RPC, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. RPC provides oilfield services and related equipment through Technical Services and Support Services, primarily in the United States and selected international markets. Comparisons below are against Q1 2011 unless otherwise noted; dollar figures are in millions except per-share data.
Financial performance
- Revenue: $502.6, up 31.6%. Technical Services revenue was $461.5, up 32.1%; Support Services revenue was $41.0, up 26.8%.
- Profit: Operating profit was $130.9, up 23.1%; net income was $80.8, up 23.2%. Diluted EPS rose to $0.37 from $0.30. The effective tax rate increased to 38.4% from 37.9%.
- Margins: Operating margin was approximately 26.0%, versus 27.9%; net margin was approximately 16.1%, versus 17.2%. Cost of revenues rose to 54.5% of revenue from 52.7%, reflecting higher employment and fuel costs and job mix. SG&A declined to 8.9% of revenue from 9.4%; depreciation and amortization was 10.3% versus 10.4%.
- Cash flow and investment: Operating cash flow was $183.6, compared with $85.6. Capital expenditures were $121.4, versus $92.3; operating cash flow less capital expenditures was approximately $62.2, compared with negative $6.7. Cash ended the quarter at $5.7, down from $7.4 at year-end 2011.
- Debt and liquidity: Bank borrowings were $180.8, down from $203.3 at December 31, 2011; the company reported $18.1 of letters of credit and $151.1 available under its $350 million revolving facility, due August 2015. RPC said it complied with the facility’s financial covenants. A one-percentage-point rate change on quarter-end borrowings would change annual interest cost by about $1.8.
- Balance sheet and shareholder returns: Total assets were $1,369.0 and stockholders’ equity was $800.4 at March 31. Dividends were $0.08 per share, versus $0.05; RPC repurchased 2.6 million shares in the quarter. A three-for-two stock split was completed in March, and historical per-share figures were adjusted for it.
Material changes and management commentary
- Revenue growth reflected a larger revenue-producing equipment fleet, higher activity, favorable job mix, and improved pricing in some service lines. The average domestic rig count rose 16.0%; average oil prices rose 9.6%, while average natural gas prices fell 41.9%.
- Management cited higher employment and fuel costs, weaker pricing in many services, and increased equipment wear as pressures on costs and operating profit. Asset disposals shifted from a $1.4 million gain in Q1 2011 to a $1.4 million loss in Q1 2012.
- Management is redirecting equipment and personnel toward oil- and liquids-directed basins as customer activity in natural-gas basins declines. It expects fleet growth in 2012 to be lower than in 2011.
Outlook, risks, and contingencies
- RPC expects approximately $350 million of 2012 capital expenditures, subject to market conditions, maintenance needs, expansion opportunities, and equipment delivery schedules. It had spent $121.4 million through March 31.
- Management said natural gas prices and the outlook for them remained weak, and warned that customer migration away from natural-gas basins could reduce overall demand. Other cited risks include commodity-price changes, competition and pricing pressure, labor and material cost inflation, weather, geopolitical events, international operations, and reliance on large customers.
- The company expects to contribute approximately $1.0 million more to its pension plan in 2012 after contributing $3.5 million in Q1. Ongoing sales and use tax audits may have unfavorable outcomes that cannot currently be estimated.
- RPC said it had no material off-balance-sheet arrangements and did not expect ordinary-course litigation to have a material adverse effect. Management stated existing liquidity and expected operating cash flows should cover requirements for at least the next 12 months.
Important facts for investors to verify
- Whether the shift toward oil- and liquids-directed basins offsets weakening natural-gas activity, and how that affects utilization, pricing, and margins.
- Whether planned 2012 capital expenditures remain near $350 million and generate sufficient returns without materially increasing borrowing needs.
- Trends in operating cash flow, working capital, equipment replacement needs, and revolver availability, including covenant headroom.
- Whether higher labor, fuel, and material costs can be recovered through service pricing, and whether equipment wear continues to cause disposal losses.
- Developments in sales and use tax audits, pension funding, and other disclosed contingencies.