RPC, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. RPC provides oilfield services, primarily in the United States, through Technical Services and Support Services.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $436.3 million | $298.1 million |
| Operating income | $60.8 million | $1.6 million |
| Net income | $52.1 million | $3.6 million |
| Diluted EPS | $0.24 | $0.02 |
| Operating cash flow | $109.7 million | $(12.4) million |
| Capital expenditures | $50.5 million | $11.7 million |
- Revenue increased 46.4%; management attributed growth to higher activity and service intensity, improved pricing, and reactivation of idle equipment. U.S. revenue rose 46.7% to $417.4 million; international revenue rose 38.4% to $18.9 million.
- Technical Services revenue rose 46.4% to $419.1 million, led by pressure pumping and downhole tools. Support Services revenue increased 44.9% to $17.3 million. Technical Services operating income was $65.0 million; Support Services recorded a $0.9 million operating loss.
- Operating margin was approximately 13.9%, versus 0.5% in Q1 2017. Cost of revenues was 67.7% of revenue versus 72.5%; SG&A was 10.0% versus 12.5%; depreciation and amortization was 8.6% versus 15.0%.
- Other income was $5.4 million, including $5.2 million of property insurance proceeds. The tax provision was $14.4 million, at a 21.6% effective rate; Q1 2017 had a $1.8 million tax benefit.
- Operating cash flow improved by $122.1 million year over year, driven by higher earnings and favorable working-capital changes. Cash after capital expenditures was approximately $59.2 million. Cash and equivalents were $101.0 million at quarter end.
- RPC had no revolving-credit borrowings. Of its $125 million facility, $19.6 million was committed to letters of credit and $105.4 million remained available. The facility matures in January 2019; RPC reported covenant compliance and no material off-balance-sheet arrangements.
Material changes and capital allocation
- Capital expenditures increased to $50.5 million from $11.7 million, primarily for revenue-producing equipment and maintenance.
- Q1 financing cash outflow included $21.7 million of dividends and $30.7 million for shares purchased and retired. RPC repurchased 1.34 million shares on the open market and had 9.63 million shares remaining under its authorization at March 31.
- The Board declared a subsequent quarterly dividend of $0.10 per share, payable June 11, 2018.
- Accounts receivable increased to $384.7 million from $377.9 million and inventories to $120.9 million from $114.9 million. Total liabilities rose to $267.3 million from $235.5 million; the filing reports no outstanding debt under the revolver.
Outlook, risks, and contingencies
- Management expected U.S. completion activity to increase moderately in the near term and described commodity prices as moderately positive for activity. It expected demand for revenue-producing service capacity to exceed supply, while noting increased competition constrained meaningful service-price increases and intensified competition for skilled labor.
- RPC projected approximately $250 million of 2018 capital expenditures, mainly for new equipment and maintenance. It planned moderate fleet expansion, expected to place some new equipment into service over the following two quarters, and intended to maintain little or no debt near term.
- Management expected the Tax Cuts and Jobs Act to benefit 2018 earnings and operating cash flow. Its tax accounting remained under review, including executive-compensation provisions and assets potentially eligible for immediate expensing; completion was expected with the 2017 federal tax return, anticipated by Q3 2018.
- Key risks include oil and gas price declines, customer spending and access to capital, OPEC and geopolitical developments, adverse weather, competition and pricing pressure, skilled-labor and input-cost inflation, hydraulic-fracturing regulation, international operations, and reliance on large customers. Natural gas prices were described as insufficient to encourage increased customer activity.
- RPC disclosed ongoing sales- and use-tax audits with potential unfavorable outcomes that could not then be estimated. It reported ordinary-course litigation, which management did not expect to have a material adverse effect. A $5.0 million pension contribution was made on April 10, 2018.
Important facts to verify
- How much of Q1 earnings and cash generation is sustainable, given the $5.2 million insurance proceeds and favorable working-capital contribution?
- Whether higher service activity and pricing persist amid rising competition, labor constraints, and input-cost pressure.
- Execution, timing, and returns on the planned $250 million of 2018 capital expenditures.
- Renewal or replacement of the revolving facility before its January 2019 maturity, and continued covenant compliance.
- Final tax-reform accounting and any eventual exposure from sales- and use-tax audits.
- Whether dividends and repurchases remain supportable through changes in oilfield activity and cash requirements.