RPC, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. RPC provides oilfield services and related equipment. Comparisons are with Q1 2013 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $501.7 million | $425.8 million | +17.8% |
| Operating profit | $65.2 million | $57.2 million | +14.0% |
| Net income | $39.4 million | $35.1 million | +12.3% |
| Diluted EPS | $0.18 | $0.16 | +12.5% |
| Operating cash flow | $77.9 million | $89.3 million | −12.8% |
| Capital expenditures | $40.3 million | $53.0 million | −24.0% |
- Operating margin was approximately 13.0%, versus 13.4%; cost of revenues rose to 65.8% of revenue from 63.0%. SG&A declined to 9.7% of revenue from 10.5%.
- Net margin was approximately 7.9%, versus 8.2%. The effective tax rate increased to 39.4% from 38.9%.
- Operating cash flow less capital expenditures was approximately $37.6 million, compared with $36.3 million. Operating cash flow fell mainly because of working-capital changes and lower deferred-tax benefits.
- Cash was $44.3 million at quarter-end, versus $8.7 million at December 31, 2013; management said the balance was temporarily higher because of the timing of receipts and revolving-credit repayments.
- Bank borrowings were $80.8 million, up from $53.3 million at year-end. The $350 million revolving facility matures in January 2019; $245.1 million was available after borrowings and letters of credit. RPC reported compliance with its debt covenants.
- Current assets were $672.8 million and current liabilities $192.5 million at March 31, 2014. Total assets were $1.434 billion and stockholders’ equity $978.3 million.
Changes and business drivers
- Technical Services revenue increased 18.5% to $467.0 million; Support Services revenue increased 9.2% to $34.7 million. Domestic revenue rose 17.2%, while international revenue rose 32.7% to $21.4 million.
- Growth reflected greater activity, service intensity and equipment fleet size, partly offset by lower pricing. Higher materials, supplies and employment costs, competitive pricing and job mix pushed cost of revenue up faster than revenue.
- Average U.S. rig count increased 1.2%; average oil price rose 4.6% and natural gas price 38.9% year over year. International results varied by market and project timing.
- RPC repurchased 399,611 shares on the open market during the quarter and paid $23.0 million in dividends. The quarterly dividend was $0.105 per share, versus $0.100 a year earlier.
Outlook, risks and other notable items
- Management expected full-year 2014 capital expenditures of approximately $375 million, including maintenance and a pressure-pumping fleet expansion. It expected equipment deliveries and deployment in Q3 and Q4 2014 and Q1 2015, financed through the credit facility.
- Management saw support from oil prices, higher service intensity and recent natural-gas and natural-gas-liquids price increases, but was cautious about near-term activity growth given high U.S. natural-gas production and very low gas-directed drilling. It did not expect the overall rig count to increase during the rest of 2014 unless natural-gas prices continued to rise.
- Risks highlighted include oil and gas price declines, customer spending and credit quality, competitive pricing and excess service capacity, skilled-labor shortages and cost inflation, weather, geopolitical events, regulation of hydraulic fracturing, international operations and reliance on large customers. Floating-rate borrowings expose RPC to interest-rate risk; a one-percentage-point rate change would affect annual interest cost by approximately $0.8 million.
- RPC said it had sufficient liquidity for at least the next 12 months. It noted ongoing sales and use tax audits with potential unfavorable outcomes that could not then be estimated. Ordinary-course litigation was not expected to have a material adverse effect; no material off-balance-sheet arrangements were reported.
- After quarter-end, the board approved a $0.105-per-share dividend payable June 10, 2014. Stockholders also approved a new 8 million-share stock incentive plan on April 22, 2014. The filing reported no material change in internal control and effective disclosure controls as of March 31.
Key facts for investors to verify
- Whether planned pressure-pumping investment is delivered on schedule and earns adequate returns, and whether actual 2014 capital spending tracks the approximately $375 million plan.
- Whether pricing and job mix improve enough to offset higher labor, materials and operating costs, given the decline in operating margin.
- Whether accounts receivable and inventory growth convert to cash; operating cash flow declined despite higher earnings.
- How oil, natural-gas and natural-gas-liquids prices, customer activity and service capacity affect utilization and pricing.
- Debt, facility availability and covenant headroom as the expansion is financed; also monitor labor availability, customer collections and outcomes of tax audits.