RPC, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. RPC provides specialized oilfield services, primarily in the United States. Financial figures below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $89.3 | $358.5 | $333.1 | $693.2 |
| Operating income (loss) | $(37.5) | $8.4 | $(256.2) | $6.2 |
| Net income (loss) | $(25.1) | $6.2 | $(185.5) | $5.4 |
| Diluted earnings (loss) per share | $(0.12) | $0.03 | $(0.87) | $0.02 |
| Operating cash flow | — | $122.1 | $93.4 | |
| Capital expenditures | — | $38.7 | $132.3 |
- Q2 gross margin, calculated as revenue less cost of revenues, was approximately 10.4%, versus 26.1% a year earlier; six-month gross margin was approximately 21.3%, versus 25.4%.
- At June 30, cash was $145.4; current assets were $409.1 and current liabilities $58.8. Total liabilities were $134.2 and stockholders’ equity was $648.7.
- RPC had no revolver borrowings. Of its $125 million revolving facility, $105.2 million was available after $19.8 million of letters of credit. The company reported covenant compliance at quarter-end.
- Operating cash flow increased year over year, supported by a $133.2 million reduction in accounts receivable and other working-capital changes. Cash flow also reflected substantial noncash impairment charges; it should not be read as evidence of improved operating earnings.
Changes versus the prior year
- Q2 revenue fell 75.1%; six-month revenue fell 51.9%. Lower customer activity, fewer active pressure-pumping fleets, and weaker pricing affected most service lines.
- Q2 Technical Services revenue declined 76.2% and Support Services revenue declined 57.2%. Both segments reported operating losses, compared with operating profits in Q2 2019.
- Cost of revenues fell in absolute terms but rose to 89.6% of revenue in Q2, from 73.9%, as fixed and operating costs were spread over much lower sales. SG&A fell to $28.8 million from $43.3 million, but rose to 32.2% of revenue from 12.1%.
- Six-month results included $204.8 million of long-lived asset impairment charges, primarily in Technical Services, plus severance and other charges. Goodwill was not impaired. Q2 impairment and other charges were $1.6 million, mainly severance.
- Cash rose from $50.0 million at year-end 2019 to $145.4 million. Investing cash outflow narrowed with lower capital spending, while dividends were suspended.
Outlook, risks, and unusual items
- Management expects U.S. well-completion activity to remain weak in the near term, citing low oil prices, COVID-19, OPEC-related disruption, oversupply and competition in services, and reduced customer access to capital. The company reduced headcount, furloughed employees, cut compensation for remaining active employees, and lowered expenses.
- RPC expects 2020 capital expenditures of approximately $50–$60 million, primarily for maintenance; $38.7 million had been spent through June 30.
- Management said existing cash and capitalization should meet needs for at least 12 months and expected not to need revolver borrowings. However, it warned that industry conditions could put the company at risk of breaching credit covenants later in the facility term; it expected to eliminate, replace, or renegotiate the facility before a default.
- The board suspended common dividends in July 2019. Management expects to resume them only subject to earnings, financial condition, and other factors; no timetable was provided.
- The six-month tax benefit was $72.3 million. It included a $13.1 million benefit related to carrying back a 2019 net operating loss under the CARES Act, while estimates for deferred tax items remained subject to refinement.
- Management identified further asset impairments, including possible goodwill impairment, as a risk if market conditions deteriorate. Other cited risks include volatile oil and gas prices, customer activity and pricing, competition, regulation, geopolitical events, weather, and international operations.
Important facts for investors to verify
- Credit-facility covenant requirements, available headroom, and any subsequent amendments or renegotiation.
- Assumptions behind the 2020 impairment valuation and whether further impairment indicators arose after quarter-end.
- Whether customer activity, service pricing, and fleet utilization improved or weakened after June 30.
- Cash conversion quality, particularly the contribution from collections and working-capital movements.
- Realization of the expected tax carryback benefit, changes in deferred-tax estimates, and actual 2020 capital spending.