RPC, Inc. — Q2 2014 Form 10-Q Summary
Business context and reporting period. RPC provides oilfield services and related equipment to oil and gas producers, principally in the United States and selected international markets. This unaudited filing covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless noted. Technical Services includes completion, production and maintenance services; Support Services primarily provides equipment and related support.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $582.8 million | $457.6 million | $1,084.5 million | $883.4 million |
| Operating profit | $103.0 million | $67.9 million | $168.3 million | $125.1 million |
| Net income | $63.3 million | $40.4 million | $102.7 million | $75.5 million |
| Diluted EPS | $0.29 | $0.19 | $0.47 | $0.35 |
| Operating cash flow | Not separately provided | Not separately provided | $91.5 million | $200.6 million |
| Capital expenditures | Not separately provided | Not separately provided | $112.8 million | $108.5 million |
All dollar figures are in U.S. dollars. Q2 revenue increased 27.4%; operating profit rose about 51.8% and net income about 56.6%. Q2 Technical Services revenue was $544.4 million, up 28.4%, and Support Services revenue was $38.4 million, up 14.6%.
Cost of revenues rose to 64.2% of revenue in Q2 from 62.8% a year earlier, reflecting more service-intensive work and higher materials costs, partly offset by improved personnel utilization. SG&A fell to 8.2% of revenue from 10.4%, largely through fixed-cost leverage. For the first six months, those ratios were 64.9% versus 62.9% and 8.9% versus 10.5%, respectively.
At June 30, cash was $22.2 million, current assets $768.2 million and current liabilities $205.5 million. Total assets were $1.531 billion and stockholders’ equity $1.022 billion. Bank borrowings were $131.4 million, compared with $53.3 million at December 31, 2013. The $350 million revolving facility had $194.5 million available after borrowings and $24.1 million of letters of credit. The company reported compliance with its debt covenants.
Material changes and cash flow
- Six-month operating cash flow declined by $109.2 million year over year, principally because working capital changes were $137.8 million unfavorable; higher receivables and inventories reflected increased activity. Increased net income partly offset the impact.
- Six-month investing cash use was $100.8 million, mainly capital expenditures. Financing provided $22.8 million, including net bank borrowings; dividends paid were $45.9 million and share repurchases were $13.1 million.
- Q2 international revenue increased approximately 52% to $21.9 million; management cited higher activity in Australia, Argentina and China, partly offset by lower activity in Tunisia.
- The board approved a $0.105-per-share dividend on July 22, payable September 10, 2014. The company repurchased 399,611 shares during the first half; 4,312,623 shares remained authorized for repurchase at June 30.
Outlook, risks and unusual items
- Management expected full-year 2014 capital expenditures of approximately $375 million, with the remainder of the year’s spending focused on pressure-pumping fleet expansion and equipment maintenance. It planned to finance the expansion partly through the credit facility; equipment deliveries were expected in Q3 and Q4 2014 and Q1 2015.
- Management described near-term activity as likely to fluctuate little absent further natural-gas price increases. Higher oil prices, completion intensity and utilization were supportive, while record-high U.S. natural-gas production tempered expectations for gas-directed activity.
- Risks cited include commodity-price declines, customer drilling budgets, competition and the ability to pass through cost increases, skilled-labor availability and cost, customer credit and receivable collection, weather, geopolitical conditions, international project timing, and potential hydraulic-fracturing regulation. Management noted ongoing sales- and use-tax audits; some possible unfavorable outcomes could not then be estimated.
- Higher raw-material prices and labor costs pressured expenses. A favorable sales-tax audit outcome led to a reversal of interest penalties in Q2 2014; this contributed to the unusually low reported Q2 interest expense of $49,000 versus $942,000 a year earlier. Other income included mark-to-market gains on nonqualified benefit-plan investments.
- Variable-rate borrowings expose RPC to interest-rate risk: a one-percentage-point rate change on the June 30 balance would change annual interest costs by approximately $1.3 million. Management said existing liquidity and expected operating cash flow should meet requirements for at least 12 months.
- RPC reported no material off-balance-sheet arrangements and said ordinary-course litigation was not expected to materially affect financial position or results. Management concluded disclosure controls were effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether receivables and inventory growth converts into cash and whether operating cash flow improves after the first-half working-capital outflow.
- Actual 2014 capital expenditures, pressure-pumping fleet delivery and deployment timing, utilization, and returns on the expansion.
- Progress in offsetting higher labor and materials costs through pricing and productivity, and the effect on service margins.
- Debt levels, remaining revolver capacity, covenant compliance and exposure to variable interest rates as expansion spending continues.
- Developments in sales- and use-tax audits, customer credit quality, commodity prices and the company’s ability to sustain dividends and any share repurchases.
The filing cautions that interim results are not necessarily indicative of full-year 2014 results.