RPC, Inc. — Q3 2011 Form 10-Q
Business and period: RPC provides oilfield services and related equipment in the U.S. and selected international markets. This unaudited report covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $502.2m | $302.2m | $1,327.0m | $768.2m |
| Operating profit | $134.5m | $74.4m | $360.0m | $149.0m |
| Net income | $83.1m | $46.3m | $221.8m | $91.3m |
| Diluted EPS | $0.57 | $0.32 | $1.51 | $0.62 |
| Operating margin | 26.8% | 24.6% | 27.1% | 19.4% |
Margins are calculated from reported revenue and operating profit. Revenue increased 66.2% in Q3 and 72.7% for the first nine months. Technical Services led growth: revenue rose 73.0% in Q3 and 78.1% year to date; Support Services revenue rose 12.9% and 28.8%, respectively. Q3 cost of revenues was 55.7% of revenue versus 53.8% a year earlier; nine-month cost ratio improved to 54.6% from 56.2%. SG&A as a share of revenue declined to 7.4% in Q3 and 8.2% year to date, from 11.0% and 11.8%.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $312.9m, compared with $92.6m in 2010. Working-capital changes used $103.8m, including a $143.4m increase in accounts receivable and $29.3m increase in inventories.
- Capital expenditures were $305.7m versus $106.1m; investing cash outflow was $286.8m. Cash ended at $7.0m, down from $9.0m at year-end 2010.
- Bank borrowings were $140.8m, up from $121.3m at year-end 2010. The $350m revolving facility matures August 2015; $192.6m was available at quarter-end, after $16.6m of letters of credit. RPC reported compliance with its debt covenants.
- Total assets were $1,214.0m and stockholders’ equity was $718.8m at September 30, 2011. Dividends paid during the first nine months totaled $32.5m; the company also repurchased shares.
Outlook, commentary and risks
- Management expected U.S. oilfield activity to remain positive through the rest of 2011 and cited expanding opportunities in unconventional basins. It cautioned that competition could increase and that weak natural-gas prices could hurt activity in gas-focused basins.
- Full-year 2011 capital expenditures were expected to be approximately $400m–$450m, for growth, maintenance and customer-specific equipment. This is a spending outlook, not earnings guidance.
- Management attributed growth to a larger revenue-producing fleet, higher utilization and improved pricing. Q3 pressure-pumping material logistics and changing job mix raised costs; higher activity also brought fuel, wage and material cost pressures.
- Net losses on asset dispositions were $4.2m in Q3, versus a $0.9m gain in Q3 2010; management linked losses in part to equipment wear from high-intensity operations. The interest-rate swap on $50m of debt expired September 8, leaving $140.8m of floating-rate borrowings; a 1 percentage-point rate change would affect annual interest cost by about $1.4m.
- Ongoing sales and use tax audits could have unfavorable outcomes, which the company said could not then be estimated. RPC reported ordinary-course litigation and did not expect a material adverse effect. The board approved a $0.10-per-share dividend on October 25, payable December 10, 2011.
Important facts for investors to verify
- Whether customer activity, pricing and utilization in unconventional basins sustain growth, especially if natural-gas prices remain weak.
- Whether planned 2011 capital spending stays within the $400m–$450m range and generates returns sufficient to support cash flow and debt levels.
- Working-capital trends, particularly receivables and inventory, and the remaining availability and covenant headroom on the credit facility.
- Pressure-pumping supply costs, equipment wear and disposition losses, and exposure to floating interest rates following the swap’s expiration.
- Developments in sales and use tax audits and other contingencies; the filing does not provide a clear estimate of potential audit exposure.