3,093         1%         4,410         1%         10,470         1%         14,356         1%         1,982         1%      

Fuel, lube and supplies

     24,710         7%         18,589         5%         69,900         6%         56,748         6%         22,820         6%      

Other

     31,977         8%         32,378         9%         96,491         8%         94,662         9%         34,051         8%        

Total vessel operating costs

   $     210,365         56%         197,679         55%         640,428         56%         589,156         56%         212,819         54%      
                                                                                                

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 nine-month periods ended December 31, 2014 and 2013 and for the quarter ended September 30, 2014:

 

     Quarter Ended
December 31,
       Nine Months Ended
December 31,
      

  Quarter

  Ended
  September 30,

      
  

 

 

      

 

 

      

 

 

(In thousands)

     2014         2013           2014         2013           2014        

Other operating revenues

   $     9,428         4,535           20,167         11,259           6,572      

Costs of other operating revenues

     8,395         4,097           19,616         10,157           6,560        

 

39


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 nine-month periods ended December 31, 2014 and 2013 and for the quarter ended September 30, 2014:

 

    

Quarter Ended

December 31,

    

Nine Months Ended

December 31,

    

  Quarter

  Ended
  September 30,

      
  

 

 

    

 

 

    

 

 

(In thousands)

     2014         %         2013         %         2014         %         2013         %         2014         %        

Vessel operating costs:

                                

Americas:

                                

Crew costs

   $ 37,250         28%         31,854         29%         110,765         28%         91,084         30%         36,949         28%      

Repair and maintenance

     18,763         14%         14,034         13%         40,985         10%         34,642         12%         12,700         10%      

Insurance and loss reserves

     668         <1%         1,421         1%         2,762         1%         3,919         1%         493         <1%      

Fuel, lube and supplies

     7,728         6%         4,819         5%         22,527         6%         14,273         5%         7,257         5%      

Other

     8,339         6%         7,935         7%         26,504         7%         21,608         7%         10,034         7%        
     72,748         54%         60,063         55%         203,543         52%         165,526         55%         67,433         50%      

Asia/Pacific:

                                

Crew costs

   $ 13,628         39%         14,012         38%         53,301         44%         44,233         38%         21,388         47%      

Repair and maintenance

     4,473         13%         3,235         9%         15,763         13%         9,257         8%         3,448         7%      

Insurance and loss reserves

     595         2%         402         1%         1,233         1%         1,402         1%         207         <1%      

Fuel, lube and supplies

     2,834         8%         2,449         7%         8,726         7%         7,578         6%         2,134         5%      

Other

     1,884         5%         2,163         6%         6,607         6%         7,728         7%         2,454         5%        
     23,414         67%         22,261         61%         85,630         71%         70,198         60%         29,631         64%      

Middle East/North Africa:

                                

Crew costs

   $ 15,878         29%         13,582         26%         47,958         30%         35,591         26%         15,734         32%      

Repair and maintenance

     6,732         12%         5,392         11%         20,543         13%         12,318         9%         5,031         11%      

Insurance and loss reserves

     594         1%         642         1%         2,602         1%         2,660         2%         947         2%      

Fuel, lube and supplies

     4,614         8%         5,177         10%         12,171         8%         11,417         8%         4,866         10%      

Other

     3,551         6%         3,986         8%         10,805         7%         9,785         7%         3,581         7%        
     31,369         56%         28,779         56%         94,079         59%         71,771         52%         30,159         62%      

Sub-Saharan Africa/Europe:

                                

Crew costs

   $ 37,411         24%         41,934         26%         118,062         25%         124,473         25%         40,563         25%      

Repair and maintenance

     16,450         11%         18,259         11%         56,190         12%         71,792         14%         18,153         11%      

Insurance and loss reserves

     1,236         1%         1,945         1%         3,873         1%         6,375         1%         335         1%      

Fuel, lube and supplies

     9,534         6%         6,144         4%         26,476         5%         23,480         5%         8,563         5%      

Other

     18,203         12%         18,294         11%         52,575         11%         55,541         11%         17,982         11%        
       82,834         54%         86,576         53%         257,176         54%         281,661         56%         85,596         53%        

Total operating costs

   $     210,365         56%         197,679         55%         640,428         56%         589,156         56%         212,819         54%      
                                                                                                

 

 

40


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 nine-month periods ended December 31, 2014 and 2013 and for the quarter ended September 30, 2014:

 

    

Quarter Ended

December 31,

   

Nine Months Ended

December 31,

   

  Quarter

  Ended

  September 30,

     
  

 

 

   

 

 

   

 

 

(In thousands)

     2014        %        2013        %        2014        %        2013        %        2014        %       

Vessel operating profit:

                      

Americas

   $ 33,784        8%        25,579        7%        100,770        8%        69,555        6%        36,778        9%     

Asia/Pacific

     2,621        1%        5,932        2%        9,064        1%        21,028        2%        7,414        2%     

Middle East/North Africa

     12,408        3%        10,927        3%        31,568        3%        34,496        3%        7,367        2%     

Sub-Saharan Africa/Europe

     34,120        9%        38,502        10%        113,168        10%        103,282        10%        41,446        10%       
     82,933        21%        80,940        22%        254,570        22%        228,361        21%        93,005        23%     

Other operating profit (loss)

     (1,032     (<1%     (233     (<1%     (5,548     (<1%     (407     (<1%     (2,093     (1%    
     81,901        21%        80,707        22%        249,022        22%        227,954        21%        90,912        22%     

Corporate general and administrative expenses

     (9,411     (3%     (10,323     (3%     (30,686     (3%     (38,269     (4%     (8,943     (2%  

Corporate depreciation

     (834     (<1%     (783     (<1%     (2,486     (<1%     (2,283     (<1%     (836     (<1%    

Corporate expenses

     (10,245     (3%     (11,106     (3%     (33,172     (3%     (40,552     (4%     (9,779     (2%  

(Loss) gain on asset dispositions, net

     (1,537     (<1%     7,170        2%        4,996        <1%        9,359        1%        3,590        1%     

Goodwill impairment

     (283,699     (73%     (56,283     (15%     (283,699     (24%     (56,283     (5%                  

Operating income (loss)

   $ (213,580     (55%     20,488        6%        (62,853     (5%     140,478        13%        84,273        21%       

Foreign exchange gain

     4,334        1%        1,341        <1%        8,453        1%        4,269        <1%        5,408        1%     

Equity in net earnings of unconsolidated companies

                   2,671        1%        9,104        1%        10,872        1%        3,821        1%     

Interest income and other, net

     434        <1%        137        <1%        1,555        <1%        1,415        <1%        499        <1%     

Loss on early extinguishment of debt

                                               (4,144     (<1%                

Interest and other debt costs, net

     (12,239     (3%     (12,250     (3%     (37,927     (3%     (31,081     (3%     (12,559     (3%    

Earnings (loss) before income taxes

   $ (221,051     (57%     12,387        3%        (81,668     (7%     121,809        11%        81,892        21%     
                                                                                      

Americas Segment Operations. Vessel revenues in the Americas segment increased 23%, or $24.7 million and 29%, or $86.5 million, respectively, during the quarter and nine month periods ended December 31, 2014, as compared to the same periods in fiscal 2014, due primarily to higher revenues earned on deepwater vessels, which increased 31%, or $22.3 million and 42%, or $79.1 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 average day rates of 10% and 4% percent, during the same respective 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 10%, or $3.2 million and 10%, or $8.5 million, during the quarter and nine month periods ended December 31, 2014, respectively, as compared to the same periods in the prior fiscal year, due to increases in utilization of 14 and 19 percentage points, respectively.

At the beginning of fiscal 2015, the company had 10 stacked Americas-based vessels. During the first nine months of fiscal 2015, the company stacked five additional vessels and sold five vessels from the previously stacked vessel fleet, resulting in a total of 10 stacked Americas-based vessels as of December 31, 2014.

Operating profit for the Americas segment increased 32%, or $8.2 million, and 45%, or $31.2 million, during the quarter and nine-month periods ended December 31, 2014, respectively, as compared to the same periods in fiscal 2014, primarily due to higher revenues, which were partially offset by a 21%, or $12.7 million, and 23%, or $38.0 million, respective increase in vessel operating costs (primarily crew costs, repairs and maintenance, and fuel, lube and supplies 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 17%, or $5.4 million, and 22%, or $19.7 million; fuel, lube and supplies costs increased 60%, or $2.9 million, and 58%, or $8.3 million; repairs and maintenance costs increased 34%, or $4.7 million, and 18%, or $6.3 million; and depreciation expense increased 5%, or $0.5 million, and 11%, or $3.4 million,

 

41


respectively, during the quarter and nine-month periods ended December 31, 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 107%, or $2.8 million and 248%, or $10.4 million, respectively, during the same comparative periods due to the increased number of vessels operating in the region that were sold and leased back. General and administrative expenses increased 5%, or $0.5 million and 11%, or $3.5 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 decreased 4%, or $1.3 million, during the quarter ended December 31, 2014, as compared to the same period in fiscal 2014, primarily due to lower revenues earned on towing-supply vessels. This decrease in towing-supply revenue is 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.

Vessel revenues in the Asia/Pacific segment increased 4%, or $4.6 million, during the nine months ended December 31, 2014, as compared to the same period in fiscal 2014. Deepwater vessel revenue increased 13%, or $8.1 million, primarily due to a net increase in the number of deepwater vessels operating in the segment, most notably in Australia. These increases were partially offset by a decrease in revenues from towing-supply vessels of 7%, or $3.7 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 nine month period ended December 31, 2014.

Operating profit for the Asia/Pacific segment decreased 56%, or $3.3 million, during the third quarter of fiscal 2015 as compared to the third quarter of fiscal 2014, due to decreased revenues, and a 5%, or $1.2 million, increase in vessel operating costs (primarily repair and maintenance costs). Repair and maintenance costs increased 38%, or $1.2 million, during the third quarter of fiscal 2015 as compared to the third quarter of fiscal 2014, due to an increase in drydockings.

Operating profit for the Asia/Pacific segment decreased 57%, or $12.0 million, during the nine-month period ended December 31, 2014 as compared to the nine-month period ended December 31, 2013, due to a 22%, or $15.4 million, increase in vessel operating costs (primarily crew costs and repair and maintenance costs), partially offset by higher revenues.

Crew costs increased 21%, or $9.1 million, during the nine-month period ended December 31, 2014 as compared to the same period in fiscal 2104, due to increased headcount on vessels manned for certain projects and ramp up of crew for work on new contracts in Australia. Repair and maintenance costs also increased 70%, or $6.5 million, during the same comparative periods, due to an increase in the number of 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 9%, or $4.8 million, during the quarter ended December 31, 2014, as compared to the same period during fiscal 2014, due to increased revenues from deepwater vessels. Deepwater vessel revenue increased 36%, or $6.8 million, during the quarter ended December 31, 2014, due to an increase in utilization rates of 18 percentage points, as well as an increase in the number of deepwater vessels operating in the segment.

Vessel revenues in the Middle East/North Africa segment increased 16%, or $22.6 million, during the nine month period ended December 31, 2014, as compared to the same period during fiscal 2014, due to increased revenues from both the deepwater and towing-supply vessel classes. Deepwater vessel revenue increased 28%, or $13.9 million, due to an increase in the number of deepwater vessels operating in the segment and an 8% increase in average day rates. Increases in vessel revenues in Middle East/North Africa segment is primarily the result of increased scale of operations in the Black 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

 

42


Middle East/North Africa region and lump sum mobilization fees. In addition to increased deepwater revenues for the nine months ended December 31, 2014, towing-supply vessel revenue also increased 10%, or $8.7 million, during the same comparative periods, due to a 5% increase in average day rates and an increase in the number of towing-supply vessels operating in the segment.

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 December 31, 2014.

Operating profit for the Middle East/North Africa segment increased 14%, or $1.5 million, during the quarter ended December 31, 2014 as compared to the same period of fiscal 2014, primarily due to higher revenues which were partially offset by a 9%, or $2.6 million, increase in vessel operating costs (primarily crew costs), an increase in depreciation expense and an increase in general and administrative expenses, during the same comparative periods.

Crew costs increased 17%, or $2.3 million, during the quarter ended December 31, 2014, as compared to the same period 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. Depreciation expense increased 10%, or $0.6 million, also due to an increase in the number of vessels operating in the segment. General and administrative expenses increased 13%, or $0.6 million, due to the increase in shore-based personnel, primarily to support our growing operation in Saudi Arabia and in the Black Sea.

Operating profit for the Middle East/North Africa segment decreased 9%, or $2.9 million, during the nine-month period ended December 31, 2014 as compared to the same period of fiscal 2014, primarily due to a 31%, or $22.3 million, increase in vessel operating costs (primarily crew costs and repairs and maintenance 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 35%, or $12.4 million, during the nine-month period ended December 31, 2014, as compared to the same period 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 67%, or $8.2 million, during the same comparative period, 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. Depreciation expense increased 15%, or $2.6 million, also due to an increase in the number of vessels operating in the segment. General and administrative expenses increased 17%, or $2.1 million, due to the increase in shore-based personnel, primarily to support our growing operation in Saudi Arabia and in the Black Sea.

Sub-Saharan Africa/Europe Segment Operations. Vessel revenues in the Sub-Saharan Africa/Europe segment decreased 7%, or $10.8 million and 4%, or $19.1 million, respectively, during the quarter and nine month periods ended December 31, 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 4%, or $3.7 million and 6%, or $16.6 million, and revenues from towing-supply vessels decreased 12%, or $7.3 million and 5%, or $8.8 million, respectively, during the quarter and nine month periods ended December 31, 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 1%, or $0.2 million and 13%, or $6.4 million, respectively, during the same comparative periods, primarily due to an 11% and 16% 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 nine months of fiscal 2015, the company stacked seven additional vessels and sold five previously stacked vessels, resulting in a total of six stacked Sub-Saharan Africa/Europe-based vessels as of December 31, 2014.

 

43


Operating profit for the Sub-Saharan Africa/Europe segment decreased 11%, or $4.4 million, during the third quarter of fiscal 2015 as compared to the third quarter of fiscal 2014, primarily due to decreased revenues, which were partially offset by a 4%, or $3.7 million, decrease in vessel operating costs (primarily crew costs) and a decrease in depreciation expense. Crew costs decreased 11%, or $4.5 million, and depreciation expense decreased 8%, or $1.6 million, during the third quarter of fiscal 2015 as compared to the third quarter of fiscal 2014, primarily due to a decrease in the number of vessels operating in the segment.

Although vessel revenues decreased during the same comparative periods, operating profit for the Sub-Saharan Africa/Europe segment increased 10%, or $9.9 million, during the nine-month period ended December 31, 2014, as compared to the nine-month period ended December 31, 2013, primarily due to a 9%, or $24.5 million, decrease in vessel operating costs (primarily crew costs and repair and maintenance costs), a decrease in vessel operating lease costs and a decrease in depreciation.

Crew costs decreased 5%, or $6.4 million, and depreciation expense decreased 7%, or $3.9 million, during the nine-month period ended December 31, 2014, as compared to the same period in fiscal 2014, primarily due to a decrease in the number of vessels operating in the segment. Repair and maintenance costs decreased 22%, or $15.6 million, during the same comparative period, due to a fewer number of drydocks performed in the current period. Vessel operating lease costs decreased 30%, or $2.4 million, during the same comparative period, as vessels operated under lease arrangements transferred to other segments.

Other Items. A goodwill impairment charge of $283.7 million was recorded during the quarter ended December 31, 2014. Please refer to the “Goodwill” section of Management Discussion and Analysis of this report for a discussion on the company’s goodwill impairment.

Insurance and loss reserves expense decreased 30%, or $1.3 million, and 27%, or $3.9 million during the quarter and nine month periods ended December 31, 2014 as compared to comparable periods ended December 31, 2013 primarily due to downward adjustments to case-based and other reserves.

Gain on asset dispositions, net, decreased $8.7 million and $4.4 million respectively, during the quarter and nine month periods ended December 31, 2014 as compared to the quarter and nine months ended December 31, 2013. This decrease is primarily due to a decrease in the number of vessels sold during the current fiscal year.

The below table summarizes the combined fair value of the assets that incurred impairments during the quarters and nine-month periods ended December 31, 2014 and 2013, along with the amount of impairment. The impairment charges were recorded in gain on asset dispositions, net.

 

     Quarter Ended
December 31,
           Nine Months Ended
    December 31,
      
  

 

 

      

 

 

(In thousands)

     2014           2013           2014         2013        

Amount of impairment incurred

   $     6,236           3,691           8,096         7,738      

Combined fair value of assets incurring impairment

     3,914           4,308           4,634         8,774        

Foreign exchange gains increased $3.0 million and $4.2 million respectively, during the quarter and nine month periods ended December 31, 2014 as compared to the quarter and nine months ended December 31, 2013. These increases are due to the overall strengthening of the U.S. Dollar in relation to the other foreign currencies in which the company transacts business, most notably the Norwegian Kroner, which has depreciated significantly against the U.S. Dollar during the current fiscal year and in which currency the company maintains a portion of its debt which is regularly revalued. Please refer to the “Troms Offshore Debt” section of Management Discussion and Analysis of this report for a discussion on the company’s Norwegian Kroner denominated debt.

Equity in net earnings of unconsolidated companies decreased $2.7 million and $1.8 million respectively, during the quarter and nine month periods ended December 31, 2014 as compared to the quarter and nine months ended December 31, 2013 primarily due to losses generated by an unconsolidated joint venture company as a result of the revaluation of its Kwanza denominated working capital accounts.

 

44


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 and, as a result, can be impacted by lump sum mobilization and de-mobilizatiion fees and/or other than day rate-based revenue or revenue adjustments.

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 December 31, 2014) or vessels owned by joint ventures (10 vessels at December 31, 2014).

 

45


The following tables compare revenues, day-based utilization percentages and average day rates by vessel class and in total for the quarters and nine-month periods ended December 31, 2014 and 2013 and for the quarter ended September 30, 2014:

 

                        Quarter
     Quarter Ended    Nine Months Ended    Ended
     December 31,    December 31,    September 30,
     2014       2013     2014     2013       2014
   

REVENUE BY VESSEL CLASS (In thousands):

                       

Americas fleet:

                       

Deepwater

     $ 94,298         72,048          267,983          188,891          91,403  

Towing-supply

       33,607         30,451          97,511          88,982          34,387  

Other

       6,649         7,349          23,056          24,148          8,223  

Total

     $ 134,554         109,848          388,550          302,021          134,013  

Asia/Pacific fleet:

                       

Deepwater

     $ 20,575         20,142          72,492          64,357          27,675  

Towing-supply

       13,487         15,235          45,862          49,516          17,338  

Other

       984         948          2,930          2,838          976  

Total

     $ 35,046         36,325          121,284          116,711          45,989  

Middle East/North Africa fleet:

                       

Deepwater

     $ 25,615         18,805          64,336          50,389          19,254  

Towing-supply

       29,441         31,481          93,435          84,741          28,715  

Other

       869         872          2,530          2,611          868  

Total

     $ 55,925         51,158          160,301          137,741          48,837  

Sub-Saharan Africa/Europe fleet:

                       

Deepwater

     $ 81,129         84,866          262,013          278,658          89,193  

Towing-supply

       52,532         59,789          162,585          171,421          54,617  

Other

       18,940         18,727          55,855          49,459          18,303  

Total

     $ 152,601         163,382          480,453          499,538          162,113  

Worldwide fleet:

                       

Deepwater

     $ 221,617         195,861          666,824          582,295          227,525  

Towing-supply

       129,067         136,956          399,393          394,660          135,057  

Other

       27,442         27,896          84,371          79,056          28,370  

Total

     $     378,126         360,713          1,150,588          1,056,011          390,952  
                                                       

UTILIZATION:

                       

Americas fleet:

                       

Deepwater

       87.3  %       85.3          89.3          78.6          91.9  

Towing-supply

       74.5         60.9          69.1          50.1          70.3  

Other

       56.7         78.0          67.7          83.9          76.9  

Total

       77.2  %       73.9          77.7          65.7          80.9  

Asia/Pacific fleet:

                       

Deepwater

       66.9  %       77.2          73.3          83.0          82.4  

Towing-supply

       76.6         70.6          86.9          69.1          93.6  

Other

       100.0         100.0          100.0          100.0          100.0  

Total

       73.9  %       73.6          82.3          73.8          89.6  

Middle East/North Africa fleet:

                       

Deepwater

       89.3  %       71.0          80.8          80.1          80.4  

Towing-supply

       79.6         84.8          81.4          81.0          71.1  

Other

       100.0         100.0          97.3          67.4          100.0  

Total

       83.2  %       81.7          81.9          79.9          74.7  

Sub-Saharan Africa/Europe fleet:

                       

Deepwater

       85.7  %       83.0          85.8          83.7          85.5  

Towing-supply

       78.8         73.8          77.5          69.3          78.5  

Other

       73.3         76.8          74.2          73.2          71.3  

Total

       78.7  %       77.3          78.7          74.7          77.9  

Worldwide fleet:

                       

Deepwater

       84.9  %       81.7          85.2          81.6          87.0  

Towing-supply

       77.7         72.8          77.5          66.4          76.2  

Other

       71.0         78.1          73.9          75.6          73.9  

Total

       78.6  %       76.7          79.2          72.9          79.3  
                                                       

 

46


   
                        Quarter
     Quarter Ended    Nine Months Ended    Ended
     December 31,    December 31,    September 30,
     2014       2013     2014     2013     2014     
         

AVERAGE VESSEL DAY RATES:

                          

Americas fleet:

                          

Deepwater

     $ 32,612         29,779          31,686          30,459          31,233     

Towing-supply

       16,890         17,247          16,932          15,949          17,309     

Other

       9,314         7,320          8,772          7,391          8,304     

Total

     $ 24,048         21,169          23,067          20,071          22,701     

Asia/Pacific fleet:

                          

Deepwater

     $ 35,821         33,937          39,250          37,015          39,841     

Towing-supply

       13,664         12,687          13,701          12,716          14,387     

Other

       10,692         10,300          10,653          10,317          10,609     

Total

     $ 21,195