RPC, Inc. — Second-Quarter 2018 Form 10-Q
Business and period: RPC provides oilfield services, primarily in the United States, through Technical Services and Support Services. This unaudited filing covers the three and six months ended June 30, 2018; comparisons are with the same 2017 periods.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $467.9 million | $398.8 million | $904.3 million | $696.9 million |
| Operating income | $75.0 million | $67.0 million | $135.8 million | $68.6 million |
| Net income | $59.9 million | $43.8 million | $112.1 million | $47.5 million |
| Diluted EPS | $0.28 | $0.20 | $0.52 | $0.22 |
| Operating cash flow | Not separately provided for Q2 | $229.2 million | $28.7 million |
- Q2 revenue grew 17.3%; first-half revenue grew 29.7%. Higher activity and a larger revenue-producing fleet were the main drivers. International revenue rose 115.4% in Q2 and 73.0% for the first half, but remained under 10% of total revenue.
- Q2 operating margin was approximately 16.0%, versus 16.8% a year earlier; first-half operating margin was approximately 15.0%, versus 9.8%. Q2 cost of revenue increased to 66.7% of revenue from 63.7%, reflecting job mix and higher fuel prices. SG&A fell as a share of revenue to 9.1% from 10.1%.
- Q2 effective tax rate was 24.6%, compared with 36.7%; first-half rate was 23.2%, compared with 33.2%. The lower 2018 rates reflect the Tax Cuts and Jobs Act and beneficial stock-compensation tax adjustments.
- First-half operating cash flow was $229.2 million; investing cash outflow was $142.8 million, including $149.7 million of capital expenditures. Financing cash outflow was $83.3 million, including $43.2 million in dividends and $40.1 million for shares repurchased and retired. Cash increased $3.1 million to $94.2 million. Operating cash flow less capital expenditures was approximately $79.5 million.
- At June 30, current assets were $631.1 million and current liabilities $183.4 million. RPC had no revolving-credit borrowings; $19.6 million of letters of credit left $105.4 million available under its $125 million facility. Total liabilities were $273.7 million; the filing reports no outstanding bank debt.
- RPC paid a $5.0 million pension-plan contribution in the first half and said it did not expect further contributions in 2018. It repurchased 2.1 million shares and paid $0.20 per share in dividends during the first half.
Changes, outlook, and risks
- Segment growth was broad: first-half Technical Services revenue increased 29.4%, while Support Services revenue increased 39.9%. Support Services moved from an $8.6 million first-half operating loss to $0.3 million of operating income.
- First-half capital expenditures rose to $149.7 million from $30.6 million in the prior-year period. Management expected 2018 capital expenditures of approximately $280 million, principally for revenue-producing equipment and maintenance.
- Management saw moderately positive near-term activity prospects and expected U.S. well completions to increase moderately. It also cautioned that competition was limiting meaningful service-price increases, skilled-labor competition was increasing, and logistical constraints could pressure results. RPC intended to maintain a conservative capital structure with little or no debt.
- The Permian Basin is RPC’s largest market. Potential pipeline-capacity constraints could reduce customer drilling and completion activity and hurt revenue and profit until additional capacity is available; the filing cited expected completion of new pipeline capacity in the third quarter of 2019.
- Other risks include oil and gas price declines, customer funding constraints, competition, fuel, materials and labor costs, weather, regulation, international operations, and unpredictable timing of international projects. Sales and use tax audits could have unfavorable outcomes that the company said were not currently estimable.
- Q2 other income included $4.4 million of property-insurance proceeds; first-half other income included $9.6 million. These proceeds contributed to reported earnings. The company was still evaluating certain Tax Cuts and Jobs Act effects and expected to complete its accounting with its 2017 federal tax return, anticipated in Q3 2018.
- On July 26, 2018, RPC amended its credit agreement, extending maturity to July 2023, reducing commitment fees, and revising covenants. When trailing four-quarter EBITDA is at least $50 million, the amended agreement provides for maximum leverage of 2.50:1.00 and minimum debt-service coverage of 2.00:1.00; otherwise, it requires minimum tangible net worth of $600 million.
- The board declared a subsequent quarterly dividend of $0.10 per share, payable September 10, 2018. Management said future dividends would depend on industry conditions, earnings, financial condition, and other factors. No specific full-year revenue or earnings guidance was provided.
Investor verification points
- Assess whether activity growth and fleet utilization can offset higher operating costs, fuel prices, and competition that constrained pricing.
- Track Permian pipeline capacity and any resulting changes in customer activity, as well as RPC’s ability to redeploy equipment and personnel.
- Verify the timing and returns on the planned $280 million of 2018 capital expenditures and the effect on cash generation.
- Review the amended credit agreement’s covenant calculations and available liquidity as operating conditions change.
- Separate recurring operating performance from insurance proceeds and confirm final Tax Cuts and Jobs Act accounting and any sales/use-tax audit developments.