RPC, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. RPC provides oilfield services and related equipment, primarily in the United States. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $443.0 | $252.9 | $824.8 | $466.0 |
| Operating profit | $119.3 | $52.1 | $225.6 | $74.7 |
| Net income | $73.2 | $31.6 | $138.7 | $45.0 |
| Diluted EPS | $0.50 | $0.21 | $0.94 | $0.31 |
| Cost of revenue / revenue | 54.8% | 55.2% | 53.9% | 57.7% |
| SG&A / revenue | 8.1% | 11.7% | 8.7% | 12.3% |
Q2 revenue increased 75.2%; six-month revenue increased 77.0%. Technical Services drove most of the growth: Q2 segment revenue rose 80.3% to $406.7 million, while Support Services revenue rose 32.7% to $36.3 million. Management attributed growth to higher activity, expanded customer relationships, a larger revenue-producing equipment fleet, and improved pricing. Q2 operating margin was approximately 26.9% versus 20.6% a year earlier; net margin was approximately 16.5% versus 12.5%.
- Cash flow and investment: Six-month operating cash flow was $170.8 million, compared with $47.8 million. Investing cash outflow was $188.6 million, including $203.8 million of capital expenditures; financing cash inflow was $15.9 million. The cash-flow statement reports six-month figures; an MD&A passage describes $170.8 million as quarterly operating cash flow, which appears inconsistent with the statements.
- Liquidity and debt: Cash was $7.2 million at June 30, down from $9.0 million at year-end 2010. Current assets were $510.1 million and current liabilities $175.6 million. Bank borrowings were $173.1 million, up from $121.3 million at year-end 2010; $157.4 million remained available under the $350 million revolving facility after outstanding letters of credit. The company reported compliance with financial covenants.
- Other balance-sheet items: Total assets were $1.115 billion and stockholders’ equity $646.3 million. Accounts receivable rose to $400.3 million from $294.0 million at year-end, alongside higher business activity.
- Shareholder returns: Six-month dividends declared were $20.7 million, and the company repurchased and retired shares for $18.9 million in cash. The board approved a subsequent $0.08-per-share dividend payable September 9, 2011.
Changes and management outlook
Profitability improved substantially year over year as higher activity and pricing leveraged fixed employment and overhead costs. Cost of revenue as a share of sales also benefited from pricing and, for the six-month period, improved procurement and service mix; higher materials and supply costs, particularly in pressure pumping, partly offset these gains. Depreciation and amortization increased with equipment placed in service.
Management expects full-year 2011 capital expenditures of approximately $400 million, including fleet expansion for unconventional basins, maintenance, and customer-specific projects. It expected domestic oilfield activity to remain positive and forecast higher revenue and improved financial performance for the remainder of 2011 versus 2010. Management said the expanded fleet could lift revenue and profit as soon as Q4 2011. These are expectations, not guarantees.
Risks, contingencies, and unusual items
- Management cited near-term natural-gas price weakness and exposure to gas-focused basins, competition and uncertain service pricing, inflation and possible wage and materials cost increases, and variability in international project timing. Oil and gas prices, customer spending, weather, geopolitical events, and offshore regulation may also affect demand.
- The company expected to manage credit-facility use closely while increasing capital spending. Its $50 million interest-rate swap, which hedged part of variable-rate debt, was scheduled to terminate September 8, 2011; a 1-percentage-point rate change on unhedged borrowings would affect annual interest cost by approximately $1.2 million.
- Ongoing sales and use tax audits could have unfavorable outcomes, but the potential amount was not estimable. RPC said ordinary-course litigation was not expected to materially affect its financial position or results. It reported no material off-balance-sheet arrangements.
- Q2 international revenue fell 53.0% to $7.4 million, mainly reflecting lower customer activity in New Zealand. No material change in critical accounting policies was reported; disclosure controls were considered effective.
Important facts for investors to verify
- Whether fleet expansion and the roughly $400 million 2011 capital-spending plan deliver the expected utilization, pricing, and Q4 contribution.
- Working-capital demands, especially receivables, and the extent to which investment spending requires additional borrowing.
- Exposure to natural-gas weakness, materials and labor inflation, and competitive pricing pressures.
- The timing and financial effect, if any, of tax audits, international project changes, and the September 2011 swap expiration.
- The MD&A’s apparent misstatement of six-month operating cash flow as quarterly cash flow.