RPC, Inc. — FY 2016 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it is not a quarterly filing. RPC provides oilfield services and equipment, principally in the United States, through Technical Services (including pressure pumping, downhole tools and coiled tubing) and Support Services (including rentals, pipe services, training and consulting). About 70% of 2016 revenue was related to oil activity and 30% to natural gas. Pressure pumping accounted for approximately 46% of revenue.
Financial performance and condition
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $729.0 million | $1,263.8 million |
| Operating loss / margin | $238.9 million / (32.8%) | $156.3 million / (12.4%) |
| Net loss | $141.2 million | $99.6 million |
| Diluted loss per share | $0.66 | $0.47 |
| Cash from operations | $101.7 million | $473.8 million |
| Capital expenditures | $33.9 million | $167.4 million |
- Cost of revenues was $607.9 million, or 83% of revenue, versus 78% in 2015. SG&A was $150.7 million, or 20.7% of revenue, and depreciation and amortization was $217.3 million, or about 30% of revenue.
- Technical Services revenue fell 42.2% to $679.7 million; Support Services revenue fell 44.3% to $49.3 million. Both segments reported operating losses.
- Cash and cash equivalents were $131.8 million at year-end, compared with $65.2 million a year earlier. Working capital was $377.6 million; current assets were $479.1 million and current liabilities $101.5 million.
- No borrowings were outstanding under the revolving credit facility. The facility provides up to $125 million, subject to a receivables-based borrowing base; letters of credit outstanding were $19.1 million. Long-term debt was zero.
- Total assets were $1.04 billion and stockholders’ equity was $806.8 million. Contractual obligations totaled $65.4 million, primarily operating leases and purchase obligations.
Changes versus comparable periods
- Revenue declined 42.3% year over year, chiefly due to lower customer activity and pricing. The average U.S. rig count fell 48.2%, to 509, from 2015.
- Operating loss widened by $82.7 million and net loss by $41.7 million. Lower activity reduced cost of revenue, but not as quickly as revenue; low pricing and underused capacity pressured margins.
- Operating cash flow dropped $372.1 million, primarily reflecting lower earnings and unfavorable working-capital movements. The company cited a $237.0 million net unfavorable working-capital change.
- International revenue declined 29% to $51.2 million, or 7% of consolidated revenue, from $72.1 million in 2015.
- Fourth-quarter 2016 revenue was $221.0 million, up from $175.9 million in Q3; the quarterly operating loss narrowed to $32.2 million from $56.4 million. RPC remained loss-making in each quarter of 2016.
Outlook, commentary, and notable items
- Management expected U.S. oilfield activity to recover moderately in the near term, while emphasizing limited long-term visibility and continued weak natural-gas-directed activity. It expected oil-directed drilling to remain the majority of activity.
- RPC planned approximately $70 million of 2017 capital expenditures, primarily for equipment maintenance, and minimal additions to revenue-producing equipment. Management said pricing remained highly competitive and customer resistance to price increases could make it difficult to recover rising labor and materials costs.
- Management described liquidity and capitalization as strong enough to meet requirements for at least 12 months and intended to maintain little or no debt. It expected no pension contribution in 2017 and said regular quarterly dividends might resume in the future, subject to results and other factors. The regular dividend remained suspended; a special $0.05-per-share dividend was paid in Q4 2016.
- Unusual items included a $15.7 million discrete tax benefit following resolution of an income-tax matter, a $2.0 million contingent professional fee related to that matter, and a $4.0 million gain on sale of pipe-inspection equipment. 2015 included $6.3 million of legal-settlement proceeds.
- Key risks include volatile commodity prices and customer spending, sustained low service pricing, competition and equipment oversupply, skilled-labor and supplier constraints, weather, environmental and hydraulic-fracturing regulation, international political and currency risks, credit losses, and operational injury, pollution or property-damage claims. Routine legal proceedings were not expected by management to have a material adverse effect.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether the recovery in rig counts and commodity prices translated into durable revenue growth, better utilization and improved service pricing after year-end.
- Whether cash from operations can recover from the 2016 decline and whether receivables, customer credit quality and bad-debt expense remain controlled.
- Whether planned 2017 capital spending is sufficient to maintain equipment while avoiding excess capacity, and how much spending is maintenance versus growth.
- Availability under the receivables-based credit facility after letters of credit, compliance with the $700 million minimum tangible-net-worth covenant, and the impact of contractual commitments.
- Potential tax, insurance, pension and environmental exposures, including the status of tax examinations and the assumptions used to value self-insurance and pension obligations.
- Whether and when regular dividends resume; management’s statement is conditional, not a firm commitment.