10-Q 1 d10q.htm FORM 10-Q FOR QUARTERLY PERIOD ENDED DECEMBER 31, 2010 Form 10-Q for quarterly period ended December 31, 2010

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, 2010

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

For the transition period from              to             .

Commission file number: 1-6311

Tidewater Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State of incorporation)

  LOGO  

72-0487776

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

   
   

601 Poydras St., Suite 1900

New Orleans, Louisiana           70130

(Address of principal executive offices) (zip code)

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

Not Applicable

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

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

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

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

 

Large accelerated filer x

 

Accelerated filer ¨

  

Non-accelerated filer ¨

 

Smaller reporting company ¨

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

51,440,973 shares of Tidewater Inc. common stock $.10 par value per share were outstanding on January 28, 2011. Registrant has no other class of common stock outstanding.


PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

TIDEWATER INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

   
ASSETS    December 31,
2010
    March 31,
2010
       
   

Current assets:

      

Cash and cash equivalents

   $ 308,041        223,070     

Trade and other receivables, net

     282,312        311,617     

Marine operating supplies

     49,169        44,237     

Other current assets

     13,508        6,703     
   

Total current assets

     653,030        585,627     
   

Investments in, at equity, and advances to unconsolidated companies

     36,464        40,614     

Properties and equipment:

      

Vessels and related equipment

     3,837,234        3,455,322     

Other properties and equipment

     85,435        82,007     
   
     3,922,669        3,537,329     

Less accumulated depreciation and amortization

     1,285,849        1,283,505     
   

Net properties and equipment

     2,636,820        2,253,824     
   

Goodwill

     328,754        328,754     

Other assets

     100,472        84,538     
   

Total assets

   $ 3,755,540        3,293,357     
   

LIABILITIES AND STOCKHOLDERS’ EQUITY

      
   

Current liabilities:

      

Current maturities on long-term debt

     ---        25,000     

Accounts payable

     41,938        41,673     

Accrued expenses

     123,256        119,485     

Accrued property and liability losses

     3,909        4,809     

Other current liabilities

     29,485        13,745     
   

Total current liabilities

     198,588        204,712     
   

Long-term debt

     700,000        275,000     

Deferred income taxes

     218,751        211,504     

Accrued property and liability losses

     5,304        12,809     

Other liabilities and deferred credits

     126,759        125,302     

Commitments and Contingencies Note (6)

      

Stockholders’ equity:

      

Common stock of $0.10 par value, 125,000,000 shares authorized, issued 51,440,973 shares at December 31, 2010 and 51,830,048 shares at March 31, 2010

     5,144        5,183     

Additional paid-in capital

     83,586        73,203     

Retained earnings

     2,437,585        2,402,575     

Accumulated other comprehensive loss

     (20,177     (16,931  
   

Total stockholders’ equity

     2,506,138        2,464,030     
   

Total liabilities and stockholders’ equity

   $ 3,755,540        3,293,357     
   

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

2


TIDEWATER INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except share and per share data)

   
           Quarter Ended    
       December 31,    
           Nine Months Ended
December 31,
 
     2010     2009            2010     2009        
   

Revenues:

             

Vessel revenues

   $ 269,633        274,507           798,499        879,506     

Other marine revenues

     2,142        11,998           2,901        29,132     
   
     271,775        286,505           801,400        908,638     
   

Costs and expenses:

             

Vessel operating costs

     160,597        148,188           485,072        459,365     

Costs of other marine revenues

     2,705        10,565           3,403        26,147     

Depreciation and amortization

     35,058        32,734           105,853        96,643     

General and administrative

     33,238        33,676           103,932        105,750     

Provision for Venezuelan operations

     ---        ---           ---        49,070     

Gain on asset dispositions, net

     (2,425     (5,151        (11,621     (23,063  
   
     229,173        220,012           686,639        713,912     
   

Operating income

     42,602        66,493           114,761        194,726     

Other income (expenses):

             

Foreign exchange gain (loss)

     973        161           2,147        (4,677  

Equity in net earnings of unconsolidated companies

     3,291        3,732           8,766        14,704     

Interest income and other, net

     1,074        978           3,481        4,648     

Interest and other debt costs

     (3,646     (583        (6,405     (1,110  
   
     1,692        4,288           7,989        13,565     
   

Earnings before income taxes

     44,294        70,781           122,750        208,291     

Income tax expense

     9,931        10,885           29,153        5,728     
   

Net earnings

   $ 34,363        59,896           93,597        202,563     
   

Basic earnings per common share

   $ 0.67        1.17           1.83        3.94     
   

Diluted earnings per common share

   $ 0.67        1.16           1.82        3.93     
   

Weighted average common shares outstanding

     51,053,051        51,373,290           51,129,443        51,369,519     

Dilutive effect of stock options and restricted stock

     306,647        280,962           231,463        238,133     
   

Adjusted weighted average common shares

     51,359,698        51,654,252           51,360,906        51,607,652     
   

Cash dividends declared per common share

   $ 0.25        0.25           0.75        0.75     
   

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3


TIDEWATER INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

   
                    Nine Months Ended         
        December 31,        
 
            2010     2009        
   

Operating activities:

         

Net earnings

   $           93,597        202,563     

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

         

Depreciation and amortization

        105,853        96,643     

Provision (benefit) for deferred income taxes

        (12,114     (15,172  

Reversal of liabilities for uncertain tax positions

        ---        (34,284  

Gain on asset dispositions, net

        (11,621     (23,063  

Provision for Venezuelan operations

        ---        49,070     

Equity in earnings of unconsolidated companies, net of dividends

        4,150        (694  

Compensation expense - stock-based

        6,661        7,328     

Excess tax liability (benefit) on stock options exercised

        (275     (161  

Changes in assets and liabilities, net:

         

Trade and other receivables

        21,155        (4,824  

Marine operating supplies

        (2,932     2,622     

Other current assets

        (6,805     (6,050  

Accounts payable

        265        (11,856  

Accrued expenses

        (966     31,406     

Accrued property and liability losses

        (900     130     

Other current liabilities

        16,957        7,755     

Other liabilities and deferred credits

        5,581        (2,117  

Other, net

        (556     54     
   

Net cash provided by operating activities

        218,050        299,350     
   

Cash flows from investing activities:

         

Proceeds from sales of assets

        29,732        34,063     

Proceeds from sales/leaseback of assets

        ---        101,755     

Proceeds from insurance settlements on Venezuela seized vessels

        8,150        ---     

Additions to properties and equipment

        (508,640     (304,013  
   

Net cash used in investing activities

        (470,758     (168,195  
   

Cash flows from financing activities:

         

Principal payments on debt

        (190,000     ---     

Debt borrowings

        590,000        ---     

Debt issuance costs

        (7,446     (7,712  

Proceeds from exercise of stock options

        3,457        962     

Cash dividends

        (38,619     (38,786  

Excess tax benefit on stock options exercised

        275        161     

Stock repurchases

        (19,988     ---     
   

Net cash used in financing activities

        337,679        (45,375  
   

Net change in cash and cash equivalents

        84,971        85,780     

Cash and cash equivalents at beginning of period

        223,070        250,793     
   

Cash and cash equivalents at end of period

   $           308,041        336,573     
   

Supplemental disclosure of cash flow information:

         

Cash paid during the period for:

         

Interest

   $           8,898        7,222     

Income taxes

   $           35,810        42,413     
   

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(1)

INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements for the interim periods presented herein have been prepared in conformity with United States generally accepted accounting principles and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated balance sheets and the condensed consolidated statements of earnings and cash flows at the dates and for the periods indicated 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, 2010, filed with the SEC on May 20, 2010.

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

 

(2)

STOCKHOLDERS’ EQUITY

Common Stock Repurchase Program

In July 2009, 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 company announced on May 14, 2010 that its Board of Directors had extended this program through June 30, 2011, unless further extended by the Board of Directors. 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 expended $20.0 million for the repurchase and cancellation of 486,800 common shares, at an average price paid per common share of $41.06 during the three-month period ended June 30, 2010, and $180.0 million remains available to repurchase shares under the 2009 share repurchase program at December 31, 2010. The company will continue to evaluate share repurchase opportunities relative to other investment opportunities and in the context of current conditions in the credit and capital markets.

Dividend Program

The Board of Directors declared dividends of $12.9 million and $38.6 million, or $0.25 and $0.75 per share, for the quarter and the nine-month period ended December 31, 2010, respectively. The Board of Directors declared dividends of $12.9 million and $38.8 million, or $0.25 and $0.75 per share, for the quarter and the nine-month period ended December 31, 2009, respectively. The declaration of dividends is at the discretion of the company’s Board of Directors.

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period. The components of comprehensive income (loss), net of related tax, are as follows:

 

               Quarter Ended           
December 31,
                    Nine Months Ended      
December 31,
        
(In thousands)    2010      2009                      2010      2009                
   

Net earnings

     $ 34,363         59,896                 93,597          202,563         

Other comprehensive income (loss):

                         

Unrealized gains on available-for-sale securities

     876         568                 658           2,612         

Realized loss on derivative

     ---         ---                 (3,974)          ---         

Amortization of loss on derivative contract

     70         ---                 70           ---         
   

Comprehensive income

     $ 35,309         60,464                 90,351          205,175         
   

 

5


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Included in accumulated other comprehensive loss for the nine months ended December 31, 2010, is an after-tax loss of $4.0 million ($6.1 million pre-tax) relating to interest rate hedges, which are cash flow hedges, entered into in July 2010 in connection with the September 2010 senior notes issuance as disclosed in Note (5). The interest rate hedges settled in August 2010 concurrent with the pricing of the senior unsecured notes. The hedges met the effectiveness criteria and will be amortized over the term of the individual notes matching the term of the hedges to interest expense.

 

(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 quarter and the nine-month period ended December 31, 2010, was 22.4% and 23.75%, respectively. The effective tax rate applicable to pre-tax earnings for the quarter and the nine-month period ended December 31, 2009, was 15.48% and 2.75%, respectively. The increase in the effective tax rate during the nine-month period ended December 31, 2010, as compared to the same period in fiscal 2010, is primarily attributable to the successful resolution by the company, in the prior fiscal year, of a tax dispute with the Internal Revenue Service as previously disclosed.

The effective tax rate of 23.75%, for the nine-month period ended December 31, 2010, primarily reflects the company’s current estimate for its operating tax rate for fiscal 2011 of approximately 22.8% and the Department of Justice charge of $4.35 million (as disclosed in Note (6), which had no related tax benefit. The company’s current estimate for its operating tax rate of 23.1% largely reflects the current expected mix of pre-tax earnings between the company’s U.S. and international businesses and an expectation for lower estimated operating margin in certain jurisdictions that tax on the basis of deemed profits. The company has historically realized lower tax rates in these deemed profit jurisdictions than it now expects to realize in fiscal 2011.

The company’s balance sheet at December 31, 2010 reflects $17.4 million of tax liabilities for uncertain tax positions in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes. The liabilities are attributable to a permanent establishment issue related to a foreign joint venture and a tax audit of a foreign subsidiary. In addition, the company has $8.1 million of unrecognized tax benefits related to a state tax issue. The unrecognized tax benefits would lower the effective tax rate if realized. Penalties and interest related to income tax liabilities are included in income tax expense.

With limited exceptions, the company is no longer subject to tax audits by state, local or foreign taxing authorities for years prior to 2003. The company has ongoing examinations by various state and foreign tax authorities and does not believe that the results of these examinations will have a material adverse effect on the company’s financial position or results of operations.

Included in other current liabilities at December 31, 2010 and March 31, 2010 are income taxes payable of $15.9 million and $2.6 million, respectively.

 

(4)

EMPLOYEE BENEFIT PLANS

The company has a defined benefit pension plan that covers certain U.S. citizen employees and employees who are permanent residents of the United States. Benefits are based on years of service and employee compensation. In December 2009, the Board of Directors amended the pension plan to discontinue the accrual of benefits once the plan is frozen. On that date, previously accrued pension benefits under the pension plan were frozen for the approximately 60 active employees who participated in the plan. This change will not affect benefits earned by participants prior to January 1, 2011. The active employees who participated in the defined benefit pension plan have become participants in the company’s defined contribution retirement plan effective January 1, 2011. These changes will provide the company more predictable retirement plan costs and cash flows. By freezing the benefits, the company’s future benefit obligations and requirements for cash contributions for the frozen pension plan will be reduced. Losses associated with the curtailment of the pension plan were immaterial. The company did not contribute to the defined benefit plan during the quarter and the nine-month period ended December 31, 2010, and does not expect to contribute to the plan during the remainder of fiscal 2011. The company contributed $4.7 million to the defined benefit pension plan during the nine-month period

 

6


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

ended December 31, 2009. No amounts were contributed to the plan during the quarter ended December 31, 2009.

The company also offers a supplemental retirement plan (supplemental plan) that provides pension benefits to certain employees in excess of those allowed under the company’s tax-qualified pension plan. Assets set aside to support the obligations of this non-contributory defined benefit plan are held in a Rabbi Trust and invested in a variety of marketable securities, none of which is Tidewater stock. The Trust assets, which are included in “other assets” in the company’s consolidated balance sheet, are recorded at fair value with unrealized gains or losses included in 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. At December 31, 2010 and March 31, 2010, $16.8 million and $16.2 million was held in Rabbi Trust for the benefit of participants in the supplemental plan. The carrying value of the trust assets at December 31, 2010 and March 31, 2010, includes $0.1 million (net of income tax expense of $0.1 million) and $0.8 million (net of income tax expense of $0.5 million), respectively, of unrealized losses, which are included in accumulated other comprehensive income (other stockholders’ equity).

The supplemental plan was amended in December 2008 to allow participants the option to elect a lump sum benefit in lieu of other payment options currently provided by the plan. As a result of the amendment, certain retired participants received a lump sum distribution in July 2009 in settlement of the supplemental plan obligation. The aggregate payment to those participants electing the lump sum distribution in July 2009 was $8.7 million. A settlement loss of $3.6 million was recorded in general and administrative expenses during the quarter ended September 30, 2009.

Qualified retired employees currently are covered by a program that 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.

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)      2010     2009                   2010     2009        
   

Pension Benefits:

                  

Service cost

     $ 230        229              690        669     

Interest cost

       1,115        1,133              3,345        3,567     

Expected return on plan assets

       (620     (576           (1,860     (1,728  

Amortization of prior service cost

       4        10              12        30     

Recognized actuarial loss

       425        325              1,275        1,025     
   

Net periodic benefit cost

     $ 1,154        1,121              3,462        3,563     
   

Other Benefits:

                  

Service cost

     $ 145        251              435        753     

Interest cost

       365        537              1,095        1,611     

Amortization of prior service cost

       (508     (502           (1,524     (1,506  

Recognized actuarial (gain) loss

       (5     114              (15     342     
   

Net periodic benefit cost

     $ (3     400              (9     1,200     
   

 

7


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(5)

DEBT

Revolving Credit Agreement

Borrowings under the company’s $450.0 million amended and restated revolving credit facility as it existed at December 31, 2010 (Existing Facility) bear interest at the company’s option at the greater of (i) prime or the federal funds rate plus 2.0 to 3.0%, or (ii) Eurodollar rates plus margins ranging from 3.0 to 4.0%, based on the company’s consolidated funded debt to total capitalization ratio. Commitment fees on the unused portion of this facility are in the range of 0.50 to 0.75% based on the company’s funded debt to total capitalization ratio. The Existing Facility provides for a maximum ratio of consolidated debt to consolidated total capitalization of 0.45. The company’s Existing Facility matures in July 2012.

At December 31, 2010, the entire amount of the company’s $450.0 million Existing Facility was available for future financing needs.

In January 2011, the company amended and extended its Existing Facility to a $575.0 million facility (“New Facilities”) for a five year period maturing January 2016. The New Facilities includes a $125.0 million term loan (“Term Loan”) and a $450.0 million revolving line of credit (“Revolver”). The New Facilities Revolver and Term Loan borrowings bear interest at the company’s option at the greater of (i) prime or the federal funds rate plus 0.5 to 1.25%, or (ii) Eurodollar rates plus margins ranging from 1.5 to 2.25%, based on the company’s consolidated funded debt to total capitalization ratio. Commitment fees on the unused portion of the New Facilities range from 0.15 to 0.35% based on the company’s funded debt to total capitalization ratio. The New Facilities provide for a maximum ratio of consolidated debt to consolidated total capitalization of 0.55 (as compared to a maximum ratio of consolidated debt to total capitalization of 0.45 with the existing agreement) and a minimum consolidated interest coverage ratio (essentially consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four prior fiscal quarters to consolidated interest charges for such period) of 3.0 (which is consistent with the existing agreement). All other terms, including the financial and negative covenants, are customary for facilities of its type and consistent with the prior agreement in all material respects. The Term Loan allows for multiple draws for up to 180 days from the closing date (“delayed draw period”). Principal repayments of any Term Loan borrowings are payable in quarterly installments beginning after the second anniversary of the first draw in amounts equal to 1.25% of the total outstanding borrowings as of the end of the delayed draw period.

Senior Debt Notes

September 2010 Senior Notes

On September 9, 2010, the company announced that it had entered into a note purchase agreement with a group of institutional investors to place $425.0 million of senior unsecured notes. On October 15, 2010, the company completed the sale of $310.0 million of these notes, and completed the sale of an additional $115.0 million of the notes on December 30, 2010. The notes have maturities ranging from five years to 12 years and have a weighted average life to maturity of approximately nine years. The notes may be retired before their respective scheduled maturity dates subject only to a make-whole provision. The weighted average coupon rate on the notes is 4.25%. The terms of the notes require that the company maintain a minimum ratio of debt to consolidated total capitalization that does not exceed 55%. Proceeds from the note sales were used to repay borrowings under the company’s $450.0 million revolving credit facility, to fund capital expenditures related to the company’s on-going fleet enhancement program and for general corporate purposes. The fair value of this debt at December 31, 2010 was estimated to be $398.4 million.

Included in accumulated other comprehensive income at December 31, 2010, is an after-tax loss of $4.0 million ($6.1 million pre-tax) relating to the purchase of interest rate hedges, which are cash flow hedges, in July 2010 in connection with the September 2010 senior notes offering. The interest rate hedges settled in August 2010 concurrent with the pricing of the senior unsecured notes. The hedges met the effectiveness criteria and their acquisition costs are being amortized over the term of the individual notes matching the term of the hedges to interest expense.

 

8


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

July 2003 Senior Notes

At December 31, 2010, the company had $275.0 million outstanding of senior unsecured notes that were issued in July 2003. The multiple series of notes were originally issued with maturities ranging from seven years to 12 years and had a weighted average remaining life of 2.33 years as of December 31, 2010. These notes can be retired in whole or in part prior to maturity for a redemption price equal to the principal amount of the notes redeemed plus a make-whole premium. The weighted average coupon rate on the notes outstanding is 4.39%. The fair value of this debt at December 31, 2010 and March 31, 2010 was estimated to be $285.6 million and $289.6 million, respectively.

Debt Costs

The company capitalizes a portion of its interest costs incurred on borrowed funds used to construct vessels. Interest and debt costs incurred, net of interest capitalized, for the quarter and nine-month period ended December 31, 2010, were approximately $3.6 million and $6.4 million, respectively. Interest costs capitalized, for the quarter and nine-month period ended December 31, 2010, were approximately $3.8 million and $10.7 million, respectively.

Interest and debt costs incurred, net of interest capitalized, for the quarter and nine-month period ended December 31, 2009, were approximately $0.6 million and $1.1 million, respectively. Interest costs capitalized, for the quarter and nine-month period ended December 31, 2009, were approximately $4.0 million and $11.7 million, respectively.

 

(6)

COMMITMENTS AND CONTINGENCIES

Vessel Purchase Agreements and Commitments

At December 31, 2010, the company had agreements to acquire 11 vessels and commitments to build 26 vessels at a number of different shipyards around the world (with one of these vessels being constructed in the United States by the company’s wholly-owned shipyard, Quality Shipyards, L.L.C.) at a total cost, including contract costs and other incidental costs, of approximately $782.8 million. Of the 26 new-build vessels, eight are anchor handling towing supply vessels ranging between 5,150 and 8,200 brake horsepower (BHP), 17 are platform supply vessels ranging between 3,200 and 5,400 deadweight tons of cargo capacity, and one is a fast crew/supply boat. Scheduled delivery for these vessels will begin in March 2011, with delivery of the final vessel expected in November 2012.

Of the 11 vessels to be purchased, 10 are anchor handling towing supply vessels and one is a platform supply vessel. The aggregate approximate purchase price for these 11 vessels is $143.7 million. The company took possession of one anchor handling towing supply vessel in January 2011 for an approximate purchase price of $11.7 million and expects to take possession of eight of the remaining nine anchor handling towing supply vessels throughout calendar year 2011 and the final anchor handling towing supply vessel in February 2012 for an aggregate purchase price of $110.0 million. The company plans to take possession of the platform supply vessel in April 2011 for an approximate purchase price of $22.0 million.

At December 31, 2010, the company had invested $291.2 million in progress payments towards the construction of 26 vessels and $5.6 million towards the purchase of the 11 vessels. At December 31, 2010, the remaining expenditures necessary to complete construction of the 26 vessels currently under construction (based on contract prices), and to fund the acquisition of the 11 vessels was $486.0 million.

The company’s vessel construction program has been designed to replace over time the company’s older fleet of vessels with fewer, larger and more efficient vessels, while also opportunistically revamping the size and capabilities of the company’s fleet. The company anticipates using future operating cash flows, existing borrowing capacity and new borrowings or lease arrangements to fund current and future commitments in connection with the fleet renewal and modernization program. The company continues to evaluate its fleet renewal program, whether through new construction or acquisitions, relative to other investment opportunities

 

9


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

and uses of cash, including the current share repurchase authorization, and in the context of current conditions in the credit and capital markets.

Currently the company is experiencing substantial delay with one fast, crew/supply boat under construction in Brazil that was originally scheduled to be delivered in September of 2009. The company continues to work with the shipyard and to pursue various measures to ensure as timely delivery as possible of this vessel, but further delay or cancellation of the ship construction contract is possible.

The company generally requires shipyards to provide third party credit support in the event that vessels are not completed and delivered 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 issued by major financial institutions located in the country of the shipyard. While the company seeks to minimize its shipyard credit risk by requiring these instruments, the ultimate return of amounts paid by the company in the event of shipyard default is still subject to the creditworthiness of the shipyard and the provider of the credit support, as well as the company’s ability to successfully pursue legal action to compel payment of these instruments. When third party credit support is not available or cost effective, the company endeavors to limit its credit risk through cash deposits and other contract terms with the shipyard and other counterparties.

Venezuelan Operations

The company has previously reported that in May 2009 the Venezuelan National Assembly enacted a law (the Reserve Law) whereby the Bolivarian Republic of Venezuela (Venezuela) reserved to itself assets and services related to maritime activities on Lake Maracaibo. The company also previously reported that in May 2009, Petróleos de Venezuela, S.A. (PDVSA), the Venezuelan national oil company, invoking the Reserve Law, took possession of (a) 11 of the company’s vessels that were then supporting PDVSA operations in the Lake Maracaibo region, (b) the company’s shore-based facility adjacent to Lake Maracaibo and (c) certain other related assets. The company has also previously reported that in July 2009, Petrosucre, S.A. (Petrosucre), a subsidiary of PDVSA, took control of four additional company vessels. As a consequence of these measures, the company (i) no longer has possession or control of those assets, (ii) no longer operates them or provides support for their operations, and (iii) no longer has any other vessels or operations in Venezuela.

As a result of the May 2009 seizure of the 11 vessels and other assets discussed above, the company recorded a charge of $3.75 million ($2.9 million after tax, or $0.06 per common share), during the quarter ended June 30, 2009, to write off the net book value of the assets seized. As a result of the July 2009 vessel seizures, the company recorded a charge of $0.5 million ($0.4 million after tax, or $0.01 per common share) during the quarter ended September 30, 2009, to write off the net book value of those assets.

As a result of the asset seizures referred to above, the lack of further operations in Venezuela, and the continuing uncertainty about the timing and amount of the compensation that the company may collect in the future (including compensation for the taking of the accounts receivable payable by PDVSA and Petrosucre), the company recorded a $44.8 million ($44.8 million after tax, or $0.87 per common share) provision during the quarter ended June 30, 2009, to fully reserve accounts receivable payable by PDVSA and Petrosucre.

As previously reported by the company, the company has filed with the International Centre for Settlement of Investment Disputes (ICSID) a Request for Arbitration against the Republic of Venezuela seeking compensation for the expropriation of the company’s Venezuelan investments. On January 24, 2011, the arbitration tribunal appointed under the ICSID Convention to resolve the investment dispute held its first session in Washington, D.C. The company continues diligently to prosecute its claim in the arbitration. While the company believes, after consultation with its advisors, that it is entitled to full reparation for the losses suffered as a result of the actions taken by Venezuela, there is no assurance that the company will prevail in the arbitration.

On March 31, 2010, the company entered into a Settlement and Release with its marine insurers to resolve the claim the company had made under its marine insurance policy for the total loss of the 15 vessels seized by Venezuela. Under the Settlement and Release, the underwriters paid, subject to certain conditions, $8.2 million (the Settlement Payment) in full and final settlement of the claim. Those conditions include a requirement that

 

10


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

the company continue to prosecute its ICSID arbitration claim and reimburse the underwriters the Settlement Payment (less certain expenses) if and when the company receives payment from Venezuela. Under the Settlement and Release, the company continues to retain ownership of the claims in arbitration and the underwriters have waived any and all subrogation rights. The Settlement Payment does not represent full reparation of the losses suffered by the company as a consequence of the expropriation of its investments in Venezuela. The $8.2 million payment by the underwriters triggered an obligation by the company under the company’s insurance program to pay an additional $2.8 million in insurance premium to its underwriters and the company has paid that amount. Both the $8.2 million payment from the underwriters and the $2.8 million payment to the underwriters were made in the first quarter of fiscal 2011.

Internal Investigation

The company has previously reported that special counsel engaged by the company’s Audit Committee had completed an internal investigation into certain Foreign Corrupt Practices Act (FCPA) matters and reported its findings to the Audit Committee. The substantive areas of the internal investigation have been reported publicly by the company in prior filings.

Special counsel has reported to the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) the results of the investigation, and the company has entered into separate agreements with the two agencies to resolve the matters reported by special counsel. Both of these agreements have been approved by a federal district court judge. The principal terms of the agreements are described below.

Securities and Exchange Commission

As previously reported, the company reached an agreement with the SEC to resolve its previously disclosed investigation of possible violations of the FCPA. Under the agreement, the company consented to the filing in federal district court of a complaint (“SEC Complaint”) by the SEC against Tidewater Inc., without admitting or denying the allegations in the SEC Complaint, and to the entry by the court of a final judgment and permanent injunction. The SEC Complaint alleges civil violations of the FCPA’s anti-bribery and accounting provisions with respect to certain previously discussed conduct involving tax authorities in Azerbaijan, and the FCPA’s accounting provisions with respect to amounts paid by a company subsidiary to a third party customs broker in connection with the operation of the company’s vessels in Nigeria. The final agreement permanently enjoins the company from future violations of those provisions. On November 8, 2010, a federal district court entered a final judgment approving the agreement.

The agreement required Tidewater Inc. to pay a total of approximately $11.4 million, consisting of $8.4 million (principally representing disgorgement of profits and prejudgment interest) payable at the time of settlement and a contingent civil penalty of $3.0 million. The contingent civil penalty was to be payable to the SEC in the event that the company had not otherwise agreed within 18 months of the date the court entered judgment to pay fines or penalties of at least that amount to another United States government authority (or authorities) in connection with the matters covered by the SEC Complaint. Given the agreement reached with the DOJ (discussed below), no contingent civil penalty was required to be paid to the SEC. The full $11.4 million financial charge associated with the settlement with the SEC, however, was recorded in the fourth quarter of fiscal 2010 and was included in general and administrative expenses. The $8.4 million settlement was paid to the SEC in the third quarter of fiscal 2011 after the federal district court approved the agreement.

Department of Justice

The company reached an agreement with the DOJ to resolve its previously disclosed investigation of possible violations of the FCPA. Under the agreement, Tidewater Marine International Inc. (“TMII”), a wholly-owned subsidiary of the company organized in the Cayman Islands, and the DOJ entered into a Deferred Prosecution Agreement (“DPA”). Pursuant to the DPA, the DOJ deferred criminal charges against TMII for the same conduct in Azerbaijan and Nigeria as described above in connection with the SEC Complaint for a period of three years and seven days from the date of judicial approval of the Agreement, in return for: (a) TMII’s acceptance of responsibility for, and agreement not to contest or contradict the truthfulness of, the statement of facts and allegations contained in a three-count criminal information to be filed concurrently with the DPA; (b) TMII’s

 

11


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

payment of a $7.35 million fine, (c) TMII’s and Tidewater Inc.’s compliance with certain undertakings relating to compliance with the FCPA and other applicable laws in connection with the Company’s operations, and cooperation with domestic and foreign authorities in connection with the matters that are the subject of the DPA; (d) TMII’s and Tidewater Inc.’s agreement to continue to address any deficiencies in the company’s internal controls, policies and procedures relating to compliance with the FCPA and other applicable anti-corruption laws, if and to the extent not already addressed; and (e) Tidewater Inc.’s agreement to report to the DOJ in writing annually for the term of the DPA regarding remediation of the matters that are the subject of the DPA, the implementation of any enhanced internal controls, and any evidence of improper payments the company may have discovered during the term of the DPA.

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

A federal district court accepted the DPA on November 9, 2010. In the quarter ended December 31, 2010, TMII paid the $7.35 million fine. Implementation of the DOJ settlement eliminated the $3.0 million contingent civil penalty in connection with the SEC civil settlement detailed above. An additional financial charge of $4.35 million associated with the DOJ settlement was recorded during the quarter ended September 30, 2010 and was included in general and administrative expenses.

Current Developments with the Nigerian Government

On January 10, 2011, representatives of the Nigerian Economic and Financial Crimes Commission (EFCC) entered the offices of the company’s operating company in Lagos, Nigeria, and requested that representatives of the operating company participate in a series of interviews. Those representatives agreed to participate and were interviewed by the EFCC.

The company has now been asked to participate in discussions with the Nigerian Attorney General’s Office to resolve, under Nigerian law, issues raised by the company’s FCPA-related settlements with the United States Department of Justice and the United States Securities and Exchange Commission. It is our current understanding that the discussions with the Nigerian Attorney General’s Office relate solely to Nigeria operations issues raised in those settlements and that the Nigerian Government seeks monetary restitution based on the same issues. The company has begun participating in those discussions.

The company has not concluded that any potential liability that may result from any potential enforcement action by the Nigerian Attorney General’s Office is both probable and reasonably estimable and, thus, no accrual has been recorded as of December 31, 2010. Should additional information be obtained that any potential liability is probable and reasonably estimable, the company will record such liability at that time.

Merchant Navy Officers Pension Fund

Certain current and former subsidiaries of the company are, or were, participating employers in an industry-wide multi-employer retirement fund in the United Kingdom, known as the Merchant Navy Officers Pension Fund (MNOPF). The company has been informed by the trustee of the MNOPF that the fund has a deficit that will require contributions from the participating employers. The amount and timing of the company’s share of the fund’s deficit depends on a number of factors, including updated calculations of the total fund deficit, theories of contribution imposed as determined by and within the scope of the Trustee’s authority, the number of then participating solvent employers, and the final formula adopted to allocate the required contribution among such participating employers. The company recorded an additional liability of $6.0 million and made payments totaling $0.9 million into the fund during the quarter ended September 30, 2010. As of December 31, 2010, $9.3 million remains payable to MNOPF based on current assessments, all of which has been accrued. In the future, the fund’s trustee may claim that the company owes additional amounts for various reasons, including negative fund investment returns in a depressed global market as reflected in a preliminary future actuarial valuation, or the inability of other assessed parties to contribute their share of respective allocations, failing which, the company and other solvent participating employers will be asked for additional contributions. The company is in discussions with the fund’s trustee about the trustee’s recent unilateral decision to accelerate previously agreed

 

12


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

installment payments and require the company to pay outstanding deficit contributions of $9.3 million immediately. The company has objected to that decision as there has been no change in circumstances since the last valuation that would justify the decision by the trustee to accelerate the installment payments previously permitted.

Sonatide

Tidewater has a 49% ownership interest in Sonatide, a joint venture that owns vessels that serve the Angolan offshore energy industry. Tidewater has previously disclosed that it has been in discussions with its joint venture partner, Sonangol, with respect to certain terms and conditions of the joint venture agreement under which Sonatide is managed and operated. This joint venture agreement was originally scheduled to expire by its terms on July 31, 2010, however, representatives of Sonangol and Tidewater agreed to extend the expiration date of the joint venture agreement to January 31, 2011. The purpose of the extension was to give the parties additional time to negotiate the terms of a new, more permanent joint venture agreement.

As of the date of the filing of this Form 10Q, Sonangol and Tidewater have not agreed on the terms of a new joint venture agreement. Further, the existing joint venture agreement has expired except to the extent described in the following paragraph. The company continues to pursue either a re-institution of the expired joint venture agreement or a new, more permanent joint venture agreement. Although the company continues in its efforts to resolve the matter and continue the joint venture relationship, no assurances can be given that these discussions will be successfully concluded or whether such terms will be advantageous to the company. Failing to further extend the existing Sonatide joint venture or reach a new joint venture agreement with Sonangol could impair the company’s ability to continue to effectively compete for business in Angola in the future. More Tidewater vessels are deployed in Angola and more revenue is derived from our operations in Angola than in or from any of Tidewater’s other countries of operation. While the company continues to be hopeful that matters with Sonangol can be resolved productively, it is also undertaking a review of its available options for the future deployment of its Angolan fleet if a resolution on acceptable terms cannot be achieved.

Prior to January 31, 2011, Sonangol agreed to continue the Sonatide joint venture to the extent required to fulfill several new or renewed charterparty agreements with customers in Angola that extend well beyond January 31, 2011. These charterparty agreements cover a substantial portion of our vessels in Angola. Accordingly, while it is unclear as to Sonangol’s willingness to further extend existing charterparty agreements or enter into new charterparty agreements until joint venture agreement issues are resolved, the joint venture has been extended, on a charter by charter basis, to fulfill the remaining term of the current charters for approximately two-thirds of the vessels owned by the joint venture and the Tidewater-owned vessels operating in Angola. The remaining term on these charters ranges from one month to approximately 40 months, with a median contract term of approximately 11 months. In addition, we have no reason to believe that Sonangol or Sonatide has any other intention than to allow the remaining operating vessels to fulfill their current charterparty agreements, and these vessels continue to do so as of the date of the filing of this Form 10Q.

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.

 

(7)

FAIR VALUE MEASUREMENTS AND DISCLOSURES

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. The fair value is calculated based on assumptions that market

 

13


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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, a deferred supplemental savings plan and a multinational savings plan.

The following table provides the fair value hierarchy for the plan assets measured at fair value as of December 31, 2010:

 

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

Significant
unobservable
inputs

(Level 3)

        
   

Supplemental plan measured at fair value:

            

Equity securities:

            

Common stock

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

Preferred stock

     11        11        ---         ---      

Foreign stock

     380        380        ---         ---      

American depository receipts

     2,133        2,122        11         ---      

Real estate investment trusts

     31        31        ---         ---      

Debt securities:

            

Government debt securities

     3,355        2,187        1,168         ---      

Open ended mutual funds

     2,358        2,358        ---         ---      

Cash and cash equivalents

     735        63        672         ---      
   

Total

   $         16,979        15,128        1,851         ---      

Other pending transactions

     (157     (157     ---         ---      
   

Total fair value of plan assets

   $ 16,822        14,971        1,851         ---      
   

Supplemental savings plan measured at fair value:

            

Open ended mutual funds

   $ 6,686        6,686        ---         ---      

Cash and cash equivalents

     153        ---        153         ---      
   

Total

   $ 6,839        6,686        153         ---      

Other pending transactions

     35        35        ---         ---      
   

Total fair value of plan assets

   $ 6,874        6,721        153         ---      
   

Multinational savings plan measured at fair value:

            

Equity securities:

            

Common stock

   $ 3,569        3,569        ---         ---      

American depository receipts

     118        118        ---         ---      

Corporate debt securities

     1,940        ---        1,940         ---      

Cash and cash equivalents

     16        ---        16         ---      
   

Total fair value of plan assets

   $ 5,643        3,687        1,956         ---      
   

 

14


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table provides the fair value hierarchy for the plan assets measured at fair value as of March 31, 2010:

 

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

Significant
unobservable
inputs

(Level 3)

        
   

Supplemental plan measured at fair value:

            

Equity securities:

            

Common stock

   $ 7,323        7,323        ---         ---      

Preferred stock

     11        11        ---         ---      

Foreign stock

     432        432        ---         ---      

American depository receipts

     2,049        2,021        28         ---      

Real estate investment trusts

     27        27        ---         ---      

Debt securities:

            

Government debt securities

     3,267        1,243        2,024         ---      

Open ended mutual funds

     2,595        2,595        ---         ---      

Cash and cash equivalents

     553        53        500         ---      
   

Total

   $         16,257        13,705        2,552         ---      

Other pending transactions

     (58     (58     ---         ---      
   

Total fair value of plan assets

   $ 16,199        13,647        2,552         ---      
   

Supplemental savings plan measured at fair value:

            

Common stock

   $ 637        637        ---         ---      

Open ended mutual funds

     5,323        5,323        ---         ---      

Cash and cash equivalents

     334        ---        334         ---      
   

Total

   $ 6,294        5,960        334         ---      

Other pending transactions

     (141     (141     ---         ---      
   

Total fair value of plan assets

   $ 6,153        5,819        334         ---      
   

Multinational savings plan measured at fair value:

            

Equity securities:

            

Common stock

   $ 3,350        3,350        ---         ---      

American depository receipts

     50        50        ---         ---      

Corporate debt securities

     1,567        ---        1,567         ---      

Cash and cash equivalents

     39        ---        39         ---      
   

Total fair value of plan assets

   $ 5,006        3,400        1,606         ---      
   

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 meet 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.

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

The company had no spot contracts outstanding at December 31, 2010. The company had 10 foreign exchange spot contracts outstanding at March 31, 2010, which totaled $4.7 million.

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.

 

15


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

At December 31, 2010, the company had four British Pound forward contracts outstanding totaling $8.7 million, which are generally intended to hedge the company’s foreign exchange exposure relating to its Merchant Navy Officers Pension Fund (MNOPF) liability of $9.3 million as disclosed in Note (6) and elsewhere in this document. The forward contracts have varying expiration dates between March 2011 and June 2012. The combined change in fair value of these four forward contracts at December 31, 2010 was approximately $0.1 million, all of which was recorded as a foreign exchange gain during the nine-months ended December 31, 2010, because the forward contracts did not qualify as hedge instruments. All changes in fair value of the forward contracts were recorded in earnings. The company had no forward contracts outstanding at March 31, 2010.

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, and reviews long-lived assets for impairment whenever events occur or changes in circumstances indicate that the carrying amount of assets may not be recoverable. In such evaluation the estimated future undiscounted cash flows generated by an asset group are compared with the carrying amount of the asset group to determine if a write-down may be required. The company estimates cash flows based upon historical data adjusted for the company’s best estimate of future market performance that is based on industry trends. 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, 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. Vessels with similar operating and marketing characteristics are grouped for asset impairment testing.

The company performed a review of all the vessels in its fleet for asset impairment during the quarter ended December 31, 2010, which resulted in the company recording $2.0 million in impairments on four stacked vessels to write down the carrying value of the four assets to a combined fair value of $4.7 million. The company recorded $1.8 million in impairments during the quarter ended September 30, 2010 to write down the carrying value of an asset to its estimated fair value of $1.8 million. The company recorded $1.3 million in impairments during the quarter ended June 30, 2010, and the combined fair value of three vessels that incurred the impairments was $4.5 million. The company recorded $1.7 million in impairments during the quarter ended December 31, 2009, on three stacked vessels to write down the carrying value of the three assets to a combined fair value of $4.9 million. The impairment charges were recorded in gain on asset dispositions, net.

 

(8)

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

A summary of other assets at December 31, 2010 and March 31, 2010 are as follows:

 

(In thousands)    December 31,   
2010         
         March 31,    
2010         
 
   

Recoverable insurance losses

   $ 5,304                  12,809            

Deferred income tax assets

     54,996                  35,635            

Other

     40,172                  36,094            
   
   $       100,472                  84,538            
   

 

16


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

A summary of accrued expenses at December 31, 2010 and March 31, 2010 are as follows:

 

(In thousands)    December 31,   
2010         
     March 31,    
2010         
 
   

Payroll and related payables

   $ 35,781                  31,385            

Commissions payable

     17,098                  15,783            

Accrued vessel expenses

     57,262                  53,521            

SEC and DOJ settlements

     ---                  11,396            

Other accrued expenses

     13,115                  7,400            
   
   $       123,256                  119,485            
   

A summary of other current liabilities at December 31, 2010 and March 31, 2010 are as follows:

 

(In thousands)    December 31,   
2010         
     March 31,    
2010         
 
   

Income tax payables

   $ 16,461                  1,177            

Deferred credits - current

     12,986                    12,559            

Dividend Payable

     38                  9            
   
   $         29,485                  13,745            
   

A summary of other liabilities and deferred credits at December 31, 2010 and March 31, 2010 are as follows:

 

(In thousands)    December 31,   
2010         
     March 31,    
2010         
 
   

Postretirement benefits liability

   $ 28,715                  29,512            

Pension liability

     37,432                  33,146            

Deferred gain on vessel sales

     39,568                  39,568            

Income taxes

     5,072                  4,450            

Other

     15,972                  18,626            
   
   $       126,759                  125,302            
   

 

(9)

SALE/LEASEBACK ARRANGEMENTS

In June 2009, the company sold five vessels to four unrelated third-party companies, and simultaneously entered into bareboat charter agreements for the vessels with the purchasers. In July 2009, the company sold an additional vessel to an unrelated third-party company, and simultaneously entered into a bareboat charter agreements with that purchaser.

The sale/leaseback transactions resulted in proceeds to the company of approximately $101.8 million and a deferred gain of $39.6 million. The aggregate carrying value of the six vessels was $62.2 million at the dates of sale. The leases on the five vessels sold in June 2009 will expire June 30, 2014, and the lease on the vessel sold in July 2009 will expire July 30, 2014. The company is accounting for the transactions as sale/leaseback transactions with operating lease treatment and expenses lease payments over the five year charter hire operating lease terms.

Under the sale/leaseback agreements, the company has the right to either re-acquire the six vessels at 75% of the original sales price or cause the owners to sell the vessels to a third party under an arrangement where the company guarantees approximately 84% of the original lease value to the third-party purchaser. The company also has the right to re-acquire the vessels prior to the end of the charter term with penalties of up to 5% assessed if purchased in years one and two of the five year lease. The company will recognize the deferred gain as income if it does not exercise its option to purchase the six vessels at the end of the operating lease term. If the company exercises its option to purchase these vessels, the deferred gain will reduce the vessel’s stated cost after exercising the purchase option.

 

17


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(10)

GOODWILL

The company tests goodwill impairment annually at the reporting unit level using carrying amounts as of December 31. The company considers its reporting units to be its U.S. and international operations. The company performed its annual impairment test as of December 31, 2010, and the test determined there was no goodwill impairment. Interim testing will be performed when events occur or circumstances indicate that the carrying amount of goodwill may be impaired. Goodwill as of December 31, 2010 and 2009 is $328.8 million.

 

(11)

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 January 2010, the FASB issued an update to ASC 820, Fair Value Measurements and Disclosures- Improving Disclosures about Fair Value Measurements, which amended the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the company on April 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the company on April 1, 2011. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on our financial statements. Please see Note (7) – Fair Value Measurements.

In June 2009, the FASB issued guidance on the consolidation of variable interest entities within ASC 810, Consolidation, which is effective for annual and interim reporting periods beginning after November 15, 2009. The company adopted the new guidance on April 1, 2010. The new guidance replaced the quantitative approach to identify a variable interest entity with a qualitative approach that focuses on an entity’s control and ability to direct the variable interest entity’s activities. The new guidance also requires ongoing assessments of control over such entities, and additional disclosures for variable interests. The adoption of this guidance did not have a material impact on our financial condition, results of operations or cash flows.

 

18


TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(12)

SEGMENT AND GEOGRAPHIC DISTRIBUTION OF OPERATIONS

The company follows the disclosure requirements of ASC 280, Segment Reporting, and operates in two business segments: International and United States. Operating business segments are defined as a component of an enterprise for which separate financial information is available and is evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The following table provides a comparison of revenues, vessel operating profit, depreciation and amortization, and additions to properties and equipment for the quarters and the nine-month periods ended December 31, 2010 and 2009. Vessel revenues and operating costs relate to vessels owned and operated by the company while other marine revenues relate to the activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related businesses.

 

     Quarter Ended
December 31,
     Nine Months Ended
December  31,
 
(In thousands)    2010      2009          2010      2009           
   

Revenues:

           

Vessel revenues:

           

International

   $ 249,190         254,586               727,914          812,472            

United States

     20,443         19,921             70,585          67,034            
   
     269,633         274,507             798,499          879,506            

Other marine revenues

     2,142         11,998             2,901          29,132            
   
   $ 271,775         286,505             801,400          908,638            
   

Vessel operating profit:

           

International

   $ 48,937         66,893             123,067          195,375            

United States

     1,210         1,527             11,945          5,370            
   
     50,147         68,420             135,012          200,745            

Corporate expenses

     (9,188      (8,289)            (30,815)         (31,232)           

Gain on asset dispositions, net

     2,425         5,151             11,621          23,063            

Other marine services

     (782      1,211             (1,057)         2,150            
   

Operating income

   $ 42,602         66,493             114,761          194,726            
   

Foreign exchange gain (loss)

     973         161             2,147          (4,677)           

Equity in net earnings of unconsolidated companies

     3,291         3,732             8,766          14,704            

Interest income and other, net

     1,074         978             3,481          4,648            

Interest and other debt costs

     (3,646      (583)            (6,405)         (1,110)           
   

Earnings before income taxes

   $ 44,294         70,781             122,750          208,291            
   

Depreciation and amortization:

           

Marine equipment operations:

           

International

   $ 31,654         29,942             95,490          87,780            

United States

     2,784         2,516             8,530          7,948            

General corporate depreciation

     620         276             1,833          915            
   
   $ 35,058         32,734             105,853          96,643            
   

Additions to properties and equipment:

           

Marine equipment operations:

           

International

   $ 109,034         79,465             484,937          272,086            

United States

     5,904         11,756             19,653          31,224            

General corporate

     2,239         260             4,050          703            
   
   $     117,177         91,481             508,640          304,013            
   

 

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TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table provides a comparison of total assets at December 31, 2010 and March 31, 2010:

 

(In thousands)    December 31,
2010   
     March 31,  
2010    
 
   

Total assets:

     

Marine:

     

International

   $ 3,178,226         2,781,444       

United States

     369,983         334,182       
   
     3,548,209         3,115,626       

Investments in, at equity, and advances to unconsolidated companies

     36,464         40,614       
   
     3,584,673         3,156,240       

General corporate

     170,867         137,117       
   
   $       3,755,540         3,293,357       
   

The following table discloses the amount of revenue for the company’s International and United States segments, and in total for the worldwide fleet, along with the respective percentage of total vessel revenue for the quarters and the nine-month periods ended December 31, 2010 and 2009:

 

     Quarter Ended
December 31,
     Nine Months Ended
December 31,
 
(In thousands)    2010      %      2009      %      2010      %      2009      %      
   

REVENUES BY VESSEL CLASS:

                       

International-based fleet:

                       

Deepwater vessels

   $ 96,540         36%         81,670         30%             274,328         34%         224,478         26%       

Towing-supply/supply

     122,412         45%         144,500         53%         366,306         46%         491,153         56%       

Crew/utility

     20,534         8%         19,812         7%         59,456         7%         67,775         8%       

Offshore tugs

     9,704         4%         8,604         3%         27,824         3%         28,499         3%       

Other

     ---         ---         ---         ---         ---         ---         567         <1%       

Total

   $ 249,190         92%         254,586         93%         727,914         91%         812,472         92%       

United States-based fleet:

                       

Deepwater vessels

   $ 12,373         5%         12,554         5%         46,093         6%         40,565         5%       

Towing-supply/supply

     7,738         3%         6,931         3%         23,299         3%         23,788         3%       

Crew/utility

     332         <1%         436         <1%         1,193         <1%         2,681         <1%       

Total

   $ 20,443         8%         19,921         7%         70,585         9%         67,034         8%       

Worldwide fleet:

                       

Deepwater vessels

   $ 108,913         40%         94,224         34%         320,421         40%         265,043         30%       

Towing-supply/supply

     130,150         48%         151,431         55%         389,605         49%         514,941         59%       

Crew/utility

     20,866         8%         20,248         7%         60,649         8%         70,456         8%       

Offshore tugs

     9,704         4%         8,604         3%         27,824         3%         28,499         3%       

Other

     ---         ---         ---         ---         ---         ---         567         <1%       

Total

   $     269,633         100%         274,507         100%         798,499         100%         879,506         100%       
   

 

(13)

SUBSEQUENT EVENTS

The company took possession of one anchor handling towing supply vessel in January 2011 for an approximate purchase price of $11.7 million. Please refer to Note (6) - Commitment and Contingencies.

In January 2011, the company amended and extended its amended and restated revolving credit facility to a $575.0 million facility (“New Facilities”) for a five year period maturing January 2016. The New Facilities include a $125.0 million term loan (“Term Loan”) and a $450.0 million revolving line of credit (“Revolver”). Please refer to Note (5) – Debt for a detailed disclosure regarding the company’s New Facilities.

 

20


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, 2010, and the related condensed consolidated statements of earnings for the three-month and nine-month periods ended December 31, 2010 and 2009, and of cash flows for the nine-month periods ended December 31, 2010 and 2009. 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, 2010, and the related consolidated statements of earnings, stockholders’ equity and other comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated May 20, 2010, 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, 2010 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 4, 2011

 

21


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS

FORWARD-LOOKING STATEMENT

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that this Quarterly Report on Form 10-Q and the information incorporated herein by reference contain certain forward-looking statements which reflect the company’s current view with respect to future events and financial performance. All such forward-looking statements are subject to risks and uncertainties, and the company’s future results of operations could differ materially from its historical results or current expectations. Some of these risks are discussed in this report and include, without limitation, volatility in worldwide energy demand and oil and gas prices; fleet additions by competitors and industry overcapacity; changes in capital spending by customers in the energy industry for offshore exploration, field development and production; changing customer demands for vessel specifications, which may make some of our older vessels technologically obsolete for certain customer projects or in certain markets; uncertainty of global financial market conditions and difficulty in accessing credit or capital; acts of terrorism and piracy; significant weather conditions; unsettled political conditions, war, civil unrest and governmental actions, such as expropriation, especially in higher risk countries where we operate; foreign currency fluctuations; labor influences proposed by international conventions; increased regulatory burdens and oversight following the Deepwater Horizon incident; and enforcement of laws related to the environment, labor and foreign corrupt practices.

Forward-looking statements, which can generally be identified by the use of such terminology as “may,” “expect,” “anticipate,” “estimate,” “forecast,” “believe,” “think,” “could,” “continue,” “intend,” “seek,” “plan,” and similar expressions contained in this report, are predictions and not guarantees of future performance or events. Any forward-looking statements are based on the company’s assessment of current industry, financial and economic information, which by its nature is dynamic and subject to rapid and possibly abrupt changes. The company’s actual results may differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. While management believes that these forward-looking statements are reasonable when made, there can be no assurance that future developments that affect us will be those that we anticipate and have identified. The forward-looking statements should be considered in the context of the risk factors listed above and discussed in Items 1, 1A, 2 and 7 included in the company’s Annual Report on Form 10-K for the year ended March 31, 2010, filed with the Securities and Exchange Commission (SEC) on May 20, 2010, and elsewhere in the Form 10-Q. Investors and prospective investors are cautioned that 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 refer to reports published by third parties that purport to describe trends or developments in energy production and drilling and exploration activity. The company does so for the convenience of our investors and potential investors and in an effort to provide information available in the market that will lead to a better understanding of the market environment in which the company operates. The company specifically disclaims any responsibility for the accuracy and completeness of such information and undertakes no obligation to update such information.

The following information contained in this Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and related disclosures and the company’s Annual Report on Form 10-K for the year ended March 31, 2010, filed with the SEC on May 20, 2010.

Our Business

The company provides offshore service vessels and marine support services to the global offshore energy industry through the operation of a diversified fleet of marine service vessels. Tidewater operates in two reportable segments: International and the United States, and the company has one of the broadest global operating footprints in the offshore energy industry. Operations are conducted in most of the world’s significant offshore crude oil and natural gas exploration and production regions. The company is also one of the most experienced international operators in the offshore energy industry having operated in many countries throughout the world over the last six decades. At December 31, 2010, the company had 384 vessels (including

 

22


joint-venture vessels and vessels withdrawn from service) servicing the global energy industry. The company provides services in support of all phases of offshore exploration, field development and production, including towing of, and anchor handling for, mobile offshore drilling units; transporting supplies and personnel necessary to sustain drilling, workover and production activities; offshore construction and seismic support; and a variety of specialized services such as pipe and cable laying.

Principal Factors That Drive Our Revenues

The company’s revenues, net earnings and cash flows from operations are largely dependent upon the activity level of its offshore marine vessel fleet. As is the case with other energy service companies, our business activity is largely dependent on the level of drilling and exploration activity by 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. In addition, since the Deepwater Horizon incident, the level of drilling activity off the continental shelf of the Gulf of Mexico has dwindled while the federal government evaluated the causes of the incident and announced a plan for enhanced regulatory and safety oversight as a condition to granting additional drilling and exploration permits. At December 31, 2010, no drilling permits for deepwater exploration activity had been issued since the Deepwater Horizon incident in April 2010.

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

Principal Factors That Drive Our Operating Costs

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

Fleet size, fleet composition, geographic areas of operation, supply and demand for marine personnel, and local labor requirements are the major factors which affect overall crew costs in both the International and United States segments. In addition, the company’s newer, more technologically sophisticated anchor handling towing supply vessels and platform supply vessels generally require a greater number of specially trained fleet personnel than the company’s older, smaller vessels. The company believes that competition for skilled crew personnel may again intensify, particularly in international markets, as new-build support vessels currently under construction increase the number of offshore vessels operating worldwide. If competition for personnel intensifies, the company’s crew costs will likely increase.

The timing and amount of repair and maintenance costs are influenced by customer demand, vessel age and safety and inspection drydockings mandated by regulatory agencies. A certain number of drydockings are required within a given period to meet regulatory requirements. Drydocking costs are incurred only if the company believes a drydocking can be justified economically, taking into consideration the vessel’s age, physical condition and future marketability. If the company elects to forego a required drydocking, the company will stack and possibly sell the vessel, as the vessel is not permitted to work without valid regulatory certifications. When the company drydocks a productive vessel, the company not only foregoes vessel revenues and incurs drydocking cost, but also continues to incur vessel operating costs and vessel depreciation. In any given period, downtime associated with drydockings and major repairs and maintenance can have a significant effect on the company’s revenues and operating costs.

At times, vessel drydockings take on an increased significance to the company and its financial performance. Older vessels typically require more frequent and more expensive repairs and drydockings. Newer vessels (generally those built after 2000), which now account for a majority of the company’s revenues and vessel margin (vessel revenues less vessel operating cost), can also result in expensive drydockings, even in the early years of a vessel’s useful life due to these vessels’ larger relative size and greater relative complexity. Conversely, when the company stacks vessels, the number of drydockings in any period could decline. The combination of these factors can affect drydock costs, which are primarily included in repair and maintenance

 

23


expense, and incrementally increase the volatility of the company’s revenues and operating income, thus making period-to-period comparisons more difficult.

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

Fuel and lube costs can also fluctuate in any given period depending on the number and distance of vessel mobilizations in addition to changes in fuel prices.

Insurance and loss reserves costs are dependent on a variety of factors, including the company’s safety record and the cost of insurance, and can fluctuate from time to 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 third-party liability 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 on-going operations and the cost of third-party coverage.

The company also incurs vessel operating costs that are aggregated under the “other” vessel operating cost heading. These costs consist of brokers’ commissions, training costs and other miscellaneous costs. Brokers’ commission costs are incurred primarily in the company’s international operations where brokers 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 and temporary vessel importation fees.

The Past and Potential Future Impact of the Deepwater Horizon Disaster on Our Business

As an international company that derives over 90% of its revenues from operations outside of United States territorial waters, we believe that the overall impact of the Deepwater Horizon will not have a significant immediate impact on our overall operations or financial performance. Less than 7% of our total fleet operates in the U.S. GOM, and, if necessary, these vessels can be mobilized to serve other markets if demand for their services does not continue to exist in the U.S. GOM because of any precipitous and long-term reduction in the level of drilling and exploration activity in that region.

The company’s vessel day rates in the U.S. GOM trended higher during the first half of fiscal 2011 due to the strong demand for vessels to assist with the oil spill response effort since the April 2010 explosion and collapse of the rig. During the first half of fiscal 2011, all of the company’s available-for-work U.S. segment vessels were working at relatively high utilization rates. This helped drive utilization rates higher for the first half of fiscal 2011 as compared to the same period during fiscal 2010. However, during the quarter ended December 31, 2010, demand for the company’s vessels decreased as work related to the oil spill response effort declined significantly. As a result, the company transferred three deepwater vessels to international markets because the vessels would otherwise become less marketable if they remained in the U.S. GOM due to the uncertainty surrounding the U.S. GOM permitting process as discussed below.

Although the United States government lifted the moratorium on deepwater drilling and permitting on October 12, 2010, new regulations of the Bureau of Ocean Energy Management (BOEM) calling for additional safety measures and inspections continue to create uncertainty as to when permits will be issued and drilling activity recommences. As of the date of this report, no permits for deepwater drilling have been issued since the Deepwater Horizon incident. Moreover, since the rig explosion, the approval process for shallow water drilling permits has also slowed significantly. Based on published reports, we expect that the re-commencement of new drilling activities in the Gulf of Mexico will be a slow process. Over the longer term, we, like others that operate in the U.S. GOM, are concerned over the impacts on exploration and field development (and particularly deepwater exploration and field development) and operating costs resulting from the new safety standards and

 

24


other regulatory responses to the rig explosion and oil spill. The new rules and requirements could reduce the level of drilling activity and suppress the demand for our services, which could have a material adverse effect on our United States operations.

If exploration and production activity migrates from the U.S. GOM to international markets because of additional regulation and higher operating costs in the U.S. GOM, it is also possible that other offshore supply vessel owners will redeploy additional vessels to international markets. This could increase competition and have a negative effect on vessel utilization and day rates in international markets, depending on the number of drilling rigs that exit the U.S. GOM and move to international markets.

Challenges We Confront as an International Offshore Vessel Company

The company operates in many challenging operating environments around the world that present varying degrees of political, social, economic and other uncertainties. We operate in markets where there are 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, any of which 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 to the extent practicable, it cannot give assurance that it will avoid completely the foregoing risks, although the wide geographic dispersion of the company’s vessels helps substantially mitigate the impact of these risks. In addition, immigration, customs, tax and other regulations (and administrative and judicial interpretations thereof) can have a material impact on our ability to work in certain countries and on our operating costs.

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

Sonatide

Tidewater has a 49% ownership interest in Sonatide, a joint venture that owns vessels that serve the Angolan offshore energy industry. Tidewater has previously disclosed that it has been in discussions with its joint venture partner, Sonangol, with respect to certain terms and conditions of the joint venture agreement under which Sonatide is managed and operated. This joint venture agreement was originally scheduled to expire by its terms on July 31, 2010, however, representatives of Sonangol and Tidewater agreed to extend the expiration date of the joint venture agreement to January 31, 2011. The purpose of the extension was to give the parties additional time to negotiate the terms of a new, more permanent joint venture agreement.

As of the date of the filing of this Form 10Q, Sonangol and Tidewater have not agreed on the terms of a new joint venture agreement. Further, the existing joint venture agreement has expired except to the extent described in the following paragraph. The company continues to pursue either a re-institution of the expired joint venture agreement or a new, more permanent joint venture agreement. Although the company continues in its efforts to resolve the matter and continue the joint venture relationship, no assurances can be given that these discussions will be successfully concluded or whether such terms will be advantageous to the company. Failing to further extend the existing Sonatide joint venture or reach a new joint venture agreement with Sonangol could impair the company’s ability to continue to effectively compete for business in Angola in the future. More Tidewater vessels are deployed in Angola and more revenue is derived from our operations in Angola than in or from any of Tidewater’s other countries of operation. While the company continues to be hopeful that matters with Sonangol can be resolved productively, it is also undertaking a review of its available options for the future deployment of its Angolan fleet if a resolution on acceptable terms cannot be achieved.

Prior to January 31, 2011, Sonangol agreed to continue the Sonatide joint venture to the extent required to fulfill several new or renewed charterparty agreements with customers in Angola that extend well beyond January 31, 2011. These charterparty agreements cover a substantial portion of our vessels in Angola. Accordingly, while it is unclear as to Sonangol’s willingness to further extend existing charterparty agreements or enter into new charterparty agreements until joint venture agreement issues are resolved, the joint venture has

 

25


been extended, on a charter by charter basis, to fulfill the remaining term of the current charters for approximately two-thirds of the vessels owned by the joint venture and the Tidewater-owned vessels operating in Angola. The remaining term on these charters ranges from one month to approximately 40 months, with a median contract term of approximately 11 months. In addition, we have no reason to believe that Sonangol or Sonatide has any other intention than to allow the remaining operating vessels to fulfill their current charterparty agreements, and these vessels continue to do so as of the date of the filing of this Form 10Q.

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 that ship) that are engaged in commercial activities. To date, this Convention has been ratified by eleven countries, namely, the Bahamas, Bosnia and Herzegovina, Bulgaria, Canada, Croatia, Liberia, Marshall Islands, Norway, Panama, St. Vincent and the Grenadines, and Spain, representing in excess of 33% of the world’s vessel tonnage. If adopted by an additional 19 countries, then within 12 months thereof, the Convention will become law. In the unlikely event that ratification were to be achieved in 2011, the Convention would become law in 2012 or 2013, depending upon the date of final ratification. Even though the company believes that the labor changes proposed by this Convention are unnecessary in light of existing international labor laws that govern many of these issues, and the Company continues to work with industry representatives to oppose ratification of this Convention, the Company will continue to review and assess its seafarer labor relationships and social protections in light of the Convention requirements. Should this Convention become law, the company and its customers’ operations may be negatively affected by future compliance costs.

Egypt Operations

The recent unrest and protests in Egypt have received extensive media coverage in the last few weeks. The company has operations in Egypt, although our vessels in Egypt number less than ten and some of these vessels are currently stacked. The vessels that are not stacked currently continue to operate in the normal course of business. It is possible however, that continuing unrest could further impair operations of the company’s vessels (such as a shortage of fuel or food) or the operations of our customers. In either event, an event of force majeure could eventually be declared by either the company or its customers. In the event of a declaration of force majeure, our customers would be relieved from the obligation to pay charter hire during the period of force majeureIf the force majeure event lasted for a specified period, either the company or our customer could elect to terminate the charter agreement. Our biggest customer in Egypt (both in terms of vessel count and revenue) is the Gulf of Suez Petroleum Company (GUPCO).

Macroeconomic Environment and Outlook

The primary driver of our business, and therefore revenues (see the caption above), is the level of our customers’ capital and operating expenditures for oil and natural gas exploration, field development and production. These expenditures, in turn, generally reflect our customers’ expectations for future oil and natural gas prices, economic growth, hydrocarbon demand and estimates of current and future oil and natural gas production. The prices of crude oil and natural gas are critical factors in exploration and production (E&P) companies’ decisions to contract drilling rigs and offshore service vessels in the United States (U.S.) Gulf of Mexico (GOM) or in international markets, with the international market being driven by supply and demand for crude oil, and the U.S. GOM being influenced both by the supply and demand for natural gas (in regards to shallow water activity) and the supply and demand for oil (in regards to deepwater activity).

Oil prices gradually recovered and stabilized in the range of $75 to $85 per barrel during calendar year 2010 due to signs of improvement in the global economy and, in part, because the Organization of Petroleum Exporting Countries (OPEC) reduced its crude oil production targets by more than 6.0% over the last 2 years in an effort to stabilize crude oil prices. During the most recent OPEC meeting in mid-December 2010, OPEC officials voted to maintain its existing production targets. The company expects that utilization and day rates for its internationally-based vessels will continue to be correlated with oil prices, which in mid-January 2011 were trading over $90 per barrel, drilling and exploration activity and the resulting demand for the company’s vessels in the various international markets.

 

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The number of deployed drilling rigs in the U.S. offshore market is generally the primary driver of the company’s expected activity levels and future profitability in the U.S. market. The offshore rig count in the U.S. GOM remains at historically low levels, in part because the strength of the international drilling market has attracted numerous offshore drilling rigs from the U.S. to various international markets over the past several years. Exploration and field development activity in the U.S. GOM had fallen off significantly, particularly in shallow water areas. As a consequence, the demand for offshore marine vessels in the shallow water U.S. GOM diminished over the past few years and declined further in late calendar year 2008 and into 2009 due to the weaker demand for energy discussed earlier. Prior to the April 2010 catastrophic explosion of the Deepwater Horizon drilling rig (and the resulting oil spill and drilling moratorium), exploration and field development activity in the deepwater areas of the U.S. GOM was reasonably strong despite weak overall market fundamentals in the U.S. GOM. As described below, the Deepwater Horizon incident, and potentially wide-ranging regulatory responses to the incident have had, and are expected to continue to have a material impact on activity levels, particularly in deepwater areas. Other than the impact of new regulations, the company’s U.S.-based vessel fleet should be affected more by the active offshore rig count in the United States than by any other single outside influence.

Natural gas prices, which in mid-January 2011 were trading in the $4.20 - $4.45 Mcf range, trended higher during December 2010 due to stronger demand for the resource from the industrial sector and higher consumer demand resulting from a colder-than-normal weather in North America and Europe. Although the pricing trend bodes well for activity in the mid and shallow water depths of the U.S. GOM market in the near-term, the rise in production of unconventional gas resources in North America and the commissioning of a number of new large Liquefied Natural Gas (LNG) exporting facilities around the world are contributing to an over-supplied natural gas market. This exerts downward pricing pressures on the resource. While production of natural gas from unconventional sources is a relatively small portion of the worldwide natural gas production, it is expected to grow in the future. Despite recent increases in demand for natural gas, inventories for the resource in the U.S. continue to be oversupplied. High inventory levels are attributable to the increase of unconventional gas in the market, as well as a reduction in demand for the resource due to the global recession. Prolonged increases in the supply of natural gas, whether the supply comes from conventional or unconventional production will exert downward pressures on prices for natural gas. A prolonged downturn in natural gas prices can negatively impact the exploration and development plans of E&P companies, which in turn, would result in a decrease in demand for offshore support vessel services, primarily in the company’s U.S. segment.

During the nine-month period ended December 31, 2010, vessel day rates in the U.S. GOM offshore vessel market trended higher as the normal supply/demand fundamentals were affected by to the strong demand for vessels to assist with the U.S. Gulf oil spill response effort following the Deepwater Horizon explosion in April 2010. Increased demand for the company’s vessels helped drive utilization rates for the company’s U.S. segment higher during the nine-month period ended December 31, 2010, as compared to the same periods during fiscal 2010. All of the company’s available-for-work U.S. segment vessels were working at relatively full utilization, including a number of the company’s vessels assisting with the oil spill containment effort that was underway during the six-month period ended September 30, 2010; however, by September 30, 2010 and throughout the quarter ended December 31, 2010, vessel demand related to the oil spill containment effort had declined significantly.

Many drilling operators and offshore oil and gas support service companies expressed concern over the impacts on exploration and field development (and particularly deepwater exploration and field development) and operating costs resulting from the new safety standards and other regulatory responses to the rig explosion and oil spill. Although the United States government lifted the moratorium on deepwater drilling and permitting on October 12, 2010, new regulations of the BOEM calling for additional safety measures and inspections continues to create uncertainty. As of the date of this report, no permits for deepwater drilling have been issued since the Deepwater Horizon incident. Moreover, since the rig explosion, the approval process for shallow water drilling permits has also slowed significantly. Based on published reports, we expect that the re-commencement of new drilling activities in the Gulf of Mexico will be a slow process. It appears likely that the pace for obtaining permits, whether for shallow water or deepwater drilling, will continue to be slow through 2011. Given the historically strong correlation between drilling and exploration activity and demand for the company’s vessels in the U.S. GOM, the company expects utilization rates and day rates for its vessels in the U.S. GOM market to continue to be weak if compliance with the new regulations causes drilling operators to relocate drilling rigs to international markets. However, a significant portion of the company’s operations are conducted internationally,

 

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and as such, the company’s international vessel operations remain the primary driver of its revenue and earnings.

Historically, when the U.S. market weakened, the company would redeploy some of its highly mobile assets to international markets where, market conditions permitting, the vessels could benefit from stronger demand and average day rates and from statutory income tax rates that are generally lower than those in the U.S. The company’s ability to mitigate the effects of a weak U.S. GOM market by redeploying vessels to other markets could be reduced due to the recent challenges in international markets. The company continues to assess the demand for vessels in the U.S. GOM and in the various international markets and may relocate additional vessels to international areas and between international areas if and when the need arises. The cost of mobilizing vessels to a different market is sometimes for the account of the company and sometimes for the account of a contracting customer, depending upon market conditions within a particular market.

Certain oil and gas industry analysts are reporting in their 2011 E&P expenditures (both land-based and offshore) surveys that global capital expenditure budgets for E&P companies are forecast to increase by approximately 11% over calendar year 2010 levels. The surveys forecast that international capital spending budgets will increase approximately 12% while North American capital spending budgets are forecast to increase approximately 8.1%. The industry analyst reports that the gains in international spending will be led by the “super major” international oil companies and the national oil companies. It is anticipated that the North American capital budget increases will primarily be spent onshore rather than offshore. Capital expenditure budgets incorporated into the spending surveys were based on an approximate $77 average price per barrel of oil and an approximate $4.27 per mcf average natural gas price for calendar 2011.

In recent years, international deepwater has been a growing part of the worldwide offshore crude oil and natural gas markets and a source of growth for the company. International deepwater did not experience significant negative effects from the recent global economic recession, largely because deepwater oil and gas development typically involves significant capital investment and multi-year development plans. Such projects are generally underwritten by the participating exploration, development and production companies using relatively conservative assumptions in regards to crude oil and natural gas prices. These projects are therefore considered less susceptible to short-term fluctuations in the price of crude oil and natural gas. During the past few years, worldwide rig construction increased as rig owners capitalized on the high worldwide demand for drilling. Reports published during the most recently completed quarter suggest that over the next three to four years, the worldwide movable drilling rig count (currently estimated at approximately 820 movable offshore rigs worldwide, approximately thirty percent of which are designed to operate in deeper waters) will increase as approximately 120 new-build offshore rigs that are currently on order and under construction are delivered. Of the estimated 820 movable offshore rigs worldwide, approximately 530 are currently working. It is further estimated that approximately fifty percent of these new build rigs are built to operate in deeper waters, suggesting that the number of rigs designed to operate in deeper waters could grow in the coming years by approximately one third. Investment is also being made in the floating production market, with approximately 55 new floating production units currently under construction and are expected to be delivered over the next five years and beyond to supplement the current approximately 335 floating production units worldwide. To the extent the rigs are built and delivered, it is believed that the new build rigs will largely target international regions rather than the U.S. GOM due to longer contract durations, generally lower operating costs (including insurance costs) and higher drilling day rates available in the international markets. Future additional regulatory oversight and control with respect to offshore drilling in the U.S. GOM following the explosion of the Deepwater Horizon may also increase the relative appeal of international markets.

According to ODS-Petrodata, the global offshore supply vessel market has approximately 385 new-build offshore support vessels (platform supply vessels and anchor handlers only) at December 31, 2010, that are currently estimated to be under construction and that are expected to be delivered to the worldwide offshore vessel market primarily over the next three years. The current worldwide fleet of these classes of vessels is estimated at approximately 2,590 vessels, of which approximately 9% are stacked. An increase in worldwide vessel capacity could have the effect of lowering charter rates, particularly in the context of declining levels of exploration, field development and production activity. However, the worldwide offshore marine vessel industry also has a large number of aging vessels, including more than 780 vessels that are at least 25 years old, that are nearing or exceeding original expectations of their estimated economic lives. These older vessels could potentially be removed from the market within the next few years if the cost of extending the vessels’ lives is not

 

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economically justifiable. Although the future attrition rate of these aging vessels cannot be accurately predicted, the company believes that the retirement of a sizeable portion of these aging vessels would likely mitigate the potential combined negative effects of new-build vessels on vessel utilization and vessel pricing. Additional vessel demand could also be created with the addition of new drilling rigs and floating production units that are expected to be delivered and become operational over the next few years, which should help minimize the possible negative effects of the new-build offshore support vessels being added to the offshore support vessel fleet. It is unknown at this time the extent to which the recovery from the recent worldwide recession will influence the utilization of equipment currently in existence or the ultimate timing of delivery and placing into service of new drilling rigs, floating production units and vessels currently under construction. Analysts have reported some offshore vessel construction contract cancellations as a result of the foregoing factors, which may reduce the ultimate number of vessels built and delivered.

Fiscal 2011 Business Highlights

During the nine months ended December 31, 2010, the company continued its focus on maintaining its competitive advantages, maintained its market share in international markets where it operates, and continued to modernize its vessel fleet to generate future earnings capacity while removing from active service certain traditional vessels that currently have fewer market opportunities because customer demand for such vessels has declined significantly. Key elements of the company’s strategy continue to be the preservation of its strong financial position and the maintenance of adequate liquidity to fund the expansion of its fleet of newer vessels. Operating management focused on safe operations and maintaining disciplined cost control.

The company’s consolidated net earnings during the nine months ended December 31, 2010 decreased 54%, or $109.0 million, as compared to the same period in fiscal 2010, due primarily to an approximate 12% decrease in total revenues and a $23.4 million, increase in income taxes as disclosed in Note (3) of Notes to Unaudited Condensed Consolidated Financial Statements. The company recorded $801.4 million in revenues during the nine months ended December 31, 2010, which is a decrease of approximately $107.2 million over the revenue earned during the same period of fiscal 2010. Also, earnings for the nine months ended December 31, 2009 included a $49.1 million provision for Venezuelan operations and the reversal of $34.3 million income tax liabilities as previously disclosed in previous SEC filings.

Vessel revenues generated by the company’s international segment decreased approximately 10%, or $84.6 million, during the nine months ended December 31, 2010 as compared to the same period in fiscal 2010, while vessel revenues generated by the U.S. segment increased approximately $3.6 million, or 5%, during the same comparative periods. Also, the nine months ended December 31, 2009, included $11.3 million of revenues generated by the company’s Venezuelan operations. Other marine revenues decreased approximately $26.2 million, or 90%, during the same comparative periods primarily because ship construction at the company’s shipyards for unaffiliated customers has declined. International segment vessel operating costs increased approximately 7%, or $28.6 million, while the company’s U.S. segment vessel operating costs decreased approximately 7%, or $2.9 million, during the nine months ended December 31, 2010 as compared to the same period in fiscal 2010. Costs of other marine revenues decreased approximately $22.7 million, or 87%, during the same comparative periods. A significant portion of the company’s operations are conducted internationally; therefore, the company’s international vessel operations are the primary driver of its revenue and earnings. Revenues generated from international vessel operations as a percentage of the company’s total vessel revenues were 92% during the nine months ended December 31, 2010 and 92% during the same period in fiscal 2010.

At December 31, 2010, the company had 369 owned or chartered vessels (excluding joint-venture vessels and vessels withdrawn from service) in its fleet with an average age of 15.8 years. The average age of 191 newer vessels that have been acquired or constructed since calendar year 2000 as part of the company’s new build and acquisition program is 4.5 years. The remaining 178 vessels have an average age of 28.0 years. During the nine months ended December 31, 2010 and 2009, the company’s newer vessels generated $633.4 million and $574.5 million, respectively, of revenue and accounted for 88.4%, or $277.1 million, and 70.5%, or $296.0 million, respectively, of total vessel margin (vessel revenues less vessel operating cost). Vessel operating costs for the company’s new vessels exclude depreciation of $72.2 million and $55.2 million, respectively, during the same comparative periods.

 

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Results of Operations

The following table compares revenues and operating expenses (excluding general and administrative expense, depreciation expense, provision for Venezuelan operations, and gain on asset dispositions, net) for the company’s vessel fleet and the related percentage of total revenue for the quarters and the nine-month periods ended December 31, 2010 and 2009 and for the quarter ended September 30, 2010. Vessel revenues and operating costs relate to vessels owned and operated by the company, while other marine revenues relate to third-party activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related activities.

 

           Quarter Ended
December 31,
     Nine Months Ended
December  31,
     Quarter
Ended
September 30,
 
(In thousands)          2010     %      2009     %      2010     %      2009     %      2010      %      
   

Revenues:

                           

Vessel revenues:

                           

International

  $           249,190        92%         254,586        89%         727,914        91%         812,472        89%         241,579         90%       

United States

       20,443        8%         19,921        7%         70,585        9%         67,034        7%         25,291         9%       
   
       269,633        99%         274,507        96%         798,499        100%         879,506        97%         266,870         100%       

Other marine revenues

       2,142        1%         11,998        4%         2,901        <1%         29,132        3%         230         <1%       
   
  $           271,775        100%         286,505        100%         801,400        100%         908,638        100%         267,100         100%       
   

Operating costs:

                           

Vessel operating costs:

                           

Crew costs

  $           84,412        31%         79,458        28%         255,045        32%         240,947        27%         89,941         34%       

Repair and maintenance

       26,107        10%         24,386        9%         84,991        11%         81,472        9%         31,791         12%       

Insurance and loss reserves

       6,071        2%         1,735        1%         14,994        2%         9,794        1%         4,513         2%       

Fuel, lube and supplies

       16,399        6%         13,210        5%         47,757        6%         41,265        5%         16,437         6%       

Vessel operating leases

       4,492        2%         4,494        2%         13,472        2%         10,564        1%         4,490         2%       

Other

       23,116        9%         24,905        9%         68,813        9%         75,323        8%         22,720         9%       
   
       160,597        59%         148,188        52%         485,072        61%         459,365        51%         169,892         64%       

Costs of other marine revenues

       2,705        1%         10,565        4%         3,403        <1%         26,147        3%         203         <1%       
   
  $           163,302        60%         158,753        55%         488,475        61%         485,512        53%         170,095         64%       
   

 

The following table subdivides vessel operating costs presented above by the company’s International and United States segments and its related percentage of total revenue for the quarters and the nine-month periods ended December 31, 2010 and 2009 and for the quarter ended September 30, 2010.

    

           Quarter Ended
December 31,
     Nine Months Ended
December 31,
     Quarter
Ended
September 30,
 
(In thousands)          2010     %      2009      %      2010     %      2009     %      2010      %      
   

Vessel operating costs:

                           

International:

                           

Crew costs

  $           77,595        29%         71,944         25%         231,245        29%         215,437        24%         81,390         30%       

Repair and maintenance

       22,375        8%         21,693         8%         76,601        10%         73,667        8%         28,753         11%       

Insurance and loss reserves

       5,403        2%         1,740         1%         13,505        2%         7,314        1%         4,410         2%       

Fuel, lube and supplies

       15,732        6%         12,772         4%         46,066        6%         39,349        4%         15,912         6%       

Vessel operating leases

       4,000        1%         3,707         1%         11,407        1%         8,204        1%         3,704         1%       

Other

       22,727        8%         24,520         9%         67,489        8%         73,784        8%         22,307         8%       
   
       147,832        54%         136,376         48%         446,313        56%         417,755        46%         156,476         59%       

United States:

                           

Crew costs

  $           6,817        3%         7,514         3%         23,800        3%         25,510        3%         8,551         3%       

Repair and maintenance

       3,732        1%         2,693         1%         8,390        1%         7,805        1%         3,038         1%       

Insurance and loss reserves

       668        <1%         (5)        <1%         1,489        <1%         2,480        <1%         103         <1%       

Fuel, lube and supplies

       667        <1%         438         <1%         1,691        <1%         1,916        <1%         525         <1%       

Vessel operating leases

       492        <1%         787         <1%         2,065        <1%         2,360        <1%         786         <1%       

Other

       389        <1%         385         <1%         1,324        <1%         1,539        <1%         413         <1%       
   
       12,765        5%         11,812         4%         38,759        5%         41,610        5%         13,416         5%       
   

Total operating costs

  $           160,597        59%         148,188         52%         485,072        61%         459,365        51%         169,892         64%       
   

As a result of the uncertainty of a certain customer to make payment of vessel charter hire, the company has deferred the recognition of approximately $9.2 million of billings as of December 31, 2010 ($9.2 million of billings as of March 31, 2010), which would otherwise have been recognized as revenue. The company will recognize the amounts as revenue as cash is collected or at such time as the uncertainty has been significantly reduced.

 

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Although we currently have no ongoing business with this customer, the company is continuing efforts to collect all amounts due from this customer.

The following table compares operating income and other components of earnings before income taxes and its related percentage of total revenue for the quarters and the nine-month periods ended December 31, 2010 and 2009 and for the quarter ended September 30, 2010 consist of the following:

 

           Quarter Ended
December 31,
     Nine Months Ended
December 31,
     Quarter
Ended
September 30,
 
(In thousands)          2010      %      2009      %      2010      %      2009       %          2010       %       
   

Vessel operating profit:

                            

International

  $           48,937         18%          66,893         23%          123,067         15%          195,375          22%          31,025          12%        

United States

       1,210         <1%          1,527         1%          11,945         1%          5,370          1%          5,251          2%        
   
       50,147         18%          68,420         24%          135,012         17%          200,745          22%          36,276          14%        

Corporate expenses

       (9,188)        (3%)         (8,289)        (3%)         (30,815)        (4%)         (31,232)         (3%)         (12,864)         (5%)       

Gain on asset dispositions, net

       2,425         1%          5,151         2%          11,621         1%          23,063          3%          3,638          1%        

Other marine services

       (782)        (<1%)         1,211         <1%          (1,057)        (<1%)         2,150          <1%          (158)         (<1%)       
   

Operating income

       42,602         16%          66,493         23%          114,761         14%          194,726          21%          26,892          10%        
   

Foreign exchange gain (loss)

       973         <1%          161         <1%          2,147         <1%          (4,677)         (1%)         (436)         (<1%)       

Equity in net earnings of unconsolidated companies

       3,291         1%          3,732         1%          8,766         1%          14,704          2%          2,785          1%        

Interest income and other, net

       1,074         <1%          978         <1%          3,481         <1%          4,648          1%          2,029          1%        

Interest and other debt costs

       (3,646)        (1%)         (583)        (<1%)         (6,405)        (1%)         (1,110)         (<1%)         (1,686)         (1%)       
   

Earnings before income taxes

  $           44,294         16%          70,781         25%          122,750         15%          208,291          23%          29,584          11%        
   

International Segment Operations

Internationally-based vessel revenues decreased 2% and 10%, or $5.4 million and $84.6 million, respectively, during the quarter and nine-month period ended December 31, 2010, respectively, as compared to the same periods in fiscal 2010, primarily due to decreases in utilization rates and average day rates on the towing supply/supply class of vessels as a result of weaker demand for this vessel class, and due to the stacking of vessels. In addition, the company’s revenues decreased during the comparative year-to-date periods ended December 31 because of the loss of revenue from the seizure of its Venezuelan operations in May and July of 2009. The company’s Venezuelan operations contributed no revenues during the nine-month period ended December 31, 2010 as compared to $11.3 million of revenues contributed during the nine-month period ended December 31, 2009. The decline in the towing supply/supply class of vessels revenues, during the quarter and nine-month period ended December 31, 2010, was partially offset by an increase in revenues earned by the company’s deepwater class of vessels due to the addition of 23 deepwater class of vessels to the international fleet throughout fiscal 2010 and during the nine months ended December 31, 2010 following the addition of newly-built and acquired deepwater vessels to the fleet and the transfer of deepwater class vessels from the U.S. GOM market.

Average day rates for all internationally-based vessels, during the quarter and nine-month period ended December 31, 2010, were comparable to the average day rates achieved during the same periods in fiscal 2010, which reflects a change in the mix of vessels operating during the quarter and the nine-month period ended December 31, 2010. As a general matter, leading edge day rates are declining across vessel classes; however, the impact of this decline on average day rate statistics has been mitigated by vessel charter contracts entered into in fiscal 2010 and prior years and a change in the mix of vessels that worked during the quarter and the nine-month period ended December 31, 2010, relative to the quarter and the nine-month period ended December 31, 2009. In particular, the company added 52 new vessels to the fleet since the first quarter of fiscal 2010 and stacked 95 older, traditional vessels throughout fiscal 2010 and during the nine months ended December 31, 2010, and the traditional vessels generally earn lower day rates than newer vessels. As a result, the average working vessel during the quarter and the nine-month period ended December 31, 2010 earned a higher average day rate than the average working vessel during the quarter and the nine-month period ended December 31, 2009.

As noted, the company continued to stack and remove from its active fleet of internationally-based vessels those vessels that could not find attractive charter contracts. At the beginning of fiscal 2011, the company had 63 internationally-based vessels that were stacked. During the nine months ended December 31, 2010, the

 

31


company stacked 43 additional vessels, sold and/or disposed of 20 vessels from the previously stacked vessel fleet, and returned to international service one vessel, resulting in a total of 85 stacked internationally-based vessels as of December 31, 2010. Vessel utilization rates are calculated by dividing the number of days a vessel works by the number of days the vessel is available to work. Stacked vessels depressed international utilization rates during the comparative periods because stacked vessels are considered available to work, and as such, are included in the calculation of utilization rates.

The company’s towing supply/supply vessels were responsible for the majority of the revenue decline realized during the quarter and nine-month period ended December 31, 2010, as compared to the same periods during fiscal 2010. The company’s towing supply/supply vessels accounted for approximately $22.1 million and $124.8 million of the revenue decline (an approximate 15% and 25% decrease, respectively) during the quarter and nine-month period ended December 31, 2010, respectively, as compared to the same periods during fiscal 2010, due to a nine and 15 percentage point, respective decrease in utilization rates, and an approximate 3% decrease in average day rates resulting from weaker demand for the company vessels, vessel sales, and the seizure of vessels by the Venezuelan government. Increased revenue generated by the company’s deepwater class of vessels partially offset revenue losses incurred by the other vessel classes operating in the international segment. Revenues earned by the deepwater class of vessels increased approximately 18% ($14.9 million) and 22%, ($49.9 million), respectively, during the quarter and nine-month period ended December 31, 2010, as compared to the same periods during fiscal 2010, due to a modest one percentage point increase in utilization rates during the comparative periods and, more importantly, due to an increase in the number of deepwater vessels operating in the international market following the addition of newly-built and acquired deepwater vessels to the fleet.

Vessel operating profit for internationally-based vessels decreased approximately 27% ($18.0 million) and 37% ($72.3 million), during the quarter and the nine-month period ended December 31, 2010, respectively, as compared to the same periods during fiscal 2010, because of lower revenues and higher operating costs, which were respectively up approximately 8% ($11.5 million) and 7% ($28.6 million) relative to the comparable periods in fiscal 2010 (primarily crew costs, repair and maintenance costs, vessel operating leases and fuel, lube and supply costs). Vessel operating profit also decreased during the same comparative periods because of an approximate 6% and 9%, or $1.7 million and $7.7 million, respective increase in depreciation expense. Depreciation expense increased during the quarter and the nine-month period ended December 31, 2010, as compared to the same periods during fiscal 2010, because of newly-constructed and acquired vessels that were added to the international fleet.

Crew costs increased approximately 8%, or $5.7 million, during the quarter ended December 31, 2010, as compared to the same period during fiscal 2010, due to an increase in the number of internationally-based vessels. Crew costs increased approximately 7%, or $15.8 million, during the nine-month period ended December 31, 2010, as compared to the same period during fiscal 2010, due to an increase in the number of internationally-based vessels and because of a $6.0 million charge associated with the company’s participation in the Merchant Navy Officers Pension Fund (MNOPF) as disclosed in Note (6) of Notes to Unaudited Condensed Consolidated Financial Statements. Repair and maintenance costs increased approximately 3% and 4%, or $0.7 million and $2.9 million, respectively, during the quarter and the nine-month period ended December 31, 2010, respectively, as compared to the same periods during fiscal 2010. This trend largely reflects a greater number of drydockings being performed during the current periods. In particular, during the nine-months ended December 31, 2010, the company performed the second and third of four expected drydockings of our largest anchor handling towing supply vessel class of vessels that we expect to complete in fiscal 2011.

International vessel operating lease costs increased approximately $0.3 million, or 8%, during the quarter ended December 31, 2010, because one vessel operating under an operating lease transferred from the U.S. GOM to an international market during the quarter ended December 31, 2010. International vessel operating lease costs increased approximately $3.2 million, or 39%, during the nine-month period ended December 31, 2010 because the company entered into six additional vessel operating leases during fiscal 2010, as disclosed in Note (9) of Notes to Unaudited Condensed Consolidated Financial Statements and in the “Off-Balance Sheet Arrangements” section of this report. Fuel, lube and supply costs were higher by approximately 23% and 17%, or $3.0 million and $6.7 million, respectively, during the quarter and the nine-month period ended December 31, 2010, as compared to the same periods during fiscal 2010, respectively, due to vessel

 

32


mobilizations on the company’s newly delivered vessels and because of vessels mobilizing from one international area to a different international area.

Internationally-based vessel revenues increased approximately 3%, or $7.6 million, during the third quarter of fiscal 2011 as compared to the revenues earned by the internationally-based vessels during the second quarter of fiscal 2011, primarily due to the addition of four deepwater class of vessels to the international fleet during the current quarter (three vessels mobilized from the U.S. GOM and one was acquired). Revenues earned by the deepwater class of vessels increased approximately $8.3 million, or approximately 10%, relative to the second quarter of fiscal 2011. The company’s crew/utility classes of vessels and offshore tugs also saw an increase in revenues of approximately $0.7 million and $0.9 million, or approximately 4% and 11%, respectively, as compared to the second quarter of fiscal 2011. The company’s towing supply/supply vessels experienced an approximate 2%, or $2.4 million, decline in revenue during the current quarter as compared to the second quarter of fiscal 2011.

Vessel revenues, utilization percentages and average day rates by vessel class for the international segment are disclosed in the “Vessel Class Revenues and Statistics by Segment” section of this report.

Vessel operating profit for the internationally-based vessels increased approximately 6%, or $17.9 million, during third quarter of fiscal 2011 as compared to the second quarter of fiscal 2011, due to higher revenues and an approximate 6%, or $8.6 million, decrease in operating costs (primarily crew costs and repair and maintenance costs). Crew costs decreased approximately 5%, or $3.8 million, during the comparative periods, because the second quarter of fiscal 2011 included a $6.0 million MNOPF-related charge as disclosed above and elsewhere in this document. Had the previous quarter not incurred the MNOPF related charge, crew costs would have increased approximately 3%, or $2.2 million, during the comparative periods, due to an increase in the number of internationally-based vessels as a result of vessels mobilizing from the U.S. GOM and because of a vessel acquisition. Repair and maintenance costs decreased, approximately 22%, or $6.4 million, during the third quarter of fiscal 2011 as compared to the second quarter of fiscal 2011, due to a greater number of drydockings being performed during the second quarter, including the second and third of four expected drydockings being performed on our largest anchor handling towing supply vessels in fiscal 2011.

United States Segment Operations

Vessel revenues generated by the U.S.-based vessels increased 3%, or $0.5 million, during the quarter ended December 31, 2010, as compared to the same period in fiscal 2010, due to higher utilization on the towing supply/supply vessels. Vessel revenues from the U.S.-based vessels increased 5%, or $3.6 million, during the nine-month period ended December 31, 2010, as compared to the same period in fiscal 2010, due to higher utilization on the deepwater vessels.

The company continues to stack and remove from its active fleet vessels that cannot find attractive charter hire contracts. At the beginning of fiscal 2011, the company had 20 stacked vessels in the U.S. segment. During the nine months ended December 31, 2010, the company stacked five additional vessels, sold and/or disposed of 13 vessels from the previously stacked vessel fleet, and returned to domestic service five vessels, resulting in a total of seven U.S.-based stacked vessels as of December 31, 2010.

During the quarter ended December 31, 2010, revenue earned by the company’s towing supply/supply class of vessels increased approximately 12%, or $0.8 million, due to a 10 percentage point increase in utilization and relatively stable average day rates. Revenues for this same class of vessels decreased approximately 2%, or $0.5 million during the nine-month period ended December 31, 2010, as compared to the same period in fiscal 2010, because of approximately 14% lower average day rates despite an 11 percentage point increase in utilization rates. Higher utilization for the U.S. towing supply/supply class of vessels, in part, reflects the disposition of vessels. Revenue on the company’s deepwater class of vessels decreased approximately 1%, or $0.2 million, during the quarter ended December 31, 2010, as compared to the same period in fiscal 2010, due to approximately 5% lower average day rates, while revenues for this same class of vessels increased approximately 14%, or $5.5 million, during the nine-month period ended December 31, 2010, as compared to the same period in fiscal 2010, due to a five percentage point increase in utilization rates because the supply/demand fundamentals in the U.S. GOM vessel market improved for the deepwater class of vessels due to the spill containment effort. Revenue for the U.S.-based crew/utility class of vessels decreased approximately

 

33


$0.1 million and $1.5 million, or 24% and 56%, respectively, during the quarter and nine-month period ended December 31, 2010, as compared to the same periods during fiscal 2010, primarily due to the disposition of vessels resulting from weak demand for the company’s crewboats in the U.S. GOM market. In addition, average day rates on this same class of vessel decreased approximately 4% during the nine months ended December 31, 2010, as compared to the same period in during fiscal 2010.

U.S.-based vessel operating profit decreased approximately $0.3 million, or 21%, during the quarter ended December 31, 2010, as compared to the same periods in fiscal 2010, due to approximately 8% higher vessel operating costs (primarily repair and maintenance costs due to the drydock of one vessel) and 11%, or $0.3 million, higher depreciation expense. U.S.-based vessel operating profit increased approximately $6.6 million, or 122%, during the nine-months ended December 31, 2010, as compared to the same periods in fiscal 2010, due to higher revenues and lower vessel operating costs (primarily crew costs, fuel, lube and supplies and vessel operating leases). Crew costs decreased approximately 7%, or $1.7 million, during the nine-months ended December 31, 2010, primarily due to reductions in crew personnel and wage reductions on the remaining crews staffing the vessels that took place on June 1, 2009. U.S.-based fuel, lube and supplies costs were lower by approximately 12%, or $0.2 million, during the same comparative periods, because fuel costs for the majority of the company’s working vessels were reimbursed by the charter hire customer. Vessel operating leases were 13%, or $0.3 million, lower during the same comparative periods because one vessel operating under an operating lease mobilized to an international market during the third quarter of fiscal 2011.

U.S.-based vessel revenue and vessel operating profit decreased approximately 19% and 77%, or $4.8 million and $4.0 million, respectively, during the third quarter of fiscal 2011 as compared to the second quarter of fiscal 2011, because three deepwater class of vessels mobilized to international markets, including one vessel that is operating under an operating lease. U.S.-based vessel operating costs decreased approximately 5%, or $0.7 million, during the third quarter of fiscal 2011 as compared to the second quarter of fiscal 2011, primarily because of $1.7 million, or 20%, lower crew costs resulting from the mobilization of three deepwater class of vessels to international markets and due to $0.3 million, or 37%, lower vessel operating lease costs because one vessel operating under an operating lease mobilized to an international market during the third quarter of fiscal 2011.

Vessel revenues, utilization percentages and average day rates by vessel class for the U.S. segment are disclosed in the “Vessel Class Revenues and Statistics by Segment” section of this report.

Other Items

Insurance and loss reserves expense increased $4.3 million and $5.2 million, or approximately 250% and 53%, respectively, during the quarter and the nine-month period ended December 31, 2010 as compared to the same periods in fiscal 2010, respectively, because of lower premiums and favorable adjustments to loss reserves during fiscal 2010 due to good safety results and loss management efforts. Insurance and loss reserves during the third quarter of fiscal 2011 were approximately $1.6 million, or 35%, higher than the insurance and loss reserves recorded during the second quarter of fiscal 2011 due to favorable adjustments to loss reserves during the second quarter of fiscal 2011 and an unfavorable development of losses in the quarter ended December 31, 2010.

Gain on asset dispositions, net for the nine months ended December 31, 2010, decreased approximately 50%, or $11.4 million, as compared to the same period in fiscal 2010, due to fewer vessels sales, lower gains earned on the mix of vessels sold, and higher impairment charges taken in fiscal 2011 as discussed below. Dispositions of vessels can vary from quarter to quarter; therefore, gains on sales of assets may fluctuate significantly from period to period.

The company performed a review of all the vessels in its fleet for asset impairment during the quarter ended December 31, 2010, which resulted in the company recording $2.0 million in impairments on four stacked vessels to write down the carrying value of the four assets to a combined fair value of $4.7 million. The company recorded $1.8 million in impairments during the quarter ended September 30, 2010 to write down the carrying value of an asset to its estimated fair value of $1.8 million. The company recorded $1.3 million in impairments during the quarter ended June 30, 2010, and the combined fair value of three vessels that incurred the impairments was $4.5 million. The company recorded $1.7 million in impairments during the quarter ended

 

34


December 31, 2009, on three stacked vessels to write down the carrying value of the three assets to a combined fair value of $4.9 million. The company recorded $0.3 million in impairments during the quarter ended September 30, 2009, and the combined fair value of four vessels that incurred the impairment was $2.0 million. No impairments were recorded during the quarter ended June 30, 2009. The impairment charges were recorded in gain on asset dispositions, net.

Vessel Class Statistics

Vessel utilization is determined primarily by market conditions and to a lesser extent by drydocking requirements. Vessel day rates are determined by the demand created largely through the level of offshore exploration, field development and production spending by energy companies relative to the supply of offshore service vessels. Suitability of equipment and the degree of service provided also influence vessel day rates. Vessel utilization rates are calculated by dividing the number of days a vessel works during a reporting period by the number of days the vessel is available to work in the reporting period. Average day rates are calculated by dividing the revenue a vessel earns during a reporting period by the number of days the vessel worked in the reporting period. Vessel utilization and average day rates are calculated only on vessels in service and, as such do not include vessels withdrawn from service (four vessels at December 31, 2010) or joint venture vessels (10 vessels at December 31, 2010). The following tables compare revenues, day-based utilization percentages and average day rates by vessel class and in total for the quarters and the nine-month periods ended December 31, 2010 and 2009 and the quarter ended September 30, 2010:

 

35


     Quarter Ended
December 31,
     Nine Months Ended
December 31,
     Quarter    
Ended     
September 30,    
 
     2010     2009      2010      2009      2010      
   

REVENUES BY VESSEL CLASS (In thousands):

  

International-based fleet:

             

Deepwater vessels

   $ 96,540        81,670         274,328         224,478         88,193       

Towing-supply/supply

     122,412        144,500         366,306         491,153         124,797       

Crew/utility

     20,534        19,812         59,456         67,775         19,812       

Offshore tugs

     9,704        8,604         27,824         28,499         8,777       

Other

     ---        ---         ---         567         ---       

Total

   $ 249,190        254,586         727,914         812,472         241,579       

United States-based fleet:

             

Deepwater vessels

   $ 12,373        12,554         46,093         40,565         16,672       

Towing-supply/supply

     7,738        6,931         23,299         23,788         8,190       

Crew/utility

     332        436         1,193         2,681         429       

Total

   $ 20,443        19,921         70,585         67,034         25,291       

Worldwide fleet:

             

Deepwater vessels

   $         108,913        94,224         320,421         265,043         104,865       

Towing-supply/supply

     130,150        151,431         389,605         514,941         132,987       

Crew/utility

     20,866        20,248         60,649         70,456         20,241       

Offshore tugs

     9,704        8,604         27,824         28,499         8,777       

Other

     ---        ---         ---         567         ---       

Total

   $ 269,633        274,507         798,499         879,506         266,870       
   

UTILIZATION:

             

International-based fleet:

             

Deepwater vessels

     79.6     78.8         80.1         78.7         77.4       

Towing-supply/supply

     55.1        63.8         54.8         69.7         55.2       

Crew/utility

     80.6        70.4         76.3         72.5         76.0       

Offshore tugs

     58.7        56.0         57.7         56.8         55.1       

Other

     ---        ---         ---         79.2         ---       

Total

     63.7     66.5         62.7         70.4         62.3       

United States-based fleet:

             

Deepwater vessels

     86.0     83.7         88.9         84.1         89.1       

Towing-supply/supply

     45.9        35.8         46.3         35.8         48.9       

Crew/utility

     25.9        14.3         25.3         26.9         32.5       

Total

     52.0     39.5         53.4         42.2         57.2       

Worldwide fleet:

             

Deepwater vessels

     80.2     79.4         81.1         79.4         78.9       

Towing-supply/supply

     54.2        60.7         53.9         65.9         54.6       

Crew/utility

     77.9        65.0         73.3         68.1         73.9       

Offshore tugs

     58.7        56.0         57.7         56.8         55.1       

Other

     ---        ---         ---         79.2         ---       

Total

     62.7     63.8         61.9         67.5         61.8       
   

AVERAGE VESSEL DAY RATES:

             

International-based fleet:

             

Deepwater vessels

   $ 22,663        24,406         22,658         24,677         22,619       

Towing-supply/supply

     11,761        12,164         11,945         12,361         11,975       

Crew/utility

     4,829        4,642         4,797         4,947         4,766       

Offshore tugs

     6,665        6,654         6,495         7,162         6,415       

Other

     ---        ---         ---         9,679         ---       

Total

   $ 12,230        12,247         12,244         12,205         12,173       

United States-based fleet:

             

Deepwater vessels

   $ 25,425        26,683         25,546         26,787         25,432       

Towing-supply/supply

     8,374        8,417         8,113         9,399         8,268       

Crew/utility

     4,749        4,749         4,759         4,966         4,778       

Total

   $ 13,806        14,375         14,327         14,620         14,570       

Worldwide fleet:

             

Deepwater vessels

   $ 22,946        24,687         23,032         24,978         23,024       

Towing-supply/supply

     11,485        11,921         11,617         12,184         11,653       

Crew/utility

     4,828        4,644         4,796         4,948         4,767       

Offshore tugs

     6,665        6,654         6,495         7,162         6,415       

Other

     ---        ---         ---         9,679         ---       

Total

   $ 12,337        12,380         12,403         12,360         12,366       
   

 

36


The following tables compare vessel average day rates and day-based utilization percentages for the company’s International-based fleet and U.S.-based fleet and in total for the company’s new vessels (defined as vessels acquired or constructed since calendar year 2000 as part of its new build and acquisition program) and its older, more traditional vessels for the quarters and the nine-month periods ended December 31, 2010 and 2009 and for the quarter ended September 30, 2010:

 

     Quarter Ended
December 31,
     Nine Months Ended
December 31,
     Quarter      
Ended       
        September 30,      
 
     2010     2009      2010      2009      2010                  
   

AVERAGE VESSEL DAY RATES:

             

International-based fleet:

             

New vessels

   $             14,100        15,807         14,258         16,126         14,122                   

Traditional vessels

     7,285        7,584         7,569         8,275         7,603                   

Total International-based fleet

   $ 12,230        12,247         12,244         12,205         12,173                   

United States-based fleet:

             

New vessels

   $ 20,490        20,843         21,030         19,931         21,205                   

Traditional vessels

     10,196        10,269         9,943         10,985         10,039                   

Total U.S.-based fleet

   $ 13,806        14,375         14,327         14,620         14,570                   

Worldwide fleet:

             

New vessels

   $ 14,317        16,027         14,561         16,328         14,463                   

Traditional vessels

     7,712        7,815         7,908         8,480         7,964                   

Total Worldwide Fleet

   $ 12,337        12,380         12,403         12,360         12,366                   
   

UTILIZATION:

             

International-based fleet:

             

New vessels

     87.5     86.6         86.6         86.6         85.8                   

Traditional vessels

     37.0        51.0         38.2         59.3         37.9                   

Total International-based fleet

     63.7     66.5         62.7         70.4         62.3                   

United States-based fleet:

             

New vessels

     69.8     52.7         71.7         56.4         76.6                   

Traditional vessels

     45.7        34.1         45.7         35.9         48.8                   

Total U.S.-based fleet

     52.0     39.5         53.4         42.2         57.2                   

Worldwide fleet:

             

New vessels

     86.8     84.2         85.8         84.2         85.3                   

Traditional vessels

     38.1        49.0         39.2         56.5         39.2                   

Total Worldwide Fleet

     62.7     63.8         61.9         67.5         61.8                   
   

 

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Vessel Count, Dispositions, Acquisitions and Construction Programs

The following table compares the average number of vessels by class and geographic distribution for the quarters and the nine-month periods ended December 31, 2010 and 2009 and for the quarter ended September 30, 2010:

 

     Quarter Ended
December 31,
       Nine Months Ended  
December 31,
     Quarter
Ended
September 30,    
 
       2010      2009           2010      2009           2010              
   

International-based fleet:

              

Deepwater vessels

     59         46             55         42             55           

Towing-supply/supply

     205         203             204         207             205           

Crew/utility

     57         66             59         69             59           

Offshore tugs

     27         25             27         25             27           

Other

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

Total

     348         340             345         343             346           
   

United States-based fleet:

              

Deepwater vessels

     6         6             7         7             8           

Towing-supply/supply

     22         25             22         26             22           

Crew/utility

     3         7             4         7             3           
   

Total

     31         38             33         40             33           
   

Owned or chartered vessels
included in marine revenues

     379         378             378         383             379           

Vessels withdrawn from service

     5         7             6         8             6           

Joint-venture and other

     10         10             10         10             10           
   

Total

     394         395             394         401             395           
   

Included in owned or chartered vessels are vessels that were stacked by the company. The company considers a vessel to be stacked if the vessel crew is disembarked and limited maintenance is being performed on the vessel. The company reduces operating costs by stacking vessels when management does not foresee opportunities to profitably or strategically market the vessels in the near future. Vessels are added to this list when market conditions warrant and they are removed from this list when they are returned to active service, sold or otherwise disposed. When economically practical marketing opportunities arise, the stacked vessels can be returned to service by performing any necessary maintenance on the vessel and returning fleet personnel to operate the vessel. Although not currently fulfilling charters, stacked vessels are considered to be in service and are included in the calculation of the company’s utilization statistics. The company had 92, 73 and 94 stacked vessels at December 31, 2010 and 2009 and at September 30, 2010, respectively.

Vessels withdrawn from service represent those vessels that management has determined are unlikely to return to active service and are currently marketed for sale. Vessels withdrawn from service are not included in the company’s utilization statistics.

The following is a summary of net properties and equipment at December 31, 2010 and March 31, 2010:

 

     December 31, 2010        March 31, 2010  
    

 

Number
Of Vessels

    

Carrying

Value

       Number
of Vessels
    

Carrying

Value

 
   
            (In thousands)                  (In thousands)           

Vessels in active service

     265             $ 2,245,174                 282             $ 1,891,322               

Stacked vessels

     92               48,031                 83               47,959               

Vessels withdrawn from service

     5               693                 7               440               

Marine equipment under construction

        304,401                    275,578               

Other property and equipment

        38,521                    38,525               
   

Totals

     362             $   2,636,820                 372             $   2,253,824               
   

 

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Vessel Dispositions

The company seeks opportunities to sell and/or scrap its older vessels when market conditions warrant and opportunities arise. The majority of the company’s vessels are sold to buyers who do not compete with the company in the offshore energy industry.

During the nine months ended December 31, 2010, the company disposed of 37 vessels, including 18 anchor handling towing supply vessels, six platform supply vessels, 11 crewboats, one offshore tug vessel and one utility vessel. Thirteen of the 37 vessels disposed of were from the U.S. GOM vessel fleet while 21 vessels were from the international fleet. The remaining three vessels were disposed of from vessels previously withdrawn from service.

During fiscal 2010, the company disposed of 70 vessels, including 25 anchor handling towing supply vessels, 21 platform supply vessels, 10 crewboats, seven offshore tugs, five utility vessels and two other type vessels. Five of the 70 vessels disposed of were from the U.S. GOM vessel fleet while 61 vessels were from the international fleet. The remaining four vessels were disposed of from vessels previously withdrawn from service. Six of the platform supply vessels that were disposed of were sold and leased back by subsidiaries of the company during fiscal 2010. A complete discussion regarding the sale/leaseback transactions is disclosed in the “Off-Balance Sheet Arrangements” section of this report on Form 10-Q.

Included in the above fiscal 2010 vessel dispositions are 15 vessels that were expropriated by the Venezuelan government as previously disclosed. Of the 15 expropriated vessels, one was an anchor handling towing supply vessel, three were platform supply vessels, one was a crewboat, five were offshore tugs, three were utility vessels, and two were other type vessels.

Vessel Deliveries and Acquisitions

During the nine months ended December 31, 2010, the company took delivery of seven newly-built vessels and acquired 19 vessels from third parties. Of the seven newly-built vessels added to the fleet during the nine months ended December 31, 2010, three were anchor handling towing supply vessels, three were platform supply vessels and one was a fast, crew/supply boat. The anchor handling towing supply vessels were constructed at two different international shipyards for a total approximate cost of $62.1 million and varied in size from 5,150 to 13,570 brake horsepower (BHP). The three deepwater, platform supply vessels (one 230-foot and two 240-foot) were constructed for approximately $57.9 million and were built by two different international shipyards. The crewboat was constructed at an international shipyard for an approximate cost of $9.4 million and is a 175-foot fast, crew/supply boat.

Of the 19 acquired vessels added to the fleet during the nine months ended December 31, 2010, 16 were anchor handling towing supply vessels (nine 5,150 BHP, two 8,000 BHP and five 9,500 BHP) and three platform supply vessels (one 230-foot, one 240-foot and one 250-foot) for a total cost of $329.3 million during the nine months ended December 31, 2010.

During fiscal 2010, the company took delivery of nine anchor handling towing supply vessels for an aggregate approximate total cost of $182.8 million, 11 platform supply vessels for an aggregate approximate total cost of $269.4 million, one crewboat for an approximate cost of $1.3 million and two offshore tugs for an aggregate approximate total cost of $29.3 million. The company also acquired three anchor handling towing supply vessels for a total cost of $42.6 million and two offshore tugs for a total approximate cost of $12.8 million during fiscal 2010.

Vessel Construction and Acquisition Expenditures

At December 31, 2010, the company had eight anchor handling towing supply vessels under construction, varying in size from 5,150 to 8,200 BHP, for a total capital commitment of approximately $140.8 million. Two different international shipyards are constructing the vessels. Scheduled deliveries for the eight vessels will begin in April 2011, with the last vessel scheduled for delivery in February 2012. As of December 31, 2010, the company had expended $92.2 million for the construction of these eight vessels.

 

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The company is also committed to the construction of four 265-foot, one 266-foot and twelve 286-foot deepwater platform supply vessels for a total aggregate investment of approximately $488.1 million. The company’s shipyard, Quality Shipyards, L.L.C., is constructing the 266-foot deepwater class vessel. One international shipyard is constructing the four 265-foot vessels and a different international shipyard is constructing the twelve 286-foot vessels. The four 265-foot deepwater class vessels are expected to be delivered to the market beginning in May 2012, with final delivery of the fourth vessel in November 2012. The 266-foot deepwater class vessel is scheduled for delivery in November 2011. The twelve 286-foot deepwater class vessels are expected to be delivered to the market beginning in March 2011, with final delivery of the twelfth 286-foot vessel scheduled for October of 2012. As of December 31, 2010, $191.4 million has been expended on these 17 vessels.

The company is also committed to the construction of one 175-foot, fast, crew/supply boat for a cost of approximately $10.2 million. The vessel is being constructed at an international shipyard and is expected to be delivered in March of 2012. As of December 31, 2010, the company expended $7.6 million for the construction of this vessel.

At December 31, 2010, the company also had agreed to purchase 10 anchor handling towing supply vessels and one platform supply vessel. The aggregate approximate purchase price for these 11 vessels is $143.7 million. The company took possession of one anchor handling towing supply vessel in January 2011 for an approximate purchase price of $11.7 million and expects to take possession of eight of the remaining nine anchor handling towing supply vessels throughout calendar year 2011 and the final anchor handling towing supply vessel in February 2012 for an aggregate purchase price of $110.0 million. The company plans to take possession of the platform supply vessel in April 2011 for an approximate purchase price of $22.0 million. As of December 31, 2010, the company had expended $5.6 million for the acquisition of these 11 vessels.

Vessel Commitments Summary at December 31, 2010

The table below summarizes the various vessel commitments, including vessels under construction and vessel acquisitions, by vessel class and type as of December 31, 2010:

 

     International Built           U.S. Built  
Vessel class and type   

    Number

of

    Vessels

    

Total

Cost

    

Expended    

Through    

12/31/10    

         

    Number

    of

    Vessels

    

Total

Cost

    

Expended            

Through            

12/31/10            

 
   
     (In thousands)           (In thousands)  

Deepwater vessels:

                    

Anchor handling towing supply

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

Platform supply vessels

     17         $475,504         $172,059                1         $34,645         $23,834               

Towing-supply/supply vessels:

                    

Anchor handling towing supply

     18         $262,452         $93,377                ---         ---         ---               

Platform supply vessels

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

Crewboats

     1         $10,227         $7,590                ---         ---         ---               
   

Totals

     36         $748,183         $273,026                1         $34,645         $23,834               
   

 

40


The table below summarizes by vessel class and vessel type the number of vessels expected to be delivered by quarter of the various vessel commitments as discussed above along with the expected quarterly cash outlay:

 

     Quarter Period Ended  
Vessel class and type    03/11      06/11      09/11      12/11      03/12      Thereafter          
   

Deepwater vessels:

                 

Anchor handling towing supply

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

Platform supply vessels

     1         2         1         4         1         9           

Towing-supply/supply vessels:

                 

Anchor handling towing supply

     3         4         3         6         2         ---           

Platform supply vessels

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

Crewboats

     ---         ---         ---         ---         1         ---           
   

Totals

     4         6         4         10         4         9           
   

(In thousands)

                 

Expected quarterly cash outlay

   $     130,114         96,785         60,277         91,912         53,912         52,968 (A)       
   

 

(A)

The $52,968 of ‘Thereafter’ vessel construction obligations is expected to be paid out during fiscal 2013.

The company believes it has sufficient liquidity and financial capacity to support a continued investment in new vessels, assuming customer demand, acquisition and shipyard economics and other considerations justify such an investment. 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 its financial position and conditions in the credit and capital markets. In recent years, the company has funded vessel additions with available cash, operating cash flow, revolving credit facilities, various leasing arrangements, and funds provided by the July 2003 private placement of $300.0 million and the September 2010 private placement of $425.0 million in senior unsecured notes, as disclosed in Note (5) of Notes to Unaudited Condensed Consolidated Financial Statements. The company has $486.0 million of remaining capital commitments on the 26 vessels currently under construction and the 11 vessel purchase commitments at December 31, 2010.

General and Administrative Expenses

Consolidated general and administrative expenses and its related percentage of total revenue for the quarters and the nine-month periods ended December 31, 2010 and 2009 and for the quarter ended September 30, 2010 were as follows:

 

         Quarter Ended
December 31,
   Nine Months Ended
December  31,
   Quarter    
Ended     
September 30,    
(In thousands)        2010      %    2009      %    2010      %    2009      %    2010      %    
 

Personnel

 

$

     19,620       7%              19,724       7%