RPC, Inc. — Q2 2012 Form 10-Q
Business and period: RPC provides oilfield services and related equipment, reported through Technical Services and Support Services. This unaudited filing covers the quarter and six months ended June 30, 2012; financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $500.1 | $443.0 | $1,002.7 | $824.8 |
| Operating profit | $119.9 | $119.3 | $250.7 | $225.6 |
| Net income | $72.3 | $73.2 | $153.0 | $138.7 |
| Diluted EPS | $0.33 | $0.33 | $0.71 | $0.63 |
| Operating margin | 24.0% | 26.9% | 25.0% | 27.4% |
- Q2: Revenue rose 12.9%, while operating profit was nearly flat and net income declined 1.2%. Cost of revenue rose to 56.2% of sales from 54.8%; SG&A was 8.6% versus 8.1%. Effective tax rate increased to 38.9% from 38.1%.
- First half: Revenue increased 21.6%, operating profit 11.1%, and net income 10.3%. Cost of revenue increased to 55.4% of sales from 53.9%; the effective tax rate was 38.7% versus 38.0%.
- Segment trends: Q2 Technical Services revenue increased 13.5%, while Support Services revenue rose 6.0%. Technical Services operating profit improved; Support Services profit declined, reflecting lower pricing and utilization in rental tools. First-half revenues increased in both segments.
- Cash flow: First-half cash from operations was $302.1, compared with $170.8 a year earlier. Investing used $196.2, including $204.2 of capital expenditures; financing used $104.1. Cash increased $1.9 to $9.3. Operating cash flow less capital expenditures was approximately $97.9.
- Liquidity and debt: At June 30, cash was $9.3, current assets $594.9, current liabilities $166.2, and bank debt $162.0, down from $203.3 at December 31, 2011. The $350 revolving facility had $169.9 available after $18.1 of letters of credit. The company reported compliance with its debt covenants.
- Capital returns: First-half dividends paid were $35.1 and cash spent on repurchases was approximately $30.0. The quarterly dividend per share was $0.08, versus $0.05 a year earlier. A three-for-two stock split was effected in March; historical share and per-share data were adjusted retroactively.
Changes, outlook, and risks
- Revenue growth was driven primarily by a larger revenue-producing equipment fleet and higher activity in several service lines. International revenue increased 111.2% in Q2 to $15.6, mainly from activity in New Zealand and Mexico; management cautioned that international projects can be volatile.
- Management described increasingly competitive pricing and relocation-related inefficiencies as pressures on Q2 costs. Equipment relocation followed declining natural-gas prices and weaker activity in gas-directed basins. The company shifted equipment and personnel toward oil- and liquids-directed unconventional basins and expects slower fleet growth in 2012 than in 2011.
- Management expected full-year 2012 capital expenditures of approximately $350, subject to market conditions and other factors; $204.2 had been spent by June 30. It expected natural-gas prices and gas-directed rig activity to remain weak through 2012, and highlighted possible further oil-price declines as a risk to customer drilling.
- Other risks include oilfield activity and commodity-price volatility, competition and pricing pressure, labor and materials costs, weather and geopolitical events, international operations, and reliance on large customers. A 1% change in the floating interest rate on June 30 borrowings would change annual interest costs by about $1.6. Foreign-exchange exposure was not expected to be material.
- The company expected sufficient liquidity for at least the next twelve months. It anticipated about $0.6 of additional pension contributions during the rest of 2012. Ongoing sales and use tax audits could have unfavorable outcomes that management said could not then be estimated; ordinary-course litigation was not expected to materially affect results or financial position.
- Unusual items included a Q2 net loss on asset dispositions of $1.9, versus a small gain in the prior-year quarter; the first-half net loss was $3.3, versus a $1.5 gain. Management attributed dispositions to equipment wear and tear and lost or damaged rental equipment. Q2 other expense of $0.9 primarily reflected mark-to-market movements in non-qualified benefit-plan investments.
Investor verification checklist
- Confirm whether competitive pricing, lower utilization, and relocation costs continue to weigh on margins, especially in Support Services.
- Track the shift of equipment from gas-directed to oil-directed basins, customer activity, commodity prices, and progress against the $350 full-year capital-spending expectation.
- Monitor operating cash flow and working-capital movements, capital returns, revolving-credit borrowings, and facility availability.
- Review the outcomes of sales and use tax audits, pension funding needs, and any changes in litigation or other contingencies.
- Note a period-label inconsistency in MD&A: it describes $302.1 of operating cash flow as being for the three months ended June 30, whereas the cash-flow statement reports that amount for the six months ended June 30.