UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
| | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 1-8726
RPC, INC.
(exact name of registrant as specified in its charter)
Delaware 58-1550825
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
2170 Piedmont Road, NE, Atlanta, Georgia 30324
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code -- (404) 321-2140
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
-- --
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. Yes X No__
As of June 30, 2003, RPC, Inc. had 28,807,606 shares of common stock
outstanding.
1
RPC, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -
June 30, 2003 and December 31, 2002 3
Consolidated statements of operations -
Three and six months ended June 30, 2003 and 2002 4
Consolidated statements of cash flows -
Six months ended June 30, 2003 and 2002 5
Notes to consolidated financial statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk 18
Item 4. Controls and Procedures 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
RPC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2003 AND DECEMBER 31, 2002
(In thousands)
(Unaudited)
June 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 10,182 $ 11,533
Accounts receivable, net 52,388 40,168
Inventories 9,629 9,206
Deferred income taxes 6,548 5,873
Taxes receivable 267 8,817
Prepaid expenses and other current assets 2,774 3,478
- ------------------------------------------------------------------------------------------
Total current assets 81,788 79,075
Equipment and property, net 110,802 105,338
Intangibles, net 12,657 9,609
Other assets 1,627 1,932
- ------------------------------------------------------------------------------------------
Total assets $ 206,874 $ 195,954
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 14,151 $ 12,280
Accrued payroll and related expenses 6,440 7,641
Accrued insurance expenses 4,507 4,115
Accrued state, local and other taxes 2,075 1,659
Short-term debt 1,133 552
Other accrued expenses 526 1,497
- ------------------------------------------------------------------------------------------
Total current liabilities 28,832 27,744
Long-term accrued insurance expenses 4,137 3,583
Long-term debt 4,800 2,410
Pension liability 7,891 6,931
Deferred income taxes 10,424 10,205
- ------------------------------------------------------------------------------------------
Total liabilities 56,084 50,873
- ------------------------------------------------------------------------------------------
Common stock 2,881 2,861
Capital in excess of par value 28,581 26,431
Deferred compensation (1,197) (1,186)
Earnings retained 124,380 120,805
Accumulated other comprehensive loss (3,855) (3,830)
- ------------------------------------------------------------------------------------------
Total stockholders' equity 150,790 145,081
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 206,874 $ 195,954
==========================================================================================
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, 2003 AND 2002
(In thousands except per share data)
(Unaudited)
Three months ended June 30, Six months ended June 30,
-----------------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Revenues $ 70,864 $ 49,821 $ 131,564 $ 100,587
Cost of services rendered and goods sold 42,390 34,898 82,316 68,845
Selling, general and administrative expenses 13,208 10,705 25,161 23,030
Depreciation and amortization 8,401 7,806 16,397 15,530
- ---------------------------------------------------------------------------- --------------------------------
Operating profit (loss) 6,865 (3,588) 7,690 (6,818)
Interest expense, net (77) (29) (92) (45)
Other income, net 801 466 483 1,830
- ---------------------------------------------------------------------------- --------------------------------
Income (loss) before income taxes 7,589 (3,151) 8,081 (5,033)
Income tax provision (benefit) 2,884 (1,198) 3,071 (1,913)
- ---------------------------------------------------------------------------- --------------------------------
Net income (loss) $ 4,705 $ (1,953) $ 5,010 $ (3,120)
============================================================================ ================================
Dividends paid per share $ 0.025 $ 0.025 $ 0.050 $ 0.050
============= ============== ============ ==============
Earnings (loss) per share
Basic $ 0.17 $ (0.07) $ 0.18 $ (0.11)
Diluted 0.16 (0.07) 0.17 (0.11)
Average shares outstanding
Basic 28,439 28,265 28,348 28,265
============= ============== ============ ==============
Diluted 28,851 28,265 28,754 28,265
============= ============== ============ ==============
The accompanying notes are an integral part of these consolidated financial statements.
4
RPC, INC. AND SUBSIDIARIES MACROS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 and 2002
(In thousands)
(Unaudited)
Six months ended June 30,
-----------------------------
2003 2002
- ----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITES
Net income (loss) $ 5,010 $ (3,120)
Noncash charges (credits) to earnings:
Depreciation and amortization 16,450 15,578
Loss (gain) on sale of equipment and property 354 (985)
Deferred income tax (benefit) provision (440) 3,182
(Increase) decrease in assets, excluding effect of business acquired:
Accounts receivable (12,220) 4,319
Taxes receivable 8,550 (5,610)
Inventories (27) (271)
Prepaid expenses and other current assets 652 1,520
Other non-current assets 316 (26)
Increase (decrease) in liabilities:
Accounts payable 1,871 (287)
Accrued payroll and related expenses (241) (3,522)
Accrued insurance expenses 946 (654)
Accrued state, local and other expenses 416 (1,078)
Other accrued expenses (971) 759
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,666 9,805
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (14,584) (10,613)
Purchase of businesses (6,194) (1,654)
Proceeds from sale of equipment and property 686 1,661
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (20,092) (10,606)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividend distributions (1,435) (1,435)
Reduction of debt (529) (817)
Cash paid for common stock purchased and retired (14) (484)
Proceeds from exercise of stock options 53 166
- ----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,925) (2,570)
- ----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,351) (3,371)
Cash and cash equivalents at beginning of period 11,533 10,735
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10,182 $ 7,364
================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
5
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited condensed 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 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 generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
three and six month periods ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2003.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles 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 year ended December 31, 2002. Certain prior year balances have
been reclassified to conform to the current year presentations.
2. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share are computed by dividing net
income or loss by the respective weighted average number of shares
outstanding during the respective periods. A reconciliation of the
weighted average shares outstanding is as follows:
Three months ended Six months ended
(In thousands) June 30, June 30,
--------- --------
2003 2002 2003 2002
---- ---- ---- ----
Basic 28,439 28,265 28,348 28,265
Dilutive effect of stock
options and restricted shares 412 - 406 -
---------------- -------------- -------------- ---------------
Diluted 28,851 28,265 28,754 28,265
================ ============== ============== ===============
6
For the three and six months ended June 30, 2002, the stock equivalents
that could potentially dilute basic earnings per share in the future were
not included in the computation of diluted earnings per share because to
do so would have been antidilutive for the periods presented.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued FASB Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities. The Interpretation requires
that a variable interest entity be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company believes the adoption of the Interpretation will
not have a material impact on the financial position, results of operations
or liquidity of the Company.
4. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
Three months ended Six months ended
(In thousands) June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) as reported $ 4,705 $ (1,953) $ 5,010 $ (3,120)
Change in unrealized gain on marketable
securities, net of taxes of $27 and ($15) 44 - (25) -
-------------- -------------- -------------- --------------
Comprehensive income (loss) $ 4,749 $ (1,953) $ 4,985 $ (3,120)
============== ============== ============== ===============
5. STOCK-BASED COMPENSATION
RPC accounts for its stock incentive plan using the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." If RPC had accounted for the
stock incentive plans in accordance with SFAS No. 123, RPC's reported net
income (loss) per share would have been as follows:
7
Three moths ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Net income (loss) - as reported $ 4,705 $ (1,953) $ 5,010 $ (3,120)
Add: Stock-based employee
compensation cost, included
in reported net income (loss), net
of related tax effect 38 55 75 116
Deduct: Stock-based employee
compensation cost, computed
using the fair value method for
all awards, net of related tax effect (240) (206) (479) (418)
--------------------------------------- --------- ---------- -------- ----------
Pro forma net income (loss) $ 4,503 $ (2,104) 4,606 (3,422)
======================================= ========= ========== ======== ==========
Pro forma earnings (loss) per share
Basic $ 0.16 $ (0.07) $ 0.16 $ (0.12)
Diluted 0.16 (0.07) 0.16 (0.12)
6. BUSINESS SEGMENT INFORMATION
RPC has two reportable segments: Technical Services and Support Services.
Technical Services include RPC's oil and gas service lines that utilize
people and equipment to perform value-added completion, production and
maintenance services directly to a customer's well. These services are
generally directed toward improving the flow of oil and natural gas from
producing formations or to address well control issues. The Technical
Services business segment consists primarily of snubbing, coiled tubing,
hydraulic pressure pumping, nitrogen, well control, down-hole tools, wire
line, fluid pumping, hot-tapping, gate valve drilling and casing
installation services. The principal markets for this business segment
include the United States, including the Gulf of Mexico, mid-continent,
southwest and Rocky Mountain regions, and selected international
locations. Customers include major multi-national and independent oil and
gas producers, and selected nationally owned oil companies. Support
Services include RPC's oil and gas service lines that primarily provide
equipment for customer use or services to assist customer operations. The
equipment and services include drill pipe and related tools, pipe
handling, inspection and storage services, work platform marine vessels,
and oilfield training services. The demand for these services tends to be
influenced primarily by customer drilling-related activity levels. The
principal markets for this segment include the United States, Gulf of
Mexico and mid-continent regions. Customers include domestic operations of
major multi-national and independent oil and gas producers.
8
Certain information with respect to RPC's business segments is set forth
in the following table:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------------------------
(in thousands)
Revenues:
Technical services $ 58,073 $ 38,796 $ 105,891 $ 78,732
Support services 10,670 8,359 20,368 16,860
Other 2,121 2,666 5,305 4,995
- --------------------------------------- ---------------- ---------------- -------------------- -------------------
Total revenues $ 70,864 $ 49,821 $ 131,564 $ 100,587
- --------------------------------------- ---------------- ---------------- -------------------- -------------------
Operating income (loss):
Technical services $ 8,440 $ (1,321)$ 11,185 $ (495)
Support services 750 (813) 697 (3,137)
Other (543) (415) (781) (879)
Corporate expenses (1,782) (1,039) (3,411) (2,307)
- --------------------------------------- ---------------- ---------------- -------------------- -------------------
Total operating profit (loss) $ 6,865 $ (3,588)$ 7,690 $ (6,818)
- --------------------------------------- ---------------- ---------------- -------------------- -------------------
Other income, net 801 466 483 1,830
Interest expense, net (77) (29) (92) (45)
- --------------------------------------- ---------------- ---------------- -------------------- -------------------
Income (loss) before income taxes $ 7,589 $ (3,151)$ 8,081 $ (5,033)
- --------------------------------------- ---------------- ---------------- -------------------- -------------------
9
7. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2003 2002
------------------------------------------------------------------------------------------
[in thousands]
Raw materials and supplies $ 7,752 $ 6,920
Work in process 326 428
Finished goods 1,551 1,858
------------------------------------------------------------------------------------------
Total inventories $ 9,629 $ 9,206
==========================================================================================
8. ACQUISITION
On April 1, 2003, RPC purchased all of the assets of Bronco Oilfield Services,
Inc.("Bronco"), a privately-held company, specializing in surface pressure
control services and equipment. The results of Bronco's acquisition have been
included in the consolidated financial statements since that date. As a result
of the acquisition, RPC will be better equipped to provide a broader range of
services to its customers in different geographic markets.
The aggregate purchase price was $11,033,000, including $5,533,000 of cash,
$3,500,000 in seller financed debt and common stock valued at $2,000,000. The
common stock issued for the acquisition was valued at the average of RPC's
closing price for the 10 day period ending five days before the close of the
transaction. Interest on the seller financed debt accrues at 6%, with principal
repaid over five years in equal annual installments. The payments of principal
and interest are due April 1 of each year from 2004 through 2008. Additionally,
Bronco's former owners, who have remained as employees, are eligible for an
earnout to be paid in cash and stock, based upon future earnings in accordance
with the agreement on an annual basis. The earnouts are recorded as goodwill
when the amounts are determinable. The consolidated statements of cash flows for
the six months ended June 30, 2003, exclude the $3,500,000 of promissory notes
payable in connection with the acquisition and the $2,000,000 common stock
issuance.
The purchase cost has been allocated to the assets acquired based on estimated
fair values as follows:
Inventory $ 395,500
Vehicles 571,000
Operating equipment 7,617,500
Goodwill 2,449,000
-------------------------------------------------------
TOTAL $ 11,033,000
=======================================================
All of the goodwill has been assigned to the Technical Services segment. Such
goodwill is expected to be deductible for tax purposes.
10
RPC, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
RPC provides a broad range of specialized oilfield services primarily to
independent and major oilfield companies engaged in exploration, production and
development of oil and gas properties throughout the United States, including
the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions, and
selected international locations.
CRITICAL ACCOUNTING POLICIES
The discussion on Critical Accounting Polices is incorporated herein by
reference from the Company's annual report on Form 10-K for the fiscal year
ended December 31, 2002. There have been no significant changes in the critical
accounting policies since year end.
GENERAL
The Company's operations are influenced by U.S. domestic oil and natural gas
well drilling and production activity. Factors within the drilling and
production industry that impact the Company's business include the geographic
location of wells, the conditions under which they are drilled, and the
production enhancement services which they require. The Technical Services
segment provides completion, production, and maintenance services to a
customer's well. The demand for these services is more influenced by production
activities than drilling activities, however, production activity typically
increases at the same time drilling activity increases. The Support Services
segment primarily provides equipment for customer operations, and the demand for
these services tends to depend more on drilling activities than production
activities. Drilling activity is influenced by the price of oil and natural gas.
We believe that our activity levels are affected more by natural gas prices than
oil prices, due to the nature of our services and our current geographic
concentration in the domestic U.S. market. The prices of oil and natural gas are
influenced by a wide variety of factors and can be very volatile. This
volatility can cause a great deal of fluctuation in the Company's revenues,
profitability, and cash flow.
Although the Company has historically generated revenues internationally, the
majority of revenues generated during the three months ended June 30, 2003 were
from the U.S. domestic oilfields. Domestic drilling activity, as measured by the
weekly rig count, reached its most recent cyclical peak in July 2001 with 1,293
active rigs in operation. Activity began to decline in the third and fourth
quarter of 2001 due to decreased demand and high natural gas storage levels.
This depressed rig count continued in early 2002 and reached a weekly low of 738
during the second quarter of 2002. The average weekly rig count for the three
months ending June 30, 2003 was 1,028, which was over 27 percent higher than the
average weekly rig count during the three months ending June 30, 2002. The
Company believes that the rig count has stabilized for the near term, but is
susceptible to further fluctuation based on the strength and timing of the
economic recovery, near term weather conditions in the United States, the supply
of oil and natural gas in the United States, and the prospect of continued
tensions in the oil-producing countries of the Middle East.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Revenues for the three months ended June 30, 2003 increased $21,043,000 or 42.2
percent to $70,864,000 compared to $49,821,000 for the three months ended June
30, 2002. The Technical Services segment revenues of $58,073,000 increased 49.7
percent from last year's second quarter revenues of $38,796,000. The Support
Services segment revenues for the quarter ended June 30, 2003, of $10,670,000
increased 27.6 percent from last year's second quarter revenues of $8,359,000.
Technical Services revenues increased relatively more than Support Services
revenues because of greater pricing improvements in Technical Services than in
Support Services, although equipment utilization in both segments improved
compared to the three months ended June 30, 2002. Revenues increased due to
higher activity levels in most of our service lines, but also due to slightly
increased pricing in several of our service lines. Although pricing has improved
in several of our service lines, pricing in our largest service lines remains
low as compared to historical measures during periods of favorable industry
conditions. Our revenue increases were consistent with a domestic drilling rig
count of 1,028, which was more than 27 percent higher during the three months
ending June 30, 2003 than in the prior year period. The U.S. land rig count grew
by 31.5 percent, from 695 last year to 914 this year. Also, the average natural
gas price was $5.59 this quarter, 70 percent higher than the second quarter of
last year. Foreign revenues were the same for the three months ended June 30,
2003 and June 30, 2002.
The domestic revenue increase during the quarter was driven by increased
equipment utilization in response to higher customer demand and, to a lesser
extent, by better pricing in many of our service lines. Operation Iraqi Freedom,
which began in the first quarter of 2003 and ended during the second quarter of
2003, has not directly impacted the Company's financial results. We continue to
monitor the effect that ongoing conflict in petroleum-producing countries, and
any responses to the conflict by OPEC, will have on our business.
Cost of services rendered and goods sold for the three months ended June 30,
2003 was $42,390,000 compared to $34,898,000 for the three months ended June 30,
2002, an increase of $7,492,000 or 21.5 percent. This increase was due to the
increased customer activity levels. Cost of services rendered and goods sold, as
a percent of revenues, decreased from 70.0 percent in the second quarter of 2002
to 59.8 percent in the second quarter of 2003 as a result of improved leverage
due to overall higher utilization of personnel and operating equipment.
12
Selling, general and administrative expenses for the three months ended June 30,
2003 were $13,208,000 compared to $10,705,000 for the three months ended June
30, 2002, an increase of $2,503,000 or 23.4 percent. These expenses increased
primarily due to higher incentive compensation expenses consistent with improved
operating results and increased pension plan expense relating to our pension
plan obligation. Selling, general and administrative expenses as a percent of
revenues decreased from 21.5 percent in the second quarter of 2002 to 18.6
percent in the second quarter of 2003 due primarily to a large amount of fixed
costs leveraged over a higher revenue base.
Depreciation and amortization was $8,401,000 for the three months ended June 30,
2003, an increase of $595,000 or 7.6 percent compared to $7,806,000 for the
quarter ended June 30, 2002. This increase in depreciation and amortization
resulted from various capital expenditures within Support Services and Technical
Services, and from the effect of the acquisition completed at the beginning of
the period. The percentage increase in depreciation and amortization was lower
than in the same period of 2002 due to the Company's decision to reduce its
level of capital expenditures in response to the domestic industry downturn
which began during the fourth quarter of 2001.
Operating profit (loss) for the three months ended June 30, 2003 was a profit of
$6,865,000, an increase of $10,453,000 compared to a loss of $3,588,000 for the
three months ended June 30, 2002. This improvement is the result of increased
revenues because of higher customer activity levels, partially offset by the
increases in costs of services rendered and goods sold, selling, general and
administrative expenses, and depreciation and amortization.
Other income, net for the three months ending June 30, 2003 was $801,000, an
increase of $335,000 or 71.9 percent compared to income of $466,000 for the
three months ended June 30, 2002. For the three months ended June 30, 2003,
other income included a gain of $410,000 related to proceeds from an insurance
claim for wrecked operating equipment. For the three months ending June 30,
2002, this included gains related to the sale of operating equipment.
Interest expense, net was $77,000 for the three months ended June 30, 2003
compared to $29,000 for the quarter ended June 30, 2002. The increase in
interest expense, net resulted primarily from interest expense on the promissory
note issued in connection with an acquisition made during the period. RPC
generates interest income from investment of its available cash primarily in
highly liquid investments with original maturities of three months or less.
Interest income did not vary in the current period compared to the prior year.
13
Income tax provision (benefit) was a provision of $2,884,000 during the three
months ending June 30, 2003, compared to a benefit of $1,198,000 in 2002. This
increase was due to the increase in operating profit during the period as the
effective tax rate was the same for the three months ended June 30, 2003 and
2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenues for the six months ended June 30, 2003 increased $30,977,000 or 30.8
percent to $131,564,000 compared to $100,587,000 for the six months ended June
30, 2002. The Technical Services segment revenues of $105,891,000 increased 34.5
percent from last year's revenues of $78,732,000. The Support Services segment
revenues for the six months ended June 30, 2003 of $20,368,000 increased 20.8
percent from the revenues of $16,860,000 during the six months ended June 30,
2002. Revenues increased due to higher domestic customer activity levels
consistent with the more than 18 percent higher domestic drilling rig count
during the six months ending June 30, 2003 than during the prior year period.
These domestic increases were partially offset by a decline in foreign revenues
during the period as compared to the prior year.
Domestic revenues for the six months ending June 30, 2003 increased $34,042,000
or 35.8 percent to $129,067,000 from $95,025,000 in the prior year period. The
domestic revenue increase during the quarter was driven by increased equipment
utilization in response to higher customer demand and, to a lesser extent, by
improved pricing and new equipment purchased during previous periods. Although
pricing for many of our services improved during the period, in general, it
remains at historically low levels due to intense competition. Operation Iraqi
Freedom, which occurred during the period, did not impact the Company's
financial results during the six months ended June 30, 2003. We continue to
monitor the effect that ongoing conflict in petroleum-producing countries, and
any responses to the conflict by OPEC, will have on our business. Foreign
revenues during the period declined by $3,065,000 or 55.1 percent, from
$5,562,000 during the six months ending June 30, 2002 to $2,497,000 in the
current period. The most significant decline in foreign revenues occurred in
Algeria because the Company had a contract in that country which expired during
the second quarter of 2002 and was not renewed.
Cost of services rendered and goods sold for the six months ended June 30, 2003
was $82,316,000 compared to $68,845,000 for the six months ended June 30, 2002,
an increase of $13,471,000 or 19.6 percent. Cost of services rendered and goods
sold, as a percent of revenues, decreased from 68.4 percent during the six
months ending June 30, 2002 to 62.6 percent during the six months ended June 30,
2003. The increase in cost of services rendered and goods sold during the period
was a result of higher customer activity levels due to improved industry
conditions. The decrease, as a percent of revenues, was primarily the result of
improved operating leverage due to overall higher utilization of personnel and
operating equipment.
14
Selling, general and administrative expenses for the six months ended June 30,
2003 were $25,161,000 compared to $23,030,000 for the six months ended June 30,
2002, an increase of $2,131,000 or 9.3 percent. These expenses increased
primarily due to incentive compensation expenses associated with improved
operating results. Selling, general and administrative expenses as a percent of
revenues decreased from 22.9 percent in the second quarter of 2002 to 19.1
percent in the second quarter of 2003, because many of these costs are fixed and
do not vary directly in proportion to the change in revenues.
Depreciation and amortization was $16,397,000 for the six months ended June 30,
2003, an increase of $867,000 or 5.6 percent compared to $15,530,000 for the
six months ended June 30, 2002 because of various capital expenditures within
Support Services and Technical Services. The percentage increase in depreciation
and amortization was significantly lower than in many prior periods due to the
Company's decision to reduce its level of capital expenditures in response to
the domestic industry downturn which began during the fourth quarter of 2001.
Operating profit (loss) for the six months ended June 30, 2003 was a profit of
$7,690,000, an increase of $14,508,000 compared to a loss of $6,818,000 for the
six months ended June 30, 2002. This improvement is the result of increased
revenues because of higher customer activity levels, partially offset by the
increases in costs of services rendered and goods sold and selling, general and
administrative expenses.
Other expense (income), net for the six months ending June 30, 2003 was income
of $483,000 compared to income of $1,830,000 for the six months ended June 30,
2002. For the six months ended June 30, 2003, this amount included income from a
gain from the settlement of an insurance claim of $410,000 and proceeds from a
settlement of a dispute with a vendor of $200,000 partially offset by the
recognition of a loss sustained on damaged operating equipment of $289,000. For
the six months ended June 30, 2002, other income included primarily gains
relating to the sale of operating equipment, proceeds from the settlement of a
lawsuit, and a gain from the sale of a discontinued business unit.
Interest expense, net was $92,000 for the six months ended June 30, 2003
compared to $45,000 for the six months ended June 30, 2002. The increase in
interest expense, net resulted from decreases in available cash balances, which
yielded lower interest income, and from interest expense on the promissory note
issued in connection with the acquisition made during the second quarter. RPC
generates interest income from investment of its available cash primarily in
highly liquid investments with original maturities of six months or less.
Income tax provision (benefit) was a provision of $3,071,000 during the six
months ending June 30, 2003, compared to a benefit of $1,913,000 in 2002. This
increase in the income tax provision was due to the increase in income before
income taxes. The effective tax rate was the same for the six months ended June
30, 2003 and 2002.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company's decisions about the amount of cash to be used for investing and
financing purposes are influenced by its capital position and the expected
amount of cash to be provided by operations.
Cash provided by operating activities for the six months ended June 30, 2003,
was $20,666,000 compared to $9,805,000 for the six months ended June 30, 2002, a
$10,861,000 or 110.8 percent increase. Cash provided by operating activities
increased primarily due to improved operating results coupled with lower working
capital requirements. Working capital changes during the period included an
increase in accounts payable consistent with higher business activity levels,
receipt of an income tax refund, and an increase in accounts receivable due to
higher revenues.
Cash used in investing activities for the six months ended June 30, 2003 was
$20,092,000, or an increase of $9,486,000, compared to $10,606,000 for the six
months ended June 30, 2002, primarily as a result of increased capital
expenditures and the purchase of assets of Bronco Oilfield Services, Inc.
Cash used in financing activities for the six months ended June 30, 2003 was
$1,925,000, or a decrease of $645,000, compared to $2,570,000 used for financing
activities for the six months ended June 30, 2002, primarily as a result of
lower debt service requirements and lower stock repurchases. The Company did not
purchase any of its common stock on the open market during the six months ended
June 30, 2003. Under a plan authorized by its Board of Directors, the Company
has purchased its common stock on the open market during prior periods, and can
purchase up to 346,600 additional shares.
The prices for oil and natural gas remain historically strong, but until
recently, have failed to lead to an increase in drilling activity. Prices have
also been volatile in the last several quarters, due to uncertainties over the
conflict in the Middle East and fluctuating natural gas storage levels. Although
the weekly domestic rig count has recently increased, the Company still believes
that the operating environment for our services is uncertain in the near term.
As a result of this uncertainty, RPC is monitoring customer exploration and
production activity levels very closely, and is only making capital expenditure
to support known customer requirements or to maintain our existing fleet of
operating equipment. The Company currently expects that capital expenditures
during 2003 will be approximately $30 million, but the actual amount will be
highly dependent upon our financial results for the remainder of 2003.
We believe the liquidity provided by our existing cash and cash equivalents, our
overall strong capitalization, which includes access to a $25 million credit
facility with a financial institution, of which $14 million is available, and
cash expected to be generated from operations, will provide sufficient capital
to meet our requirements for at least the next twelve months. The portion of
credit facility that is not currently available supports letters of credits
relating to insurance requirements or contract bids. We believe our liquidity
will allow us to grow our asset base and revenues as business conditions and
customer activity levels improve.
16
SEASONALITY
Oil prices affect demand throughout the oil and natural gas industry, including
the demand for the Company's products and services. The Company's business
depends in large part on the conditions of the oil and gas industry, and
specifically on the capital expenditures of its customers related to the
exploration and production of oil and natural gas. When these expenditures
fluctuate, customers' demand for the Company's services fluctuates as well.
These fluctuations depend on the current and projected prices of oil and natural
gas and resulting drilling activity, and are not seasonal to any material
degree.
INFLATION
RPC purchases its equipment and materials from suppliers who provide competitive
prices and the Company believes that the labor markets from which it hires
employees are not experiencing upward wage pressures. If inflation in the
general economy increases, however, the Company's costs for equipment, materials
and labor could increase as well. The Company operates in highly competitive
areas of the oilfield services industry. The products and services of each of
the Company's principal industry segments are sold in highly competitive
markets, and its revenues and earnings may be affected by the following factors:
changes in competitive prices, fluctuations in the level of activity and major
markets, general economic conditions, and governmental regulation.
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 that
relate to our business strategy, plans and objectives, market risk exposure,
adequacy of capital resources and funds, opportunity for growth, and the impact
of SFAS No. 143, 146, 149 and 150, 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 words "may," "will," "expect," "believe," "anticipate," "project,"
"estimate," 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. We caution you that such statements are only
predictions and not guarantees of future performance and that actual results,
developments and business decisions may differ from those envisioned by the
forward-looking statements. Risk factors that could cause such future events not
to occur as expected include those described in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 and the following: the
volatility of oil and natural gas prices, continued downturn in the economy
leading to decreased oil and gas exploration, inability to identify or complete
acquisitions, adverse weather conditions, inability to attract and retain
skilled employees, personal injury or property damage claims, and the changes in
the supply and demand for oil and gas.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2003, there were no material amounts of marketable securities
held by RPC. There have been no material changes to RPC's exposure to market
risk since December 31, 2002.
As of June 30, 2003, RPC had accounts receivable of $52.4 million (net of an
allowance for doubtful accounts of $2.4 million). RPC is subject to a
concentration of credit risk because a majority of the accounts receivable are
due from companies operating in the oil and gas industry. Although the Company
believes that it has strong credit evaluation and monitoring control procedures,
its customers are subjected to the risks of the highly cyclical and capital
intensive oil and gas industry. In the case of customers that are oil companies
owned by foreign governments, the economic and political environment of the
related country and region play a part in the collectibility of the receivables.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operations of our disclosure
controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of June 30, 2003. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective such that the material
information required to be included in our Securities and Exchange Commission
("SEC") reports is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms relating to RPC, Inc., including our
consolidated subsidiaries, and was made known to them by others within those
entities, particularly during the period when this report was being prepared.
In addition, there were no significant changes in our internal control over
financial reporting that could significantly affect these controls during the
quarter. We have not identified any significant deficiency or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.
18
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 outcomes of such litigation will have a
material adverse effect on the financial position or results of operations of
RPC.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 1, 2003, RPC issued 179,195 unregistered shares of RPC common stock for
a total consideration of $2.0 million in connection with the acquisition of the
assets of Bronco Oilfield Services, Inc. The shares were issued to Bronco
Oilfield Services, Inc. pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on April 22, 2003. At the
meeting, stockholders elected two Class II directors to the Board of Directors
for the terms expiring in 2006. Results of the voting were as follows:
Names of Nominees For Withheld
------------------------------------------------------------------------------------
Richard A. Hubbell 27,318,618 47,727
Linda H. Graham 27,310,018 56,327
ITEM 5. OTHER INFORMATION
None
19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit Number Description
- -------------------------- ---------------------------------------------------------------------------------------------
3.1 RPC's restated Certificate of Incorporation is incorporated herein by reference to Exhibit
3.1 to the 1999 Form 10-K.
3.2 By-laws of RPC (incorporated herein by reference to Exhibit (3)(b) to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1993).
4 Form of Stock Certificate (incorporated herein by reference to the Annual Report on Form
10-K for the fiscal year ended December 31, 1998).
99.1 Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K.
99.2 Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K.
99.3 Certification of Chief Executive Officer pursuant to Item 601(b)(32) of Regulation S-K.
99.4 Certification of Chief Financial Officer pursuant to Item 601(b)(32) of Regulation S-K.
b) Reports on Form 8-K
Date of
Date filed earliest event Description of event
- --------------------- ------------------ -------------------------------------------------------------------------------
April 8, 2003 April 3, 2003 Press release announcing the acquisition of Bronco Oilfield Services, Inc.
April 23, 2003 April 23, 2003 Press release announcing 2003 First Quarter results
April 23, 2003 April 23, 2003 Press release announcing First Quarter Cash Dividend
April 28, 2003 April 28, 2003 Press release announcing Richard A. Hubbell was named as Chief Executive
Officer
20
SIGNATURES
Pursuant to the requirements of the Securities and 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 25, 2003 Richard A. Hubbell
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ben M. Palmer
--------------------------------------------
Date: July 25, 2003 Ben M. Palmer
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
21