RPC, Inc. — Q2 2019 Form 10-Q
Business context and period: RPC provides oilfield services, principally in the U.S. Its Technical Services segment includes pressure pumping and other well-site services; Support Services includes rental tools and related offerings. This unaudited report covers the quarter and six months ended June 30, 2019, compared with the same 2018 periods.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $358.5m | $467.9m | $693.2m | $904.3m |
| Operating income | $8.4m | $75.0m | $6.2m | $135.8m |
| Net income | $6.2m | $59.9m | $5.4m | $112.1m |
| Diluted EPS | $0.03 | $0.28 | $0.02 | $0.52 |
| Operating cash flow | — | $93.4m | $229.2m |
Q2 operating margin was approximately 2.3% versus 16.0% a year earlier; six-month margin was approximately 0.9% versus 15.0%. Cost of revenues was 73.9% of Q2 revenue (66.7% in 2018) and 74.7% for the first half (67.2% in 2018). SG&A was 12.1% of Q2 revenue and 12.8% of first-half revenue, up from 9.1% and 9.5%, respectively.
Balance sheet and liquidity: At June 30, cash was $47.6m, down from $116.3m at year-end 2018; current assets were $540.1m and current liabilities $172.4m. Total liabilities were $302.3m and stockholders’ equity $921.7m. RPC had no revolving-credit borrowings; $104.4m of its $125m facility remained available after $20.6m of letters of credit. The facility matures in July 2023, and the company reported covenant compliance.
Six-month investing cash outflow was $122.5m, including $132.3m of capital expenditures; financing outflow was $39.6m, including $32.2m of dividends and $7.3m of share repurchases. Operating cash flow less capital expenditures was negative $38.8m. RPC reported no material off-balance-sheet arrangements.
Material changes and management commentary
- Q2 revenue declined 23.4% year over year; first-half revenue fell 23.3%. Management attributed the decline mainly to lower pricing and activity and an unfavorable materials mix in pressure pumping, RPC’s largest service line.
- Technical Services revenue fell 24.9% in Q2 and its operating income dropped to $6.9m from $75.6m. Support Services revenue rose 13.3%, with operating income of $4.0m versus $1.2m.
- Management cited increasingly competitive pricing, labor-cost inefficiencies, more efficient completion crews and oversupply in some completion services as pressures on pricing, utilization and results. Depreciation and amortization increased with prior-period capital spending.
- Prior-year other income included property-insurance proceeds of $4.4m in Q2 and approximately $9.6m in the first half, contributing to the year-over-year earnings comparison.
- Six-month operating cash flow fell $135.8m, mainly due to lower earnings and an unfavorable working-capital change. Accounts receivable increased as revenues declined; inventory reductions provided a partial offset.
Outlook, risks and unusual items
- RPC expected approximately $260m of 2019 capital expenditures, primarily for revenue-producing equipment and maintenance; $132.3m had been spent through June 30. Management said U.S. completion activity could remain near current levels or decline in the near term.
- Management saw moderately positive implications from oil-price changes early in 2019, but identified falling rig counts, oilfield-service oversupply, competition and pricing pressure as near-term risks. Results are also exposed to oil and gas prices, customer capital spending, weather, geopolitical events, regulation, international project timing and reliance on large customers.
- The board voted in late July 2019 to suspend the common-stock dividend. The filing says resumption would depend on earnings, financial condition and other factors. This followed dividends of $0.15 per share in the first half.
- RPC adopted lease accounting in 2019, recording $42.7m of operating lease right-of-use assets and $43.8m of lease liabilities at June 30; adoption did not materially affect operating results or cash flows. A $2.7m pension-related tax effect was reclassified from accumulated other comprehensive loss to retained earnings.
- Ongoing sales and use tax audits could have unfavorable outcomes that RPC said could not then be estimated. The company said ordinary-course litigation was not expected to materially affect its financial position or results.
Important facts for investors to verify
- Whether pressure-pumping pricing, activity, materials mix and equipment utilization stabilize or deteriorate further.
- Progress toward the $260m capital-spending expectation and the resulting effect on cash, liquidity and returns on new equipment.
- The duration and financial implications of the dividend suspension, and any changes to share repurchases.
- Working-capital trends, particularly receivables and cash conversion, as activity and revenue change.
- Potential outcomes of sales and use tax audits, and any material developments in litigation or credit-facility covenant compliance.