RPC, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. RPC provides oilfield services, principally in the United States, through Technical Services and Support Services. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $440.0 | $471.0 | $1,344.3 | $1,167.9 |
| Operating income | $54.6 | $97.4 | $190.4 | $165.9 |
| Net income | $50.0 | $57.3 | $162.0 | $104.8 |
| Diluted EPS | $0.23 | $0.26 | $0.75 | $0.48 |
| Operating margin | 12.4% | 20.7% | 14.2% | 14.2% |
- Revenue mix: Q3 Technical Services revenue fell 7.6% to $421.3 million, chiefly reflecting weaker pressure-pumping activity and slightly lower pricing. Support Services revenue rose 22.5% to $18.7 million, led by rental tools. For the nine-month period, revenue increased 15.1%; Technical Services rose 14.4% and Support Services 33.3%.
- Margins and earnings: Q3 cost of revenue rose to 68.4% of revenue from 62.6%, reflecting higher employment costs and inefficiencies from uneven activity. Q3 SG&A was 9.5% of revenue versus 8.4%. Nine-month cost of revenue was 67.6% versus 65.5%, while SG&A improved to 9.5% from 10.0% of revenue.
- Taxes and unusual items: The Q3 effective tax rate was 9.9% versus 41.7%; the nine-month rate was 19.6% versus 38.1%. The 2018 rates reflect the Tax Cuts and Jobs Act and a $7.5 million discrete tax benefit. Nine-month other income included $9.6 million of property-insurance proceeds. These items supported nine-month net income growth despite operating income increasing only modestly.
- Cash flow: Nine-month operating cash flow was $322.0 million, up from $109.3 million, aided by favorable working-capital changes, including lower receivables, as well as higher earnings. Investing cash outflow was $179.8 million, including $199.6 million of capital expenditures; financing cash outflow was $104.8 million, including $64.6 million in dividends and $40.2 million in share repurchases. Cash increased to $128.4 million from $91.1 million at year-end 2017.
- Liquidity and debt: Current assets were $663.6 million and current liabilities $177.6 million at September 30. RPC had no revolver borrowings and $105.5 million of its $125 million facility available after $19.5 million of letters of credit. The facility maturity was extended to July 2023; RPC reported covenant compliance. Total liabilities were $269.1 million.
- Capital returns: RPC paid $0.30 per share in dividends during the first nine months, versus $0.06 in the prior-year period. On October 23, the board declared a regular $0.10 and special $0.07 per-share dividend, payable December 10, 2018. No open-market repurchases occurred in Q3; 9.1 million shares remained authorized for repurchase.
Management outlook, risks and contingencies
- Management expected moderate near-term growth in U.S. well-completion activity and saw early-Q4 commodity prices as moderately supportive. It also cautioned that competition, service efficiency and logistical constraints could pressure revenue, earnings and cash flow for the remainder of 2018. Natural-gas prices remained insufficient, in management’s view, to encourage significant gas-directed activity.
- RPC forecast approximately $280 million in 2018 capital expenditures, primarily for revenue-producing equipment and maintenance; $199.6 million had been spent through September. Management expected sufficient liquidity for at least the next 12 months and intended to maintain little or no debt.
- The Permian Basin is RPC’s largest market. Potential pipeline capacity constraints—then expected to persist until additional capacity was completed, estimated by analysts for Q3 2019—could curtail customer activity and hurt results. Other identified risks include commodity-price declines, competition and inability to raise prices, skilled-labor and input-cost pressures, weather, regulation, customer financing and international operating risks.
- Sales and use tax audits were ongoing; some possible unfavorable outcomes could not be estimated. RPC said ordinary-course litigation was not expected to materially affect its financial position or results. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Q3 pressure-pumping activity, pricing and operating margins stabilize after the quarter’s sharp decline.
- How much of nine-month cash generation reflects sustainable operations versus working-capital movements, insurance proceeds and tax benefits.
- Whether Permian pipeline constraints, competition and labor costs affect customer activity, pricing and the planned capital-spending program.
- Whether the $7.5 million discrete tax benefit and lower statutory tax rate continue to affect reported earnings comparably in future periods.
- Progress on the sales and use tax audits, credit-facility covenant compliance, and the timing and funding of declared dividends and any future repurchases.