RPC, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. RPC provides oilfield services and related equipment through Technical Services and Support Services.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $457.6 million | $500.1 million | $883.4 million | $1,002.7 million |
| Operating profit | $67.9 million | $119.9 million | $125.1 million | $250.7 million |
| Net income | $40.4 million | $72.3 million | $75.5 million | $153.0 million |
| Diluted EPS | $0.19 | $0.33 | $0.35 | $0.71 |
| Operating cash flow | — | $200.6 million | $302.1 million |
- Q2 revenue fell 8.5% year over year; six-month revenue fell 11.9%. Q2 Technical Services revenue declined 8.1% and Support Services revenue 12.8%.
- Margins compressed: cost of revenues was 62.8% of revenue in Q2 versus 56.2% a year earlier; SG&A was 10.4% versus 8.6%. Q2 operating margin was approximately 14.8% versus 24.0%; net margin was approximately 8.8% versus 14.4%.
- For the first half, cost of revenues was 62.9% of revenue versus 55.4%, and SG&A was 10.5% versus 8.8%. Lower pricing and activity, higher pressure-pumping materials costs, and bad debt weighed on performance.
- First-half cash from operations decreased $101.5 million year over year, primarily reflecting lower earnings, deferred-tax changes, and working-capital effects. Capital expenditures were $108.5 million versus $204.2 million; cash used in investing was $103.3 million.
- Cash was $10.3 million at June 30. Bank borrowings were $67.2 million, down from $107.0 million at year-end 2012. The $350 million revolving facility had $265.5 million available, net of borrowings and letters of credit; the company reported covenant compliance. Management said liquidity should meet requirements for at least 12 months.
- Total assets were $1.329 billion and stockholders’ equity $917.1 million at June 30. Dividends paid in the first half totaled $44.0 million; dividend per share was $0.10 in Q2 versus $0.08 in Q2 2012.
Material changes and management commentary
- Management attributed weaker results mainly to competitive service pricing and lower activity in most service lines. The average U.S. rig count declined about 10.6% in Q2 year over year; natural-gas-directed drilling remained exceptionally weak despite higher gas prices.
- Q2 SG&A included increased bad-debt expense, most of which related to a customer bankruptcy. Management also cited increased interest expense associated primarily with a sales-tax audit.
- Management expects 2013 capital expenditures of approximately $250 million, primarily for equipment maintenance in the second half, and expects spending to remain below 2012 levels. Spending remains subject to market conditions and other factors.
- Management expected little near-term fluctuation in customer activity or revenue, and did not expect the overall rig count to increase during the remainder of 2013 unless natural-gas prices rose significantly. The filing says it was increasingly unlikely that 2013 revenue and profitability would exceed 2012.
- Management cited excess U.S. service capacity and pressure-pumping fleets operating largely in the spot market after contracts expired, contributing to lower utilization and pricing. It was focusing on oil- and natural-gas-liquids-directed basins and continued to pursue international opportunities.
Risks, contingencies, and unusual items
- Key exposures include oil and gas prices and drilling activity, competitive pricing, customer financial health and receivable collection, weather, geopolitical conditions, international operations, regulation of hydraulic fracturing, and reliance on large customers.
- Ongoing sales- and use-tax audits involve differing interpretations; some potentially unfavorable outcomes cannot currently be estimated. The filing records exposures where resolved or reasonably estimable.
- Variable-rate borrowings create interest-rate exposure: a 1 percentage-point rate change on the June 30 balance would change annual interest costs by approximately $0.7 million. Foreign-exchange exposure was not expected to have a material effect.
- RPC reported no material off-balance-sheet arrangements. Ordinary-course litigation was not expected by management to have a material adverse effect. Disclosure controls were judged effective at a reasonable assurance level.
Important facts for investors to verify
- Whether service pricing, utilization, and activity stabilize, particularly in pressure pumping and natural-gas-exposed markets.
- The customer bankruptcy’s effect on bad-debt expense and collections, and the status and potential exposure of tax audits.
- Actual 2013 capital expenditures versus the approximately $250 million plan, including the maintenance-versus-growth allocation.
- Credit-facility availability, covenant headroom, and the sustainability of dividends and share repurchases as earnings and operating cash flow change.
- Whether management’s expectation that 2013 revenue and profitability are unlikely to exceed 2012 is borne out by subsequent results.