RPC, Inc. — 2014 Form 10-K Summary
Business context and reporting period
RPC provides oilfield services and equipment, primarily to oil and gas producers in the United States and selected international markets. This annual report covers the fiscal year ended December 31, 2014; it also provides unaudited fourth-quarter results. Technical Services generated about 93% of annual revenue, with pressure pumping alone accounting for approximately 57%. International revenue was about 4% of the total.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $2.337 billion | $1.861 billion |
| Operating profit | $400.0 million | $275.4 million |
| Operating margin | 17.1% | 14.8% |
| Net income | $245.2 million | $166.9 million |
| Diluted EPS | $1.14 | $0.77 |
| Operating cash flow | $322.8 million | $365.6 million |
| Capital expenditures | $371.5 million | $201.7 million |
| Long-term debt | $224.5 million | $53.3 million |
Revenue rose 25.6%, and net income increased about 47%. Higher activity, service intensity and pressure-pumping equipment contributed to revenue growth; improved utilization helped segment profits. Cost of revenue increased to 64% of revenue from 63%, while SG&A fell to 8.5% of revenue from 9.9%. Operating cash flow declined mainly because of higher working-capital needs, including receivables and inventory. Capital spending exceeded operating cash flow by approximately $48.7 million.
At year-end, cash was $9.8 million and working capital was $612.6 million. RPC had $96.2 million available under its $350 million revolving facility, including the effect of $29.3 million in outstanding letters of credit. The facility matures in January 2019; the company reported compliance with its covenants. Management described liquidity and capitalization as adequate for at least the next 12 months.
Fourth-quarter revenue was $632.2 million, operating profit $125.0 million, net income $77.6 million and diluted EPS $0.36, compared with $487.0 million, $64.5 million, $37.6 million and $0.17, respectively, in fourth-quarter 2013.
Material changes, outlook and risks
- Business conditions deteriorated sharply late in 2014 as oil prices fell. Management reported that the U.S. rig count had declined about 30% from its third-quarter 2014 peak by early 2015, and expected further near-term declines and pressure on activity and results.
- Management did not expect the overall rig count to increase during 2015 unless oil prices recovered, and planned no further fleet expansion that year. It forecast approximately $200 million of 2015 capital expenditures, primarily for maintenance, refurbishment and selected equipment purchases.
- Management expected weaker activity to reduce labor and raw-material costs, but cautioned that competitive pricing could make it difficult to convert those savings into higher operating profit. It also stated that it did not expect to enter new long-term customer service arrangements during 2015.
- Key exposures include oil and gas price volatility, concentrated exposure to the energy industry, intense competition and pricing pressure, availability and cost of skilled labor and supplies, safety and environmental incidents, regulation of hydraulic fracturing, weather, customer credit, and political and currency risks in international markets.
- RPC reported a $14.8 million underfunding of its defined-benefit pension plan at year-end; the reported pension liability also includes a separate SERP liability. The company estimated approximately $0.9 million in 2015 pension contributions.
- The company recorded a $15.5 million net loss on asset dispositions in 2014. Routine litigation was disclosed; management believed the proceedings would not materially adversely affect the business or financial condition. No material off-balance-sheet arrangements were reported.
Other notable disclosures
The board approved a $0.105-per-share dividend in January 2015; future dividends remain subject to financial condition and other factors. RPC repurchased 2.7 million shares on the open market during 2014, and 2.05 million shares remained under the repurchase authorization at year-end. A group including the Rollins brothers and affiliated entities controlled more than 50% of voting power; directors, officers and affiliates held approximately 72% of shares. RPC and Marine Products each contributed about $2.6 million to a jointly owned aircraft venture, with the aircraft purchase completed in January 2015.
Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2014.
Most important facts for investors to verify
- Whether the steep post-year-end decline in oil prices and rig activity materially reduced revenue, utilization, pricing or margins after the reporting date.
- Whether operating cash flow and working capital can support planned maintenance and capital spending without further material increases in borrowings.
- The availability and covenant headroom under the revolving credit facility, including sensitivity to floating interest rates.
- The recoverability of the sharply higher receivables and inventory balances, and any resulting bad-debt or obsolescence charges.
- The status and funding assumptions of the pension plan, material legal or environmental exposures, and the terms and ongoing costs of the aircraft venture and other related-party arrangements.