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RES > SEC Filings for RES > Form 10-Q on 1-May-2013All Recent SEC Filings

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Form 10-Q for RPC INC


1-May-2013

Quarterly Report


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 23.

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 select international locations. The Company's revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. We continuously monitor factors that impact the level of current and expected customer activity levels, such as the price of oil and natural gas, changes in pricing for our services and equipment, and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers' drilling and production activities.

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, 2012 is incorporated herein by reference. In 2013, the Company's strategy of utilizing equipment in unconventional basins has continued, although we recently curtailed our capital expenditures for new equipment due to the low price of natural gas and a low natural gas drilling rig count. During the first quarter of 2013, we made approximately $53.0 million in capital expenditures primarily for the maintenance of our existing revenue-producing equipment as well as new equipment, which were significantly lower than our capital expenditures during the first quarter of 2012. Although the price of natural gas has increased recently, the low prices in 2011 and 2012 negatively impacted customer activity levels in natural gas basins. For this reason, we are now focusing on oil and natural gas liquids directed basins where customer activity levels are higher. We anticipate that capital expenditures will continue at these lower levels as compared to the prior year.

During the first quarter of 2013, revenues decreased 15.3 percent to $425.8 million compared to the same period in the prior year. The decrease in revenues resulted primarily from competitive pricing coupled with lower activity levels in most of our service lines. International revenues for the first quarter of 2013 decreased 6.4 percent to $16.2 million compared to the same period in the prior year. International revenues reflect decreases in customer activity levels primarily in New Zealand partially offset by increases in Canada and Mexico. We continue to focus on developing international growth opportunities; however, it is difficult to predict when contracts and projects will be initiated and their ultimate duration.

Cost of revenues as a percentage of revenues increased during the first quarter of 2013 in comparison to the same period of the prior year due to increasingly competitive pricing for our services, coupled with continued relatively high activity levels.

Selling, general and administrative expenses as a percentage of revenues increased to 10.5 percent in the first quarter of 2013 compared to 8.9 percent in the same period in the prior year. This percentage increase was primarily due to the relatively fixed nature of many of these expenses over the short term.

Income before income taxes was $57.4 million for the three months ended March 31, 2013 compared to $131.2 million in the same period of 2012. The effective tax rate for the three months ended March 31, 2013 was 38.9 percent compared to 38.4 percent in the same period of the prior year. Diluted earnings per share were $0.16 for the three months ended March 31, 2013 compared to $0.37 in the same period of 2012. Cash flows from operating activities were $89.3 million for the three months ended March 31, 2013 compared to $183.6 million in the same period of 2012 due primarily to a decrease in net income and the impact of working capital changes. The notes payable to banks decreased to $87.6 million as of March 31, 2013 compared to $107.0 million as of December 31, 2012.


RPC, INC. AND SUBSIDIARIES

We expect capital expenditures to be approximately $275 million during full year 2013 although this amount will ultimately depend upon market conditions and other factors. Our capital expenditures for the remainder of 2013 will be directed primarily towards capitalized equipment maintenance.

Outlook

Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a recent cyclical peak of 2,031 during the third quarter of 2008. The global recession that began during the fourth quarter of 2007 precipitated the steepest annualized rig count decline in U.S. domestic oilfield history. From the third quarter of 2008 to the second quarter of 2009, the U.S. domestic rig count dropped almost 57 percent, reaching a trough of 876 in June 2009. Between its cyclical trough in the second quarter of 2009 and its most recent peak during the fourth quarter of 2011, U.S. domestic drilling activity increased by approximately 129 percent. Beginning late in the fourth quarter of 2011, the domestic drilling rig count began to decline and continued to steadily decline throughout 2012 and during the first quarter of 2013. Unconventional activity as a percentage of total oilfield activity has grown steadily over the past several years and was approximately 75 percent of total wells drilled during 2012 and the first quarter of 2013.

The current and projected prices of oil and natural gas are important catalysts for U.S. domestic drilling activity. The price of natural gas declined steadily during 2011 and the first quarter of 2012. Although the price of natural gas began to recover during the third and fourth quarters of 2012 and the first quarter of 2013, its price remains too low to encourage drilling in the service-intensive natural gas resource shale plays in the U.S. domestic market. The price of natural gas liquids has become an increasingly important determinant of our customers' activities, since its sales comprise a large part of our customers' revenues, and it is produced in many of the shale resource plays that also produce oil. During 2012, the average price of benchmark natural gas liquids was 31.4 percent lower than in the prior year, and it declined an additional 3.3 percent during the first quarter of 2013 compared to the fourth quarter of 2012. These trends have negative implications for our near-term activity levels and our financial results, since the recent decline in domestic drilling activity is due to declines in natural gas-directed drilling. On the other hand, the average price of oil remained high during 2012, and increased by 7.2 percent in the first quarter of 2013 compared to the fourth quarter of 2012. The price of oil should continue to have a positive impact on our customers' activity levels and our financial results since there are a number of significant U.S. domestic shale resource plays which produce oil, and RPC has operational locations and revenue-producing equipment in these locations.

The effect of these trends is evident in the current composition of the U.S. domestic rig count, approximately 76 percent of which was directed towards oil during the first quarter of 2013. We believe that this trend will continue due to continued low prices for natural gas, as well as high production from existing natural gas wells. We do not believe that the overall rig count will increase during 2013 unless the price of natural gas increases significantly.

We continue to monitor the market for our services and the competitive environment in 2013. We are concerned about the continued low price of natural gas and natural gas liquids, and the fact that the high cost of completing wells in many unconventional shale plays has discouraged our customers from conducting drilling and completion activities in these areas until these commodity prices improve. In addition, we continue to monitor our customers' financial condition, because the prolonged low price of natural gas may cause financial distress among our less well-capitalized customers, thus jeopardizing timely collection of our accounts receivable. We also monitor the competitive environment because the high historical financial returns and favorable long-term outlook for our industry attracted new entrants and encouraged existing service companies to purchase additional revenue-producing equipment during 2011 and 2012. Due to the decline in domestic drilling activity that began in the fourth quarter of 2011, as well as the decrease in service-intensive drilling activities related to natural gas-directed shale plays, we believe that there is an excess of service capacity in the U.S. domestic market at the present time. Additionally, many of the contractual agreements in our pressure pumping service line expired during 2012, and we now operate the majority of our fleets in the spot market, which in the current market has resulted in lower utilization and pricing. Because of these concerns, we anticipate that our equipment purchases will be lower in 2013 than in 2012. Our consistent response to the industry's potential uncertainty is to maintain sufficient liquidity and a conservative capital structure and monitor our discretionary spending. Although we have used our bank credit facility to finance our expansion, we will continue to maintain a conservative financial structure by industry standards. Early in the second quarter of 2013, the direction of many of the catalysts impacting our revenues and profitability is uncertain; therefore, we cannot state an opinion regarding the Company's consolidated revenues and profitability in 2013 compared to 2012, although we are encouraged by the recent increases in and the current price level of natural gas.


                           RPC, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

                                                                      Three months ended
                                                                           March 31,
                                                                      2013          2012

Consolidated revenues [in thousands]                                $ 425,821     $ 502,557
Revenues by business segment [in thousands]:
Technical                                                           $ 394,011     $ 461,521
Support                                                                31,810        41,036

Consolidated operating profit [in thousands]                        $  57,219     $ 130,857

Operating profit by business segment [in thousands]:
Technical                                                           $  58,501     $ 123,531
Support                                                                 6,258        13,985
Corporate                                                              (4,900 )      (5,255 )
(Loss) gain on disposition of assets, net                              (2,640 )      (1,404 )

Percentage cost of revenues to revenues                                  63.0 %        54.5 %
Percentage selling, general & administrative expenses to revenues        10.5 %         8.9 %
Percentage depreciation and amortization expense to revenues             12.4 %        10.3 %
Average U.S. domestic rig count                                         1,758         1,990
Average natural gas price (per thousand cubic feet (mcf))           $    3.50     $    2.41
Average oil price (per barrel)                                      $   94.40     $  102.99

THREE MONTHS ENDED MARCH 31, 2013 COMPARED TO THREE MONTHS ENDED MARCH 31, 2012

Revenues. Revenues for the three months ended March 31, 2013 decreased 15.3 percent compared to the three months ended March 31, 2012. Domestic revenues of $409.7 million decreased 15.6 percent compared to the same period in the prior year. The decreases in revenues are due primarily to competitive pricing coupled with lower activity levels in most of our service lines. International revenues of $16.2 million decreased 6.4 percent for the three months ended March 31, 2013 compared to the same period in the prior year. Our international revenues are impacted by the timing of project initiation and their ultimate duration and can be volatile in nature.

The average price of natural gas were 45.2 percent higher while the average price of oil was 8.3 percent lower during the first quarter of 2013 as compared to the same period in the prior year. The average domestic rig count during the quarter was approximately 11.7 percent lower than the same period in 2012.

The Technical Services segment revenues for the quarter decreased 14.6 percent compared to the same period in the prior year. Revenues in this segment decreased due primarily to increasingly competitive pricing and lower activity levels. The Support Services segment revenues for the quarter decreased by 22.5 percent compared to the same period in the prior year. This decrease was due primarily to lower utilization and pricing within rental tools, the largest service line within this segment. Operating profit in the Technical and Support Services segment declined due to lower revenues caused by more competitive pricing for our service lines.


RPC, INC. AND SUBSIDIARIES

Cost of revenues. Cost of revenues decreased 2.0 percent to $268.2 million for the three months ended March 31, 2013 compared to $273.8 million for the three months ended March 31, 2012. Cost of revenues, as a percentage of revenues, increased in the first quarter of 2013 compared to the first quarter of 2012 due to increasingly competitive pricing for our services, coupled with continued relatively high activity levels.

Selling, general and administrative expenses. Selling, general and administrative expenses were $44.9 million for the three months ended March 31, 2013 and 2012. However, as a percentage of revenues, these costs increased to 10.5 percent during the three months ended March 31, 2013 compared to 8.9 percent during the same period in the prior year. This percentage increase was primarily due to the relatively fixed nature of many of these expenses over the short term.

Depreciation and amortization. Depreciation and amortization totaled $52.8 million for the three months ended March 31, 2013, a 2.4 percent increase, compared to $51.6 million for the quarter ended March 31, 2012. The increase was due to assets placed in service over the prior twelve months.

Loss on disposition of assets, net. Loss on disposition of assets, net was $2.6 million for the three months ended March 31, 2013 compared to $1.4 million for the three months ended March 31, 2012. The loss on disposition of assets, net includes gains or losses related to various property and equipment dispositions including certain equipment components experiencing increased wear and tear which requires early dispositions, or sales to customers of lost or damaged rental equipment.

Other income, net. Other income, net was $555 thousand for the three months ended March 31, 2013 compared to $920 thousand for the same period in the prior year. Other income, net primarily includes mark to market gains and losses of investments in the non-qualified benefit plan.

Interest expense and interest income. Interest expense was $340 thousand for the three months ended March 31, 2013 compared to $596 thousand for the three months ended March 31, 2012. The decrease in 2013 is due to a lower average debt balance on our revolving credit facility in the first quarter 2013 compared to the same period in the prior year. Interest income was $5 thousand for the three months ended March 31, 2013 and 2012.

Income tax provision. Income tax provision was $22.4 million during the three months ended March 31, 2013, compared to $50.4 million for the same period in 2012. The effective tax rate of 38.9 percent for the three months ended March 31, 2013 was slightly higher than the 38.4 percent for the three months ended March 31, 2012.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The Company's cash and cash equivalents at March 31, 2013 were $10.3
million. The following table sets forth the historical cash flows for the three
months ended March 31, 2013 and 2012:

                                                Three months ended March 31,
(In thousands)                                   2013                 2012

Net cash provided by operating activities   $       89,309       $       183,620
Net cash used for investing activities             (50,045 )            (117,728 )
Net cash used for financing activities             (43,144 )             (67,551 )

Cash provided by operating activities for the three months ended March 31, 2013 decreased by $94.3 million compared to the prior year period. This decrease is due primarily to an unfavorable change of $64.0 million associated with working capital and a decrease in net income of $45.7 million. The major components of the unfavorable change in working capital include: an unfavorable change of $47.2 million in income taxes receivable/payable related to the changes in the income tax estimate and the timing of payments; an unfavorable change of $23.3 million in accounts receivable due to the decline in revenues; and an unfavorable change of $8.0 million in accounts payable due primarily to the timing of payments; partially offset by a favorable change of $19.3 million in inventories which declined during the period ended March 31, 2013 due primarily to the drawdown of the levels of critical supplies that require longer lead times.


RPC, INC. AND SUBSIDIARIES

Cash used for investing activities for the three months ended March 31, 2013 decreased by $67.7 million, compared to the three months ended March 31, 2012, primarily as a result of lower capital expenditures.

Cash used for financing activities for the three months ended March 31, 2013 decreased by $24.4 million primarily as a result of lower open market share repurchases during the three months ended March 31, 2013 compared to the prior year period.

Financial Condition and Liquidity

The Company's financial condition as of March 31, 2013 remains strong. We believe the liquidity provided by our existing cash and cash equivalents, our overall strong capitalization and cash expected to be generated from operations will provide sufficient capital to meet our requirements for at least the next twelve months. The Company currently has a $350 million revolving credit facility (the "Revolving Credit Agreement") that matures in August 2015. The Revolving Credit Agreement contains customary terms and conditions, including certain financial covenants including covenants restricting RPC's ability to incur liens or merge or consolidate with another entity. Our outstanding borrowings were $87.6 million at March 31, 2013 and approximately $18.0 million of the credit facility supports outstanding letters of credit relating to self-insurance programs or contract bids. Accordingly, a total of $244.4 million was available under our facility as of March 31, 2013. Additional information regarding our Revolving Credit Agreement is included in Note 9 to our 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 credit 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.

Cash Requirements

The Company currently expects that capital expenditures will be approximately $275 million during 2013, of which $53.0 million has been spent as of March 31, 2013. We expect these expenditures for the remainder of 2013 to be primarily directed towards capitalized equipment maintenance. The actual amount of 2013 capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules and can be modified based on market conditions and other factors.

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. Subsequent to March 31, 2013, the Company contributed approximately $0.8 million to this plan and does not expect to make any additional contributions during the remainder of 2013.

The Company's Board of Directors announced a stock buyback program on March 9, 1998 authorizing the repurchase of 26,578,125 shares. The Company did not repurchase any shares of common stock under the program during the three months ended March 31, 2013 and 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 April 23, 2013, the Board of Directors approved a $0.10 per share cash dividend payable June 10, 2013 to stockholders of record at the close of business May 10, 2013. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.


RPC, INC. AND SUBSIDIARIES

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. Also, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees as well as increases in the costs of certain materials and key equipment components used to provide services to the Company's customers. During 2012, the Company incurred higher employment costs due to a continued shortage of skilled labor in many of its markets, although these cost pressures have subsided during the first quarter of 2013. The Company expects that labor cost pressures will continue in 2013, although to a lesser degree than in 2012. In addition, the prices of certain raw materials used to provide the Company's services fluctuated significantly during 2012 and the first quarter of 2013. During 2012, the Company successfully mitigated some of the cost increases for raw materials by securing materials through additional sources and increasing amounts held in inventory. The Company is continuing these efforts in 2013, although no assurance can be given that these efforts will be successful if price fluctuations for these raw materials continue.

OFF BALANCE SHEET ARRANGEMENTS

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

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 three months ended March 31, 2013, RPC charged Marine Products Corporation for its allocable share of administrative costs incurred for services rendered on behalf of Marine Products Corporation totaling approximately $112,000 compared to $102,000 for the comparable period in 2012.

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 approximately $405,000 for the three months ended March 31, 2013 and $400,000 for the three months ended March 31, 2012.

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 three 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 approximately $21,000 for the three months ended March 31, 2013 and 2012.

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, 2012. There have been no significant changes in the critical accounting policies since year-end.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

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


RPC, INC. AND SUBSIDIARIES

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 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 the effect of recent accounting pronouncements on the Company's consolidated financial statements; our belief that capital expenditures will be lower in 2013 . . .

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