RPC, Inc. - 10-Q quarterly report FY

 

 

 

The Board of Directors, at their quarterly meeting on January 25, 2005, authorized a three-for-two stock split by the issuance on March 10, 2005 of one additional common share for every two common shares held of record as of February 10, 2005. Accordingly, the par value of additional shares issued was adjusted between common stock and capital in excess of par value, and fractional shares resulting from the stock split were settled in cash. All share and per share data appearing in the consolidated financial statements and related footnotes have been retroactively adjusted for this split.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs—An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and therefore is required to be adopted by the Company in the first quarter of fiscal 2006, beginning on January 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated results of operations and financial condition but does not expect SFAS 151 to have a material impact.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial

statement recognition. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include the modified prospective application and the modified retrospective application. Under the modified retrospective application, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective application requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the modified retrospective application would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. SFAS No. 123R states that the requirement is to adopt  the provisions in the first interim or annual period beginning after June 15, 2005. However, the Securities and Exchange Commission issued a new rule that allows companies to implement Statement No. 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The Company will implement the provisions of SFAS 123R in the first quarter of 2006 pursuant to this rule. The Company is currently evaluating the impact of applying the various provisions of SFAS 123R.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS 153"). The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for non-monetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. By focusing the exception on exchanges that lack commercial substance, SFAS 153 intends to produce financial reporting that more faithfully represents the economics of the transaction. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 with earlier application permitted for nonmonetay exchanges occurring in fiscal periods beginning after the date of issuance. The provisions are to be applied prospectively. The Company is currently evaluating the effect that the adoption of SFAS 153 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

 

The components of comprehensive income are as follows:

RPC’s service lines have been aggregated into two reportable oil and gas services segments — Technical Services and Support Services — because of the similarities between the financial performance and approach to managing the service lines within each of the segments, as well as the economic and business conditions impacting their business activity levels. The other business segment includes information concerning RPC’s business units that do not qualify for separate segment reporting. These business units include an interactive training software developer and an overhead crane fabricator, prior to its disposition in April 2004. Corporate includes selected administrative costs incurred by the Company.

Technical Services include RPC’s oil and gas service lines that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. These services include pressure pumping services, snubbing, coiled tubing, nitrogen pumping, well control consulting and firefighting, down-hole tools, wireline, fluid pumping, and casing installation services. These Technical Services are primarily used in the completion, production and maintenance of oil and gas wells. The principal markets for this segment include the United States, including the Gulf of Mexico, the mid-continent, southwest and Rocky Mountain regions, and international locations including primarily Africa, Canada, China, Latin America and the Middle East. Customers include major multi-national and independent oil and gas producers, and selected nationally-owned oil companies.

Support Services include RPC’s oil and gas service lines that primarily provide equipment for customer use or services to assist customer operations. The equipment and services include drill pipe and related tools, pipe handling, inspection and storage services, work platform marine vessels, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico and the mid-continent regions, and international locations, including primarily Canada, Latin America, and the Middle East. Customers include domestic operations of major multi-national and independent oil and gas producers, and selected nationally-owned oil companies.  During the fourth quarter of 2004, the Company sold the marine lift boat division previously reported in this segment.

Certain information with respect to RPC’s business segments is set forth in the following table:

 

 

The following represents the net periodic defined benefit cost and related components of the Company’s pension plan.

 

 

The Company has previously filed amended federal and state tax returns for the years 1999, 2000 and 2001 to claim higher deductions for certain expenses and additional foreign tax credits representing potential tax benefits totaling up to approximately $3.5 million. These returns have been reviewed by the Internal Revenue Service and are currently being evaluated by the Joint Committee. The Company believes it has supportable positions for claiming these deductions and credits, but the amounts are subject to Joint Committee approval. Accordingly, the Company has not reflected these potential tax benefits in its financial statements. No tax benefits will be recognized in the financial statements until these gain contingencies are resolved through the eventual disposition with the respective tax authorities.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

 

RPC, Inc. (“RPC”) provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions, and selected international locations. The Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. We continuously monitor factors that impact the level of current and expected customer activity levels, such as the price of oil and natural gas, changes in pricing for our services and equipment, and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities.

A detailed discussion of our key business and financial strategies set forth under the Overview section in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004 is incorporated herein by reference. There have been no significant changes in the Company’s strategies since year-end.

During the first quarter of 2005, revenues increased 15.4 percent to $92.3 million compared to the same period in the prior year. The growth in revenues resulted primarily from higher capacity, increased utilization consistent with higher customer activity levels, and increased pricing for our equipment and services. International revenues for the first quarter of 2005 declined mainly due to a decrease in our Kuwait operation partially offset by increases from new business in China. We continue to focus on developing international growth opportunities; however, it is difficult to predict when contracts and projects will be initiated and their ultimate duration.

Cost of services rendered and goods sold as a percentage of revenues decreased approximately 4.3 percent in the first quarter of 2005 compared to the first quarter of 2004. This improvement was due to leveraging fixed costs over higher revenues as a result of increased equipment and personnel utilization and improved pricing.

Selling, general and administrative expenses as a percentage of revenues increased slightly by 1.0 percent, which is consistent with the increase in revenues due to increased incentive compensation costs and increased headcount related to higher activity levels.

Consistent with our strategy to selectively grow our capacity and maintain our existing fleet of high demand equipment, capital expenditures were $13.3 million in the first quarter of 2005. The actual amount of 2005 expenditures will depend primarily on equipment maintenance requirements and expansion opportunities, although we currently expect capital expenditures to be approximately $60 million in 2005. We expect these expenditures to be primarily directed toward our larger, core service lines including pressure pumping, snubbing, nitrogen, and rental tools.

Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, has been stable or gradually increasing for several years, and the overall domestic rig count during the first quarter of 2005 was approximately 14.7 percent higher than in the comparable period in 2004. The average price of oil rose by approximately 44 percent and the average price of natural gas rose by approximately 16 percent during the quarter as well. While the overall drilling rig count has increased, drilling activity in the Gulf of Mexico remains weak, which is unfavorable because of the Company’s historical presence in this geographic market. The Company has responded to these trends by emphasizing investments in more robust domestic markets and making only selective investments in the Gulf of Mexico market. In spite of relatively stable industry conditions, the Company understands that factors influencing the industry are unpredictable. Our response to the industry's potential uncertainty is to maintain sufficient liquidity and a conservative capital structure. Based on current industry conditions and trends during the first quarter of 2005, we expect consolidated revenues for 2005 to increase as compared to 2004, although the volatility in our industry makes accurate near-term forecasts difficult.

Further discussion of the Company’s outlook set forth under the Outlook section in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004 is incorporated herein by reference. There have been no significant changes in the Company’s outlook since year-end.

 

 

Cash used for investing activities for the three months ended March 31, 2005 increased by $4.2 million, compared to the three months ended March 31, 2004, primarily as a result of an increase in capital expenditures.

The Company’s financial condition as of March 31, 2005, remains strong. We believe the liquidity provided by our existing cash and cash equivalents, our overall strong capitalization, which includes access to a $25 million credit facility with a financial institution, of which $9.9 million was available as of March 31, 2005, and cash expected to be generated from operations, will provide sufficient capital to meet our requirements for at least the next twelve months. The portion of the credit facility that is not currently available supports letters of credit relating to self-insurance programs or contract bids.

The Company’s decisions about the amount of cash to be used for investing and financing purposes are influenced by its capital position and the expected amount of cash to be provided by operations. We believe our liquidity will allow us to grow our asset base and revenues as improvements occur in business conditions and customer activity levels.

The Company currently expects that capital expenditures during 2005 will be approximately $60 million, of which $13.3 million has been spent as of March 31, 2005, but the actual amount of 2005 expenditures will depend primarily on equipment maintenance requirements and expansion opportunities.

In accordance with the respective purchase agreements, earnout payments to sellers of two acquired businesses may be paid on an annual basis and through interim periods ending during 2005. The Company made earnout payments of approximately $4.6 million in April 2005 related to 2004 operating results. Final earnout payments to sellers of these two acquired businesses are expected to be made in the third and fourth quarter based on the interim 2005 results ending during the second quarter of 2005.

The Company purchases its equipment and materials from suppliers who provide competitive prices. Due to the recent increases in activity in the domestic oilfield, the Company has experienced some upward wage pressures in the labor markets from which it hires employees. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. During 2004, the price of steel, for both the commodity and for products manufactured with steel, rose dramatically due to increased worldwide demand. This affected the Company's operations through delays in scheduled deliveries of new equipment and price quotations that were only valid for a limited period of time. Steel prices remained high as of March 31, 2005. If steel prices remain high, delays in scheduled deliveries of new equipment will continue, and it is likely that the cost of the Company's new equipment will increase. These increases would result in higher capital expenditures and depreciation expense. RPC may not be able to recover such increased costs through price increases to its customers, thereby reducing the Company's future profits.

The Company does not have any material off balance sheet arrangements.

 

 

The Company periodically purchases in the ordinary course of business products or services from suppliers, who are owned by significant officers or shareholders of, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were approximately $327,000 for the three months ended March 31, 2005 and $139,000 for the three months ended March 31, 2004.

RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $17,000 for the three months ended March 31, 2005 and $26,000 for the three months ended March 31, 2004.

The discussion of Critical Accounting Policies is incorporated herein by reference from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004. There have been no significant changes in the critical accounting policies since year-end.

See Note 3 of the Notes to Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.

Oil and natural gas prices affect demand throughout the oil and natural gas industry, including the demand for the Company’s products and services. The Company’s business depends in large part on the conditions of the oil and gas industry, and specifically on the capital expenditures of its customers related to the exploration and production of oil and natural gas. When these expenditures fluctuate, customers’ demand for the Company’s services fluctuates as well. These fluctuations depend on the current and projected prices of oil and natural gas and resulting drilling activity, and are not seasonal to any material degree.

Certain statements made in this report that are not historical facts are “forward-looking statements” under Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and objectives, market risk exposure, adequacy of capital resources and funds, opportunity for growth, anticipated pension funding payments and capital expenditures, the impact of SFAS 151, SFAS 123R, SFAS 153 and FSP 109-2 and our beliefs and expectations regarding future demand for our products and services and other events and conditions that may influence the oilfield services market and our performance in the future.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 2005, cash and cash equivalents were primarily invested in overnight U.S. treasury bills and money market accounts which are highly liquid with maturities of three months or less. Management believes that, we are not subject to material interest rate risk exposure on these investments. The Company has been affected by the impact of lower interest rates on interest income from its short-term investments. This risk is managed through conservative policies to invest in high-quality obligations. Also, as of March 31, 2005, RPC had debt with a variable interest rate that exposes RPC to certain market risks; however, all outstanding debt is scheduled to mature in 2005, which mitigates interest rate risk exposure on this debt. RPC did not experience any material changes in market risk exposures or how those risks are managed during the first quarter of 2005.

ITEM 4.CONTROLS AND PROCEDURES

As of the end of the period covered by this report, March 31, 2005 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of the Evaluation Date.

ITEM 1.LEGAL PROCEEDINGS

RPC is involved in litigation from time to time in the ordinary course of its business. RPC does not believe that the outcome of such litigation will have a material adverse effect on the financial position or results of operations of RPC.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Shares repurchased by the Company and its "affiliated purchasers" in the first quarter of 2005 are outlined below. All share and per share data have been restated for the three-for-two stock split effective March 10, 2005.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None

ITEM 5.OTHER INFORMATION

None

ITEM 6.Exhibits

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.