UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code -- (
Title of each class: |
| Trading Symbol(s) |
| Name of each exchange on which registered: |
Common stock, par value $0.10 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
⌧ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 19, 2019, RPC, Inc. had
RPC, INC. AND SUBSIDIARIES
Table of Contents
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RPC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2019 AND DECEMBER 31, 2018
(In thousands)
(Unaudited)
| June 30, |
| December 31, | |||
2019 | 2018 | |||||
(Note 1) | ||||||
ASSETS |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowance for doubtful accounts of $ |
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Inventories |
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Income taxes receivable |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Property, plant and equipment, less accumulated depreciation of $ |
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Operating lease right-of-use assets | | — | ||||
Goodwill |
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Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Accounts payable | $ | | $ | | ||
Accrued payroll and related expenses |
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Accrued insurance expenses |
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Accrued state, local and other taxes |
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Income taxes payable |
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Current portion of operating lease liabilities | | — | ||||
Other accrued expenses |
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Total current liabilities |
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Long-term accrued insurance expenses |
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Long-term pension liabilities |
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Deferred income taxes |
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Long-term operating lease liabilities | | — | ||||
Other long-term liabilities |
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Total liabilities |
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Common stock |
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Capital in excess of par value |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
3
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands except per share data)
(Unaudited)
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||
Revenues | $ | | $ | | $ | | $ | | ||||
Cost of revenues (exclusive of items shown below) |
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Selling, general and administrative expenses |
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Depreciation and amortization |
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Gain on disposition of assets, net |
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Operating income |
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Interest expense |
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Interest income |
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Other (expense) income, net |
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Income before income taxes |
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Income tax provision |
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Net income | $ | | $ | | $ | | $ | | ||||
Earnings per share |
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Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Dividends per share | $ | | $ | | $ | | $ | | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands)
(Unaudited)
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive income (loss): | ||||||||||||
Pension adjustment and reclassification adjustment, net of taxes |
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Foreign currency translation |
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Comprehensive income | $ | | $ | | $ | | $ | | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands)
(Unaudited)
Six months ended June 30, 2019 | |||||||||||||||||
Accumulated | |||||||||||||||||
Capital in | Other | ||||||||||||||||
Common Stock | Excess of | Retained | Comprehensive | ||||||||||||||
| Shares |
| Amount |
| Par Value |
| Earnings |
| (Loss) Income |
| Total | ||||||
Balance , December 31, 2018 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Adoption of accounting standards (Note 2) |
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Stock issued for stock incentive plans, net |
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Stock purchased and retired |
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Net loss |
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Dividends |
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Pension adjustment, net of taxes |
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Foreign currency translation |
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Balance, March 31, 2019 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Adoption of accounting standards (Note 2) | — | — | — | | — | | |||||||||||
Stock issued for stock incentive plans, net | ( | ( | | — | — | | |||||||||||
Stock purchased and retired | ( | ( | ( | ( | — | ( | |||||||||||
Net income | — | — | — | | — | | |||||||||||
Dividends | — | — | — | ( | — | ( | |||||||||||
Pension adjustment, net of taxes | — | — | — | — | | | |||||||||||
Foreign currency translation | — | — | — | — | | | |||||||||||
Balance, June 30, 2019 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Six months ended June 30, 2018 | |||||||||||||||||
Accumulated | |||||||||||||||||
Capital in | Other | ||||||||||||||||
Common Stock | Excess of | Retained | Comprehensive | ||||||||||||||
| Shares |
| Amount |
| Par Value |
| Earnings |
| (Loss) Income |
| Total | ||||||
Balance , December 31, 2017 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Adoption of accounting standard (Note 2) |
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Stock issued for stock incentive plans, net |
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Stock purchased and retired |
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Net income |
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Dividends |
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Pension adjustment, net of taxes |
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Foreign currency translation |
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Balance, March 31, 2018 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Adoption of accounting standard (Note 2) | — | — | — | — | — | | |||||||||||
Stock issued for stock incentive plans, net | ( | ( | | — | — | | |||||||||||
Stock purchased and retired | ( | ( | ( | ( | — | ( | |||||||||||
Net income | — | — | — | | — | | |||||||||||
Dividends | — | — | — | ( | — | ( | |||||||||||
Pension adjustment, net of taxes | — | — | — | — | | | |||||||||||
Foreign currency translation | — | — | — | — | | | |||||||||||
Balance, June 30, 2018 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
6
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands)
(Unaudited)
Six months ended June 30, | ||||||
| 2019 |
| 2018 | |||
OPERATING ACTIVITIES |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation, amortization and other non-cash charges |
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Stock-based compensation expense |
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Gain on disposition of assets, net |
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Deferred income tax (benefit) provision |
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(Increase) decrease in assets: |
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Accounts receivable |
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Income taxes receivable |
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Inventories |
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Prepaid expenses |
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Other current assets |
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Other non-current assets |
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Increase (decrease) in liabilities: |
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Accounts payable |
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Income taxes payable |
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Accrued payroll and related expenses |
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Accrued insurance expenses |
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Accrued state, local and other taxes |
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Other accrued expenses |
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Pension liabilities |
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Long-term accrued insurance expenses |
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Other long-term liabilities |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES |
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Capital expenditures |
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Proceeds from sale of assets |
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Net cash used for investing activities |
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FINANCING ACTIVITIES |
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Payment of dividends |
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Cash paid for common stock purchased and retired |
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Net cash used for financing activities |
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Net (decrease) increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | ||
Supplemental cash flows disclosure: |
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Income taxes (refund) paid, net | $ | ( | $ | | ||
Supplemental disclosure of noncash investing activities: |
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Capital expenditures included in accounts payable | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
7
1. GENERAL
The accompanying unaudited consolidated financial statements include the accounts of RPC, Inc. and its wholly-owned subsidiaries (“RPC” or the “Company”) and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These consolidated financial statements have been prepared in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, “Consolidation” and Rule 3A-02(a) of Regulation S-X. In accordance with ASC Topic 810 and Rule 3A-02 (a) of Regulation S-X, the Company’s policy is to consolidate all subsidiaries and investees where it has voting control.
In the opinion of management, all adjustments (all of which consisted of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.
The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018.
A group that includes the Company’s Chairman of the Board, R. Randall Rollins, and his brother Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power.
2. RECENT ACCOUNTING STANDARDS
The FASB issued the following applicable Accounting Standards Updates (ASU):
Recently Adopted Accounting Standards:
Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The Company adopted ASC 842, Leases, and all the related amendments on January 1, 2019, by recognizing on its balance sheet, right-of-use assets and lease liabilities totaling approximately $
ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments provide an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The Company adopted the standard in the first quarter of 2019 and elected to reclassify approximately $
ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments expand the scope of ASC 718 to include share-based payments issued to nonemployees for goods or services, thereby substantially aligning the accounting for share-
8
based payments to nonemployees and employees. The Company adopted these provisions in the first quarter of 2019 and the adoption did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted:
To be adopted in 2020 and later:
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. In addition, the amendments require the credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration to be presented as an allowance rather than a write-down. It also allows recording of credit loss reversals in current period net income. The amendments are effective starting in the first quarter of 2020 with early application permitted. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements.
ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for annual or any interim goodwill impairment tests beginning in 2020 applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements.
ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments reduce the complexity for the accounting for costs of implementing a cloud computing service arrangement and align the requirements for capitalizing implementation costs that are incurred in a hosting arrangement that is a service contract with the costs incurred to develop or obtain internal-use software. The provisions may be applied prospectively or retrospectively. The amendments are effective starting in the first quarter of 2020, with early adoption permitted. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements.
3. REVENUES
Accounting Policy:
RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and, given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues based on the transaction price agreed upon with its customers.
Sales tax charged to customers is presented on a net basis within the consolidated statements of operations and therefore excluded from revenues.
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Nature of services:
RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see Note 6.
RPC contracts with its customers to provide the following services by reportable segment:
Technical Services
| ● | Includes pressure pumping, downhole tools services, coiled tubing, nitrogen, snubbing and other oilfield related services including wireline, well control, fishing and pump down services. |
Support Services
| ● | Rental tools – RPC rents tools to its customers for use with onshore and offshore oil and gas well drilling, completion and workover activities. |
| ● | Other support services include oilfield pipe inspection services, pipe management and pipe storage; well control training and consulting. |
Our contracts with customers are generally very short-term in nature and generally consist of a single performance obligation – the provision of oilfield services.
Payment terms:
RPC’s contracts with customers state the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection generally occurs between 30 to
Significant judgments:
RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations.
Disaggregation of revenues:
See Note 6 for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions.
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Timing of revenue recognition for each of the periods presented is shown below:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Oilfield services transferred at a point in time | $ | | $ | | $ | | $ | | ||||
Oilfield services transferred over time |
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Total revenues | $ | | $ | | $ | | $ | | ||||
Contract balances:
Contract assets representing the Company’s rights to consideration for work completed but not billed are included in accounts receivable, net on the consolidated balance sheets are shown below:
| June 30, |
| December 31, |
| June 30, |
| December 31, | |||||
(in thousands) | 2019 | 2018 | 2018 | 2017 | ||||||||
Unbilled trade receivables | $ | | $ | | $ | | $ | | ||||
Substantially all of the unbilled trade receivables disclosed were invoiced during the following quarter.
4. EARNINGS PER SHARE
Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. The following table shows the restricted shares of common stock (participating securities) outstanding and a reconciliation of outstanding weighted average shares is as follows:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(In thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net income available for stockholders: | $ | | $ | | $ | | $ | | ||||
Less: Adjustments for earnings attributable to participating securities |
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Net income used in calculating earnings per share | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding (including participating securities) |
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Adjustment for participating securities |
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Shares used in calculating basic and diluted earnings per share |
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5. STOCK-BASED COMPENSATION
In April 2014, the Company reserved
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Stock-based employee compensation expense was as follows for the periods indicated:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Pre-tax expense | $ | | $ | | $ | | $ | | ||||
After tax expense | $ | | $ | | $ | | $ | | ||||
Restricted Stock
The following is a summary of the changes in non-vested restricted shares for the six months ended June 30, 2019:
Weighted Average | |||||
| Shares |
| Grant-Date Fair Value | ||
Non-vested shares at December 31, 2018 |
| | $ | | |
Granted |
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Vested |
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Forfeited |
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Non-vested shares at June 30, 2019 |
| | $ | | |
The total fair value of shares vested was $
As of June 30, 2019, total unrecognized compensation cost related to non-vested restricted shares was $
6. BUSINESS SEGMENT INFORMATION
RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and tools offered off the well site and are more closely aligned with the customers’ drilling activities. Selected overhead including centralized support services and regulatory compliance are classified as Corporate.
Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services.
Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels.
The Company’s Chief Operating Decision Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above.
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Segment Revenues:
RPC’s operating segment revenues by major service lines are shown in the following table:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Technical Services: |
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Pressure Pumping | $ | | $ | | $ | | $ | | ||||
Downhole Tools |
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Coiled Tubing |
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Nitrogen |
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Snubbing |
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All other |
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Total Technical Services | $ | | $ | | $ | | $ | | ||||
Support Services: |
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Rental Tools | $ | | $ | | $ | | $ | | ||||
All other |
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Total Support Services | $ | | $ | | $ | | $ | | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
The following summarizes revenues for the United States and separately for all international locations combined for the three and six months ended June 30, 2019. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10 percent of RPC’s consolidated assets, and therefore are not presented.
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
United States revenues | $ | | $ | | $ | | $ | | ||||
International revenues |
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Total revenues | $ | | $ | | $ | | $ | | ||||
The accounting policies of the reportable segments are the same as those described in Note 1 to these consolidated financial statements. RPC evaluates the performance of its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results.
13
Summarized financial information with respect RPC’s reportable segments for the three and six months ended June 30, 2019 and 2018 are shown in the following table:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Revenues: |
|
|
|
|
|
|
|
| ||||
Technical Services | $ | | $ | | $ | | $ | | ||||
Support Services |
| |
| |
| |
| | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Operating income (loss): |
|
|
|
|
|
|
| |||||
Technical Services | $ | | $ | | $ | | $ | | ||||
Support Services |
| |
| |
| |
| | ||||
Corporate |
| ( |
| ( |
| ( |
| ( | ||||
Gain on disposition of assets, net |
| |
| |
| |
| | ||||
Total operating income | $ | | $ | | $ | | $ | | ||||
Interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Interest income |
| |
| |
| |
| | ||||
Other (expense) income , net |
| ( |
| |
| |
| | ||||
Income before income taxes | $ | | $ | | $ | | $ | | ||||
As of and for the six months ended | Technical | Support | ||||||||||
June 30, 2019 |
| Services |
| Services |
| Corporate |
| Total | ||||
(in thousands) |
|
|
|
|
|
|
|
| ||||
Depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Capital expenditures |
| |
| |
| |
| | ||||
Identifiable assets | $ | | $ | | $ | | $ | | ||||
As of and for the six months ended | Technical | Support | ||||||||||
June 30, 2018 |
| Services |
| Services |
| Corporate |
| Total | ||||
(in thousands) | ||||||||||||
Depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Capital expenditures |
| |
| |
| |
| | ||||
Identifiable assets | $ | | $ | | $ | | $ | | ||||
7. INVENTORIES
Inventories of $
8. EMPLOYEE BENEFIT PLAN
The following represents the net periodic benefit cost and related components of the Company’s multiple employers Retirement Income Plan:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Interest cost | $ | | $ | | $ | | $ | | ||||
Expected return on plan assets |
| ( |
| ( |
| ( |
| ( | ||||
Amortization of net losses |
| |
| |
| |
| | ||||
Net periodic benefit cost (credit) | $ | | $ | ( | $ | | $ | ( | ||||
14
The Company did not make any contributions to this plan during the six months ended June 30, 2019; and a contribution of $
The Company permits selected highly compensated employees to defer a portion of their compensation into the non-qualified Supplemental Retirement Plan (“SERP”). The SERP assets are marked to market and totaled $
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Unrealized gains, net | $ | | $ | | $ | | $ | | ||||
The SERP liability includes participant deferrals net of distributions and is recorded on the consolidated balance sheets in long-term pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the consolidated statements of operations.
9. NOTES PAYABLE TO BANKS
The Company has a revolving credit facility with Bank of America and
On July 26, 2018, the Company entered into Amendment No. 4 to Credit Agreement (the “Amendment”). The Amendment, among other matters, replaces the existing minimum tangible net worth covenant with the following covenants: (i) when RPC’s trailing four quarter EBITDA (as calculated under the Credit Agreement) is equal to or greater than $
Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election:
| ● | the Eurodollar Rate, which is the rate per annum equal to the London Interbank Offering Rate (“LIBOR”); plus, a margin ranging from |
| ● | the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus |
15
In addition, the Company pays an annual fee ranging from
The Company has incurred total loan origination fees and other debt related costs associated with this revolving credit facility in the aggregate of approximately $
As of June 30, 2019, RPC had
Interest incurred, which includes facility fees on the unused portion of the revolving credit facility and the amortization of loan cost, and interest paid on the credit facility were as follows for the periods indicated:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Interest incurred | $ | | $ | | $ | | $ | | ||||
Interest paid | | | | | ||||||||
10. INCOME TAXES
The Company determines its periodic income tax expense or benefit based upon the current period income or loss and the annual estimated tax rate for the Company adjusted for discrete items including changes to prior period estimates. The estimated tax rate is revised, if necessary, as of the end of each successive interim period during the fiscal year to the Company’s current annual estimated tax rate.
For the three months ended June 30, 2019, the income tax provision reflects an effective tax rate of
11. FAIR VALUE DISCLOSURES
The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows:
| 1. | Level 1 – Quoted market prices in active markets for identical assets or liabilities. |
| 2. | Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| 3. | Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. |
16
The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis in the balance sheets as of June 30, 2019 and December 31, 2018:
Fair Value Measurements at June 30, 2019 with: | ||||||||||||
Quoted prices in | Significant | |||||||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| assets |
| inputs |
| inputs | ||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets: |
|
|
|
|
|
|
|
| ||||
Equity securities | $ | | $ | | $ | | $ | | ||||
Investments measured at net asset value | $ | |
|
|
|
|
|
| ||||
Fair Value Measurements at December 31, 2018 with: | ||||||||||||
Quoted prices in | Significant | |||||||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| assets |
| inputs |
| inputs | ||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets: | ||||||||||||
Equity securities | $ | | $ | | $ | | $ | | ||||
Investments measured at net asset value | $ | |
|
|
|
|
|
| ||||
The Company determines the fair value of equity securities that have a readily determinable fair value through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. Marketable securities comprised of the SERP assets, as described in Note 8, are recorded primarily at their net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance company. Significant observable inputs, in addition to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the period ended June 30, 2019, there were no significant transfers in or out of levels 1, 2 or 3.
Under the Company’s revolving credit facility, there was no balance outstanding at June 30, 2019 and December 31, 2018. Borrowings under our revolving credit facility are typically based on the quote from the lender (level 2 inputs), which approximates fair value, and bear variable interest rates as described in Note 9. The Company is subject to interest rate risk on the variable component of the interest rate.
The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether it will elect this option for financial instruments acquired in the future.
17
12. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income consists of the following (in thousands):
Foreign | |||||||||
Pension | Currency | ||||||||
| Adjustment |
| Translation |
| Total | ||||
Balance at December 31, 2018 | $ | ( | $ | ( | $ | ( | |||
Change during the period: |
|
|
|
|
| ||||
Before-tax amount |
| |
| |
| | |||
Adoption of accounting standard (Note 2) | ( | ( | |||||||
Reclassification adjustment, net of taxes: |
|
|
|
| |||||
Amortization of net loss (1) |
| |
| |
| | |||
Total activity for the period |
| ( |
| |
| ( | |||
Balance at June 30, 2019 | $ | ( | $ | ( | $ | ( | |||
| (1) | Reported as part of selling, general and administrative expenses. |
Unrealized | Foreign | |||||||||||
Pension | Gain (Loss) On | Currency | ||||||||||
| Adjustment |
| Securities |
| Translation |
| Total | |||||
Balance at December 31, 2017 | $ | ( | $ | | $ | ( | $ | ( | ||||
Change during the period: |
|
|
|
|
|
|
|
| ||||
Before-tax amount |
| |
| ( |
| ( |
| ( | ||||
Reclassification adjustment, net of taxes: |
|
|
|
|
| |||||||
Amortization of net loss (1) |
| |
| |
| |
| | ||||
Total activity for the period |
| |
| ( |
| ( |
| ( | ||||
Balance at June 30, 2018 | $ | ( | $ | — | $ | ( | $ | ( | ||||
| (1) | Reported as part of selling, general and administrative expenses. |
As of January 1, 2018, the balance related to the cumulative unrealized gain on marketable securities included in accumulated other comprehensive income was reclassed upon adoption of ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
In the first quarter of 2019, the Company adopted the provisions of ASU 2018-02, which provides an option to reclassify stranded tax effects within accumulated other comprehensive income/(loss) (AOCI) to retained earnings due to the change in the U.S. federal tax rate as a result of the Tax Cuts and Jobs Act, which took effect in January 2018. Accordingly, the Company elected to reclassify approximately $
13. LEASES
The Company adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2019 and recognized leases with duration greater than 12 months on the balance sheet using the modified retrospective approach. Prior year financial statements have not been restated and therefore those amounts are not presented below. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed for a carry-forward of the historical lease classification. For leases with terms greater than 12 months, the Company has recorded the related Right-Of-Use (ROU) asset and liability at the present value of lease payments over the term. A few of the leases include rental escalation clauses or renewal options and they have been factored into the determination of lease payments when appropriate. There are no residual value guarantees on the existing leases. The Company estimates its incremental borrowing rate, at lease commencement,
18
to determine the present value of lease payments, since most of the Company’s leases do not provide an implicit rate of return. ROU assets exclude lessor incentives received.
The Company’s lease population consists primarily of real estate including its corporate headquarters, office space and warehouses, in addition to vehicles, railcars, storage containers and office equipment. The Company does not have any finance leases. The Company has a significant population of month-to-month real estate leases that have been classified as short-term leases, and therefore has not recognized a ROU asset or lease liability related to them. The Company determines at contract inception, if an arrangement is a lease or contains a lease based on whether the Company obtains the right to control the use of specifically identifiable property, plant and equipment for a period of time in exchange for consideration. The Company has elected not to separate non-lease components from lease components for its leases. Variable lease payments relate primarily to taxes and insurance on real estate contracts and are recognized as expense when incurred.
The Company subleases certain real estate to third parties. Our sublease portfolio consists solely of operating leases. As of June 30, 2019, the Company had no operating leases that had not yet commenced. During the six months ended June 30, 2019, the Company entered into new leases or modified existing leases that resulted in an increase of ROU assets in exchange for operating lease liabilities as disclosed below.
Lease position:
The table below presents the assets and liabilities related to operating leases recorded on the balance sheet:
(in thousands) |
| Classification on the Consolidated Balance Sheet |
| June 30, 2019 | |
Assets: | |||||
Operating lease assets | Operating lease right-of-use assets | $ | | ||
Liabilities: | |||||
Current – operating leases | Current portion of operating leases | $ | | ||
Non-current – operating leases | Long-term operating lease liabilities | | |||
Total lease liabilities | $ | | |||
Lease costs:
The components of lease expense for the period are reported as follows:
Classification on the Consolidated | Three months ended | Six months ended |
| ||||||
(in thousands) |
| Statements of Operations |
| June 30, 2019 |
| June 30, 2019 |
| ||
Operating lease cost | Selling, general and administrative expenses | $ | | $ | |
| |||
Short-term lease cost | Selling, general and administrative expenses | | |
| |||||
Variable lease cost | Selling, general and administrative expenses | | |
| |||||
Sublease income | Selling, general and administrative expenses | ( | ( | ||||||
Total lease cost | $ | | $ | |
| ||||
Six months ended |
| |||
Other information: |
| June 30, 2019 |
| |
Cash paid for amounts included in the measurement of lease liabilities – operating leases (in thousands) | $ | |
| |
ROU assets obtained in exchange for operating lease liabilities (in thousands) | $ | |
| |
Weighted average remaining lease term – operating leases | years | |||
Weighted average discount rate – operating leases | | % | ||
19
Operating | |||
Maturity of lease liabilities (in thousands) |
| Leases | |
2019 (excluding the six months ended June 30, 2019) | $ | | |
2020 | | ||
2021 | | ||
2022 | | ||
2023 | | ||
Thereafter | | ||
Total lease payments | | ||
Less: Amounts representing interest | ( | ||
Present value of lease liabilities |
| $ | |
14. SUBSEQUENT EVENT
On July 23, 2019, the Board of Directors voted to suspend RPC's dividend to common stockholders.
20
RPC, INC. AND SUBSIDIARIES
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
The following discussion should be read in conjunction with the Consolidated Financial Statements included elsewhere in this document. See also “Forward-Looking Statements” on page 28.
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, Rocky Mountain and Appalachian regions, and in 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 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, the actions of the OPEC oil cartel, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities.
The 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, 2018 is incorporated herein by reference. In 2019, the Company’s strategy of utilizing equipment in unconventional basins has continued. During the three months ended June 30, 2019, capital expenditures totaled $70.0 million primarily for new revenue-producing equipment and capitalized maintenance of our existing equipment.
During the second quarter of 2019, revenues of $358.5 million decreased by $109.4 million or 23.4 percent compared to the same period in the prior year. The decrease in revenues is due to lower pricing, lower activity levels and an unfavorable materials mix within pressure pumping, which is RPC’s largest service line. International revenues for the second quarter of 2019 decreased 38.2 percent to $14.8 million compared to the same period in the prior year. We continue to pursue international growth opportunities, but the nature of this work is unpredictable and we believe that international revenues will continue to be less than ten percent of RPC’s consolidated revenues in the future.
Cost of revenues decreased during the second quarter of 2019 in comparison to the same period of the prior year, consistent with lower activity levels, due to lower materials and supplies expenses, including an unfavorable materials mix within RPC’s pressure pumping service line, as well as lower fuel costs. As a percentage of revenues, cost of revenues increased in the second quarter of 2019 compared to the same period in the prior year, due to lower revenues, increasingly competitive pricing for our services and labor costs inefficiencies.
Selling, general and administrative expenses were $43.3 million in the second quarter of 2019 compared to $42.5 million in the second quarter of 2018. As a percentage of revenues, these expenses increased to 12.1 percent in the second quarter of 2019 compared to 9.1 percent in the second quarter of 2018 due to the leverage of lower revenues over primarily fixed expenses.
Income before income taxes was $8.8 million for the three months ended June 30, 2019 compared to $79.5 million in the same period of 2018. Diluted earnings per share were $0.03 for the three months ended June 30, 2019 compared to $0.28 in the same period of 2018. Cash provided by operating activities decreased to $93.4 million for the six months ended June 30, 2019 compared to $229.2 million in the same period of 2018 due to lower earnings coupled with a negative change in working capital.
We expect capital expenditures in 2019 will be approximately $260 million, and will be directed primarily towards new revenue-producing equipment and capitalized maintenance of our existing equipment.
21
RPC, INC. AND SUBSIDIARIES
Outlook
Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,931 during the third quarter of 2014. Between the third quarter of 2014 and the second quarter of 2016, the drilling rig count fell by 79 percent. During the second quarter of 2016, the U.S. domestic drilling rig count reached the lowest level ever recorded. The principal catalyst for this steep rig count decline was the decrease in the price of oil in the world markets, which began in the second quarter of 2014. The price of oil began to fall at that time due to the perceived oversupply of oil, weak global demand growth, and the strength of the U.S. dollar on world currency markets. During the second quarter of 2016, the price of oil and the U.S. domestic rig count began to increase, and increased steadily throughout the remainder of 2016, 2017 and 2018. At the end of the second quarter of 2019, the U.S. domestic rig count had fallen by approximately eleven percent compared with the end of 2018. RPC monitors rig count efficiencies and well completion trends because the majority of our services are directed toward well completions. Improvements in drilling rig efficiencies have increased the number of potential well completions for a given drilling rig count; therefore, we believe the statistics regarding well completions are more meaningful indicators of the outlook for RPC’s activity levels and revenues. Annual well completions in the U.S. domestic market fell from 21,355 in 2014 to 8,060 in 2016. Annual well completions increased by approximately 40 percent to 11,277 in 2017, and by approximately 31 percent to 14,756 during 2018. We believe that U.S. oilfield well completion activity will remain at its current level or decline during the near term.
The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. During the first two quarters of 2016, the prices of oil and natural gas remained at low levels that discouraged our customers from undertaking most of their potential exploration and production activities. The prices of oil and natural gas increased during the third and fourth quarters of 2016, throughout 2017 and continued during the first three quarters of 2018. The price of natural gas continued to rise during the fourth quarter of 2018 and into the first quarter of 2019, due to low natural gas storage levels, cold weather and increasing demand for natural gas exports. In spite of the steady increase in the price of natural gas since mid-2016, we do not believe that it has risen to a level that encourages our customers to increase their natural gas directed drilling and production activities. By contrast, the price of oil began to fall significantly during the fourth quarter of 2018, and at the end of the quarter, was approximately 38 percent lower than at the end of the third quarter of 2018. At the end of the second quarter of 2019, the price of oil had risen by approximately 29 percent when compared with the end of the fourth quarter of 2018. The average price of natural gas liquids in 2018 increased by 14.7 percent compared to the average price for the full year 2017. The change in the price of oil during the first and second quarters of 2019 carries moderately positive implications for RPC’s near-term activity levels.
The majority of the U.S. domestic rig count remains directed towards oil. At the beginning of 2019, approximately 81 percent of the U.S. domestic rig count was directed towards oil, consistent with the prior year. We believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term. We believe that this relationship will continue due to relatively low prices for natural gas, high production from existing natural gas wells, and industry projections of limited increases in domestic natural gas demand during the near term.
We continue to monitor the market for our services and the competitive environment. The U.S. domestic rig count has increased sharply since the historical low recorded during the second quarter of 2016, though the rig count has declined through the second quarter of 2019. The fact that drilling and completion activities continue to be highly service-intensive and require a large amount of equipment and raw materials carries favorable implications for our activity levels. Furthermore, we note that some wells in the U.S. domestic market have been drilled but not completed. At the end of the second quarter of 2019, the number of wells in this category had increased by approximately three percent since the beginning of 2019. We believe that operators will complete some of these wells in the near term, and that they may provide potential revenue for RPC’s completion-directed services. Also, during 2018, we began to observe that oilfield completion crews and equipment were providing services with increasing efficiency, and we believe that this higher efficiency has caused the market for several oilfield completion services, including pressure pumping, to become oversupplied. This trend has continued during the first and second quarters of 2019, and we believe that this development carries negative consequences for pricing of our services, utilization of our equipment and our financial results during the near term.
22
RPC, INC. AND SUBSIDIARIES
Activity levels and pricing for oilfield services reached a level during 2018 that allowed the industry to maintain its equipment and encouraged oilfield service providers to expand their fleets of revenue-producing equipment and hire additional personnel. The prospect of improved financial returns also provided access to the capital markets and allowed previously insolvent service companies to resume operations and add equipment. As a result, competition increased during 2018. Increased competition and improved service efficiency, coupled with the significant decline in oil prices during the fourth quarter of 2018, became catalysts for lower pricing and activity levels during the first and second quarters of 2019. RPC expanded the size of its fleet of revenue-producing equipment modestly during 2018 and has placed orders for a small amount of new equipment to be delivered in 2019. The equipment we placed in service in 2018 and 2019 is more powerful and efficient than earlier generations of oilfield service equipment, and we believe that it will produce acceptable financial returns when placed in service. Our consistent response to the near-term potential of lower activity levels and pricing is to undertake moderate fleet expansions which we believe will allow us to maintain a strong balance sheet, even if near-term pricing and activity levels generated by such new equipment are modest.
The negative implications for RPC’s near-term activity levels from low oil prices and increased competition are partially offset by improved availability and lower cost for some of the critical raw materials used in providing RPC’s services. In addition, lower activity levels reduce the cost, and increase the availability of, skilled labor. These factors may reduce the cost of providing RPC’s services and reduce logistical constraints.
Results of Operations
Three months ended | Six months ended |
| |||||||||||
June 30, | June 30, |
| |||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||
Consolidated revenues [in thousands] | $ | 358,516 | $ | 467,926 | $ | 693,172 | $ | 904,260 | |||||
Revenues by business segment [in thousands]: |
|
|
|
|
|
|
| ||||||
Technical | $ | 338,034 | $ | 449,852 | $ | 652,113 | $ | 868,915 | |||||
Support |
| 20,482 |
| 18,074 |
| 41,059 |
| 35,345 | |||||
Consolidated operating income [in thousands] | $ | 8,387 | $ | 75,029 | $ | 6,226 | $ | 135,827 | |||||
Operating income (loss) by business segment [in thousands]: |
|
|
|
|
|
|
| ||||||
Technical | $ | 6,850 | $ | 75,624 | $ | 2,392 | $ | 140,629 | |||||
Support |
| 4,018 |
| 1,193 |
| 7,155 |
| 288 | |||||
Corporate |
| (3,614) |
| (3,598) |
| (7,958) |
| (8,263) | |||||
Gain on disposition of assets, net |
| 1,133 |
| 1,810 |
| 4,637 |
| 3,173 | |||||
Percentage cost of revenues to revenues |
| 73.9 | % |
| 66.7 | % |
| 74.7 | % |
| 67.2 | % | |
Percentage selling, general & administrative expenses to revenues |
| 12.1 | % |
| 9.1 | % |
| 12.8 | % |
| 9.5 | % | |
Percentage depreciation and amortization expense to revenues |
| 12.0 | % |
| 8.6 | % |
| 12.3 | % |
| 8.6 | % | |
Average U.S. domestic rig count |
| 989 |
| 1,039 |
| 1,016 |
| 1,003 | |||||
Average natural gas price (per thousand cubic feet (mcf)) | $ | 2.57 | $ | 2.85 | $ | 2.75 | $ | 3.01 | |||||
Average oil price (per barrel) | $ | 59.89 | $ | 68.05 | $ | 57.24 | $ | 65.49 | |||||
THREE MONTHS ENDED JUNE 30, 2019 COMPARED TO THREE MONTHS ENDED JUNE 30, 2018
Revenues. Revenues of $358.5 million for the three months ended June 30, 2019 decreased 23.4 percent compared to the three months ended June 30, 2018. Domestic revenues of $343.7 million decreased 22.6 percent for the three months ended June 30, 2019 compared to the same period in the prior year. The decrease in revenues was due primarily to lower pricing, lower activity levels, and an unfavorable materials mix within pressure pumping, which is RPC’s largest service line. International revenues of $14.8 million decreased 38.2 percent for the three months ended June 30, 2019 compared to the same period in the prior year. Our international revenues are impacted by the timing of project initiations and their ultimate duration and can be difficult to predict.
23
RPC, INC. AND SUBSIDIARIES
During the second quarter of 2019, the average price of natural gas was 9.8 percent lower and the average price of oil was 12.0 percent lower, both as compared to the same period in the prior year. The average domestic rig count during the second quarter of 2019 was 4.8 percent lower than the same period in 2018.
The Technical Services segment revenues for the second quarter of 2019 decreased 24.9 percent compared to the same period in the prior year due to lower pricing and activity levels within most of the service lines which comprise this segment. The Support Services segment revenues for the second quarter of 2019 increased by 13.3 percent compared to the same period in the prior year. This increase was due principally to improved activity levels across all service lines within this segment. Technical Services reported a significantly lower operating profit of $6.9 million during the second quarter of 2019 compared to $75.6 million in the second quarter of 2018 due to lower pricing and activity levels. Support Services reported a higher operating profit of $4.0 million for the second quarter of 2019 compared to $1.2 million for the second quarter of 2018.
Cost of revenues. Cost of revenues decreased 15.1 percent to $265.1 million for the three months ended June 30, 2019 compared to $312.1 million for the three months ended June 30, 2018. Cost of revenues decreased, consistent with lower activity levels, due to lower materials and supplies expenses, including an unfavorable materials mix within RPC’s pressure pumping service line, as well as lower fuel costs. As a percentage of revenues, cost of revenues increased in the second quarter of 2019 compared to the same period in the prior year, due to lower revenues, increasingly competitive pricing for our services, and labor cost inefficiencies.
Selling, general and administrative expenses. Selling, general and administrative expenses were $43.3 million for the three months ended June 30, 2019 and $42.5 million for the three months ended June 30, 2018. As a percentage of revenues, these costs increased to 12.1 percent in the second quarter of 2019 compared to 9.1 percent in the second quarter of 2018 due to the leverage of lower revenues over primarily fixed expenses.
Depreciation and amortization. Depreciation and amortization increased 7.0 percent to $42.9 million for the three months ended June 30, 2019, compared to $40.1 million for the three months ended June 30, 2018 due to capital expenditures made during the previous four quarters.
Gain on disposition of assets, net. Gain on disposition of assets, net decreased to $1.1 million for the three months ended June 30, 2019 compared to $1.8 million for the three months ended June 30, 2018. The gain on disposition of assets, net is generally comprised of gains and losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment.
Other (expense) income, net. Other expense, net was $53 thousand for the three months ended June 30, 2019 compared to other income, net of $4.1 million for the same period in the prior year. Other income recorded in the second quarter of 2018 included property insurance proceeds of $4.4 million.
Interest expense. Interest expense was $164 thousand for the three months ended June 30, 2019 compared to $113 thousand for the three months ended June 30, 2018. Interest expense consists of facility fees on the unused portion of the credit facility and the amortization of loan costs.
Income tax provision. Income tax provision was $2.6 million during the three months ended June 30, 2019 compared to $19.5 million for the same period in 2018. The effective tax rate was 29.6 percent for the three months ended June 30, 2019 compared to 24.6 percent for the three months ended June 30, 2018. The 2019 effective rate includes detrimental discrete adjustments of $2.2 million resulting from restricted stock vesting and dividends as compared to the 2018 effective rate.
SIX MONTHS ENDED JUNE 30, 2019 COMPARED TO SIX MONTHS ENDED JUNE 30, 2018
Revenues. Revenues of $693.2 million for the six months ended June 30, 2019 decreased 23.3 percent compared to the six months ended June 30, 2018. Domestic revenues of $657.7 million decreased 23.6 percent for the six months ended June 30, 2019 compared to the same period in the prior year. The decrease in revenues was due primarily to lower
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RPC, INC. AND SUBSIDIARIES
pricing, lower activity levels, and an unfavorable materials mix within pressure pumping, which is RPC’s largest service line. International revenues of $35.5 million decreased 17.3 percent for the six months ended June 30, 2019 compared to the same period in the prior year. Our international revenues are impacted by the timing of project initiations and their ultimate duration and can be difficult to predict.
During the six months ended June 30, 2019, the average price of natural gas was 8.7 percent lower and the average price of oil was 12.6 percent lower both as compared to the same period in the prior year. The average domestic rig count during the six months ended June 30, 2019 was 1.0 percent higher than the same period in 2018.
The Technical Services segment revenues for the six months ended June 30, 2019 decreased 25.0 percent compared to the same period in the prior year due to lower pricing and activity levels within most of the service lines which comprise this segment. The Support Services segment revenues for the six months ended June 30, 2019 increased by 16.2 percent compared to the same period in the prior year. This increase was due principally to improved activity levels across all services lines within this segment. Technical Services reported significantly lower operating profit of $2.4 million during the six months ended June 30, 2019 compared to $140.6 million in the same period of the prior year due to lower pricing and activity levels. Support Services reported higher operating profit of $7.2 million for the six months ended June 30, 2019 compared to $0.3 million for the six months ended June 30, 2018.
Cost of revenues. Cost of revenues decreased 14.8 percent to $517.5 million for the six months ended June 30, 2019 compared to $607.7 million for the six months ended June 30, 2018. Cost of revenues decreased, consistent with lower activity levels, due to lower materials and supplies expenses within RPC’s pressure pumping service line, as well as lower fuel costs and maintenance and repairs expense. As a percentage of revenues, cost of revenues increased in the six months ended June 30, 2019 compared to the same period in the prior year, due to lower revenues, increasingly competitive pricing for our services, and labor cost inefficiencies.
Selling, general and administrative expenses. Selling, general and administrative expenses were $88.7 million for the six months ended June 30, 2019 and $86.3 million for the six months ended June 30, 2018. As a percentage of revenues, these costs increased to 12.8 percent in the six months ended June 30, 2019 compared to 9.5 percent in the six months ended June 30, 2018 due to the leverage of lower revenues over primarily fixed expenses.
Depreciation and amortization. Depreciation and amortization increased 10.1 percent to $85.4 million for the six months ended June 30, 2019, compared to $77.6 million for the quarter ended June 30, 2018 due to capital expenditures made during the previous four quarters.
Gain on disposition of assets, net. Gain on disposition of assets, net increased to $4.6 million for the six months ended June 30, 2019 compared to $3.2 million for the six months ended June 30, 2018. The gain on disposition of assets, net is generally comprised of gains and losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment.
Other income, net. Other income, net was $0.4 million for the six months ended June 30, 2019 compared to $9.5 million for the same period in the prior year. Other income recorded in the six months ended June 30, 2018 included property insurance proceeds of approximately $9.6 million.
Interest expense. Interest expense was $253 thousand for the six months ended June 30, 2019 compared to $218 thousand for the six months ended June 30, 2018. Interest expense consists of facility fees on the unused portion of the credit facility and the amortization of loan costs.
Income tax provision. Income tax provision was $2.3 million during the six months ended June 30, 2019 compared to $33.9 million for the same period in 2018. The effective tax rate was 30.0 percent for the six months ended June 30, 2019 compared to 23.2 percent for the six months ended June 30, 2018. The 2019 effective rate includes detrimental discrete adjustments of $2.2 million resulting from restricted stock vesting and dividends as compared to the 2018 effective rate.
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RPC, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
Cash Flows
The Company’s cash and cash equivalents as of June 30, 2019 were $47.6 million. The following table sets forth the historical cash flows for the six months ended June 30, 2019 and 2018:
Six months ended June 30, | ||||||
(In thousands) |
| 2019 |
| 2018 | ||
Net cash provided by operating activities | $ | 93,430 | $ | 229,204 | ||
Net cash used for investing activities |
| (122,477) |
| (142,797) | ||
Net cash used for financing activities |
| (39,573) |
| (83,282) | ||
Cash provided by operating activities for the six months ended June 30, 2019 decreased by $135.8 million compared to the same period in the prior year. This decrease is due primarily to decreases in net earnings of $106.6 million and the deferred income tax provision of $17.7 million coupled with a net unfavorable change in working capital of $26.3 million partially offset by increases in depreciation and amortization expenses of $7.4 million and long-term pension liability of $8.9 million. The net unfavorable change in working capital is due to unfavorable changes of $35.2 million in accounts receivable due to lower revenues, $20.1 million in accounts payable and $3.3 million in accrued payroll due to lower activity levels. These unfavorable changes were partially offset by favorable changes of $23.6 million in inventory, $4.2 million in income taxes receivable, payable (net) and $5.5 million accrued state and local taxes.
Cash used for investing activities for the six months ended June 30, 2019 decreased by $20.3 million compared to the six months ended June 30, 2018, primarily because of lower capital expenditures partially offset by an increase in proceeds from the sale of assets.
Cash used for financing activities for the six months ended June 30, 2019 decreased by $43.7 million primarily as a result of lower dividends paid to common stock holders as well as lower cost of repurchases of the Company’s shares on the open market and for taxes related to the vesting of restricted shares.
Financial Condition and Liquidity
The Company’s financial condition as of June 30, 2019 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company currently has a $125 million revolving credit facility that matures in July 2023, as recently amended. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. On July 26, 2018, the Company further amended the revolving credit facility to, among other matters, replace the existing minimum tangible net worth covenant, as well as, (1) extend the maturity date of the revolving credit facility to July 26, 2023, (2) eliminate any borrowing base limitations on revolving loans when certain criteria exist, (3) reduce the commitment fees payable by RPC and (4) reduce the letter of credit sublimit from $50 million to $35 million. As of June 30, 2019, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $20.6 million; therefore, a total of $104.4 million of the facility was available. For additional information with respect to RPC’s facility, see Note 9 of the Notes to Consolidated Financial Statements included in this report.
The Company’s decisions about the amount of cash to be used for investing and financing purposes are influenced by its capital position, including access to borrowings under our facility, and the expected amount of cash to be provided by operations. We believe our liquidity will continue to provide the opportunity to grow our asset base and revenues during periods with positive business conditions and strong customer activity levels. In addition, the Company's decisions about the amount of cash to be used for investing and financing activities may also be influenced by the financial covenants in our credit facility, but we do not expect the covenants to restrict our planned activities. The Company is in compliance with these financial covenants as of June 30, 2019.
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RPC, INC. AND SUBSIDIARIES
Cash Requirements
The Company currently expects that capital expenditures will be approximately $260 million during 2019, of which $132.3 million has been spent as of June 30, 2019. We expect capital expenditures for the remainder of 2019 to be primarily directed towards new revenue-producing equipment and capitalized maintenance of our existing equipment. The actual amount of 2019 capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules.
The Company has ongoing sales and use tax audits in various jurisdictions subject to varying interpretations of statutes. The Company has recorded the exposure from these audits to the extent issues are resolved or are reasonably estimable. There are issues that could result in unfavorable outcomes that cannot be currently estimated.
The Company’s Retirement Income Plan, a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to eligible employees. During the six months ended June 30, 2019, the Company did not make any contributions to the plan and does not expect to make any cash contributions for the remainder of 2019.
As of June 30, 2019, the Company’s stock buyback program authorizes the aggregate repurchase of up to 41,578,125 shares, including an additional 10,000,000 shares authorized for repurchase by the Board of Directors on February 12, 2018. There were 539,643 shares purchased on the open market during the second quarter of 2019 and 8,248,184 shares remain available to be repurchased under the current authorization as of June 30, 2019. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date.
On July 22, 2019, the Board of Directors voted to suspend RPC’s dividend to common stockholders. The Company expects to resume cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.
INFLATION
The Company purchases its equipment and materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause increases in the costs of certain materials and key equipment components used to provide services to the Company’s customers. When oilfield activity began to increase in the second quarter of 2016, the Company experienced upward pressure on the price of labor due to the shortage of skilled employees as well as occasional increases in the prices of certain raw materials used in providing our services. During 2018, however, prices for the raw material comprising the Company’s single largest raw material purchase began to decline due to increased sources of supply of the material, particularly in geographic markets located close to the largest U.S. oil and gas basin. In addition, labor cost pressures during the fourth quarter of 2018 began to abate due to lower oilfield activity. These cost pressures continued to decline in the first and second quarters of 2019.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any material off balance sheet arrangements.
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RPC, INC. AND SUBSIDIARIES
RELATED PARTY TRANSACTIONS
Marine Products Corporation
Effective February 28, 2001, the Company spun-off the business conducted through Chaparral Boats, Inc., RPC’s former powerboat manufacturing segment. In conjunction with the spin-off, RPC and Marine Products Corporation entered into various agreements that define the companies’ relationship. During the six months ended June 30, 2019, RPC charged Marine Products Corporation for its allocable share of administrative costs incurred for services rendered on behalf of Marine Products Corporation totaling $427,000 for the six months ended June 30, 2019 compared to $451,000 for the comparable period in 2018.
Other
The Company periodically purchases in the ordinary course of business products or services from suppliers who are owned by officers or significant stockholders of, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $587,000 for the six months ended June 30, 2019 and $602,000 for the six months ended June 30, 2018.
RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on nine months’ notice. The services covered by these agreements include office space, selected administration services for 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 $60,000 for the six months ended June 30, 2019 and $75,000 for the six months ended June 30, 2018.
CRITICAL ACCOUNTING POLICIES
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, 2018. There have been no significant changes in the critical accounting policies since year-end.
IMPACT OF RECENT ACCOUNTING STANDARDS
See Note 2 of the Notes to Consolidated Financial Statements for a description of recent accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition.
SEASONALITY
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 economic 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. There is a positive correlation between these expenditures and customers’ demand for the Company’s services. As such, 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.
FORWARD-LOOKING STATEMENTS
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 regarding our plans to continue to pursue international growth opportunities and our belief that international revenues will continue to be less than ten percent of our
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RPC, INC. AND SUBSIDIARIES
consolidated revenues in the future; our belief that U.S. oilfield well completion activity will remain at its current level or decline during the near term; our belief that the price of natural gas has not risen to a level that encourages our customers to increase their drilling and production activities; our belief that the change in the price of oil during the first and second quarters of 2019 carries moderately positive implications for our near-term activity levels; our belief that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term and that this relationship will continue due to relatively low prices for natural gas, high production from existing natural gas wells, and industry projections of limited increases in domestic natural gas demand during the near term; our belief that drilling and completion activities continue to be highly service-intensive and require a large amount of equipment and raw materials and, therefore, carry favorable implications for our activity levels; our belief that many wells in the U.S. domestic market that have been drilled but not completed will be completed in the near term and that they will provide potential revenue for RPC’s completion-directed services; our belief that the equipment we placed in service in 2018 and the new equipment we have ordered so far in 2019 is more powerful and efficient than earlier generations of oilfield service equipment, which will produce acceptable financial returns when placed in service; our belief that undertaking moderate fleet expansions in response to the near-term potential of lower activity levels and pricing will allow us to maintain a strong balance sheet, even if near-term pricing and activity levels generated by such new equipment is modest; our belief that the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months; our expectation that we will continue to pay cash dividends, subject to industry conditions, the earnings and financial condition of the Company and other relevant factors; our belief that our liquidity will continue to provide the opportunity to grow our asset base and revenues during periods with positive business conditions and strong customer activity levels; our expectations that the financial covenants in our credit facility will not restrict our planned activities; our expectations that capital expenditures will be approximately $260 million in 2019 and will be directed primarily towards new revenue-producing equipment and capitalized maintenance of our existing equipment; our expectation that we will not make any cash contributions to our Retirement Income Plan for the remainder of 2019; our belief that the outcome of litigation will not have a material adverse effect upon our financial position or results of operations; 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. The Company does not undertake to update its forward-looking statements.
The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” “focus,” “plan,” and similar expressions generally identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of RPC to be materially different from any future results, performance or achievements expressed or implied in such forward-looking statements. Risk factors that could cause such future events not to occur as expected include the following: the declines in the price of oil and natural gas, which tend to result in a decrease in drilling activity and therefore a decline in the demand for our services, the actions of the OPEC cartel, the ultimate impact of current and potential political unrest and armed conflict in the oil producing regions of the world, which could impact drilling activity, adverse weather conditions in oil or gas producing regions, including the Gulf of Mexico, competition in the oil and gas industry, the Company’s ability to implement price increases, the potential impact of possible future regulations on hydraulic fracturing on our business, risks of international operations, and reliance on large customers. Additional discussion of factors that could cause actual results to differ from management’s projections, forecasts, estimates and expectations is contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk exposure through borrowings on its credit facility. As of June 30, 2019, there were no outstanding interest-bearing advances on our credit facility, which bear interest at a floating rate.
Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition.
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RPC, INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures – The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, June 30, 2019 (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 a reasonable assurance level as of the Evaluation Date.
Changes in internal control over financial reporting – Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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RPC, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
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 1A. RISK FACTORS
See additional risk factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Shares repurchased by the Company and affiliated purchasers in the second quarter of 2019 are outlined below.
Total Number | Maximum Number | ||||||||
of Shares (or | (or Approximate | ||||||||
Units) | Dollar Value) of | ||||||||
Purchased as | Shares (or Units) | ||||||||
Total Number of | Average Price | Part of Publicly | that May Yet Be | ||||||
Shares | Paid Per | Announced | Purchased Under | ||||||
(or Units) | Share | Plans or | the Plans or | ||||||
Period |
| Purchased |
| (or Unit) |
| Programs (1) |
| Programs (1) | |
April 1, 2019 to April 30, 2019 |
| 69 | (2) | $ | 11.48 |
| — |
| 8,787,827 |
May 1, 2019 to May 31, 2019 |
| 371,008 | (1) |
| 9.21 |
| 371,008 |
| 8,416,819 |
June 1, 2019 to June 30, 2019 |
| 168,635 | (1) |
| 7.30 |
| 168,635 |
| 8,248,184 |
Totals |
| 539,712 | $ | 8.62 |
| 539,643 |
| 8,248,184 | |
| (1) | The Company has a stock buyback program initially adopted in 1998 (and subsequently amended in 2013 and 2018) that authorizes the aggregate repurchase of up to 41,578,125 shares, including an additional 10,000,000 shares authorized for repurchase by the Board of Directors on February 12, 2018. There were 539,643 shares purchased on the open market during the second quarter of 2019 and 8,248,184 remain available to be repurchased under the current authorization as of June 30, 2019. Currently the program does not have a predetermined expiration date. |
| (2) | Represent shares repurchased in connection with taxes related to the vesting of certain restricted shares. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
The information required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-Q.
ITEM 5. OTHER INFORMATION
None.
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RPC, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS
Exhibit |
| Description |
3.1(a) | ||
3.1(b) | ||
3.1(c) | ||
3.2 | ||
4 | ||
31.1 | ||
31.2 | ||
32.1 | Section 906 certifications for Chief Executive Officer and Chief Financial Officer. | |
95.1 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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RPC, INC. AND SUBSIDIARIES
SIGNATURES
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.
RPC, INC. | ||
/s/ Richard A. Hubbell | ||
Date: July 31, 2019 | Richard A. Hubbell | |
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
/s/ Ben M. Palmer | ||
Date: July 31, 2019 | Ben M. Palmer | |
Vice President, Chief Financial Officer and Corporate Secretary | ||
(Principal Financial and Accounting Officer) |
33