RPC, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited consolidated results. RPC provides oilfield services and related equipment, primarily in the United States, through Technical Services and Support Services.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $620.7 | $491.1 | $1,705.2 | $1,374.5 |
| Operating profit | $106.7 | $85.8 | $274.9 | $210.9 |
| Net income | $64.9 | $53.8 | $167.6 | $129.3 |
| Diluted EPS | $0.30 | $0.25 | $0.77 | $0.60 |
| Operating margin | 17.2% | 17.5% | 16.1% | 15.3% |
| Cost of revenues / revenue | 64.2% | 61.8% | 64.7% | 62.5% |
| SG&A / revenue | 8.2% | 9.6% | 8.6% | 10.2% |
Q3 revenue increased 26.4% year over year; nine-month revenue increased 24.1%. Growth reflected higher activity and service intensity, plus a slightly larger revenue-producing fleet. Q3 Technical Services revenue was $576.9 million and Support Services revenue was $43.8 million. Nine-month segment operating profit was $267.5 million for Technical Services and $31.2 million for Support Services.
Cost of revenues rose faster than revenue, reflecting service mix and higher materials, fuel, logistics, labor, and maintenance costs; improved personnel utilization partly offset the pressure. SG&A increased in dollars but declined as a share of revenue through operating leverage. Q3 asset-disposition losses rose to $7.7 million from $1.3 million, primarily due to damage to critical pressure-pumping components in more service-intensive work; nine-month losses were $11.3 million versus $5.7 million.
Cash flow, liquidity, and capital
- Nine-month operating cash flow: $206.3 million, down from $303.5 million, mainly due to working-capital demands, including higher receivables and inventory.
- Capital expenditures: $237.5 million in the first nine months, versus $159.9 million a year earlier. Management expected approximately $375 million for full-year 2014, including pressure-pumping fleet expansion and maintenance.
- Investing cash flow: $(222.5) million; financing cash flow: $16.0 million. Operating cash flow less reported capital expenditures was approximately $(31.2) million.
- Cash: $8.5 million at September 30, 2014. Bank debt: $152.0 million, up from $53.3 million at December 31, 2013. Net debt was approximately $143.5 million.
- Credit availability: The $350 million revolving facility matures January 2019. After $152.0 million of borrowings and $24.1 million of letters of credit, $173.9 million was available. The company reported compliance with its debt covenants.
- Balance sheet: Total assets were $1,616.0 million and stockholders’ equity $1,060.9 million. Current assets of $785.1 million exceeded current liabilities of $241.5 million.
- Shareholder returns: Nine-month dividends paid were $68.8 million; the declared quarterly dividend was $0.105 per share. The company repurchased 609,096 shares in the first nine months.
Outlook, risks, and notable matters
- Management expected service intensity to support near-term revenue, but did not expect a significant near-term increase in the U.S. rig count. It described its near-term outlook for oil and natural gas prices as unfavorable; the oil-price decline could curb customer drilling, while natural-gas-directed activity remained weak.
- RPC was expanding its pressure-pumping fleet, with deliveries and deployment beginning in Q3 and early Q4 and continuing into Q1 2015. Management planned to use the credit facility and considered its expected capital structure conservative.
- Management identified skilled-labor availability and cost, customer financial distress and collection risk, competition and pricing, commodity prices, geopolitical events, weather, international project timing, and possible hydraulic-fracturing regulation as risks. It said raw-material and labor cost pressure persisted, though it had generally passed increased costs to customers.
- Ongoing sales and use tax audits could produce unfavorable outcomes that the company said it could not currently estimate. RPC said ordinary-course litigation was not expected to materially affect its financial position or results.
- Floating-rate exposure: a 1 percentage-point increase on the $152.0 million outstanding balance would increase annual interest costs by approximately $1.5 million. The filing reported no material off-balance-sheet arrangements.
- A controlling group including Chairman R. Randall Rollins and director Gary W. Rollins held more than 50% of the company’s voting power. The filing also disclosed related-party transactions.
- On October 28, 2014, the board approved a $0.105-per-share dividend payable December 10, 2014 and amended the bylaws, including stockholder nomination/business-submission, indemnification, and exclusive-forum provisions.
Most important facts for investors to verify
- Whether oilfield activity and service intensity remain strong enough to support planned pressure-pumping expansion as oil prices fall.
- Whether working-capital growth, particularly receivables and inventory, converts into cash and whether customer collections remain timely.
- Actual capital spending and fleet utilization, including labor availability, service pricing, and equipment damage or disposition costs.
- Debt levels, remaining facility capacity, covenant compliance, and sensitivity to floating interest rates.
- Developments in sales and use tax audits and any changes in the estimated exposure.
Note: The MD&A contains an apparent unit error describing nine-month interest expense as $842 million; the financial statements report $842 thousand, consistent with the comparative figures.