RPC, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. RPC provides oilfield services and equipment. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $491.1 | $472.4 | $1,374.5 | $1,475.1 |
| Operating profit | $85.8 | $102.4 | $210.9 | $353.1 |
| Net income | $53.8 | $66.0 | $129.3 | $219.1 |
| Diluted EPS | $0.25 | $0.30 | $0.60 | $1.01 |
| Operating margin | 17.5% | 21.7% | 15.3% | 23.9% |
| Net margin | 10.9% | 14.0% | 9.4% | 14.8% |
- Q3 revenue rose 4.0%, as stronger activity and job mix in Technical Services more than offset lower pricing and weaker Support Services revenue. International revenue fell 13.3% to $18.1 million.
- For the first nine months, revenue fell 6.8%; Technical Services revenue declined 6.1% and Support Services revenue declined 15.2%. Lower pricing and activity earlier in the year weighed on results.
- Profitability fell in both comparison periods. Cost of revenue was 61.8% of revenue in Q3 versus 57.4% a year earlier; nine-month figures were 62.5% versus 56.0%. SG&A was 9.6% of Q3 revenue and 10.2% year to date, up from 9.1% and 8.9%, respectively.
Cash flow, financial position and capital allocation
- Nine-month operating cash flow was $303.5 million, down from $465.3 million. Management attributed the decrease mainly to lower net income, deferred-tax effects and working-capital changes.
- Capital expenditures were $159.9 million; investing cash outflow was $151.3 million. Management expected full-year 2013 capital expenditures of approximately $225 million, mainly for equipment maintenance in the remainder of the year.
- At September 30, cash was $22.9 million, current assets were $571.9 million and current liabilities were $165.7 million. Total assets were $1.35 billion.
- Bank borrowings were $51.4 million, down from $107.0 million at December 31, 2012. The $350 million revolving facility had $281.3 million available after borrowings and $17.3 million of letters of credit. RPC reported compliance with its financial covenants.
- Financing cash outflow was $143.5 million, including $65.9 million of dividends and $25.1 million of share repurchases. The board approved a further $0.10-per-share dividend, payable December 10, 2013.
Outlook, risks and notable items
- Management expected little near-term change in customer activity or revenue and did not expect the overall U.S. rig count to rise during the rest of 2013 unless natural-gas prices increased significantly. A seasonal fourth-quarter decline was possible.
- Oil-directed activity supported demand, but natural-gas drilling remained at an 18-year low. Management cited excess domestic service capacity, competitive pricing and lower pressure-pumping utilization after all contractual agreements in that service line expired; fleets were operating in the spot market.
- RPC curtailed equipment purchases and shifted focus toward oil- and natural-gas-liquids-directed basins. It stated that cash, expected operating cash flow and credit availability should meet requirements for at least 12 months.
- Bad-debt expense increased by $3.7 million in Q3 and $7.0 million year to date, including higher customer-specific reserves and a customer bankruptcy in Q2. Management also flagged the possibility of further collection pressure if lower natural-gas prices strain less-capitalized customers.
- Other risks include commodity-price and drilling-activity volatility, pricing competition, customer concentration, weather, international operations, potential hydraulic-fracturing regulation, and variable-rate debt. A one-percentage-point rate change on outstanding borrowings would change annual interest cost by about $0.5 million.
- Sales and use tax audits were ongoing; some possible unfavorable exposures could not be estimated. RPC said ordinary-course litigation was not expected to have a material adverse effect. No material off-balance-sheet arrangements were reported.
Key facts for investors to verify
- Whether Q3 revenue growth can persist despite service-price pressure and lower utilization, particularly in pressure pumping and Support Services.
- Further trends in customer receivables, bad-debt reserves and collections following the disclosed customer bankruptcy.
- Actual 2013 capital spending versus the approximately $225 million estimate, and the balance between maintenance and growth investment.
- Remaining credit-facility availability, covenant compliance and exposure to floating interest rates.
- Developments in sales and use tax audits, commodity prices, U.S. drilling activity and the spot-market economics of pressure-pumping operations.