RPC, Inc. — FY 2013 Form 10-K
Business context and reporting period. RPC provides oilfield services and equipment, primarily in the United States, through Technical Services and Support Services. The filing covers the fiscal year ended December 31, 2013; it also includes unaudited quarterly results. Pressure pumping represented approximately 55% of annual revenue. About 64% of revenue was tied to oil activity and 36% to natural gas activity.
Financial results
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $1,861.5 million | $1,945.0 million | Down 4.3% |
| Operating profit | $275.4 million | $442.4 million | Down 37.8% |
| Operating margin | 14.8% | 22.7% | Down 7.9 percentage points |
| Net income | $166.9 million | $274.4 million | Down 39.2% |
| Diluted earnings per share | $0.77 | $1.27 | Down 39.4% |
| Cash from operating activities | $365.6 million | $559.9 million | Down $194.3 million |
| Capital expenditures | $201.7 million | $328.9 million | Down $127.3 million |
Cost of revenues rose to $1,178.4 million, or 63% of revenue, from $1,105.9 million, or 57%. Selling, general and administrative expenses increased 5.4% to $185.2 million and were 9.9% of revenue, versus 9.0%. The effective tax rate increased to 39.6% from 38.0%.
At year-end, cash was $8.7 million, working capital was $436.9 million, and long-term debt was $53.3 million, down from $107.0 million. The $350 million revolving credit facility had $272.6 million available, with $24.1 million supporting letters of credit. Total assets were $1,383.9 million and stockholders’ equity was $968.7 million. The company reported compliance with its credit covenants.
Material changes and quarterly trend
- Both segments weakened: Technical Services revenue declined 3.6% and operating profit fell to $276.2 million from $420.2 million; Support Services revenue declined 12.7% and operating profit fell to $26.2 million from $45.9 million. Management attributed the pressure mainly to lower pricing; Technical Services also faced higher materials and supplies costs.
- Domestic revenue declined 4.0%; international revenue fell to $65.9 million from $74.2 million, mainly due to lower activity in New Zealand and Mexico. International business remained about 4% of total revenue.
- Operating cash flow declined primarily because of lower earnings and an unfavorable working-capital change, including higher accounts receivable. Capital spending was reduced as pricing and expected returns on additional equipment weakened.
- In the fourth quarter, revenue was $487.0 million, operating profit $64.5 million, and net income $37.6 million. Compared with fourth-quarter 2012, revenue increased from $469.9 million, while operating profit declined from $89.3 million and net income from $55.4 million.
Outlook, risks and notable items
- Management expected approximately $200 million of 2014 capital expenditures, mostly for equipment maintenance and pressure-pumping fleet refurbishment, and did not plan a significant fleet expansion. It expected about $0.8 million of pension contributions in 2014.
- Management viewed sustained high oil prices and oil-directed drilling as supportive of near-term activity, but expected natural-gas drilling to remain weak unless higher gas prices persisted. It cited excess U.S. service capacity and competitive pricing as continuing concerns. These statements are forward-looking, not guarantees.
- The revolving credit facility was amended in January 2014, extending maturity to January 2019 and reducing loan pricing by 0.125 percentage points at all pricing levels. The company incurred approximately $0.7 million in related fees and costs.
- The allowance for doubtful accounts increased to $13.5 million from $9.1 million; 2013 bad-debt expense was $8.8 million versus $1.8 million. Unbilled receivables were $80.8 million.
- Unrecognized tax benefits rose to $16.3 million from $38,000, primarily relating to state tax refund claims. The IRS was examining the 2011 federal return; no adjustments had been proposed as of year-end. Management said the tax-benefit balance could decrease in the next 12 months, but could not estimate a range.
- Routine commercial, workers’ compensation and personal-injury proceedings were disclosed; management did not expect them, even if resolved adversely, to materially affect the company. Self-insurance exposure was estimated at $14.1 million to $18.6 million, with $16.3 million recorded.
- Other key risks include oil and gas price volatility, service-pricing competition, skilled-labor and supplier constraints, severe weather, environmental and hydraulic-fracturing regulation, international political risks, and potential liability from hazardous operations. The Rollins family and affiliated entities controlled more than 50% of voting power; directors, executives and affiliates held approximately 72% of shares.
- The board approved a $0.105-per-share dividend in January 2014. RPC reported $0.40 per share in dividends paid during 2013. Grant Thornton issued unqualified opinions on the financial statements and internal controls; management also assessed internal control as effective.
Important facts for investors to verify
- Whether service pricing, utilization and cost of revenues improve, especially in pressure pumping, and how excess capacity affects margins.
- Whether receivables and the higher bad-debt allowance convert to cash as expected.
- The outcome of state tax refund claims, the IRS examination and the potential change in unrecognized tax benefits.
- Whether planned 2014 capital spending is sufficient to maintain equipment and support customer demand without straining liquidity.
- Whether the $16.3 million recorded self-insurance liability adequately reflects claims exposure, and how pension funding needs develop.
- Whether the dividend remains supportable given earnings, cash generation and capital requirements; also review the January 2014 credit amendment and covenant terms.