RPC, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. RPC provides oilfield services and related equipment, primarily to oil and gas producers. This unaudited report covers the three months ended March 31, 2013, compared with the same period in 2012; balance-sheet comparisons are with December 31, 2012. Amounts below are in millions except per-share data.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $425.8 | $502.6 | Down 15.3% |
| Operating profit | $57.2 | $130.9 | Down 56.3% |
| Operating margin | 13.4% | 26.0% | Down 12.6 percentage points |
| Net income | $35.1 | $80.8 | Down 56.6% |
| Diluted EPS | $0.16 | $0.37 | Down $0.21 |
| Operating cash flow | $89.3 | $183.6 | Down $94.3 |
| Capital expenditures | $53.0 | $121.4 | Down $68.4 |
Net margin was approximately 8.2%, versus 16.1% a year earlier. Cost of revenues fell 2.0% to $268.2 million, but rose to 63.0% of revenue from 54.5%. Selling, general and administrative expense was $44.9 million in both periods; as a share of revenue it increased to 10.5% from 8.9%. Depreciation and amortization rose 2.4% to $52.8 million. Net loss on asset dispositions was $2.6 million, compared with $1.4 million.
Revenue declined in both reportable segments: Technical Services fell 14.6% to $394.0 million, and Support Services fell 22.5% to $31.8 million. Segment operating profit was $58.5 million for Technical Services and $6.3 million for Support Services, down from $123.5 million and $14.0 million, respectively.
Balance sheet, cash flow and liquidity
- At March 31, cash was $10.3 million; current assets were $550.7 million and current liabilities $161.4 million (a current ratio of approximately 3.4).
- Bank borrowings declined to $87.6 million from $107.0 million at year-end. The $350 million revolving facility matures in August 2015; $244.4 million remained available after borrowings and $18.0 million in letters of credit. RPC reported compliance with its financial covenants.
- Operating cash flow of $89.3 million, investing outflow of $50.0 million and financing outflow of $43.1 million resulted in a $3.9 million net decrease in cash. Management attributed the lower operating cash flow chiefly to reduced net income and an unfavorable working-capital comparison.
- Cash dividends paid were $22.0 million, versus $17.6 million. The board approved a further $0.10-per-share dividend, payable June 10, 2013. The company reported no open-market share repurchases in Q1; 346,007 shares were repurchased in connection with taxes on restricted-stock vesting.
Material changes, outlook and risks
Management attributed the revenue and profit declines primarily to more competitive pricing and lower activity across most service lines. Support Services was affected particularly by lower utilization and pricing in rental tools. Domestic revenue declined 15.6%; international revenue declined 6.4% to $16.2 million, reflecting lower activity in New Zealand partly offset by Canada and Mexico.
Management curtailed new-equipment spending amid low natural-gas prices and a declining gas-directed rig count, and shifted focus toward oil- and natural-gas-liquids-directed basins. It expected 2013 capital expenditures of approximately $275 million, primarily for equipment maintenance during the remainder of the year, subject to market conditions and other factors. Management did not provide a revenue or profit forecast, citing uncertainty in the factors affecting results. It noted that oil prices supported activity, while low natural-gas and natural-gas-liquids prices, excess domestic service capacity, and pressure-pumping fleets operating largely in the spot market weighed on activity, utilization and pricing.
- Principal risks: commodity-price and drilling-activity volatility; competitive pricing and excess service capacity; customer financial distress and collection risk; labor and raw-material cost pressure; potential hydraulic-fracturing regulation; international, geopolitical and weather risks; and dependence on large customers.
- Contingencies: ongoing sales- and use-tax audits could produce unfavorable outcomes that the company said could not currently be estimated. RPC reported ordinary-course litigation and did not expect it to materially adversely affect its financial position or results. It reported no material off-balance-sheet arrangements.
- Other items: the effective tax rate was 38.9%, versus 38.4%. A 1-percentage-point change in the floating rate on quarter-end borrowings would change annual interest costs by approximately $0.9 million. Management said disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether service pricing, utilization and customer activity stabilize or continue to pressure segment margins.
- Whether the $275 million 2013 capital-expenditure expectation changes with market conditions, and the resulting effects on cash flow and equipment capacity.
- Debt-facility availability, covenant compliance and exposure to variable interest rates as operating results evolve.
- Customer receivable quality and any developments in the sales- and use-tax audits.
- The distinction between the 346,007 tax-related share retirements and the absence of open-market buybacks during the quarter.