RPC, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited. RPC provides oilfield services and equipment through Technical Services and Support Services, primarily in U.S. markets, with selected international operations. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $472.4 | $502.2 | $1,475.1 | $1,327.0 |
| Operating profit | $102.4 | $134.5 | $353.1 | $360.0 |
| Net income | $66.0 | $83.1 | $219.1 | $221.8 |
| Diluted EPS | $0.30 | $0.38 | $1.01 | $1.01 |
| Operating margin | 21.7% | 26.8% | 23.9% | 27.1% |
Operating margins are calculated from reported revenue and operating profit. Q3 cost of revenues was 57.4% of revenue versus 55.7% a year earlier; SG&A was 9.1% versus 7.4%, and depreciation and amortization was 11.4% versus 9.3%. For the nine-month periods, those ratios were 56.0% versus 54.6%, 8.9% versus 8.2%, and 10.8% versus 9.9%, respectively.
- Cash flow: Nine-month operating cash flow was $465.3, compared with $312.9; capital expenditures were $273.8, compared with $305.7. Investing cash flow was negative $261.9 and financing cash flow negative $199.6. Cash increased $3.7 to $11.1.
- Debt and liquidity: Bank borrowings were $83.7 at September 30, down from $203.3 at year-end 2011. The $350 revolving facility had $248.2 available after borrowings and $18.1 of letters of credit. RPC reported compliance with its debt covenants.
- Balance sheet: Total assets were $1,358.1, liabilities $450.2, and stockholders’ equity $908.0. Current assets were $557.5 and current liabilities $167.0.
- Capital returns: Dividends declared were $52.6 for the first nine months; dividends per share were $0.24 versus $0.15. The company repurchased and retired $30.2 of stock during the period.
Material changes and management commentary
Q3 revenue fell 5.9% year over year, primarily from lower pricing and utilization, partly offset by a slightly larger equipment fleet. Domestic revenue declined 7.4%; international revenue rose 41.3% to $20.9. Nine-month revenue grew 11.2%, reflecting a larger fleet and higher activity in several service lines, partly offset by weaker pricing. Nine-month international revenue increased 67.0% to $53.7.
Q3 operating profit declined 23.9% and net income declined 20.5%. Management attributed pressure to lower pricing, lower equipment and personnel utilization, and higher relative operating costs. Depreciation increased as equipment placed in service over the prior year raised the asset base. For the nine months, revenue increased but operating profit and net income were slightly lower than the prior-year period.
Technical Services, the larger segment, recorded Q3 revenue of $436.1 and operating profit of $98.7, versus $463.7 and $127.9 a year earlier. Support Services recorded Q3 revenue of $36.4 and operating profit of $10.0, versus $38.6 and $14.1.
Outlook, risks, and unusual items
- Management expected full-year 2012 capital expenditures of approximately $350, subject to market conditions; $273.8 had been spent through September. It anticipated lower 2012 capital spending than in 2011 and planned to prioritize growth opportunities and maintenance.
- RPC was shifting equipment and personnel away from weaker natural-gas-directed basins toward oil- and liquids-directed unconventional basins. Management described natural gas pricing and activity as weak and uncertain, and noted increased competition and equipment supply could constrain pricing and utilization.
- Risks include further declines in oil or gas prices, reduced customer drilling, adverse weather, geopolitical events, competition, difficulty implementing price increases, international operating risks, and reliance on large customers. A 1% interest-rate change on September 30 borrowings would change annual interest cost by approximately $0.8.
- Sales and use tax audits were ongoing; some potential unfavorable outcomes could not be estimated. RPC said ordinary-course litigation was not expected to have a material adverse effect and reported no material off-balance-sheet arrangements.
- Other notable items: the Board approved a three-for-two stock split in March, with share and per-share data retroactively adjusted. Q3 other income included mark-to-market gains on non-qualified benefit-plan investments; reported net gain was $0.7 million.
Management said existing cash, operating cash generation, and facility availability should be sufficient for at least the next 12 months. It approved a $0.08-per-share dividend payable December 10, 2012, subject to company performance and other factors. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether oilfield activity and pricing—especially in natural-gas basins—continue to affect utilization, margins, and revenue.
- Whether the planned $350 million annual capital expenditure level is achieved or revised, and the resulting impact on cash flow and borrowing needs.
- Facility availability, covenant compliance, and the sensitivity of variable-rate debt to interest-rate changes.
- The status and potential exposure from sales and use tax audits, and developments in litigation or other contingencies.
- Whether dividends and future share repurchases remain consistent with cash generation, capital spending, and credit-facility restrictions.