RES

Business Context and Reporting Period

Company: RPC, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2009
Business Overview: RPC provides specialized oilfield services and equipment to independent and major oil and gas companies in the U.S. and internationally. Operations are divided into two segments: Technical Services (completion, production, maintenance) and Support Services (equipment rental, pipe handling). The company is controlled by a group including Chairman R. Randall Rollins.

Key Financial Metrics

Margins: Cost of revenues increased to 62% of revenue (from 60% in Q1 2008). Selling, general, and administrative (SG&A) expenses rose to 16% of revenue (from 14%). Depreciation and amortization increased to 18% of revenue (from 14%).

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 10.6% year-over-year, driven by a 12% drop in domestic revenues due to lower equipment utilization and competitive pricing. International revenues increased slightly.
• Profitability Compression: Operating profit fell 67% to $8.4 million. This was caused by lower revenues and a 17.2% increase in depreciation and amortization expenses.
• Cost Structure: Cost of revenues as a percentage of revenue increased 2.7 percentage points due to higher maintenance/repairs and negative leverage on personnel costs. SG&A as a percentage of revenue increased 1.3 percentage points due to fixed costs.
• Debt Reduction: Borrowings under the revolving credit facility decreased by $42.0 million to $132.5 million, reflecting lower capital expenditures and working capital requirements.
• Cash Flow Improvement: Despite lower net income, operating cash flow increased $19.3 million to $66.0 million, primarily due to a significant decrease in accounts receivable.

Guidance, Outlook, and Risks

Outlook: Management expects revenues for 2009 to be lower than 2008. While costs for materials, SG&A, and interest are projected to decline, these reductions will be offset by the revenue drop. Customer activity levels are expected to continue declining in the near term.

Capital Strategy: The company plans to reduce expenses and capital expenditures to maintain liquidity. Total 2009 capital expenditures are projected at approximately $80 million. The company recently reduced base salaries and wages for most employees.

Risks and Contingencies:

• Market Conditions: Severe downturn in the oil and gas industry, with the U.S. domestic rig count down 24.1% year-over-year. Oil prices dropped 55.5% and natural gas prices dropped 47.6% compared to the prior year.
• Competition: Increased competition is driving down service pricing and equipment utilization.
• Liquidity: The company maintains a $296.5 million revolving credit facility with $148.9 million available as of March 31, 2009. It is subject to financial covenants regarding debt-to-EBITDA and EBIT-to-interest ratios.
• Legal/Tax: Ongoing sales and use tax audits in various jurisdictions with potentially unfavorable outcomes that cannot be currently estimated.

Investor Verification Checklist

• Revenue Drivers: Verify the correlation between the reported 24.1% decline in U.S. rig counts and the company's specific revenue decline of 10.6%.
• Cost Management: Assess the sustainability of the recent salary and wage reductions and their impact on employee retention and operational capacity.
• Debt Covenants: Confirm compliance with the debt-to-EBITDA (max 2.5:1) and EBIT-to-interest (min 2:1) covenants given the sharp decline in operating profit.
• Capital Expenditures: Monitor the execution of the $80 million 2009 CapEx plan against the backdrop of declining cash flows and reduced activity.
• Working Capital: Review the significant reduction in accounts receivable ($57 million cash inflow) to ensure it reflects collection efficiency rather than a one-time anomaly.