RPC, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. RPC provides oilfield services and related equipment, primarily in the United States. Financial statements are unaudited.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $298.1 million | $189.1 million |
| Operating income (loss) | $1.6 million | $(75.1) million |
| Net income (loss) | $3.6 million | $(32.5) million |
| Diluted EPS | $0.02 | $(0.15) |
| Operating cash flow | $(12.4) million | $53.5 million |
| Capital expenditures | $11.7 million | $9.6 million |
- Technical Services revenue rose 63.1% to $286.2 million; Support Services revenue fell 12.5% to $11.9 million. Technical Services generated $9.2 million of operating income, while Support Services recorded a $5.2 million loss.
- Cost of revenues was 72.5% of revenue versus 85.3% a year earlier, implying gross margins of approximately 27.5% and 14.7%, respectively. SG&A was 12.5% of revenue versus 23.0%; depreciation and amortization was 15.0% versus 32.1%.
- The effective income tax benefit rate was 100.6%. A $2.5 million discrete benefit from adopting stock-compensation guidance contributed to the tax benefit; reported net income was also affected by that benefit.
- Cash and cash equivalents were $104.5 million at March 31, down from $131.8 million at December 31, 2016. Current assets were $524.7 million and current liabilities $124.8 million.
- RPC had no revolving-credit borrowings. Its facility provides up to $125 million and matures in January 2019; $19.1 million of letters of credit were outstanding. The company reported compliance with its minimum tangible-net-worth covenant.
- Total assets were $1.05 billion and stockholders’ equity $807.6 million at quarter-end. No dividends were paid; the regular quarterly dividend remained temporarily suspended.
Changes and drivers
Revenue increased 57.7%, reflecting stronger activity, improved pricing and greater service intensity, especially in pressure pumping and downhole tools. Domestic revenue rose 64.6%; international revenue fell 16.2% to $13.7 million. Higher activity increased materials, supplies, maintenance and repair costs, but pricing and operating efficiencies improved cost ratios. SG&A declined on lower bad-debt expense and employment costs. Depreciation and amortization declined 26.3%, primarily due to lower prior capital expenditures.
Operating cash flow fell by $65.9 million year over year, chiefly because of unfavorable working-capital movements, including increased accounts receivable as activity expanded. Investing cash use was $9.2 million; financing cash use was $5.7 million, including shares withheld or repurchased for taxes related to restricted-share vesting. The company reported no open-market repurchases under its buyback program in the quarter.
Outlook, risks and other matters
- Management expected U.S. oilfield activity to continue increasing in the near term, but noted limited long-term visibility and expected the pace of rig-count growth to moderate. It viewed commodity-price trends as moderately positive for near-term activity.
- Management said service pricing remained insufficient to support industry equipment maintenance and hiring, and customers were reluctant to accept price increases. Labor and some raw-material costs were rising, creating risk that costs could outpace pricing.
- RPC expected approximately $75 million of 2017 capital expenditures, primarily for maintenance of existing revenue-producing equipment, with minimal fleet expansion planned. It intended to maintain sufficient liquidity and little or no debt near term.
- Key risks include oil and natural-gas price declines, customer drilling and spending decisions, competition and pricing pressure, skilled-labor and input-cost inflation, weather, geopolitical events, hydraulic-fracturing regulation, international operations and reliance on large customers.
- Sales and use tax audits could result in unfavorable outcomes that the company said were not currently estimable. RPC stated that ordinary-course litigation was not expected to have a material adverse effect.
- The company was assessing new accounting standards, including revenue recognition guidance planned for adoption in Q1 2018; it did not expect that standard to have a material financial-statement impact. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and improved Technical Services margins persist, and whether customer pricing keeps pace with labor, materials and maintenance costs.
- Whether the negative operating cash flow reverses as receivables and other working-capital needs normalize.
- Actual 2017 capital spending versus the approximately $75 million plan, and the timing of any dividend resumption.
- Liquidity and covenant headroom, including the borrowing base and letters of credit under the revolver.
- Developments in sales and use tax audits, commodity prices, customer activity, and the company’s assessment of upcoming accounting standards.