RPC, Inc. — FY 2018 Form 10-K
Business context and reporting period. RPC provides oilfield services and equipment, principally in the United States, through Technical Services and Support Services. This filing covers the fiscal year ended December 31, 2018; fourth-quarter data are also shown. Technical Services, including pressure pumping and downhole tools, generated about 96% of annual revenue. Pressure pumping alone accounted for 55%. Approximately 85% of revenue related to oil activity and 15% to natural gas.
Financial performance
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Revenue | $1,721.0 million | $1,595.2 million | Up 7.9% |
| Operating profit | $210.0 million | $226.2 million | Down 7.2%; operating margin 12.2% vs. 14.2% |
| Net income | $175.4 million | $162.5 million | Up 7.9% |
| Diluted EPS | $0.82 | $0.75 | 2017 included a $19.3 million discrete tax benefit |
| Cash from operating activities | $389.0 million | $133.7 million | Increase driven substantially by favorable working-capital changes |
| Capital expenditures | $242.6 million | $117.5 million | Primarily revenue-producing equipment and maintenance |
| Cash and cash equivalents | $116.3 million | $91.1 million | At year-end |
| Working capital | $475.7 million | $494.8 million | At year-end |
| Long-term debt | None | None | No facility borrowings at year-end |
Cost of revenue rose 12.6% to $1,183.0 million, and increased to 68.7% of revenue from 65.9%, reflecting higher labor, maintenance and other activity-related costs. SG&A rose 5.6% to $168.2 million, but declined slightly as a share of revenue to 9.8%. The effective tax rate fell to 20.7% from 30.2%, principally reflecting the federal tax-rate reduction; 2018 also included a further $5.1 million discrete tax benefit related to the Tax Cuts and Jobs Act.
Fourth-quarter revenue was $376.8 million, versus $427.3 million a year earlier. Operating profit fell to $19.7 million from $60.3 million, and net income to $13.4 million from $57.7 million. Annual revenue growth therefore masked a marked year-end slowdown.
At December 31, 2018, the $125 million revolving facility had no borrowings; $19.5 million of letters of credit left $105.5 million available. RPC reported total assets of $1,199.6 million and stockholders’ equity of $950.4 million. Dividends paid were $0.47 per share in 2018, and the board declared a $0.10 quarterly dividend in January 2019.
Material changes versus the prior comparable period
- Technical Services revenue rose 7.1%; its operating profit declined to $216.7 million from $251.5 million. Support Services revenue increased 29.7% to $73.8 million, and the segment moved from a $12.2 million operating loss to $4.6 million operating profit.
- Pressure pumping revenue decreased to $945.9 million from $993.5 million, while downhole tools increased to $423.8 million from $294.6 million. Rental tools revenue rose to $50.8 million from $30.3 million.
- International revenue increased 61.9% to $90.4 million, mainly on higher activity in Argentina, and represented about 5% of total revenue.
- Cash from operations improved sharply, but the company attributed much of the increase to favorable working capital, including a $262.6 million accounts-receivable benefit as activity and revenue slowed in the second half.
- Capital spending more than doubled. RPC repurchased 2.13 million shares on the open market during 2018 and paid $101.1 million in dividends.
Outlook, commentary, risks and unusual items
- Near-term outlook: Management expected U.S. completion activity to remain at current levels or decline. It cited the late-2018 oil-price drop, customers delaying or curtailing plans, early-2019 indications of a lower rig count, and increased service capacity and competition. Management also warned that improved completion efficiency had contributed to oversupply in services including pressure pumping, putting pressure on pricing, equipment utilization and results.
- Offsetting factors and investment: Management noted that drilled-but-uncompleted wells could support completion-service demand, and that lower raw-material and labor costs could reduce operating costs. It planned moderate fleet expansion, ordered a limited amount of equipment for 2019, and expected approximately $289 million of 2019 capital expenditures. It said the new equipment was expected to earn acceptable returns, while emphasizing that activity and pricing remained uncertain.
- Market exposure: Results are highly sensitive to oil and gas prices, customer capital spending, activity, pricing and utilization. Other risks include intense competition, skilled-labor availability, weather, equipment and material supply constraints, environmental and hydraulic-fracturing regulation, safety incidents, litigation and insurance adequacy, international political and currency risks, and cybersecurity.
- Contingencies and unusual items: Other income in 2018 included $9.6 million of property-insurance proceeds. The pension plan was underfunded by $5.1 million; RPC contributed $5.0 million in 2018 and said it would evaluate any 2019 contribution. Management believed routine legal proceedings would not materially affect the company. The filing reports no material off-balance-sheet arrangements.
- Accounting and controls: Adoption of the revenue standard had no material financial-statement impact. RPC adopted the lease standard on January 1, 2019 and expected to recognize approximately $47 million of right-of-use assets and lease liabilities. Management and the auditor concluded internal control over financial reporting was effective; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether 2019 revenue, pricing and utilization weakened as management anticipated, particularly in pressure pumping, and whether the fourth-quarter decline continued.
- How much of 2018 operating cash flow was repeatable: the filing attributes a large portion of its improvement to working-capital movements, including lower receivables.
- Whether planned 2019 capital expenditures of approximately $289 million and fleet additions earn adequate returns under lower activity and pricing.
- Dividend and repurchase sustainability relative to cash generation, investment needs and the $105.5 million of year-end facility availability.
- Changes in customer spending, commodity prices, competition, labor and material costs, and any developments in insurance, pension or tax exposures.
- Governance and trading considerations: insiders and affiliates held approximately 74% of shares, and the company used the NYSE controlled-company exemption.