RPC, Inc. — Q2 2016 Form 10-Q Summary
Business context and reporting period
RPC provides specialized oilfield services and equipment, principally in the United States. This unaudited report covers the three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Results were affected by the severe industry downturn, lower customer activity and service pricing.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $143.0 million | $297.6 million | $332.1 million | $703.8 million |
| Operating loss | $75.2 million | $52.3 million | $150.3 million | $46.0 million |
| Net loss | $48.7 million | $34.1 million | $81.2 million | $26.5 million |
| Loss per diluted share | $0.23 | $0.16 | $0.38 | $0.12 |
| Operating cash flow | Not reported separately | Not reported separately | $92.3 million | $344.2 million |
Q2 cost of revenues was $127.0 million, or 88.8% of revenue, versus 81.2% a year earlier. Selling, general and administrative expense was $36.5 million, or 25.5% of revenue, versus 13.5%. For the first half, cost of revenues was 86.8% of revenue versus 75.9%, and SG&A was 24.1% versus 11.7%. The filing attributes the higher expense ratios to lower activity and pricing, which reduced revenue faster than costs.
At June 30, 2016, cash and cash equivalents were $141.4 million, total assets $1.091 billion, and total liabilities $217.3 million. RPC had no borrowings under its revolving credit facility. The amended facility provides up to $125 million subject to a receivables-based borrowing limit; $29.7 million of letters of credit were outstanding under a separate uncommitted facility. The company reported compliance with its minimum tangible net worth covenant of $700 million.
Material changes versus the prior comparable period
- Q2 revenue fell 51.9%; first-half revenue fell 52.8%. Lower activity and pricing were the primary causes. The average U.S. rig count declined 53.7% in Q2 and 58.2% in the first half year over year.
- Both Technical Services and Support Services reported operating losses. First-half Technical Services revenue declined 53.1%, and Support Services revenue declined 49.1%.
- First-half operating cash flow fell by $252.0 million, primarily due to unfavorable working-capital changes and increased net losses. Capital expenditures declined to $18.3 million from $139.3 million.
- Cash increased by $76.2 million from year-end 2015. Accounts receivable fell to $130.9 million from $232.2 million, while property, plant and equipment declined to $585.0 million from $688.3 million.
- No common dividends were paid in the first half of 2016; the dividend had been suspended beginning in Q2 2015. No open-market share repurchases occurred in the first half of 2016.
Outlook, commentary, risks and unusual items
- Management believed U.S. oilfield activity had reached a cyclical trough by early Q3 2016, while cautioning that a significant near-term recovery was not expected absent stronger commodity prices. Management said oversupply of oilfield equipment and personnel would constrain service-price increases.
- RPC expected approximately $35 million of 2016 capital expenditures, primarily for maintenance, and planned minimal fleet expansion. It stated that existing cash and capitalization should provide sufficient liquidity for at least 12 months and that it intended to maintain little or no debt.
- The six-month income tax benefit included a $15.7 million discrete benefit from favorable resolution of an uncertain state tax matter; the six-month effective tax rate was 46.0%. A $2.0 million contingent professional fee related to resolving an open tax matter was recorded in Q1.
- Other income in the first half of 2015 included proceeds from a legal settlement; consequently, other income was $0.2 million in first-half 2016 versus $5.7 million a year earlier. RPC reported ordinary-course litigation and ongoing sales-and-use-tax audits; some possible audit outcomes could not be estimated. Management did not expect litigation to have a material adverse effect.
- Key risks include oil and gas prices and customer activity, continued pricing pressure, competition, customer financial stability, potential hydraulic-fracturing regulation, international operations, weather and possible cost inflation. The company noted that rising labor, materials or fuel costs may be difficult to pass through to customers.
Important facts for investors to verify
- Whether activity and pricing improved after quarter-end, and whether the expected industry trough translated into revenue or utilization recovery.
- Available borrowing capacity under the amended receivables-based facility, including the effect of outstanding letters of credit and the $700 million tangible-net-worth covenant.
- Whether the $35 million capital-spending outlook and liquidity expectations remained appropriate as market conditions changed.
- The effects of the one-time $15.7 million tax benefit, unresolved tax-audit exposures and any other unusual or nonrecurring items on future results.
- Any decision to resume dividends or repurchase shares; the filing says dividends were suspended and future resumption was conditional.