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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 September 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
of incorporation or organization) Identification Number)
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 September 30, 2003, RPC, Inc. had 28,728,574 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 -
September 30, 2003 and December 31, 2002 3
Consolidated statements of operations -
Three and Nine months ended September 30, 2003 and 2002 4
Consolidated statements of cash flows -
Nine months ended September 30, 2003 and 2002 5
Notes to consolidated financial statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
RPC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(In thousands)
(Unaudited)
September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 20,972 $ 11,533
Accounts receivable, net 48,587 40,168
Inventories 9,538 9,206
Deferred income taxes 8,313 5,873
Taxes receivable 2,993 8,817
Prepaid expenses and other current assets 1,777 3,478
- --------------------------------------------------------------------------------------------------------
Total current assets 92,180 79,075
Equipment and property, net 108,008 105,338
Intangibles, net 12,663 9,609
Other assets 1,775 1,932
- --------------------------------------------------------------------------------------------------------
Total assets $ 214,626 $ 195,954
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 15,606 $ 12,280
Accrued payroll and related expenses 7,898 7,641
Accrued insurance expenses 3,008 4,115
Accrued state, local and other taxes 1,500 1,659
Short-term debt 1,110 552
Other accrued expenses 511 1,497
- --------------------------------------------------------------------------------------------------------
Total current liabilities 29,633 27,744
Long-term accrued insurance expenses 6,414 3,583
Long-term debt 4,800 2,410
Long-term pension liability 8,388 6,931
Deferred income taxes 13,475 10,205
- --------------------------------------------------------------------------------------------------------
Total liabilities 62,710 50,873
- --------------------------------------------------------------------------------------------------------
Common stock 2,873 2,861
Capital in excess of par value 27,810 26,431
Earnings retained 126,237 120,805
Deferred compensation (1,137) (1,186)
Accumulated other comprehensive loss (3,867) (3,830)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 151,916 145,081
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 214,626 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(In thousands except per share data)
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- ---------- --------- ---------
Revenues $ 69,244 $ 53,370 $ 200,808 $ 153,957
Cost of services
rendered and goods sold 43,482 36,391 125,798 105,236
Selling, general and
administrative expenses 13,438 11,083 38,599 34,113
Depreciation
and amortization 8,387 7,954 24,784 23,484
- -------------------------------------------------------------------------
Operating profit (loss) 3,937 (2,058) 11,627 (8,876)
Interest expense, net (45) (17) (137) (62)
Other income, net 264 398 747 2,228
- -------------------------------------------------------------------------
Income (loss)
before income taxes 4,156 (1,677) 12,237 (6,710)
Income tax
provision (benefit) 1,579 (637) 4,650 (2,550)
- -------------------------------------------------------------------------
Net income (loss) $ 2,577 $ (1,040) $ 7,587 $ (4,160)
=========================================================================
Dividends per share $ 0.025 $ 0.025 $ 0.075 $ 0.075
========= ======== ========= =======
Earnings (loss) per share
Basic $ 0.09 $ (0.04) $ 0.27 $ (0.15)
Diluted 0.09 (0.04) 0.26 (0.15)
Average shares outstanding
Basic 28,446 28,259 28,380 28,263
========= ======== ========= =======
Diluted 28,877 28,259 28,794 28,263
========= ======== ========= =======
The accompanying notes are an integral part of these consolidated financial statements.
4
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 and 2002
(In thousands)
(Unaudited)
Nine months
ended September 30,
--------------------------
2003 2002
------- --------
OPERATING ACTIVITIES
Net income (loss) $ 7,587 $ (4,160)
Noncash charges (credits) to earnings:
Depreciation and amortization 24,857 23,558
Loss (gain) on sale of equipment and property 297 (1,275)
Deferred income tax provision 853 4,146
(Increase) decrease in assets, excluding effect of business acquired:
Accounts receivable (8,419) 8,357
Taxes receivable 5,824 (5,986)
Inventories 64 (178)
Prepaid expenses and other current assets 1,625 872
Other non-current assets 173 (9)
Increase (decrease) in liabilities:
Accounts payable 3,326 (700)
Accrued payroll and related expenses 1,714 (4,908)
Accrued insurance expenses 1,724 (2,006)
Accrued state, local and other expenses (159) (662)
Other accrued expenses (986) 1,124
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 38,480 18,173
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (20,711) (16,264)
Purchase of businesses (6,211) (1,886)
Proceeds from sale of equipment and property 1,328 2,156
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,594) (15,994)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of dividends (2,155) (2,152)
Reduction of debt (552) (1,313)
Cash paid for common stock purchased and retired (836) (680)
Proceeds from exercise of stock options 96 187
- -----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,447) (3,958)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,439 (1,779)
Cash and cash equivalents at beginning of period 11,533 10,735
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 20,972 $ 8,956
===========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
5
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 nine
month periods ended September 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 presentation.
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 Nine months ended
(In thousands) September 30, September 30,
2003 2002 2003 2002
------ ------ ------ ------
Basic 28,446 28,259 28,380 28,263
Dilutive effect of stock options
and restricted shares 431 - 414 -
------ ------ ------ ------
Diluted 28,877 28,259 28,794 28,263
====== ====== ====== ======
6
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 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 these periods.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("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 December 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 has not
entered into any agreements subject to FIN 46 since January 31, 2003 and
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 Nine months ended
(In thousands) September 30, September 30,
2003 2002 2003 2002
------ ------ ------ ------
Net income (loss) as reported $ 2,577 $ (1,040) $ 7,587 $ (4,160)
Change in unrealized gain on
marketable securities, net
of taxes of ($7) and ($22) (12) - (37) -
-------- -------- --------- ---------
Comprehensive income (loss) $ 2,565 $ (1,040) $ 7,550 $ (4,160)
======== ======== ========= =========
7
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 "Accounting for
Stock-Based Compensation", RPC's reported net income (loss) per share would
have been as follows:
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Net income (loss) - as reported $ 2,577 $ (1,040) $ 7,587 $ (4,160)
Add: Stock-based employee
compensation cost, included
in reported net income (loss),
net of related tax effect 38 66 113 182
Deduct: Stock-based employee
compensation cost, computed
using the fair value method
for all awards, net of
related tax effect (240) (217) (719) (635)
-----------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 2,375 $ (1,191) $ 6,981 $ (4,613)
===============================================================================================
Pro forma earnings (loss) per share
Basic $ 0.08 $ (0.04) $ 0.25 $ (0.16)
Diluted 0.08 (0.04) 0.24 (0.16)
6. BUSINESS SEGMENT INFORMATION
RPC has two reportable segments: Technical Services and Support Services.
Technical Services includes 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,
pressure pumping, nitrogen, well control, downhole tools, wire line, fluid
pumping, surface production equipment 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 includes RPC's oilfield
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 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 Sept 30, Nine Months Ended Sept 30,
-----------------------------------------------------------------------------------
2003 2002 2003 2002
-----------------------------------------------------------------------------------
(in thousands)
Revenues:
Technical services $ 53,603 $ 41,542 $ 159,494 $ 120,274
Support services 13,125 9,339 33,493 26,199
Other 2,516 2,489 7,821 7,484
- ----------------------------------------- ---------------- ----------------- -------------------- -------------------
Total revenues $ 69,244 $ 53,370 $ 200,808 $ 153,957
- ----------------------------------------- ---------------- ----------------- -------------------- -------------------
Operating profit (loss):
Technical services $ 3,969 $ (365)$ 15,154 $ (860)
Support services 2,376 (116) 3,073 (3,253)
Other (419) (445) (1,200) (1,324)
Corporate expenses (1,989) (1,132) (5,400) (3,439)
- ----------------------------------------- ---------------- ----------------- -------------------- -------------------
Total operating profit (loss) $ 3,937 $ (2,058)$ 11,627 $ (8,876)
- ----------------------------------------- ---------------- ----------------- -------------------- -------------------
Other income, net 264 398 747 2,228
Interest expense, net (45) (17) (137) (62)
- ----------------------------------------- ---------------- ----------------- -------------------- -------------------
Income (loss) before income taxes $ 4,156 $ (1,677)$ 12,237 $ (6,710)
- ----------------------------------------- ---------------- ----------------- -------------------- -------------------
9
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2003 2002
---------------------------------------- ----------------------------------------------
(in thousands)
Raw materials and supplies $ 7,948 $ 6,920
Work in process 190 428
Finished goods 1,400 1,858
---------------------------------------- ----------------------------------------------
Total inventories $ 9,538 $ 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.
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 nine months ended
September 30, 2003, exclude the $3,500,000 of promissory notes payable in
connection with the acquisition and the $2,000,000 common stock issuance.
10
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
11
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 and nine months ended September
30, 2003 were from the U.S. domestic oilfields. Domestic drilling activity, as
measured by the weekly active 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 third quarter of 2002.
12
RPC, INC. AND SUBSIDIARIES
The average weekly rig count for the three months ended September 30, 2003 was
1,088, which was 28 percent higher than the average weekly rig count during the
three months ended September 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.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Revenues for the three months ended September 30, 2003 increased $15,874,000 or
29.7 percent to $69,244,000 compared to $53,370,000 for the three months ended
September 30, 2002. The Technical Services segment revenues of $53,603,000
increased 29.0 percent from last year's third quarter revenues of $41,542,000.
The Support Services segment revenues for the quarter ended September 30, 2003
of $13,125,000 increased 40.5 percent from last year's third quarter revenues of
$9,339,000. Revenues increased compared to prior year due to higher overall
activity and pricing levels in most of our service lines.
Domestic revenues increased during the quarter due to higher customer drilling
activity. The average domestic rig count during the third quarter was 1,088,
27.6 percent higher than the same period in 2002. The average U.S. land rig
count, a subset of the domestic rig count, grew by 34 percent during the
quarter, from 721 last year to 965 this year. We continue to experience weakness
in the Gulf of Mexico market, where activity levels have not increased to the
extent that they have in the U.S. land-based markets. Our revenues grew at a
slightly higher rate than the overall rig count, principally because of the
effect of our Bronco Oilfield Services acquisition, which was closed in the
second quarter of 2003. Also, the average natural gas price was $4.82 this
quarter, 49.7 percent higher than the third quarter of last year, which had a
positive impact on our results. We believe that our activity levels are affected
more by natural gas prices than by the price of oil. Also, revenues were
slightly lower this quarter compared to the second quarter of 2003 due to lower
activity levels in many of our service lines. Foreign revenues were comparable
for the three months ended September 30, 2003 and 2002.
Cost of services rendered and goods sold for the three months ended September
30, 2003 was $43,482,000 compared to $36,391,000 for the three months ended
September 30, 2002, an increase of $7,091,000 or 19.5 percent. This increase was
due to higher activity levels, which results in increased direct employment
costs and increases in certain operational expenses, and due to increased
third-quarter 2003 self-insured casualty claim costs. Cost of services rendered
and goods sold, as a percent of revenues, decreased from 68.2 percent in the
third quarter of 2002 to 62.8 percent in the third quarter of 2003 as a result
of improved leverage due to overall higher utilization of personnel and
operating equipment.
13
RPC, INC. AND SUBSIDIARIES
Selling, general and administrative expenses for the three months ended
September 30, 2003 were $13,438,000 compared to $11,083,000 for the three months
ended September 30, 2002, an increase of $2,355,000 or 21.2 percent. These
expenses increased primarily due to higher incentive compensation expenses
consistent with improved operating results. Also contributing to the increase in
compensation expenses was higher pension plan expense caused by adverse
conditions in the equity markets, along with the low interest rate environment,
which had an unfavorable impact on the funded status of the Company's qualified
pension plan. Selling, general and administrative expenses as a percent of
revenues decreased from 20.8 percent in the third quarter of 2002 to 19.4
percent in the third quarter of 2003 due primarily to a large amount of fixed
costs leveraged over a higher revenue base.
Depreciation and amortization was $8,387,000 for the three months ended
September 30, 2003, an increase of $433,000 or 5.4 percent compared to
$7,954,000 for the quarter ended September 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 during the second quarter of 2003. 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
and continued throughout 2002.
Operating profit (loss) for the three months ended September 30, 2003 was a
profit of $3,937,000, an increase of $5,995,000 compared to a loss of $2,058,000
for the three months ended September 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, as discussed
above.
Other income, net for the three months ended September 30, 2003 was $264,000, a
decrease of $134,000 or 33.7 percent compared to income of $398,000 for the
three months ended September 30, 2002. For the three months ended September 30,
2003 and 2002, other income primarily reflects net gains related to the sale of
operating equipment.
Interest expense, net was $45,000 for the three months ended September 30, 2003
compared to $17,000 for the quarter ended September 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 second quarter.
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.
14
RPC, INC. AND SUBSIDIARIES
Income tax provision (benefit) was a provision of $1,579,000 during the three
months ended September 30, 2003, compared to a benefit of $637,000 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 September 30, 2003
and 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
Revenues for the nine months ended September 30, 2003 increased $46,851,000 or
30.4 percent to $200,808,000 compared to $153,957,000 for the nine months ended
September 30, 2002. The Technical Services segment revenues of $159,494,000
increased 32.6 percent from last year's revenues of $120,274,000. The Support
Services segment revenues for the nine months ended September 30, 2003 of
$33,493,000 increased 27.8 percent from the revenues of $26,199,000 during the
nine months ended September 30, 2002. Revenues increased due to higher domestic
customer activity levels consistent with the more than 22 percent higher
domestic drilling rig count of 1,003 during the nine months ended September 30,
2003 in comparison to the prior year period. These domestic revenue increases
were partially offset by a decline in foreign revenues during the period as
compared to the prior year. Foreign revenues during the period declined by
$5,366,000 or 56.4 percent, from $9,521,000 during the nine months ended
September 30, 2002 to $4,155,000 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 third quarter of 2002 and was
not renewed.
Domestic revenues for the nine months ended September 30, 2003 increased
$52,217,000 or 36.2 percent to $196,653,000 from $144,436,000 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 service lines improved during the period,
competition remains very intense. Operation Iraqi Freedom, which occurred during
the period, did not impact the Company's financial results during the nine
months ended September 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.
Cost of services rendered and goods sold for the nine months ended September 30,
2003 was $125,798,000 compared to $105,236,000 for the nine months ended
September 30, 2002, an increase of $20,562,000 or 19.5 percent. Cost of services
rendered and goods sold, as a percent of revenues, decreased from 68.4 percent
during the nine months ended September 30, 2002 to 62.6 percent during the nine
months ended September 30, 2003. The increase in cost of services rendered and
goods sold during the period was a result of higher customer activity levels and
revenues 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, and improving pricing.
15
RPC, INC. AND SUBSIDIARIES
Selling, general and administrative expenses for the nine months ended September
30, 2003 were $38,599,000 compared to $34,113,000 for the nine months ended
September 30, 2002, an increase of $4,486,000 or 13.2 percent. These expenses
increased primarily due to higher incentive compensation expenses associated
with improved operating results. Selling, general and administrative expenses as
a percent of revenues decreased from 22.2 percent in the third quarter of 2002
to 19.2 percent in the third 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 $24,784,000 for the nine months ended
September 30, 2003 compared to $23,484,000 for the nine months ended September
30, 2002, an increase of $1,300,000 or 5.5 percent 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 and continued throughout 2002.
Operating profit (loss) for the nine months ended September 30, 2003 was a
profit of $11,627,000, an increase of $20,503,000 compared to a loss of
$8,876,000 for the nine months ended September 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, as discussed above.
Other expense (income), net for the nine months ended September 30, 2003 was
income of $747,000 compared to income of $2,228,000 for the nine months ended
September 30, 2002. For the nine months ended September 30, 2003, this amount
included income from a gain from the settlement of an insurance claim of
$410,000, proceeds from a settlement of a dispute with a vendor of $200,000,
and gains related to the sale of operating equipment, partially offset by the
recognition of a loss sustained on damaged operating equipment of $289,000. For
the nine months ended September 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 $137,000 for the nine months ended September 30, 2003
compared to $62,000 for the nine months ended September 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 Bronco acquisition made during the second
quarter of 2003. RPC generates interest income from investment of its available
cash primarily in highly liquid investments with original maturities of six
months or less.
16
RPC, INC. AND SUBSIDIARIES
Income tax provision (benefit) was a provision of $4,650,000 during the nine
months ended September 30, 2003, compared to a benefit of $2,550,000 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 nine months
ended September 30, 2003 and 2002.
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 nine months ended September 30,
2003, was $38,480,000 compared to $18,173,000 for the nine months ended
September 30, 2002, a $20,307,000 or 111.7 percent increase. Cash provided by
operating activities increased primarily due to improved operating results
coupled with a tax refund in the current period resulting from prior year net
operating losses. These increases were partially offset by higher working
capital requirements during the current period including an increase in accounts
payable and other liabilities consistent with higher business activity levels
partially offset by an increase in accounts receivable due to higher revenues.
Cash used in investing activities for the nine months ended September 30, 2003
was $25,594,000, or an increase of $9,600,000, compared to $15,994,000 for the
nine months ended September 30, 2002, primarily as a result of increased capital
expenditures and the acquisition completed during the second quarter of 2003.
Cash used in financing activities for the nine months ended September 30, 2003
was $3,447,000, or a decrease of $511,000, compared to $3,958,000 used for
financing activities for the nine months ended September 30, 2002, primarily as
a result of lower debt service requirements partially offset by higher stock
repurchases. The Company purchased 82,800 shares of its common stock on the open
market during the nine months ended September 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 263,800 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 expenditures
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 $43 million, but the actual amount will be
highly dependent upon our financial results for the remainder of 2003.
17
RPC, INC. AND SUBSIDIARIES
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 $10 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 the
credit facility that is not currently available supports letters of credits
relating to self-insurance programs or contract bids. We believe our liquidity
will allow us to grow our asset base and revenues as business conditions and
customer activity levels increase.
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. 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 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.
18
RPC, INC. AND SUBSIDIARIES
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, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 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 September 30, 2003, RPC had accounts receivable of $48.6 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,
as well.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the 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 September 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
19
RPC, INC. AND SUBSIDIARIES
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 during the quarter that could significantly affect these
controls. We have not identified any significant deficiency or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.
20
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 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
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
21
RPC, INC. AND SUBSIDIARIES
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).
31.1 Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K.
31.2 Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K.
32.1 Certification of Chief Executive Officer pursuant to Item 601(b)(32) of Regulation S-K.
32.2 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
- ----------------------- --------------------- --------------------------------------------------------------------------
July 23, 2003 July 23, 2003 Item 5 and Item 7: Press release announcing 2003 Second Quarter results
July 23, 2003 July 23, 2003 Item 5 and Item 7: Press release announcing Second Quarter Cash Dividend
October 10, 2003 October 10, 2003 Item 5 and Item 7: Press release announcing the repurchase of 82,800
shares of RPC, Inc. Common Stock during the third quarter of 2003.
22
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: October 31, 2003 Richard A. Hubbell
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ben M. Palmer
-----------------------------------------
Date: October 31, 2003 Ben M. Palmer
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
23