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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
________
FORM
10-K
(Mark
One)
|
[X] |
Annual
report pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934 |
|
[ ] |
Transition
report pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934 |
For
the fiscal year ended December 31, 2004
Commission
File No. 1-8726
RPC,
INC.
|
Delaware
(State
of Incorporation) |
58-1550825
(I.R.S.
Employer Identification No.) |
2170
PIEDMONT ROAD, NE
ATLANTA,
GEORGIA 30324
(404)
321-2140
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
COMMON
STOCK, $0.10 PAR VALUE |
Name
of each exchange on which registered
THE
NEW YORK STOCK EXCHANGE |
Securities
registered pursuant to Section 12(g) of the Act:
NONE
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 [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act): Yes [X] No [ ]
The
aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June
30, 2004, the last business day of the registrant’s most recently completed
second fiscal quarter, was $147,960,621 based on the closing price on the New
York Stock Exchange on June 30, 2004 of $10.53 (adjusted for the three-for-two
stock split payable March 10, 2005) per share.
RPC, Inc.
had 43,466,183 (adjusted for the three-for-two stock split payable March 10,
2005) shares of Common Stock outstanding as of February 23, 2005.
Documents
Incorporated by Reference
Portions
of the Proxy Statement for the 2005 Annual Meeting of Stockholders of RPC, Inc.
are incorporated by reference into Part III, Items 10 through 14 of this
report.
PART
I
Throughout
this report, we refer to RPC, Inc., together with its subsidiaries, as “we,”
“us,” “RPC” or “the Company.”
Forward-Looking
Statements
Certain
statements made in this report that are not historical facts are
“forward-looking statements” under 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, 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. Forward-looking statements made elsewhere in
this report include without limitation statements regarding continued demand for
natural gas and increases in gas-directed drilling activity, our expectation for
increased financial performance in 2005, anticipated cash requirements for 2005,
our future investments in higher yielding assets and increased spending in 2005,
our ability to meet capital requirements, opportunities for higher growth in
selected markets and attractive acquisitions, our ability to obtain additional
customers, and improvements in business and industry conditions.
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. See “Risk Factors” contained in Item 1.
Item
1. Business
Organization
RPC is a
Delaware corporation originally organized in 1984 as a holding company for
several oilfield services companies and is headquartered in Atlanta, Georgia.
Effective February 28, 2001, RPC completed the spin-off of its powerboat
manufacturing business through a distribution of shares of Marine Products
Corporation (“Marine Products”) (AMEX:MPX).
Overview
RPC
provides a broad range of specialized oilfield services and equipment primarily
to independent and major oil and gas companies engaged in the 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 in selected international markets. The services and
equipment provided include, among other things, (1) pressure pumping services,
(2) snubbing services, (3) coiled tubing services, (4) nitrogen services, (5)
the rental of drill pipe and other specialized oilfield equipment, and (6)
firefighting and well control. RPC acts as a holding company for its operating
units, Cudd Pressure Control, Cudd Pumping Services, Patterson Rental Tools,
Bronco Oilfield Services (acquired in April 2003), Thru-Tubing Solutions, Well
Control School, International Hammer and others. As of December 31, 2004, RPC
had approximately 1,600 employees.
Business
Segments
RPC’s
service lines have been aggregated into two reportable oil and gas services
business segments, Technical Services and Support Services, because of the
similarities between the financial performance and approach to managing the
service lines within each of the segments, as well as the economic and business
conditions impacting their business activity levels. The Other business segment
aggregates information concerning RPC’s business units that do not qualify for
separate segment reporting, including an interactive training software developer
and an overhead crane fabricator (disposed of in April 2004).
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. The demand for these services is generally
influenced by customers’ decisions to invest capital toward initiating
production in a new oil or natural gas well, improving production flows in an
existing formation, or to address well control issues. This business segment
consists primarily of pressure pumping, snubbing, coiled tubing, nitrogen, well
control, down-hole tools, wireline, fluid pumping 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 international locations including
primarily Africa, Canada, China, Latin America and the Middle East. Customers
include major multi-national and independent oil and gas producers, and selected
nationally owned oil companies.
Support
Services include RPC’s oil and gas service lines that primarily provide
equipment for customer use or services to assist customer operations. The
equipment and services include drill pipe and related tools, pipe handling,
inspection and storage services, work platform marine vessels and oilfield
training services. The demand for these services tends to be influenced
primarily by customer drilling-related activity levels. The principal markets
for this segment include the United States, Gulf of Mexico and mid-continent
regions and international locations including primarily Canada, Latin America
and the Middle East. Customers primarily include domestic operations of major
multi-national and independent oil and gas producers, and selected nationally
owned oil companies.
Technical
Services
The
following is a description of the primary service lines conducted within the
Technical Services business segment:
Pressure
Pumping.
Pressure pumping services, which accounted for approximately 31 percent of
revenues during 2004, are provided to customers throughout the Gulf Coast and
mid-continent regions of the United States and are generally utilized to
initiate or enhance production in existing customer wells. Pressure pumping
services involve using complex, truck or skid-mounted equipment designed and
constructed for each specific pumping service offered. The mobility of this
equipment permits pressure pumping services to be performed in varying
geographic areas. Principal materials utilized in the pressure pumping business
include fracturing proppants, acid and bulk chemical additives. Generally, these
items are available from several suppliers, and the Company utilizes more than
one supplier for each item. Pressure pumping services offered include:
Fracturing
— Fracturing services are performed to stimulate production of oil and natural
gas by increasing the permeability of a formation. The fracturing process
consists of pumping a fluid gel into a cased well at sufficient pressure to
fracture the formation at desired depths. Sand, bauxite or synthetic proppant,
which is suspended in the gel, is pumped into the fracture. When the pressure is
released at the surface, the fluid gel returns to the well, but the proppant
remain in the fracture, thus keeping it open so that oil and natural gas can
flow through the fracture into the well. In some cases, fracturing is performed
in formations with a high amount of carbonate rock by an acid solution pumped
under pressure without a proppant or with small amounts of proppant.
Acidizing
— Acidizing services are also performed to stimulate production of oil and
natural gas, but they are used in wells that have undergone formation damage due
to the buildup of various materials that block the formation. Acidizing entails
pumping large volumes of specially formulated acids into reservoirs to dissolve
barriers and enlarge crevices in the formation, thereby eliminating obstacles to
the flow of oil and natural gas. Acidizing services can also enhance production
in limestone formations.
Snubbing.
Snubbing, which accounted for approximately 12 percent of 2004 revenues,
involves using a hydraulic workover rig that permits an operator to repair
damaged casing, production tubing and down-hole production equipment in a
high-pressure environment. A snubbing unit makes it possible to remove and
replace down-hole equipment while maintaining pressure in the well. Customers
benefit because these operations can be performed without removing the pressure
from the well, which stops production and can damage the formation, and because
a snubbing rig can perform many applications at a lower cost than other
alternatives. Since snubbing is a very hazardous process that entails high risk,
the snubbing segment of the oil and gas services industry is limited to a
relatively few operators who have the experience and knowledge required to
perform such services safely and efficiently.
Coiled
Tubing. Coiled
tubing services, which accounted for approximately 11 percent of 2004 revenues,
involve the injection of coiled tubing into wells to perform various
applications and functions for use principally in well-servicing operations.
Coiled tubing is a flexible steel pipe with a diameter of less than four inches
manufactured in continuous lengths of thousands of feet and wound or coiled
around a large reel. It can be inserted through existing production tubing and
used to perform workovers without using a larger, more costly workover rig.
Principal advantages of employing coiled tubing in a workover operation include:
(i) not having to “shut-in” the well during such operations, (ii) the ability to
reel continuous coiled tubing in and out of a well significantly faster than
conventional pipe, (iii) the ability to direct fluids into a wellbore with more
precision, and (iv) enhanced access to remote or offshore fields due to the
smaller size and mobility of a coiled tubing unit. There are several
manufacturers of flexible steel pipe used in coiled tubing services, and the
Company believes that its sources of supply are adequate.
Nitrogen.
Nitrogen accounted for approximately nine percent of 2004 revenues. There are a
number of uses for nitrogen, an inert, non-combustible element, in providing
services to oilfield customers and industrial users outside of the oilfield. For
our oilfield customers, nitrogen can be used to clean drilling and production
pipe and displace fluids in various drilling applications. It also can be used
to create a fire-retardant environment in hazardous blowout situations and as a
fracturing medium for our fracturing service line. In addition, nitrogen can be
complementary to our snubbing and coiled tubing service lines, because it is a
non-corrosive medium and is frequently injected into a well using coiled tubing.
For non-oilfield industrial users, nitrogen can be used to purge pipelines and
create a non-combustible environment. RPC stores and transports nitrogen and has
a number of pumping unit configurations that inject nitrogen in its various
applications. Some of these pumping units are set up for use on offshore
platforms or inland waters. RPC purchases its nitrogen in liquid form from
several suppliers and believes that these sources of supply are adequate.
Well
Control. Cudd
Pressure Control specializes in responding to and controlling oil and gas well
emergencies, including blowouts and well fires, domestically and
internationally. In connection with these services, Cudd, along with Patterson
Services, has the capacity to supply the equipment, expertise and personnel
necessary to restore affected oil and gas wells to production. In the last seven
years, the Company has responded to well control situations in several
international locations including Algeria, Argentina, Australia, Bolivia,
Canada, Colombia, Egypt, India, Kuwait, Peru, Qatar, Taiwan, Trinidad and
Venezuela.
The
Company’s professional firefighting staff has more than 300 years of aggregate
industry experience in responding to well fires and blowouts. This team of 20
experts responds to well control projects where hydrocarbons are escaping from a
well bore, regardless of whether a fire has occurred. In the most critical
situations, there are explosive fires, the destruction of drilling and
production facilities, substantial environmental damage and the loss of hundreds
of thousands of dollars per day in well operators’ production revenue. Since
these events ordinarily arise from equipment failures or human error, it is
impossible to predict accurately the timing or scope of this work. Additionally,
less critical events frequently occur in connection with the drilling of new
wells in high-pressure reservoirs. In these situations, the Company is called
upon to supervise and assist in the well control effort so that drilling
operations can resume as promptly as safety permits.
Down-hole
Tools.
ThruTubing Solutions (“TTS”), a division of the Company, provides services and
proprietary down-hole motors and fishing tools to operators and service
companies in drilling and production operations. TTS’ experience providing
reliable tool services allows it to work in a pressurized environment with
virtually any coiled tubing unit or snubbing unit that is equipped for the task.
Wireline
Services. A
wireline unit is a spooled wire that can be unwound and lowered into a well
carrying various types of tools. Wireline services are used for a variety of
purposes, such as accessing a well to assist in data acquisition or logging
activities, fishing tool operations to retrieve lost or broken equipment, pipe
recovery and remedial activities. In addition, wireline services are an integral
part of the plug and abandonment process, near the end of the life cycle of a
well.
Casing
and Laydown. Casing
and laydown principally consists of installing casing and production tubing into
a wellbore. Casing is run to protect the structural integrity of the wellbore
and to seal various production zones in the well. These services are normally
provided during the drilling phase of a well. Production tubing is then run
inside the casing. Oil and natural gas are produced through the production
tubing. These services are provided during the completion or workover phases of
a well.
Torque-Turn.
Torque-Turn is used on casing and tubing in the deeper, higher pressure gas
wells where connection integrity and leak resistance are most critical. By
monitoring the makeup of connections with both torque and turns simultaneously,
optimum bearing pressure is achieved between the connection. The level of
bearing pressure directly affects the leak resistance of the connection. The use
of the torque-turn system allows the maximum bearing pressure to be achieved
without permanently deforming the tubular material.
Fishing.
Fishing, a new service line which began in February 2004, involves the use of
specialized tools and procedures to retrieve lost equipment from a well. It is a
service required by oil and gas operators who have lost equipment in a well.
Well production typically ceases until the lost equipment can be retrieved. In
some cases, the Company creates customized tools to perform a fishing operation.
The customized tools are maintained by the Company after the particular fishing
job for future use if a similar need arises.
Support
Services
The
following is a description of the primary service lines conducted within the
Support Services business segment:
Rental
Tools. Rental
tools accounted for approximately 11 percent of 2004 revenues. The Company rents
specialized equipment for use with onshore and offshore oil and gas well
drilling, completion and workover activities. The drilling and subsequent
operation of oil and gas wells generally require a variety of equipment. The
equipment needed is in large part determined by the geological features of the
production zone and the size of the well itself. As a result, operators and
drilling contractors often find it more economical to supplement their tool and
tubulars inventories with rental items instead of owning a complete inventory.
The Company’s facilities are strategically located to serve the major staging
points for oil and gas activities in the Gulf of Mexico and mid-continent
regions.
Patterson
Rental Tools offers a broad range of rental tools including:
|
Blowout
Preventors |
High
Pressure Manifolds |
|
Coflexip
Hoses |
Hydraulic
Torque Wrenches |
|
Drill
Collars |
Power
Tongs |
|
Drill
Pipe |
Pressure
Control Equipment |
|
Production
Related Rental Tools |
Test
Pumps |
|
Gravel
Pack Equipment |
Tubing
|
|
Handling
Tools |
Tubulars
|
|
Hevi-wate
Pipe |
Tubular
Handling Tools |
Pipe
Inspection and Handling Services. Pipe
inspection services involve the inspection and testing of the integrity of pipe
used in oil and gas wells. These services are provided primarily at the
Company’s inspection yards located on a water channel near Houston, Texas, and
in Morgan City, Louisiana. Customers rely on tubular inspection services to
avoid failure of in-service tubing, casing, flowlines, and drill pipe. Such
tubular failures are expensive and, in some cases, catastrophic. The yard in
Houston, Texas is equipped with bulkhead waterfronts, large capacity cranes,
specially designed forklifts and a computerized inventory system to serve a
variety of other storage and handling services that can serve both oilfield and
non-oilfield customers.
Well
Control School. Well
Control School provides industry and government accredited training for the oil
and gas industry both in the United States and in several international
locations. Well Control School provides this training in various formats
including conventional classroom training, interactive computer training and
mobile simulator training. Well Control School also develops customized training
solutions for clients.
Energy
Personnel International. Energy
Personnel International provides drilling and production engineers, project
management specialists and workover specialists on a consulting basis to the oil
and gas industry to meet customers’ needs for staff engineering and wellsite
management.
Marine
Services. The
Company's Marine services are provided by liftboats, which are sea-going vessels
with legs which allow the vessel to elevate itself above the water's surface
upon arriving at a customer's work site. In this configuration the vessel
becomes a stable work platform from which a variety of offshore services can be
performed, including both oilfield and non-oilfield related work. During 2004,
RPC received offers for, and sold, three of its four liftboats. RPC's sole
remaining liftboat is located in Venezuela, and may be sold to a prospective
purchaser. RPC decided to accept the offers to sell its domestic liftboat fleet
due to continued low demand in the Gulf of Mexico offshore market, and our
belief that we can invest the proceeds from the sale of these assets into other
assets which will yield higher financial returns.
Industry
United
States. RPC
provides its services to its domestic customers through a network of facilities
strategically located to serve the Gulf of Mexico, the mid-continent, the
southwest and the Rocky Mountains production fields. Demand for RPC’s services
in the U.S. tends to be extremely volatile and fluctuates with current and
projected price levels of oil and natural gas and activity levels in the oil and
gas industry. Customer activity levels are influenced by their decisions about
capital investment toward the development and production of oil and gas
reserves.
Due to
aging oilfields and lower-cost sources of oil internationally, drilling activity
in the U.S. has declined more than 75 percent from its peak in 1981. Record low
drilling activity levels were experienced in 1986, 1992, 1999 (with April 1999
recording the lowest U.S. drilling rig count in the industry’s history) and
again in 2002.
At the
beginning of 2004, there were 1,126 domestic working drilling rigs, down 13
percent from the third quarter 2001 peak during that industry cycle. U.S.
domestic drilling activity steadily rose during 2004 and peaked in the fourth
quarter at a rig count of 1,268, which was two percent lower than the third
quarter 2001 peak. At the end of 2004 the rig count was 1,243, an increase of
over 10 percent compared to the beginning of 2004. The price of natural gas rose
by nine percent during 2004, and the price of oil rose by 32 percent. The
increase in the domestic rig count was more highly correlated with the change in
the price of natural gas, possibly due to the fact that the majority of U.S.
drilling relates to natural gas rather than oil.
Gas
drilling rigs have represented an increasing percentage of the total drilling
rig count, and have represented at least 80 percent of the drilling rig count
each year since 2001. In 2004, gas drilling rigs represented 86 percent of total
drilling activity. Demand for natural gas is continuing to rise, primarily as a
result of increased emphasis on gas-fired power generation. Also, unlike oil,
foreign imports of natural gas do not compete with domestic production. This
lack of foreign competition tends to keep prices high. Based on the current
demand for natural gas as well as the high oil and gas well depletion rates
experienced over the past several years, it is anticipated that gas-directed
drilling will represent at least 80 percent of the total drilling rig count in
the foreseeable future. The demand for RPC’s services is driven more by
gas-directed drilling than oil-directed drilling, because our services are more
applicable to deeper, higher pressure wells, which tend to be the wells that
produce natural gas.
Thus, in
North America the demand for our services and products associated with natural
gas development is currently more robust than demand related to oil drilling.
Drilling activity and demand for our services has started to increase and is
expected to continue to increase with domestic economy improvements and as
current storage levels of natural gas decrease.
International.
RPC has
historically operated in several countries outside of the United States,
although international revenues have never accounted for more than 10 percent of
total revenues. As the result of a focus on developing international
opportunities, however, RPC's international revenues increased during 2004 by
slightly more than 100 percent compared to the prior year. During 2004 RPC
performed snubbing work in Kuwait, China, Cameroon and Gabon, among other
countries. We also provided rental tools, well control services, downhole
motors, fishing tool services and oilfield training to customers located in
Algeria, Argentina, Australia, Bahrain, Bolivia, Canada, Chile, China, Ecuador,
Equatorial Guinea, India, Indonesia, Mexico, Peru, the United Kingdom and
Venezuela. We continue to focus on the development of international
opportunities in these and other markets. In early 2005 we continued our
operations in all of the countries shown above except for Algeria, Australia,
Chile, Ecuador, India, Peru, the United Kingdom and Venezuela, and realized a
small amount of revenues in Qatar and South Africa.
RPC
provides services to its international customers through branch locations or
wholly-owned foreign subsidiaries. The international market is prone to
political uncertainties, including the risk of civil unrest and conflicts.
However, due to the significant investment requirement and complexity of
international projects, customers’ drilling decisions relating to such projects
tend to be evaluated and monitored with a longer-term perspective with regard to
oil and natural gas pricing, and therefore tend to be more stable than most U.S.
domestic operations. Additionally, the international market is dominated by
major oil companies and national oil companies which tend to have different
objectives and more operating stability than the typical independent oil and gas
producer in the U.S. Pursuing selective international opportunities for revenue
growth continues to be a strong emphasis for RPC. Refer to Note 12 in the Notes
to Consolidated Financial Statements for further information on our
international operations.
Growth
Strategies
RPC’s
primary objective is to generate excellent long-term returns on investment
through the effective and conservative management of its invested capital, thus
yielding strong cash flow and asset appreciation. This objective will be pursued
through strategic investments and opportunities designed to enhance the
long-term value of RPC while improving market share, product offerings and the
profitability of existing businesses. Growth strategies are focused on selected
areas and markets in which we believe there exist opportunities for higher
growth, market penetration, or enhanced returns achieved through consolidations
or through providing proprietary value-added products and services. RPC intends
to focus on specific market segments in which it believes that it has a
competitive advantage or there exists significant growth potential.
RPC seeks
to expand its service capabilities through a combination of internal growth,
acquisitions, joint ventures and strategic alliances. Because of the fragmented
nature of the oil and gas services industry, RPC believes a number of attractive
acquisition opportunities exist.
Customers
Demand
for RPC’s services and products depends primarily upon the number of oil and
natural gas wells being drilled, the depth and drilling conditions of such
wells, the number of well completions and the level of production enhancement
activity worldwide. RPC’s principal customers consist of major and independent
oil and natural gas producing companies. During 2004, RPC provided oilfield
services to several hundred customers, none of which accounted for more than 10
percent of consolidated revenues. While the loss of certain of RPC’s largest
customers could have a material adverse effect on Company revenues and operating
results in the near term, management believes RPC would be able to obtain other
customers for its services in the event of a loss of any of its largest
customers. Sales are generated by RPC’s sales force and through referrals from
existing customers. With the exception of certain international customers, there
are no long-term written contracts for services or equipment. Due to the short
lead time between ordering services or equipment and providing services or
delivering equipment, there is no significant sales backlog in most of our
service lines.
Competition
RPC
operates in highly competitive areas of the oilfield services industry. The
products and services of each of RPC’s principal industry segments are sold in
highly competitive markets, and its revenues and earnings are affected by
changes in prices for our services, fluctuations in the level of customer
activity in major markets, general economic conditions and governmental
regulation. RPC competes with many large and small oilfield industry
competitors, including the largest integrated oilfield services companies. RPC
believes that the principal competitive factors in the market areas that it
serves are product and service quality and availability, reputation for safety
and technical proficiency, and price.
The oil
and gas services business includes a small number of dominant global competitors
including Halliburton Energy Services Group, a division of Halliburton Company,
and Schlumberger Ltd., and a significant number of locally oriented businesses,
many of which tend to be viable acquisition targets.
Facilities/Equipment
RPC’s
equipment consists primarily of oil and gas services equipment used either in
servicing customer wells or provided on a rental basis for customer use.
Substantially all of this equipment is Company owned and unencumbered. RPC both
owns and leases regional and district facilities from which its oilfield
services are provided to land-based and offshore customers. RPC’s principal
executive offices in Atlanta, Georgia are leased. The Company has two
administrative buildings, one in Houston, Texas that includes the Company’s
operations, sales and marketing headquarters, and one in Houma, Louisiana that
houses certain administrative functions. RPC believes that its facilities are
adequate for its current operations. For additional information with respect to
RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial
Statements.
Governmental
Regulation
RPC’s
business is significantly affected by state, federal and foreign laws and other
regulations relating to the oil and gas industry, as well as laws and
regulations relating to worker safety and environmental protection. RPC cannot
predict the level of enforcement of existing laws and regulations or how such
laws and regulations may be interpreted by enforcement agencies or court
rulings, whether additional laws and regulations will be adopted, or the effect
such changes may have on it, its businesses or financial condition.
In
addition, our customers are affected by laws and regulations relating to the
exploration for and production of natural resources such as oil and natural gas.
These regulations are subject to change, and new regulations may curtail or
eliminate our customers’ activities in certain areas where we currently operate.
We cannot determine the extent to which new legislation may impact our
customers’ activity levels, and ultimately, the demand for our services.
Intellectual
Property
RPC uses
several patented items in its operations, which management believes are
important but are not indispensable to RPC’s success. Although RPC anticipates
seeking patent protection when possible, it relies to a greater extent on the
technical expertise and know-how of its personnel to maintain its competitive
position.
Availability
of Filings
RPC makes
available, free of charge, on its website, www.rpc.net, its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports on the same day as they are filed with the
Securities and Exchange Commission.
Risk
Factors
Demand
for our products and services is affected by the volatility of oil and natural
gas prices.
Oil
prices affect demand throughout the oil and natural gas industry, including the
demand for our products and services. Our business depends in large part on the
conditions of the oil and gas industry, and specifically on the capital
investments of our customers related to the exploration and production of oil
and natural gas. When these capital investments decline, our customers’ demand
for our services declines.
Although
the production sector of the oil and gas industry is less immediately affected
by changing prices, and, as a result, less volatile than the exploration sector,
producers react to declining oil and gas prices by curtailing capital spending,
which would adversely affect our business. A prolonged low level of customer
activity in the oil and gas industry will adversely affect the demand for our
products and services and our financial condition and results of operations.
The
relationship between the prices of oil and natural gas and our customers’
drilling and production activities may not be highly correlated in the future.
Historically,
a rise in the prices of oil and natural gas has led to an immediate increase in
our customers’ drilling and production activities as measured by the domestic
rig count. However, this relationship has not been as strong in the recent past
as it was historically. For example, during 2004 the price of natural gas rose
by nine percent and the price of oil rose by 32 percent, but the drilling rig
count only rose by 16 percent. If this correlation continues to be weak in the
future, then it is possible that increases in the prices of oil and natural gas
will not lead to an increase in our customers’ activities, and our future
operating results could be negatively impacted.
We
may be unable to compete in the highly competitive oil and gas industry in the
future.
We
operate in highly competitive areas of the oilfield services industry. The
products and services of each of our principal industry segments are sold in
highly competitive markets, and our revenues and earnings may be affected by the
following factors: changes in competitive prices, fluctuations in the level of
activity in major markets, general economic conditions, and governmental
regulation. We compete with the oil and gas industry’s many large and small
industry competitors, including the largest integrated oilfield service
providers. We believe that the principal competitive factors in the market areas
that we serve are product and service quality and availability, reputation for
safety, technical proficiency and price. Although we believe that our reputation
for safety and quality service is good, we cannot assure you that we will be
able to maintain our competitive position.
We
may be unable to identify or complete acquisitions.
Acquisitions
have been and will continue to be a key element of our business strategy. We
cannot assure you that we will be able to identify and acquire acceptable
acquisition candidates on terms favorable to us in the future. We may be
required to incur substantial indebtedness to finance future acquisitions and
also may issue equity securities in connection with such acquisitions. The
issuance of additional equity securities could result in significant dilution to
our stockholders. We cannot assure you that we will be able to consolidate
successfully the operations and assets of any acquired business with our own
business. Any inability on our part to consolidate and manage the growth from
acquired businesses could have a material adverse effect on our results of
operations and financial condition.
Our
operations are affected by adverse weather conditions.
Our
operations are directly affected by the weather conditions in several domestic
regions, including the Gulf of Mexico, the Gulf Coast, and the mid continent.
Due to seasonal differences in weather patterns, our crews may operate more days
in some periods than others. Hurricanes and other storms prevalent in the Gulf
of Mexico and along the Gulf Coast during certain times of the year may also
affect our operations, and prolonged rain or snow in our mid continent locations
may temporarily prevent our crews and equipment from reaching customer work
sites. Accordingly, our operating results may vary from quarter to quarter,
depending on the impact of these weather conditions.
Our
inability to attract and retain skilled workers may impair growth potential and
profitability.
Our
ability to remain productive and profitable will depend substantially on our
ability to attract and retain skilled workers. Our ability to expand our
operations is in part impacted by our ability to increase our labor force. The
demand for skilled oilfield employees is high, and the supply is very limited. A
significant increase in the wages paid by competing employers could result in a
reduction in our skilled labor force, increases in the wage rates paid by us, or
both. If either of these events occurred, our capacity and profitability could
be diminished, and our growth potential could be impaired.
Our
concentration of customers in one industry may impact overall exposure to credit
risk.
Substantially
all of our customers are engaged in the energy industry. This concentration of
customers in one industry may impact our overall exposure to credit risk, either
positively or negatively, in that customers may be similarly affected by changes
in economic and industry conditions. We perform ongoing credit evaluations of
our customers and do not generally require collateral in support of our trade
receivables.
Our
business has potential liability for litigation, personal injury and property
damage claims assessments.
Our
operations involve the use of heavy equipment and exposure to inherent risks,
including blowouts, explosions and fires. If any of these events were to occur,
it could result in liability for personal injury and property damage, pollution
or other environmental hazards or loss of production. Litigation may arise from
a catastrophic occurrence at a location where our equipment and services are
used. This litigation could result in large claims for damages. The frequency
and severity of such incidents will affect our operating costs, insurability and
relationships with customers, employees and regulators. These occurrences could
have a material adverse effect on us. We maintain what we believe is prudent
insurance protection. We cannot assure you that we will be able to maintain
adequate insurance in the future at rates we consider reasonable or that our
insurance coverage will be adequate to cover future claims and assessments that
may arise.
Our
operations may be adversely affected if we are unable to comply with regulatory
and environmental laws.
Our
business is significantly affected by stringent environmental laws and other
regulations relating to the oil and gas industry and by changes in such laws and
the level of enforcement of such laws. We are unable to predict the level of
enforcement of existing laws and regulations, how such laws and regulations may
be interpreted by enforcement agencies or court rulings, or whether additional
laws and regulations will be adopted. The adoption of laws and regulations
curtailing exploration and development of oil and gas fields in our areas of
operations for economic, environmental or other policy reasons would adversely
affect our operations by limiting demand for our services. We also have
potential environmental liabilities with respect to our offshore and onshore
operations, and could be liable for cleanup costs, or environmental and natural
resource damage due to conduct that was lawful at the time it occurred, but is
later ruled to be unlawful. We also may be subject to claims for personal injury
and property damage due to the generation of hazardous substances in connection
with our operations. We believe that our present operations substantially comply
with applicable federal and state pollution control and environmental protection
laws and regulations. We also believe that compliance with such laws has had no
material adverse effect on our operations to date. However, such environmental
laws are changed frequently. We are unable to predict whether environmental laws
will, in the future, materially adversely affect our operations and financial
condition. Penalties for noncompliance with these laws may include cancellation
of permits, fines, and other corrective actions, which would negatively affect
our future financial results.
Our
international operations could have a material adverse effect on our business.
Our
operations in various countries including, but not limited to, Africa, Canada,
Latin America and the Middle East are subject to risk. These risks include, but
are not limited to, political changes, expropriation, currency restrictions and
changes in currency exchange rates, taxes, and boycotts and other civil
disturbances. Although it is impossible to predict the likelihood of such
occurrences or their effect on our operations, our management believes that
these risks are acceptable. However, the occurrence of any one of these events
could have a material adverse effect on our operations.
Our
common stock price has been volatile.
Historically,
the market price of common stock of companies engaged in the oil and gas
services industry has been highly volatile. Likewise, the market price of our
common stock has varied significantly in the past.
Our
management has a substantial ownership interest, and public shareholders may
have no effective voice in the management of the Company.
The
Company has elected the “Controlled Corporation” exemption under Rule 303A of
the New York Stock Exchange (“NYSE”) Company Guide. The Company is a “Controlled
Corporation” because a group that includes the Company’s Chairman of the Board,
R. Randall Rollins and his brother, Gary W. Rollins, who is also a director of
the Company, and certain companies under their control, controls in excess of
fifty percent of the Company’s voting power. As a “Controlled Corporation”, the
Company need not comply with certain NYSE rules including those requiring a
majority of independent directors.
RPC’s
executive officers, directors and their affiliates hold directly or through
indirect beneficial ownership, in the aggregate, approximately 66 percent of
RPC’s outstanding shares of common stock. As a result, these stockholders
effectively control the operations of RPC, including the election of directors
and approval of significant corporate transactions such as acquisitions. This
concentration of ownership could also have the effect of delaying or preventing
a third party from acquiring control over the Company at a premium.
Our
management has a substantial ownership interest, and the availability of the
Company’s common stock to the investing public may be
limited.
The
availability of RPC’s common stock to the investing public may be limited to
those shares not held by the executive officers, directors and their affiliates,
which could negatively impact RPC’s stock trading prices and affect the ability
of minority stockholders to sell their shares. Future sales by executive
officers, directors and their affiliates of all or a portion of their shares
could also negatively affect the trading price of our common stock.
Provisions
in RPC's
Certificate of Incorporation and Bylaws May Inhibit a Takeover of
RPC
RPC’s
certificate of incorporation, bylaws and other documents contain provisions
including advance notice requirements for shareholder proposals and staggered
terms of office for the Board of Directors. These provisions may make a tender
offer, change in control or takeover attempt that is opposed by RPC’s Board of
Directors more difficult or expensive.
Item
2. Properties
RPC owns
or leases approximately 70 offices and operating facilities. The Company leases
approximately 7,800 square feet of office space in Atlanta, Georgia that serves
as its headquarters, a portion of which is allocated and charged to Marine
Products Corporation. See “Related Party Transactions” contained in Item 7. The
lease agreement on the headquarters is effective through May, 2007. RPC believes
its current operating facilities are suitable and adequate to meet current and
reasonably anticipated future needs. Descriptions of the major facilities used
in our operations are as follows:
Owned
Locations
Houma,
Louisiana — Administrative office
Houston,
Texas — Pipe storage terminal and inspection sheds
Houston,
Texas — Operations, sales and administrative office
Morgan
City, Louisiana — Pipe cleaning facility
Elk City,
Oklahoma — Operations, sales and equipment storage yard
Rock
Springs, Wyoming — Operations, sales and equipment storage yard
Leased
Locations
Seminole,
Oklahoma — Pumping services facility
Elk City,
Oklahoma — Equipment storage yard
Kilgore,
Texas — Pumping services facility
The
Company’s crane fabrication plant in Irving, Texas was sold in April
2004.
Item
3. Legal Proceedings
RPC is a
party to various routine legal proceedings primarily involving commercial
claims, workers’ compensation claims and claims for personal injury. RPC insures
against these risks to the extent deemed prudent by its management, but no
assurance can be given that the nature and amount of such insurance will, in
every case, fully indemnify RPC against liabilities arising out of pending and
future legal proceedings related to its business activities. While the outcome
of these lawsuits, legal proceedings and claims cannot be predicted with
certainty, management believes that the outcome of all such proceedings, even if
determined adversely, would not have a material adverse effect on RPC’s business
or financial condition.
Item
4. Submission of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2004.
Item
4A. Executive Officers of the Registrant
Each of
the executive officers of RPC was elected by the Board of Directors to serve
until the Board of Directors’ meeting immediately following the next annual
meeting of stockholders or until his or her earlier removal by the Board of
Directors or his or her resignation. The following table lists the executive
officers of RPC and their ages, offices, and terms of office with RPC.
|
Name
and Office with Registrant |
Age |
Date
First Elected to Present Office |
| |
|
|
|
R.
Randall Rollins (1) |
73 |
1/24/84
|
|
Chairman
of the Board |
|
|
| |
|
|
|
Richard
A. Hubbell (2) |
60 |
4/22/03
|
|
President
and
Chief
Executive Officer |
|
|
| |
|
|
|
Linda
H. Graham (3) |
68 |
1/27/87
|
|
Vice
President and
Secretary |
|
|
| |
|
|
|
Ben
M. Palmer (4) |
44 |
7/8/96 |
|
Vice
President,
Chief
Financial Officer and
Treasurer
|
|
|
|
(1) |
R.
Randall Rollins began working for Rollins, Inc. (consumer services) in
1949. At the time of the spin-off of RPC from Rollins, in 1984, Mr.
Rollins was elected Chairman of the Board and Chief Executive Officer of
RPC. He remains Chairman of RPC, Inc. and stepped down as the Chief
Executive Officer of RPC effective April 22, 2003. He has served as
Chairman of the Board for Marine Products Corporation (boat manufacturing)
since it was spun off in February 2001 and Chairman of the Board of
Rollins, Inc. since October 1991. He is also on the boards of Dover Downs
Gaming and Entertainment, Inc., and Dover Motorsports, Inc. and, until
April 2004, he was on the boards of SunTrust Banks, Inc. and SunTrust
Banks of Georgia. |
|
(2) |
Richard
A. Hubbell has been the President of RPC since 1987 and Chief Executive
Officer since April 22, 2003. He has also been the President and Chief
Executive Officer of Marine Products Corporation since it was spun off in
February 2001. Mr. Hubbell serves on the Board of Directors for both of
these companies. |
|
(3) |
Linda
H. Graham has been the Vice President and Secretary of RPC since 1987. She
has also been the Vice President and Secretary of Marine Products
Corporation since it was spun off in February 2001. Ms. Graham serves on
the Board of Directors for both of these companies. |
|
(4) |
Ben
M. Palmer has been the Vice President, Chief Financial Officer and
Treasurer of RPC since 1996. He has also been the Vice President, Chief
Financial Officer and Treasurer at Marine Products Corporation since it
was spun off in February 2001. |
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
RPC’s
common stock is listed for trading on the New York Stock Exchange under the
symbol RES. All share and dividends per share data disclosed below have been
restated for the three-for-two stock split payable March 10, 2005, to
stockholders of record on February 10, 2005. At February 23, 2005, there were
43,466,183 (adjusted for the three-for-two stock split) shares of common stock
outstanding.
As of
February 23, 2005, there were approximately 3,175 holders of record of common
stock. The following table sets forth the high and low prices of RPC’s common
stock for each quarter in the years ended December 31, 2004 and 2003 and the
quarterly dividends paid in those periods:
| |
|
2004 |
|
2003 |
|
|
Quarter |
|
High |
|
Low |
|
Dividends |
|
High |
|
Low |
|
Dividends
|
|
First |
|
$ |
8.17 |
|
$ |
7.05 |
|
$ |
0.020 |
|
$ |
8.23 |
|
$ |
6.00 |
|
$ |
0.017 |
|
Second |
|
|
10.65 |
|
|
7.17 |
|
|
0.020 |
|
|
7.80 |
|
|
6.23 |
|
|
0.017
|
|
Third |
|
|
11.97 |
|
|
9.11 |
|
|
0.020 |
|
|
8.17 |
|
|
6.25 |
|
|
0.017
|
|
|
Fourth |
|
|
18.90 |
|
|
11.53 |
|
|
0.020 |
|
|
7.45 |
|
|
6.39 |
|
|
0.017 |
|
On
January 25, 2005 the Board of Directors approved a 100 percent increase in the
quarterly cash dividend, from $0.02 to $0.04, as adjusted for the three-for-two
stock split. The
Company expects to continue to pay cash dividends to the common stockholders,
subject to the earnings and financial condition of the Company and other
relevant factors.
Issuer
Purchases of Equity Securities
Shares
repurchased in the fourth quarter of 2004 are outlined below. All share and per
share data have been restated for the three-for-two stock split effective
February 10, 2005 payable March 10, 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
Total
Number of Shares (or Units) Purchased |
|
|
|
Average
Price Paid Per Share (or Unit) |
|
Total
number of Shares (or Units) Purchased as Part of Publicly Announced Plans
or Programs |
|
Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be
Purchased Under the Plans or Programs |
|
|
October
1, 2004 to
October
31, 2004 |
|
|
11,400 |
|
(1 |
) |
$ |
13.29 |
|
|
- |
|
|
2,491,500 |
|
|
November
1, 2004 to
November
30, 2004 |
|
|
12,714 |
|
(1 |
) |
|
16.87 |
|
|
- |
|
|
2,491,500 |
|
|
December
1, 2004 to
December
31, 2004 |
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
2,491,500 |
|
|
Totals |
|
|
24,114 |
|
|
|
$ |
15.18 |
|
|
- |
|
|
2,491,500 |
|
| (1) |
All
shares shown were tendered to the Company in connection with option
exercises. |
The
Company’s Board of Directors announced a stock buyback program in March 1998
authorizing the repurchase of 5,250,000 shares. The program does not have a
predetermined expiration date.
Item
6. Selected Financial Data
The
following table summarizes certain selected financial data of the Company. The
historical information may not be indicative of the Company’s future results of
operations. The information set forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the Consolidated Financial Statements and the notes thereto
included elsewhere in this document.
All
earnings per share and dividends per share have been restated for the
three-for-two stock split effective March 10, 2005 for shares held on February
10, 2005.
STATEMENT
OF OPERATIONS DATA:
|
Years
Ended December 31, |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
|
(in
thousands, except employee and per share amounts)
|
|
|
Revenues |
|
$ |
339,792 |
|
$ |
270,527 |
|
$ |
209,030 |
|
$ |
284,521 |
|
$ |
201,958 |
|
|
Cost
of services rendered and goods sold |
|
|
193,659 |
|
|
168,766 |
|
|
143,362 |
|
|
168,152 |
|
|
124,989 |
|
|
Selling,
general and administrative expenses |
|
|
65,871 |
|
|
52,268 |
|
|
44,852 |
|
|
52,873 |
|
|
37,076 |
|
|
Depreciation
and amortization |
|
|
34,473 |
|
|
33,094 |
|
|
31,242 |
|
|
25,434 |
|
|
17,805 |
|
|
Operating
profit (loss) |
|
|
45,789 |
|
|
16,399 |
|
|
(10,426 |
) |
|
38,062 |
|
|
22,088 |
|
|
Interest
expense (income) |
|
|
68 |
|
|
153 |
|
|
74 |
|
|
65 |
|
|
(1,443 |
) |
|
Other
income, net (a) |
|
|
7,482 |
|
|
1,324 |
|
|
2,346 |
|
|
3,126 |
|
|
2,446 |
|
|
Income
(loss) from continuing operations before income taxes |
|
|
53,203 |
|
|
17,570 |
|
|
(8,154 |
) |
|
41,123 |
|
|
25,977 |
|
|
Income
tax provision (benefit) |
|
|
18,430 |
|
|
6,677 |
|
|
(2,894 |
) |
|
15,627 |
|
|
9,850 |
|
|
Income
(loss) from continuing operations |
|
|
34,773 |
|
|
10,893 |
|
|
(5,260 |
) |
|
25,496 |
|
|
16,127 |
|
|
Income
from discontinued operation, net of income taxes |
|
|
— |
|
|
— |
|
|
— |
|
|
1,486 |
|
|
13,961 |
|
|
Net
income (loss) |
|
$ |
34,773 |
|
$ |
10,893 |
|
$ |
(5,260 |
) |
$ |
26,982 |
|
$ |
30,088 |
|
|
Earnings
(loss) per share — basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
|
|
0.82 |
|
|
0.26 |
|
|
(0.12 |
) |
|
0.61 |
|
|
0.39 |
|
|
Income
from discontinued operation |
|
|
— |
|
|
— |
|
|
— |
|
|
0.03 |
|
|
0.33 |
|
|
Net
income (loss) |
|
$ |
0.82 |
|
$ |
0.26 |
|
$ |
(0.12 |
) |
$ |
0.64 |
|
$ |
0.72 |
|
|
Earnings
(loss) per share — diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
|
|
0.80 |
|
|
0.25 |
|
|
(0.12 |
) |
|
0.59 |
|
|
0.38 |
|
|
Income
from discontinued operation |
|
|
— |
|
|
— |
|
|
— |
|
|
0.04 |
|
|
0.33 |
|
|
Net
income (loss) |
|
$ |
0.80 |
|
$ |
0.25 |
|
$ |
(0.12 |
) |
$ |
0.63 |
|
$ |
0.71 |
|
|
Dividends
paid per share |
|
$ |
0.08 |
|
$ |
0.07 |
|
$ |
0.07 |
|
$ |
0.07 |
|
$ |
0.09 |
|
|
OTHER
DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin percent |
|
|
13.5 |
% |
|
6.1 |
% |
|
(5.0 |
%) |
|
13.4 |
% |
|
10.9 |
% |
|
Net
cash provided by continuing operations |
|
$ |
50,374 |
|
$ |
50,631 |
|
$ |
27,556 |
|
$ |
55,938 |
|
$ |
11,272 |
|
|
Net
cash used for investing activities |
|
|
(37,215 |
) |
|
(34,670 |
) |
|
(21,831 |
) |
|
(46,357 |
) |
|
(19,890 |
) |
|
Net
cash used for financing activities |
|
|
(5,825 |
) |
|
(5,192 |
) |
|
(4,927 |
) |
|
(4,283 |
) |
|
(4,392 |
) |
|
Depreciation
and amortization (b) |
|
|
34,500 |
|
|
33,182 |
|
|
31,342 |
|
|
25,536 |
|
|
17,995 |
|
|
Capital
expenditures |
|
$ |
49,869 |
|
$ |
30,356 |
|
$ |
22,481 |
|
$ |
45,850 |
|
$ |
35,526 |
|
|
Employees
at end of period (c) |
|
|
1,596 |
|
|
1,529 |
|
|
1,419 |
|
|
1,533 |
|
|
1,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SHEET DATA AT END OF YEAR: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net |
|
$ |
75,793 |
|
$ |
53,719 |
|
$ |
40,168 |
|
$ |
46,928 |
|
$ |
55,485 |
|
|
Working
capital |
|
|
77,509 |
|
|
63,226 |
|
|
52,646 |
|
|
42,513 |
|
|
47,794 |
|
|
Property,
plant and equipment, net |
|
|
114,222 |
|
|
109,163 |
|
|
105,338 |
|
|
115,046 |
|
|
85,032 |
|
|
Total
assets (d) |
|
|
262,942 |
|
|
226,864 |
|
|
195,954 |
|
|
202,402 |
|
|
277,915 |
|
|
Current
portion of long-term debt |
|
|
2,700 |
|
|
1,110 |
|
|
552 |
|
|
1,390 |
|
|
470 |
|
|
Long-term
debt |
|
|
2,100 |
|
|
4,800 |
|
|
2,410 |
|
|
2,937 |
|
|
848 |
|
|
Total
stockholders’ equity (d) |
|
$ |
181,423 |
|
$ |
151,106 |
|
$ |
145,081 |
|
$ |
156,436 |
|
$ |
169,319 |
|
|
(a) |
Other
income in 2004 includes a $3.3 million pretax gain ($0.05 after tax per
diluted share) on sale of certain operating assets. |
|
(b) |
Depreciation
and amortization differs from depreciation and amortization presented in
the statements of operations due to depreciation related to the
manufacturing of goods which is included in cost of services rendered and
goods sold. |
|
(c) |
Represents
employees of continuing operations for all periods presented.
|
|
(d) |
Includes
assets and stockholders’ equity associated with the discontinued operation
prior to 2001. |
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The
following discussion should be read in conjunction with “Selected Financial
Data,” and the Consolidated Financial Statements included elsewhere in this
document. See also “Forward-Looking Statements” on page 2.
RPC, Inc.
(“RPC”) provides a broad range of specialized oilfield services primarily to
independent and major oilfield companies engaged in exploration, production and
development of oil and gas properties throughout the United States, including
the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions, and
selected international locations. The Company’s revenues and profits are
generated by providing equipment and services to customers who operate oil and
gas properties and invest capital to drill new wells and enhance production or
perform maintenance on existing wells.
Our key
business and financial strategies are:
| - |
To
focus our management resources on and invest our capital in equipment and
geographic markets that we believe will earn high returns on capital, and
maintain a conservative capital structure including low debt
levels. |
| - |
To
maintain a flexible cost structure that can respond quickly to volatile
industry conditions and business activity
levels. |
| - |
To
deliver equipment and services to our customers
safely. |
| - |
To
maximize shareholder return by optimizing the balance between cash
invested in the Company's productive assets, the payment of dividends to
shareholders, and the repurchase of its common stock on the open
market. |
| - |
To
align the interests of our management and
shareholders. |
In
assessing the outcomes of these strategies and RPC’s financial condition and
operating performance, management generally reviews periodic forecast data,
monthly actual results, and other similar information. We also consider trends
related to certain key financial data, including revenues, utilization of our
equipment and personnel, pricing for our services and equipment, profit margins,
selling, general and administrative expenses and cash flows. We continuously
monitor factors that impact the level of current and expected customer activity
levels, such as the price of oil and natural gas, changes in pricing and
utilization. Our financial results are affected by geopolitical factors such as
political instability in the petroleum-producing regions of the world, overall
economic conditions and weather in the United States, the prices of oil and
natural gas, and our customers’ drilling and production activities.
Current
industry conditions include historically high but stable natural gas prices,
historically high, volatile oil prices, and a gradually increasing domestic rig
count. These trends in 2004 resulted in increased utilization of our equipment
and personnel followed by increased pricing for the Company's services and
equipment. Improved results have also allowed us to make higher capital
expenditures, which has led to an increase in capacity for providing services to
our customers.
The
results of our strategies are reflected in our 2004 financial and operational
performance. We generated record revenues and profitability in 2004 because of
better industry conditions, increased capacity, and growth in the utilization of
our personnel and equipment. Revenues in 2004 of $339.8 million increased 25.6
percent compared to the prior year. The growth in revenues resulted primarily
from increased utilization consistent with higher customer activity levels and
to a lesser extent, our ability to increase our pricing for our equipment and
services. International revenues for all of 2004 grew by 132.1 percent mainly
due to our focus on several international business opportunities. We continue to
focus on developing international growth opportunities; however, it is difficult
to predict when contracts and projects will be initiated and their ultimate
duration. Based on current industry conditions and trends during the first two
months of 2005, we expect consolidated revenues for 2005 to increase, although
the volatility in our industry makes accurate near-term forecasts unreliable.
During
the fourth quarter, we sold certain non-core operating assets generating
proceeds of approximately $10 million and a pretax gain of approximately $3.3
million, or $0.05 (adjusted for the three-for-two stock split) per diluted
share. Earnings before income taxes increased to $53.2 million in 2004 compared
to $17.6 million in the prior year. The effective tax rate in 2004 of 34.6
percent was lower than the rate of 38.0 percent in 2003 because we recognized
previously reserved foreign tax credits and made adjustments to liabilities for
foreign taxes. Diluted earnings per share increased to $0.80 (adjusted for the
three-for-two stock split) in 2004 compared to $0.25 (adjusted for the
three-for-two stock split) in the prior year. Cash flows from operating
activities were $50.4 million compared to $50.6 million in the prior year, and
cash and cash equivalents were $29.6 million at December 31, 2004, an increase
of $7.3 million compared to the prior year. This increase in cash and cash
equivalents resulted primarily from improved operating results coupled with $10
million of proceeds generated from the sale of liftboats in the fourth quarter
of 2004, offset by increased capital expenditures and contributions to the
defined benefit pension plan. Our financial condition remains strong as our debt
to capitalization remains at less than three percent as of December 31, 2004.
Cost of
services rendered and goods sold as a percentage of revenues decreased
approximately five percent in 2004 compared to 2003. This improvement was due to
leveraging our direct costs with higher revenues as a result of increased
utilization and improved pricing.
Selling,
general and administrative expenses as a percentage of revenues remained
relatively stable at 19 percent, but increased consistent with the increase
in revenues due to increased incentive compensation costs and increased
headcount related to higher activity levels and the expansion of
our safety program, the implementation of additional information technology to
support operational efficiencies at higher activity levels, and an increase in
bad debt expense.
Consistent
with our strategy to selectively grow our capacity and maintain our existing
fleet of high demand equipment, capital expenditures were $49.9 million in 2004.
The actual amount of 2005 expenditures will depend primarily on equipment
maintenance requirements and expansion opportunities, although we currently
expect capital expenditures to be approximately $60 million in 2005. Consistent
with 2004, we expect these expenditures to be primarily directed toward our
larger, core service lines including pressure pumping, snubbing, nitrogen, and
rental tools.
Outlook
Drilling
activity in the U.S. domestic oilfields, as measured by the rotary drilling rig
count, has been stable or gradually increasing for several years, and the
overall domestic rig count during the first two months of 2005 is approximately
13 percent higher than in the comparable period in 2004. The price of oil has
risen by approximately 36 percent and the price of natural gas has risen by
approximately 10 percent during this period as well. While the overall drilling
rig count has increased, drilling activity in the Gulf of Mexico remains weak,
which is unfavorable because of the Company’s historical presence in this
geographic market. The Company has responded to these trends by emphasizing
investments in more robust domestic markets and making only selective
investments in the Gulf of Mexico market. In spite of relatively stable industry
conditions, the Company understands that factors influencing the industry are
unpredictable. Our response to the industry's potential uncertainty is to
maintain sufficient liquidity and a conservative capital structure.
On
January 25, 2005, RPC's Board of Directors declared a three-for-two stock split
of the Company's common shares. The additional shares were distributed on March
10, 2005 to stockholders of record on February 10, 2005. All share, earning per
share, and dividends per share data have been adjusted to reflect this stock
split.
Our
ability to sustain our recent growth in revenues and profitability will depend
upon a number of factors, including our ability to expand the business generated
by our core service lines (including geographic expansion) and continue to
improve operating efficiencies and organizational effectiveness. Numerous
factors can affect our ability to achieve these goals, including without
limitation, U.S. and global economic conditions, increased competition from
other oilfield service companies, increased cost of equipment, delays in
receiving equipment, availability and cost of qualified personnel, tensions in
the Middle East and other oil-producing nations, demand for oil in rapidly
industrializing economies such as China and India, and the weather in the United
States during 2005.
Results
of Operations
|
Years
Ended December 31, |
|
2004 |
|
2003 |
|
2002
|
|
|
Consolidated
revenues |
|
$ |
339,792 |
|
$ |
270,527 |
|
$ |
209,030 |
|
|
Revenues
by business segment: |
|
|
|
|
|
|
|
|
|
|
|
Technical |
|
$ |
279,070 |
|
$ |
216,321 |
|
$ |
163,593 |
|
|
Support |
|
|
56,917 |
|
|
43,909 |
|
|
35,784 |
|
|
Other |
|
|
3,805 |
|
|
10,297 |
|
|
9,653 |
|
|
Consolidated
operating profit (loss) |
|
$ |
45,789 |
|
$ |
16,399 |
|
$ |
(10,426 |
) |
|
Operating
profit (loss) by business segment: |
|
|
|
|
|
|
|
|
|
|
|
Technical |
|
$ |
47,027 |
|
$ |
22,433 |
|
$ |
(1,162 |
) |
|
Support |
|
|
8,287 |
|
|
2,641 |
|
|
(3,154 |
) |
|
Other |
|
|
(975 |
) |
|
(1,355 |
) |
|
(1,603 |
) |
|
Corporate
expenses |
|
$ |
(8,550 |
) |
$ |
(7,320 |
) |
$ |
(4,507 |
) |
|
Net
income (loss) |
|
$ |
34,773 |
|
$ |
10,893 |
|
$ |
(5,260 |
) |
|
Earnings
(loss) per share — diluted (adjusted for three-for-two stock
split) |
|
$ |
0.80 |
|
$ |
0.25 |
|
$ |
(0.12 |
) |
|
Percentage
cost of services rendered and goods sold to revenues |
|
|
57 |
% |
|
62 |
% |
|
69 |
% |
|
Percentage
selling, general and administrative expenses to revenues |
|
|
19 |
% |
|
19 |
% |
|
21 |
% |
|
Percentage
depreciation and amortization expense to revenues |
|
|
10 |
% |
|
12 |
% |
|
15 |
% |
|
Effective
income tax rate |
|
|
34.6 |
% |
|
38.0 |
% |
|
35.5 |
% |
|
Average
U.S. domestic rig count |
|
|
1,190 |
|
|
1,029 |
|
|
830 |
|
|
Average
natural gas price (per thousand cubic feet (mcf)) |
|
$ |
5.88 |
|
$ |
5.41 |
|
$ |
3.29 |
|
|
Average
oil price (per barrel) |
|
$ |
41.35 |
|
$ |
31.23 |
|
$ |
26.16 |
|
| |
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2004 Compared To Year Ended December 31, 2003
Revenues. Revenues
for 2004 increased 25.6 percent compared to 2003. Domestic
revenues increased due to higher customer drilling and production enhancement
activity. Our growth in revenues was higher than the domestic rig count growth,
principally because of the effect of increased international revenues, of an
acquisition closed during 2003 and of our new fishing tool service line which
began operations in 2004. These increases were partially offset by continued
weakness in the Gulf of Mexico market, exacerbated by the hurricanes in the area
during the third quarter 2004, heavy rains during the fourth quarter impacting
mid-continent operations, and the sale of one of our non-oilfield businesses
during the second quarter of 2004.
The
average price of natural gas increased 8.7 percent during 2004 compared to 2003,
and the average price of oil increased 32.4 percent during the same period. The
average U.S. domestic rig count increased by 15.6 percent during 2004 compared
to 2003. This increase in oil and gas prices and resulting increase in drilling
activity had a positive impact on our financial results. We believe that our
activity levels are affected more by natural gas prices than by the price of
oil, because the majority of U.S. domestic drilling activity relates to natural
gas, and many of our services are more appropriate for gas wells than oil wells.
The correlation between the changes in the price of oil and natural gas and U.S.
domestic drilling activity were more highly correlated in 2004 than in 2003.
This higher correlation is consistent with past industry cycles.
The
Technical Services segment revenues for 2004 increased 29.0 percent due
primarily to increased
customer activity levels and demand for our services, additional equipment
capacity, higher pricing levels in most of our service lines and a shift in the
mix of pressure pumping work towards higher revenue generating jobs.
The
Support Services segment revenues for 2004 increased 29.6 percent as a
result of higher equipment utilization, additional capacity and slightly higher
pricing in rental tools, which is the largest service line within this segment,
partially offset by lower utilization and reduced pricing for our marine
liftboats.
Cost
of services rendered and goods sold. Cost of
services rendered and goods sold, as a percentage of revenues, decreased five
percentage points in 2004 compared to 2003 as a result of improved operating
leverage due to overall higher utilization of personnel and operating equipment,
and better pricing. Cost of services rendered and goods sold increased 14.8
percent
due primarily to increased direct employment costs, and variable operational
expenses such as equipment maintenance, materials and supplies, sub-rental
expense and fuel costs.
Selling,
general and administrative expenses.
Selling, general and administrative expenses increased by 26.0 percent to $65.9
million in 2004 from $52.3 million in 2003, however as a percentage of revenues,
remained relatively stable at 19 percent. The increase was due to increased
incentive compensation costs and increased headcount related to higher activity
levels and the expansion of our safety program. The increase was also due to the
implementation of additional information technology to support operational
efficiencies at higher activity levels and an increase in bad debt
expense.
Depreciation
and amortization.
Depreciation and amortization were $34.5 million in 2004, a 4.2 percent increase
compared to $33.1 million in 2003. This increase in depreciation and
amortization resulted from various maintenance and growth capital expenditures
within Support Services and Technical Services, and from the effect of the
acquisition completed during the second quarter of 2003. As a percentage of
revenues these costs declined due to their fixed nature.
Other
income, net. Other
income, net for 2004 includes a gain of approximately $3.3 million related to
the sale of the Company’s domestic liftboat fleet during the fourth quarter of
2004. This transaction generated proceeds of approximately $10 million. Other
income also includes gains in 2004 and 2003 related to miscellaneous real
property dispositions, sales to customers of lost or damaged rental equipment,
and gains from various legal and insurance claim settlements.
Interest
expense, net.
Interest expense, net was $68 thousand in 2004 compared to $153 thousand in
2003.
Income
tax provision. The
effective tax rate in 2004 was 34.6 percent, a reduction from 38.0 percent in
2003, primarily because of an aggregate reduction in the tax provision of
approximately $1.1 million related to the recognition of previously reserved
foreign tax credit carryovers and an adjustment to the liabilities for foreign
taxes.
Net
income and diluted earnings per share. Net
income for 2004 was $34.8 million, or $0.80 (adjusted for three-for-two stock
split) diluted earnings per share. This included the $2.2 million after tax
gain, or $0.05 (adjusted for three-for-two stock split) per diluted share,
related to the sale of the liftboats and $1.1 million, or $0.03 (adjusted for
three-for-two stock split) per diluted share, related to the tax provision
adjustments. Net income for 2003 was $10.9 million or $0.25 (adjusted for
three-for-two stock split) diluted earnings per share.
Year
Ended December 31, 2003 Compared To Year Ended December 31, 2002
Revenues.
Revenues for 2003 increased 29.4 percent compared to 2002 as a result of higher
utilization of equipment and personnel, increased pricing in most of our service
lines and the impact of the Bronco Oilfield Services acquisition completed at
the beginning of the second quarter of 2003. During 2003, the average domestic
rig count increased 24.0 percent compared to 2002. The average price of natural
gas increased 64.4 percent during 2003 compared to 2002, while the average price
of oil increased 19.4 percent during the same period. This increase in oil and
gas prices had a positive impact on our financial results especially the greater
increase in gas prices, because we believe that our activity levels are affected
more by natural gas prices than by the price of oil. Although the prices of oil
and natural gas in 2003 were significantly higher than in 2002, the higher
prices and the increase in drilling activity did not correlate as closely as in
past cycles. If this continues, then it is possible that rising oil and gas
prices in the future may not necessarily indicate an increase in our activity
levels, as they have historically.
Technical
Services revenues increased 32.2 percent in 2003 compared to 2002 as a result of
higher utilization of equipment and personnel, increased pricing in most service
lines and the impact of the Bronco Oilfield Services acquisition completed at
the beginning of the second quarter of 2003. Support Services revenues increased
22.7 percent in 2003 compared to the prior year, as a result of higher
utilization of equipment slightly offset by a decrease in pricing. Part of this
revenue increase was due to increased utilization of the Company’s marine
liftboats, which were involved in a long term, non-oilfield related project
during most of 2003. Support Services revenues experienced a relatively lower
revenue increase than Technical Services due to this segment’s presence in the
Gulf of Mexico geographic market. Drilling activity in the Gulf of Mexico was
much weaker than in other parts of the U.S. domestic market, and as measured by
the rig count, declined during 2003 compared to 2002.
Cost
of services rendered and goods sold. Cost of
services rendered and goods sold, as a percentage of revenues, decreased seven
percentage points because of higher utilization of equipment and personnel. Cost
of services rendered and goods sold increased 17.7 percent due to higher
customer activity levels, because many of these costs vary directly with
activity. In particular, materials and supplies expense, insurance and overtime
personnel expense increased compared to 2002.
Selling,
general and administrative expenses.
Selling, general and administrative expenses were $52.3 million in 2003 compared
to $44.9 million in 2002, an increase of 16.5 percent. These expenses increased
primarily because of higher personnel and incentive compensation expense
consistent with increased activity levels and profitability, and increased
pension expense relating to the Company’s pension plan obligation. As a
percentage of revenues, these costs decreased two percentage points due to
improved operating leverage.
Depreciation
and amortization.
Depreciation and amortization were $33.1 million in 2003, a six percent increase
compared to $31.2 million in 2002. The increase in depreciation and amortization
resulted from the cumulative effect of the higher levels of growth capital
expenditures.
Interest
expense (Income), net.
Interest expense was $153 thousand in 2003 compared to $74 thousand in
2002.
Other
income, net. Other
income, net in 2003 includes a gain from the settlement of an insurance claim,
proceeds from a settlement of a dispute with a vendor, and gains related to the
sale of operating equipment, partially offset by the recognition of a loss
sustained on damaged operating equipment. During 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 small business unit.
Income
tax provision (benefit). The
effective income tax rate for 2003 was 38.0 percent while the rate for 2002 was
35.5 percent. The slight increase in the book effective tax rate is due to the
effect of permanent differences between book and taxable income.
Liquidity
and Capital Resources
Cash
Flows
The
following table sets forth the historical cash flows for the twelve months ended
December 31:
| |
|
(in
thousands) |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Net
cash provided by operating activities |
|
$ |
50,374 |
|
$ |
50,631 |
|
$ |
27,556 |
|
|
Net
cash used for investing activities |
|
|
37,215 |
|
|
34,670 |
|
|
21,831 |
|
|
Net
cash used for financing activities |
|
|
5,825 |
|
|
5,192 |
|
|
4,927 |
|
2004
Cash
provided by operating activities was $50.4 million in 2004 compared to $50.6
million in 2003. The large improvement in operating results was offset by a $4.2
million cash contribution to the defined benefit pension plan, receipt of large
income tax refunds in 2003 that did not recur in 2004, and higher working
capital requirements. Increased revenues resulted in an increase in accounts
receivable which was partially offset by an increase in accounts payable and
other liabilities.
Cash used
in investing activities for 2004 increased by $2.5 million compared to 2003,
primarily as a result of an increase in capital expenditures partially offset by
an increase in proceeds from sale of property and equipment, including the sale
of the liftboats, and a decrease in cash used for purchases of businesses. Cash
used for purchases of businesses in 2004 includes earnout payments of $3.3
million related to 2003 operating results. Cash used for purchases of businesses
in 2003 included a business acquisition; there were no earnout payments in
2003.
Cash used
in financing activities for 2004 increased by $0.6 million compared to 2003, due
to increases in dividends paid per share and debt service requirements,
partially offset by increases in proceeds received from the exercise of stock
options.
2003
Cash
provided by operating activities for 2003 increased $23.1 million, or 84
percent, compared to 2002. The increase was primarily due to improved operating
results coupled with receipt of a tax refund in 2003 resulting from carryback of
prior year net operating losses. These increases were partially offset by higher
working capital requirements including an increase in accounts receivable due to
higher revenues partially offset by an increase in accounts payable and other
liabilities consistent with higher business activity levels.
Cash used
in investing activities for 2003 increased $12.8 million, or 59 percent,
compared to 2002, primarily as a result of an increase in capital expenditures
and a business acquisition.
Cash used
in financing activities for 2003 increased $0.3 million, or 5 percent, compared
to 2002. The increase is primarily a result of lower debt service requirements
partially offset by higher repurchases in the open market of the Company’s
stock. The
Company purchased 185,600 shares of its common stock on the open market during
2003.
Financial
Condition and Liquidity
The
Company’s financial condition as of December 31, 2004, was strong. We believe
the liquidity provided by our existing cash and cash equivalents, our overall
strong capitalization, which includes access to a $25 million credit facility
with a financial institution, of which $9.9 million was available as of December
31, 2004, and cash expected to be generated from operations, will provide
sufficient capital to meet our requirements for at least the next twelve months.
The portion of the credit facility that is not currently available supports
letters of credit relating to self-insurance programs or contract bids.
The
Company’s decisions about the amount of cash to be used for investing and
financing purposes are influenced by its capital position and the expected
amount of cash to be provided by operations. We believe our liquidity will allow
us to grow our asset base and revenues as improvements occur in business
conditions and customer activity levels.
Cash
Requirements
Capital
expenditures were $49.9 million in 2004, and we currently expect capital
expenditures to be approximately $60 million in 2005. The actual amount of 2005
expenditures will depend primarily on equipment maintenance requirements and
expansion opportunities.
We expect
that additional contributions to the defined benefit pension plan of
approximately $1.6 million will be required in 2005 to achieve the Company’s
funding objective.
On
January 25, 2005, the Board of Directors approved a 100 percent increase in the
quarterly cash dividend, from $0.02 to $0.04 to be paid March 10, 2005 to
shareholders of record on February 10, 2005. Based on the shares outstanding on
December 31, 2004, the aggregate annual amount would be approximately $6.9
million. The
Company expects to continue to pay cash dividends to the common stockholders,
subject to the earnings and financial condition of the Company and other
relevant factors.
In
accordance with the respective purchase agreements, earnout payments to sellers
of acquired businesses may be paid on an annual basis. The Company anticipates
that earnout payments of approximately $4.3 million will be made in 2005 related
to 2004 operating results.
In
February 2005, the Company prepaid a promissory note totaling $2.8 million.
Contractual
Obligations
The
Company’s obligations and commitments that require future payments include notes
payable in connection with acquisitions, a bank demand note, certain
non-cancelable operating leases, purchase obligations and other long-term
liabilities. The following table summarizes the Company’s significant
contractual obligations as of December 31, 2004:
|
Contractual
obligations |
|
Payments
due by period |
|
|
(in
thousands) |
|
Total |
|
Less
than
1
year |
|
1-3
years |
|
3-5
years |
|
More
than
5
years |
|
|
Long-term
debt (1) |
|
$ |
4,800 |
|
$ |
2,700 |
|
$ |
2,100 |
|
$ |
— |
|
$ |
— |
|
|
Capital
lease obligations |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
—
|
|
|
Operating
leases (2) |
|
|
4,869 |
|
|
2,131 |
|
|
2,579 |
|
|
159 |
|
|
—
|
|
|
Purchase
obligations (3) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
—
|
|
|
Other
long-term liabilities (4) |
|
|
11,466 |
|
|
11,466 |
|
|
— |
|
|
— |
|
|
—
|
|
|
Total
contractual obligations |
|
$ |
21,135 |
|
$ |
16,297 |
|
$ |
4,679 |
|
$ |
159 |
|
$ |
— |
|
|
(1) |
In
February 2005, the Company prepaid a $2.8 million promissory note which
extinguished a portion of this debt. |
|
(2) |
Operating
leases include agreements for various office locations, office equipment,
and certain operating equipment. |
|
(3) |
As
part of the normal course of business the Company enters into purchase
commitments to manage its various operating needs. However, the Company
does not have any obligations that are non-cancelable or subject to a
penalty if canceled. |
|
(4) |
Includes
expected cash payments for long-term liabilities reflected on the balance
sheet where the timing of the payments are known. These amounts include
primarily known pension plan funding obligations, earnout payments, and
incentive compensation. These amounts exclude pension obligations with
uncertain funding requirements and deferred compensation liabilities.
|
Inflation
The
Company purchases its equipment and materials from suppliers who provide
competitive prices. Due to the recent increases in activity in the domestic
oilfield, the Company has experienced some upward wage pressures in the labor
markets from which it hires employees. If inflation in the general economy
increases, the Company’s costs for equipment, materials and labor could increase
as well. During 2004, the price of steel, for both the commodity and for
products manufactured with steel, rose dramatically due to increased worldwide
demand. This affected the Company's operations through delays in scheduled
deliveries of new equipment and price quotations that were only valid for a
limited period of time. Steel prices remained high as of December 31, 2004. If
steel prices remain high, delays in scheduled deliveries of new equipment will
continue, and it is likely that the cost of the Company's new equipment will
increase. These increases would result in higher capital expenditures and
depreciation expense. RPC may not be able to recover such increased costs
through price increases to its customers, thereby reducing the Company's future
profits.
Off
Balance Sheet Arrangements
The
Company does not have any material off balance sheet arrangements.
Related
Party Transactions
Marine
Products Corporation
Effective
February 28, 2001, the Company spun-off the business conducted through Chaparral
Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC
accomplished the spin-off by contributing 100 percent of the issued and
outstanding stock of Chaparral to Marine Products Corporation (a Delaware
corporation) (“Marine Products”), a newly formed wholly-owned subsidiary of RPC,
and then distributing the common stock of Marine Products to RPC stockholders.
In conjunction with the spin-off, RPC and Marine Products entered into various
agreements that define the companies’ relationship.
In
accordance with a Transition Support Services agreement, which may be terminated
by either party, RPC provides certain administrative services, including
financial reporting and income tax administration, acquisition assistance, etc.,
to Marine Products. Charges from the Company (or from corporations that are
subsidiaries of the Company) for such services aggregated approximately $546,000
in 2004, $496,000 in 2003 and $588,000 in 2002. The Company’s directors are also
directors of Marine Products and all of the executive officers are employees of
both the Company and Marine Products.
The
Employee Benefits Agreement provides for, among other things, Marine Products to
participate in two RPC sponsored benefit plans, specifically, the defined
contribution 401(k) plan and the defined benefit retirement income plan.
Following the spin-off, RPC charged Marine Products for, and Marine Products has
been obligated to pay, its allocable share of pension costs and the associated
funding obligation related to the prior service liabilities of Chaparral
employees. Effective December 2003, the related prior service liabilities
totaling $3,314,000 and pension assets totaling $2,517,000 were transferred
within the multiple employer plan from RPC to Marine Products. Accordingly,
during 2004, the pension costs and funding obligations were incurred directly by
Marine Products.
The Tax
Sharing and Indemnification Agreement provides for, among other things, the
treatment of income tax matters for periods through the date of the spin-off and
responsibility for any adjustments as a result of audit by any taxing authority.
The general terms provide for the indemnification for any tax detriment incurred
by one party caused by the other party’s action. The amounts transferred as
settlements from RPC to Marine Products totaled approximately $19,000 in 2004,
$0 in 2003 and $140,000 in 2002.
Other
The
Company periodically purchases in the ordinary course of business products or
services from suppliers, who are owned by significant officers or shareholders,
or affiliated with the directors of RPC. The total amounts paid to these
affiliated parties were approximately $529,000 in 2004 and $1,058,000 in 2003.
In addition, the overhead crane fabrication division of RPC recorded $171,000 in
2003 and $332,000 in 2002 in revenues from the powerboat manufacturing segment
that is now a subsidiary of Marine Products pursuant to the spin-off, related to
the sale, installation and service of overhead cranes.
RPC
receives certain administrative services and rents office space from Rollins,
Inc. (a company of which Mr. R. Randall Rollins is also Chairman). The service
agreements between Rollins, Inc. and the Company provide for the provision of
services on a cost reimbursement basis and are terminable on six months notice.
The services covered by these agreements include office space, administration of
certain employee benefit programs, and other administrative services. Charges to
the Company (or to corporations which are subsidiaries of the Company) for such
services and rent aggregated $76,000 in 2004 and $105,000 in 2003.
Critical
Accounting Policies
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require significant
judgment by management in selecting the appropriate assumptions for calculating
accounting estimates. These judgments are based on our historical experience,
terms of existing contracts, trends in the industry, and information available
from other outside sources, as appropriate. Senior management has discussed the
development, selection and disclosure of its critical accounting estimates with
the Audit Committee of our Board of Directors. The Company believes the
following critical accounting policies involve estimates that require a higher
degree of judgment and complexity:
Allowance
for doubtful accounts —
Substantially all of the Company’s receivables are due from oil and gas
exploration and production companies in the United States, selected
international locations and foreign, nationally owned oil companies. Our
allowance for doubtful accounts is determined using a combination of factors to
ensure that our receivables are not overstated due to uncollectibility. Our
established credit evaluation procedures seek to minimize the amount of business
we conduct with higher risk customers. Our customers’ ability to pay is directly
related to their ability to generate cash flow on their projects and is
significantly affected by the volatility in the price of oil and natural gas.
Provisions for doubtful accounts are recorded in selling, general and
administrative expenses. Accounts are written-off against the allowance for
doubtful accounts when the Company determines that amounts are uncollectible and
recoveries of amounts previously written off are recorded when collected.
Significant recoveries will generally reduce the required provision in the
period of recovery. Therefore, the provision for doubtful accounts can fluctuate
significantly from period to period. In 2002 and 2003, the Company recorded four
large recoveries of previously charged off amounts from three different
customers. There were no large recoveries in 2004.
We record
specific provisions when we become aware of a customer's inability to meet its
financial obligations to us, such as in the case of bankruptcy filings or
deterioration in the customer's operating results or financial position. If
circumstances related to customers change, our estimates of the realizability of
receivables would be further adjusted, either upward or downward.
The
estimated allowance for doubtful accounts is based on our evaluation of the
overall trends in the oil and gas industry, financial condition of our
customers, our historical write-off experience, current economic conditions, and
in the case of international customers, our judgments about the economic and
political environment of the related country and region. In addition to reserves
established for specific customers, we establish general reserves by using
different percentages depending on the age of the receivables. Excluding the
effect of the recoveries referred to above, the annual provisions for doubtful
accounts have ranged from 0.06 percent to 0.34 percent of revenues over the last
three years. Increasing or decreasing the estimated general reserve percentages
by 0.50 percentage points as of December 31, 2004 would have resulted in a
change of approximately $0.4 million to the allowance for doubtful accounts and
a corresponding change to selling, general and administrative expenses.
Income
taxes — The
effective income tax rates were 34.6 percent in 2004, 38.0 percent in 2003, and
35.5 percent in 2002. Our effective tax rates vary due to changes in estimates
of our future taxable income, fluctuations in the tax jurisdictions in which our
earnings and deductions are realized, and favorable or unfavorable adjustments
to our estimated tax liabilities related to proposed or probable assessments. As
a result, our effective tax rate may fluctuate significantly on a quarterly or
annual basis.
We
establish a valuation allowance against the carrying value of deferred tax
assets when we determine that it is more likely than not that the asset will not
be realized through future taxable income. Such amounts are charged to earnings
in the period in which we make such determination. Likewise, if we later
determine that it is more likely than not that the net deferred tax assets would
be realized, we would reverse the applicable portion of the previously provided
valuation allowance. We have considered future market growth, forecasted
earnings, future taxable income, the mix of earnings in the jurisdictions in
which we operate, and prudent and feasible tax planning strategies in
determining the need for a valuation allowance.
We
calculate our current and deferred tax provision based on estimates and
assumptions that could differ from the actual results reflected in income tax
returns filed during the subsequent year. Adjustments based on filed returns are
recorded when identified, which is generally in the third quarter of the
subsequent year for U.S. federal and state provisions. Deferred tax liabilities
and assets are determined based on the differences between the financial and tax
bases of assets and liabilities using enacted tax rates in effect in the year
the differences are expected to reverse.
The
amount of income taxes we pay is subject to ongoing audits by federal, state and
foreign tax authorities, which often result in proposed assessments. Our
estimate for the potential outcome for any uncertain tax issue is highly
judgmental. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may
include favorable or unfavorable adjustments to our estimated tax liabilities in
the period the assessments are made or resolved or when statutes of limitation
on potential assessments expire. Additionally, the jurisdictions in which our
earnings or deductions are realized may differ from our current estimates.
During
2004 the Company re-evaluated its estimated tax exposures in various
international tax jurisdictions based on our projected international business
development opportunities. Based on this review, we reduced our liabilities for
foreign taxes and our tax provision by $0.6 million to reflect the estimated
change which lowered the 2004 effective tax rate by approximately 1.2 percentage
points.
Insurance
expenses - The
Company self insures, up to certain policy-specified limits, certain risks
related to general liability, workers’ compensation, vehicle and equipment
liability. The cost of claims under these self-insurance programs is estimated
and accrued using individual case-based valuations and statistical analysis and
is based upon judgment and historical experience; however, the ultimate cost of
many of these claims may not be known for several years. These claims are
monitored and the cost estimates are revised as developments occur relating to
such claims. The Company has retained an independent third party actuary to
assist in the calculation of a range of exposure for these claims. As of
December 31, 2004, the Company estimates the range of exposure to be from $8.6
million to $11.6 million. The Company has recorded liabilities at December 31,
2004 of approximately $10.3 million which represents management’s best estimate
of probable loss.
Depreciable
life of assets — RPC’s
net property, plant and equipment at December 31, 2004 was $114.2 million
representing 43.4 percent of the Company’s consolidated assets. Depreciation and
amortization expenses for the year ended December 31, 2004 were $34.5 million,
or 11.7 percent of total operating costs. Management judgment is required in the
determination of the estimated useful lives used to calculate the annual and
accumulated depreciation and amortization expense.
Property,
plant and equipment are reported at cost less accumulated depreciation and
amortization, which is generally provided on a straight-line basis over the
estimated useful lives of the assets. The estimated useful life represents the
projected period of time that the asset will be productively employed by the
Company and is determined by management based on many factors including
historical experience with similar assets. Assets are monitored to ensure
changes in asset lives, are identified and prospective depreciation and
amortization expense is adjusted accordingly. We have not made any changes to
the estimated lives of assets resulting in a material impact in the last three
years.
Defined
benefit pension plan - In
2002, the Company ceased all future benefit accruals under the defined benefit
plan, although the Company remains obligated to provide employees benefits
earned through March 2002. The Company accounts for the defined benefit plan in
accordance with the provisions of SFAS 87, “Employers’ Accounting for Pensions”
and engages an outside actuary to calculate its obligations and costs. With the
assistance of the actuary, the Company evaluates the significant assumptions
used on a periodic basis including the estimated future return on plan assets,
the discount rate, and other factors, and makes adjustments to these liabilities
as necessary.
The
Company chooses an expected rate of return on plan assets based on historical
results for similar allocations among asset classes, the investments strategy,
and the views of our investment adviser. Differences between the expected
long-term return on plan assets and the actual return are amortized over future
years. Therefore, the net deferral of past asset gains (losses) ultimately
affects future pension expense. The Company’s assumption for the expected return
on plan assets is 8.0 percent which is unchanged from the prior
year.
The
discount rate reflects the current rate at which the pension liabilities could
be effectively settled at the end of the year. In estimating this rate, the
Company utilizes the Moody’s Aa long-term corporate bond yield with a yield
adjustment made for the longer duration of the Company’s obligations. A lower
discount rate increases the present value of benefit obligations. The Company
determined a discount rate of 5.75 percent as of December 31, 2004, compared to
a discount rate of 6.25 percent in 2003 and 6.875 percent in 2002.
In 2004,
the change in the minimum pension liability within accumulated other
comprehensive loss decreased stockholders’ equity by $0.6 million after tax.
Holding all other factors constant, a decrease in the discount rate used to
measure plan liabilities by 0.25 percentage points would result in an after-tax
increase of approximately $0.9 million in accumulated other comprehensive loss
and an increase in the discount rate used to measure plan liabilities by 0.25
percentage points would result in an after-tax decrease of approximately $0.5
million in accumulated other comprehensive loss.
The
Company recognized pretax pension expense of $1.2 million in 2004, $1.6 million
in 2003, and $0.7 million in 2002. Pension expense is anticipated to remain
relatively unchanged at approximately $1.2 million in 2005. Holding all other
factors constant, a change in the expected long-term rate of return on plan
assets by 0.50 percentage points would result in an increase or decrease in
pension expense of approximately $0.10 million in 2005. Holding all other
factors constant, a change in the discount rate used to measure plan liabilities
by 0.25 percentage points would result in an increase or decrease in pension
expense of approximately $0.12 million in 2005.
New
Accounting Standards
In
December 2003, the FASB issued Statement of Financial Accounting Standard No.
132 (revised 2003) (“SFAS 132R”), “Employers’ Disclosures about Pensions and
Other Post-Retirement Benefits.” SFAS 132R does not change the measurement or
recognition provisions for defined benefit pensions and other post-retirement
benefits; however, it requires additional annual disclosures about assets,
obligations, cash flows, net periodic benefit cost and projected benefit
payments of those plans. The Company has adopted the provisions of SFAS 132R and
presented the disclosures in Note 10 to the consolidated financial
statements.
In March
2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.
03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments.” EITF 03-1 applies to investments accounted for under SFAS
No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and
SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit
Organizations.” In September 2004, the FASB delayed the accounting provisions of
EITF No. 03-1; however, qualitative and quantitative disclosures are effective
for the fiscal year ending December 31, 2004. The adoption of EITF 03-1 did not
have a material impact on the financial position, results of operations or
liquidity of the Company.
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs—An
Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs be recognized as current-period charges regardless
of whether they meet the criterion of "so abnormal" as stated in ARB
No. 43. Additionally, SFAS 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and is required to be adopted by the Company
in the first quarter of fiscal 2006, beginning on January 1, 2006. The Company
is currently evaluating the effect that the adoption of SFAS 151 will have
on its consolidated results of operations and financial condition but does not
expect SFAS 151 to have a material impact.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values beginning with the first interim or annual period that begins after
June 15, 2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. The Company is required to adopt SFAS 123R
in the third quarter of fiscal 2005. Under SFAS 123R, the Company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods include the
modified prospective application and the modified retrospective
application. Under the modified retrospective application, prior periods
may be restated either as of the beginning of the year of adoption or for all
periods presented. The modified prospective application requires that
compensation expense be recorded for all unvested stock options and restricted
stock at the beginning of the first quarter of adoption of SFAS 123R, while
the modified retrospective application would record compensation expense
for all unvested stock options and restricted stock beginning with the first
period restated. The Company is currently evaluating the impact of applying the
various provisions of SFAS 123R.
In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS 153"). The amendments made by SFAS 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for non-monetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. By focusing the exception on exchanges that
lack commercial substance, SFAS 153 intends to produce financial reporting that
more faithfully represents the economics of the transaction. SFAS 153 is
effective for the fiscal periods beginning after June 15, 2005 with earlier
application permitted for nonmonetay exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions are to be applied
prospectively. The Company is currently evaluating the effect that the adoption
of SFAS 153 will have on its consolidated results of operations and
financial condition but does not expect it to have a material impact.
FASB
Staff Position ("FSP") No. 109-2, "Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004" ("FSP 109-2"), issued in December 2004, is intended to provide
limited relief in the application of the indefinite reinvestment criterion due
to ambiguities surrounding the implementation of the Act. The Jobs Act was
enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed
time beyond the financial reporting period of enactment to evaluate the effect
of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings
for purposes of applying FASB Statement No. 109. RPC has not yet completed
evaluating the impact of the repatriation provisions.
Item
7A. Quantitative and Qualitative Disclosures about Market Risk
As of
December 31, 2004, cash and cash equivalents were primarily invested in
overnight U.S. treasury bills and money market accounts which are highly liquid
with maturities of three months or less. As a result, we are not subject to
material interest rate risk exposure on these investments. The Company has been
affected by the impact of lower interest rates on interest income from its
short-term investments. This risk is managed through conservative policies to
invest in high-quality obligations. Also, as of December 31, 2004, RPC had debt
with a variable interest rate that exposes RPC to certain market risks; however,
all outstanding debt will either be prepaid or mature in 2005, therefore, RPC is
not subject to material interest rate risk exposure. For additional information
with respect to RPC’s long term debt, see Note 7 of the Notes to
Consolidated Financial Statements.
As of
December 31, 2004, RPC had accounts receivable of approximately $76 million (net
of an allowance for doubtful accounts of approximately $2.6 million). RPC is
subject to a concentration of credit risk because most of the accounts
receivable are due from companies in the oil and gas industry.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the
Stockholders of RPC, Inc.:
The
management of RPC, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. RPC, Inc. maintains a
system of internal accounting controls designed to provide reasonable assurance,
at a reasonable cost, that assets are safeguarded against loss or unauthorized
use and that the financial records are adequate and can be relied upon to
produce financial statements in accordance with accounting principles generally
accepted in the United States of America. The internal control system is
augmented by written policies and procedures, an internal audit program and the
selection and training of qualified personnel. This system includes policies
that require adherence to ethical business standards and compliance with all
applicable laws and regulations.
There are
inherent limitations to the effectiveness of any controls system. A controls
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the objectives of the controls system are met.
Also, no evaluation of controls can provide absolute assurance that all control
issues and any instances of fraud, if any, within the Company will be detected.
Further, the design of a controls system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. The Company intends to continually improve and refine its
internal controls.
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 required by Rules 13a-15 and 15d under the
Securities Exchange Act of 1934, as of December 31, 2004 based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management’s assessment is that RPC, Inc. maintained effective internal control
over financial reporting as of December 31, 2004.
The
independent registered public accounting firm, Grant Thornton LLP, has audited
the consolidated financial statements for the year ended December 31, 2004, and
has also issued their report on management’s assessment of the Company’s
internal control over financial reporting, included in this report on page
29.
| |
|
|
|
|
/s/
Richard A. Hubbell |
|
/s/
Ben M. Palmer |
|
Richard
A. Hubbell
President
and Chief Executive Officer |
|
Ben
M. Palmer
Chief
Financial Officer and Treasurer |
Atlanta,
Georgia
March 11,
2005
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Board
of Directors and Stockholders of RPC,
Inc.
We have
audited management’s assessment included in Management’s Report on Internal
Control Over Financial Reporting included in RPC, Inc.’s Form 10-K for 2004,
that RPC, Inc. (a Delaware Corporation) maintained effective internal control
over financial reporting as of December 31, 2004 based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). RPC, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, management’s assessment that RPC, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on criteria established in Internal
Control—Integrated Framework issued by the COSO. Also in our opinion, RPC,
Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control—Integrated Framework issued by the COSO.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of RPC, Inc. and
subsidiaries as of December 31, 2004, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the year ended December 31,
2004 and our report dated March 11, 2005 expressed an unqualified opinion on
those financial statements.
/s/ Grant
Thornton LLP
Atlanta,
Georgia
March 11,
2005
Item 8. Financial Statements and
Supplementary Data
CONSOLIDATED
BALANCE SHEETS
RPC,
INC. AND SUBSIDIARIES
(in
thousands except share information)
|
December
31, |
|
2004 |
|
2003 |
|
|
ASSETS |
|
|
Cash
and cash equivalents |
|
$ |
29,636 |
|
$ |
22,302 |
|
|
Accounts
receivable, net |
|
|
75,793 |
|
|
53,719 |
|
|
Inventories |
|
|
10,587 |
|
|
10,057 |
|
|
Deferred
income taxes |
|
|
6,144 |
|
|
6,394 |
|
|
Income
taxes receivable |
|
|
- |
|
|
4,263 |
|
|
Prepaid
expenses and other current assets |
|
|
3,638 |
|
|
3,614 |
|
|
Current
assets |
|
|
125,798 |
|
|
100,349 |
|
|
Property,
plant and equipment, net |
|
|
114,222 |
|
|
109,163 |
|
|
Goodwill
and other intangibles, net |
|
|
20,183 |
|
|
15,488 |
|
|
Other
assets |
|
|
2,739 |
|
|
1,864 |
|
|
Total
assets |
|
$ |
262,942 |
|
$ |
226,864 |
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
23,389 |
|
$ |
19,603 |
|
|
Accrued
payroll and related expenses |
|
|
10,842 |
|
|
8,526 |
|
|
Accrued
insurance expenses |
|
|
3,875 |
|
|
2,852 |
|
|
Accrued
state, local and other taxes |
|
|
2,183 |
|
|
1,663 |
|
|
Income
taxes payable |
|
|
113 |
|
|
- |
|
|
Current
portion of long-term debt |
|
|
2,700 |
|
|
1,110 |
|
|
Other
accrued expenses |
|
|
5,187 |
|
|
3,369 |
|
|
Current
liabilities |
|
|
48,289 |
|
|
37,123 |
|
|
Long-term
accrued insurance expenses |
|
|
6,451 |
|
|
5,856 |
|
|
Long-term
debt |
|
|
2,100 |
|
|
4,800 |
|
|
Long-term
pension liability |
|
|
11,379 |
|
|
12,972 |
|
|
Deferred
income taxes |
|
|
11,945 |
|
|
13,296 |
|
|
Other
long-term liabilities |
|
|
1,355 |
|
|
1,711 |
|
|
Total
liabilities |
|
|
81,519 |
|
|
75,758 |
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
|
Preferred
stock, $.10 par value, 1,000,000 shares authorized, none
issued |
|
|
|
|
|
|
|
|
Common stock, $.10 par value, 79,000,000 shares authorized,
43,215,368 and 42,939,480 shares issued and outstanding in 2004 and
2003, respectively |
|
|
4,321 |
|
|
4,293 |
|
|
Capital
in excess of par value |
|
|
27,326 |
|
|
25,365 |
|
|
Retained
earnings |
|
|
160,189 |
|
|
128,824 |
|
|
Deferred
compensation |
|
|
(3,527 |
) |
|
(1,076 |
) |
|
Accumulated
other comprehensive loss |
|
|
(6,886 |
) |
|
(6,300 |
) |
|
Total
stockholders’ equity |
|
|
181,423 |
|
|
151,106 |
|
|
Total
liabilities and stockholders’ equity |
|
$ |
262,942 |
|
$ |
226,864 |
|
The
accompanying notes are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
RPC,
INC. AND SUBSIDIARIES
(in
thousands except per share data)
|
Years
ended December 31, |
|
2004
|
|
2003
|
|
2002
|
|
|
REVENUES
|
|
$ |
339,792 |
|
$ |
270,527 |
|
$ |
209,030 |
|
|
COSTS
AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
Cost
of services rendered and goods sold |
|
|
193,659 |
|
|
168,766 |
|
|
143,362 |
|
|
Selling,
general and administrative expenses |
|
|
65,871 |
|
|
52,268 |
|
|
44,852 |
|
|
Depreciation
and amortization |
|
|
34,473 |
|
|
33,094 |
|
|
31,242 |
|
|
Operating
profit (loss) |
|
|
45,789 |
|
|
16,399 |
|
|
(10,426 |
) |
|
Interest
expense, net |
|
|
68 |
|
|
153 |
|
|
74 |
|
|
Other
income, net |
|
|
7,482 |
|
|
1,324 |
|
|
2,346 |
|
|
Income
(loss) before income taxes |
|
|
53,203 |
|
|
17,570 |
|
|
(8,154 |
) |
|
Income
tax provision (benefit) |
|
|
18,430 |
|
|
6,677 |
|
|
(2,894 |
) |
|
Net
income (loss) |
|
$ |
34,773 |
|
$ |
10,893 |
|
$ |
(5,260 |
) |
|
EARNINGS
(LOSS) PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.82 |
|
$ |
0.26 |
|
$ |
(0.12 |
) |
|
Diluted |
|
$ |
0.80 |
|
$ |
0.25 |
|
$ |
(0.12 |
) |
|
Dividends
paid per share |
|
$ |
0.08 |
|
$ |
0.07 |
|
$ |
0.07 |
|
The
accompanying notes are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
RPC,
INC. AND SUBSIDIARIES
(in
thousands)
| |
|
|
|
|
Common
Stock |
|
|
Capital
in
Excess
of |
|
|
|
|
|
|
|
|
Accumulated
Other |
|
|
|
|
|
Three
Years Ended
December
31, 2004 |
|
Comprehensive
Income
(Loss) |
|
|
Shares |
|
|
Amount |
|
|
|
|
|
Deferred
Compensation |
|
|
Retained
Earnings |
|
|
Loss |
|
|
Total |
|
|
Balance,
December 31, 2001 |
|
|
|
|
|
28,691 |
|
$ |
2,869 |
|
$ |
27,182 |
|
$ |
(1,686 |
) |
$ |
128,932 |
|
$ |
(861 |
) |
$ |
156,436 |
|
|
Stock
issued for stock incentive plans, net |
|
|
|
|
|
1 |
|
|
1 |
|
|
122 |
|
|
500 |
|
|
— |
|
|
— |
|
|
623
|
|
|
Stock
purchased and retired |
|
|
|
|
|
(85 |
) |
|
(9 |
) |
|
(873 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(882 |
) |
|
Net
loss |
|
$ |
(5,260 |
) |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
(5,260 |
) |
|
— |
|
|
(5,260 |
) |
|
Minimum
pension liability, net of taxes of $1,909 |
|
|
(3,114 |
) |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,114 |
) |
|
(3,114 |
) |
|
Unrealized
gain on securities, net of taxes of $90 |
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145 |
|
|
145
|
|
|
Comprehensive
loss |
|
$ |
(8,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
(2,867 |
) |
|
— |
|
|
(2,867 |
) |
|
Three-for-two
stock split |
|
|
|
|
|
14,304 |
|
|
1,430 |
|
|
(1,430 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
Balance,
December 31, 2002 |
|
|
|
|
|
42,911 |
|
|
4,291 |
|
|
25,001 |
|
|
(1,186 |
) |
|
120,805 |
|
|
(3,830 |
) |
|
145,081
|
|
|
Stock
issued for stock incentive plans, net |
|
|
|
|
|
29 |
|
|
3 |
|
|
233 |
|
|
110 |
|
|
— |
|
|
— |
|
|
346
|
|
|
Stock
purchased and retired |
|
|
|
|
|
(189 |
) |
|
(20 |
) |
|
(1,850 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(1,870 |
) |
|
Stock
issued in connection with purchase of business |
|
|
|
|
|
179 |
|
|
18 |
|
|
1,982 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,000
|
|
|
Net
income |
|
$ |
10,893 |
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
10,893 |
|
|
— |
|
|
10,893
|
|
|
Minimum
pension liability, net of taxes of $1,534 |
|
|
(2,503 |
) |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,503 |
) |
|
(2,503 |
) |
|
Unrealized
gain on securities, net of taxes of $20 |
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
33
|
|
|
Comprehensive
income |
|
$ |
8,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
(2,874 |
) |
|
— |
|
|
(2,874 |
) |
|
Three-for-two
stock split |
|
|
|
|
|
9 |
|
|
1 |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
Balance,
December 31, 2003 |
|
|
|
|
|
42,939 |
|
|
4,293 |
|
|
25,365 |
|
|
(1,076 |
) |
|
128,824 |
|
|
(6,300 |
) |
|
151,106 |
|
|
Stock
issued for stock incentive plans, net |
|
|
|
|
|
354 |
|
|
36 |
|
|
4,282 |
|
|
(2,451 |
) |
|
— |
|
|
— |
|
|
1,867 |
|
|
Stock
purchased and retired |
|
|
|
|
|
(170 |
) |
|
(17 |
) |
|
(2,312 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(2,329 |
) |
|
Net
income |
|
$ |
34,773 |
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
34,773 |
|
|
— |
|
|
34,773
|
|
|
Minimum
pension liability, net of taxes of $370 |
|
|
(605 |
) |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(605 |
) |
|
(605 |
) |
|
Unrealized
gain on securities, net of taxes of $12 |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
19 |
|
|
Comprehensive
income |
|
$ |
34,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
(3,408 |
) |
|
— |
|
|
(3,408 |
) |
|
Three-for-two
stock split |
|
|
|
|
|
92 |
|
|
9 |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
Balance,
December 31, 2004 |
|
|
|
|
|
43,215 |
|
$ |
4,321 |
|
$ |
27,326 |
|
$ |
(3,527 |
) |
$ |
160,189 |
|
$ |
(6,886 |
) |
$ |
181,423 |
|
The
accompanying notes are an integral part of these statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
RPC,
Inc. and Subsidiaries
(in
thousands)
|
Years
ended December 31, |
|
2004
|
|
2003
|
|
2002
|
|
|
OPERATING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
$ |
34,773 |
|
$ |
10,893 |
|
$ |
(5,260 |
) |
|
Non-cash
charges (credits) to earnings: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization and other non-cash charges |
|
|
35,054 |
|
|
33,182 |
|
|
31,342 |
|
|
Gain
on sale of equipment and property |
|
|
(5,551 |
) |
|
(36 |
) |
|
(1,353 |
) |
|
Deferred
income tax (benefit) provision |
|
|
(756 |
) |
|
5,401 |
|
|
9,193 |
|
|
(Increase)
decrease in assets: |
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(22,074 |
) |
|
(13,551 |
) |
|
6,760 |
|
|
Income
taxes receivable |
|
|
4,472 |
|
|
4,554 |
|
|
(6,564 |
) |
|
Inventories |
|
|
(530 |
) |
|
(455 |
) |
|
(794 |
) |
|
Prepaid
expenses and other current assets |
|
|
41 |
|
|
(117 |
) |
|
461 |
|
|
Other
non-current assets |
|
|
(875 |
) |
|
103 |
|
|
(501 |
) |
|
Increase
(decrease) in liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
|
3,786 |
|
|
7,323 |
|
|
205 |
|
|
Income
taxes payable |
|
|
113 |
|
|
- |
|
|
- |
|
|
Accrued
payroll and related expenses |
|
|
2,316 |
|
|
885 |
|
|
(2,482 |
) |
|
Accrued
insurance expenses |
|
|
1,618 |
|
|
1,010 |
|
|
(2,403 |
) |
|
Accrued
state, local and other taxes |
|
|
520 |
|
|
4 |
|
|
(1,237 |
) |
|
Other
accrued expenses |
|
|
391 |
|
|
(962 |
) |
|
189 |
|
|
Pension
liabilities |
|
|
(2,568 |
) |
|
2,003 |
|
|
— |
|
|
Other
non-current liabilities |
|
|
(356 |
) |
|
394 |
|
|
— |
|
|
Net
cash provided by operating activities |
|
|
50,374 |
|
|
50,631 |
|
|
27,556 |
|
|
INVESTING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures |
|
|
(49,869 |
) |
|
(30,356 |
) |
|
(22,481 |
) |
|
Purchase
of businesses |
|
|
(3,310 |
) |
|
(6,210 |
) |
|
(1,885 |
) |
|
Proceeds
from sale of assets |
|
|
15,964 |
|
|
1,896 |
|
|
2,535 |
|
|
Net
cash used for investing activities |
|
|
(37,215 |
) |
|
(34,670 |
) |
|
(21,831 |
) |
|
FINANCING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
Payment
of dividends |
|
|
(3,408 |
) |
|
(2,874 |
) |
|
(2,867 |
) |
|
Payments
on debt |
|
|
(1,110 |
) |
|
(552 |
) |
|
(1,365 |
) |
|
Cash
paid for common stock purchased and retired |
|
|
(1,728 |
) |
|
(1,870 |
) |
|
(882 |
) |
|
Proceeds
received upon exercise of stock options |
|
|
421 |
|
|
104 |
|
|
187 |
|
|
Net
cash used for financing activities |
|
|
(5,825 |
) |
|
(5,192 |
) |
|
(4,927 |
) |
Net
increase in cash and cash equivalents |
|
|
7,334 |
|
|
10,769 |
|
|
798 |
|
|
Cash
and cash equivalents at beginning of year |
|
|
22,302 |
|
|
11,533 |
|
|
10,735 |
|
|
Cash
and cash equivalents at end of year |
|
$ |
29,636 |
|
$ |
22,302 |
|
$ |
11,533 |
|
The
accompanying notes are an integral part of these statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
Note
1: Significant Accounting Policies
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include the accounts of RPC, Inc. and its
wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany
accounts and transactions have been eliminated.
Nature
of Operations
RPC
provides a broad range of specialized oilfield services and equipment primarily
to independent and major oil and gas companies engaged in the 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 in selected international markets. The services and
equipment provided include Technical Services such as pressure pumping services,
snubbing services, coiled tubing services, nitrogen services, and firefighting
and well control, and Support Services such as the rental of drill pipe and
other specialized oilfield equipment, marine services, and oilfield training.
Dividends
On
January 25, 2005 the Board of Directors approved a 100 percent increase in the
quarterly cash dividend, from $0.02 to $0.04, as adjusted for the three-for-two
stock split, which will be payable March 10, 2005 to stockholders of record at
the close of business February 10, 2005.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant
estimates are used in the determination of the allowance for doubtful accounts,
income taxes, accrued insurance expenses, depreciable lives of assets, and
pension liabilities.
Revenues
RPC
recognizes revenue when an agreement exists, prices are determinable, services
and products are delivered and collectibility is reasonably assured.
Reclassifications
Certain
prior year balances have been reclassified to conform with the current year
presentation.
Concentration
of Credit Risk
Substantially
all of the Company’s customers are engaged in the oil and gas industry. This
concentration of customers may impact overall exposure to credit risk, either
positively or negatively, in that customers may be similarly affected by changes
in economic and industry conditions. The Company provided oilfield services to
several hundred customers, none of which accounted for more than 10 percent of
consolidated revenues.
Cash
and Cash Equivalents
Highly
liquid investments with original maturities of three months or less when
acquired are considered to be cash equivalents. RPC maintains cash equivalents
and investments in one or more large, well-capitalized financial institutions,
and RPC’s policy restricts investment in any securities rated less than
“investment grade” by national rating services.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
Investments
Investments
classified as available-for-sale are stated at their fair values, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders’ equity. The cost of securities sold is based on the specific
identification method. Realized gains and losses, declines in value judged to be
other than temporary, interest, and dividends with respect to available-for-sale
securities are included in interest income. The Company did not realize any
gains on securities during 2004, 2003 and 2002. In 2004, the Company reclassed
approximately $59,000 from other comprehensive income as a result of the
securities that are held in a Supplemental Retirement Plan being classified as
trading. This reclassification of securities from available-for-sale to trading
was due to a change in the frequency of participant directed investment choices.
Management
determines the appropriate classification of investments at the time of purchase
and re-evaluates such designations as of each balance sheet date.
Allowance
for Doubtful Accounts
Accounts
receivable are carried at the amount owed by customers, reduced by an allowance
for estimated amounts that may not be collectible in the future. The estimated
allowance for doubtful accounts is based on our evaluation of industry trends,
financial condition of our customers, our historical write-off experience,
current economic conditions, and in the case of our international customers, our
judgments about the economic and political environment of the related country
and region. Accounts are written off against the allowance for doubtful accounts
when the Company determines that amounts are uncollectible and recoveries of
previously written-off accounts are recorded when collected.
Inventories
Inventories,
which consist principally of (i) products that are consumed in RPC’s services
provided to customers, (ii) spare parts for equipment used in providing these
services and (iii) manufactured components and attachments for equipment used in
providing services, are recorded at the lower of weighted average cost or market
value. Market value is determined based on replacement cost for material and
supplies and net realizable value for work in process and finished goods. The
Company regularly reviews inventory quantities on hand and records provisions
for excess or obsolete inventory based primarily on its estimated forecast of
product demand, market conditions, production requirements and technological
developments.
Property,
Plant and Equipment
Property,
plant and equipment, including software costs, are reported at cost less
accumulated depreciation and amortization, which is generally provided on a
straight-line basis over the estimated useful lives of the assets. Costs of
developing software for sale are charged to expense when incurred until
technological feasibility has been established for the product. Thereafter,
until the software is ready for general release to customers the costs are
capitalized. Annual depreciation and amortization expense is computed using the
following useful lives: operating equipment, 3 to 10 years; buildings and
leasehold improvements, 15 to 30 years; furniture and fixtures, 5 to 7 years;
software, 5 years; and vehicles, 3 to 5 years. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation and amortization
are eliminated from the accounts in the year of disposal with the resulting gain
or loss credited or charged to income. Expenditures for additions, major
renewals, and betterments are capitalized. Expenditures for restoring an
identifiable asset to working condition or for maintaining the asset in good
working order constitute repairs and maintenance and are expensed as incurred.
RPC
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. The Company periodically reviews the values
assigned to long-lived assets, such as property, plant and equipment and other
assets, to determine if any impairments should be recognized. Management
believes that the long-lived assets in the accompanying balance sheets have not
been impaired.
.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
Goodwill
and Other Intangibles
Goodwill
represents the excess of the purchase price over the fair value of net assets of
businesses acquired. The carrying amount of goodwill was $20,133,000 at December
31, 2004 and $15,396,000 at December 31, 2003. Goodwill is reviewed annually for
impairment in accordance with the provisions of Statement of Financial
Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” In
reviewing goodwill for impairment, potential impairment is measured
by comparing the estimated fair value of a reporting unit with its
carrying value. Based upon the results of these analyses, the Company has
concluded that no impairment of its goodwill has occurred.
Other
intangibles primarily represent non-compete agreements related to businesses
acquired. Non-compete agreements are amortized on a straight-line basis over the
period of the agreement, as this method best estimates the ratio that current
revenues bear to the total of current and anticipated revenues. The carrying
amount and accumulated amortization for non-compete agreements are as follows:
| |
|
December
31, |
|
| |
|
2004 |
|
2003
|
|
|
Non-compete
agreements |
|
$ |
450,000 |
|
$ |
450,000 |
|
|
Less:
accumulated amortization |
|
|
(411,691 |
) |
|
(371,683 |
) |
| |
|
$ |
38,309 |
|
$ |
78,317 |
|
Amortization
of non-compete agreements was approximately $40,000 in 2004, $40,000 in 2003,
and $80,000 in 2002. Estimated amortization for the remaining useful lives of
non-compete agreements is as follows:
Insurance
Expenses
RPC self
insures, up to certain policy-specified limits, certain risks related to general
liability, workers’ compensation, vehicle and equipment liability, and employee
health insurance plan costs. The estimated cost of claims under these
self-insurance programs is estimated and accrued as the claims are incurred
(although actual settlement of the claims may not be made until future periods)
and may subsequently be revised based on developments relating to such claims.
The portion of these estimated outstanding claims expected to be paid more than
one year in the future is classified as long-term accrued insurance expenses.
Income
Taxes
Deferred
tax liabilities and assets are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company establishes a valuation allowance against the carrying value of deferred
tax assets when the Company determines that it is more likely than not that the
asset will not be realized through future taxable income.
Defined
Benefit Pension Plan
The
Company has a defined benefit pension plan that provides monthly benefits upon
retirement at age 65 to eligible employees. See Note 10 for a full description
of this plan and the related accounting and funding policies.
Earnings
per Share
SFAS No.
128, “Earnings Per Share,” requires a basic earnings per share and diluted
earnings per share presentation. The two calculations differ as a result of the
dilutive effect of stock options and time lapse restricted and performance
restricted shares included in diluted earnings per share, but excluded from
basic earnings per share. A reconciliation of the weighted
shares outstanding (adjusted for three-for-two stock split) is as follows:
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
| |
|
2004 |
|
2003 |
|
2002
|
|
|
Basic |
|
|
42,464,193 |
|
|
42,555,222 |
|
|
42,393,024 |
|
|
Dilutive
effect of stock options and restricted shares |
|
|
965,246 |
|
|
598,985 |
|
|
--
|
|
|
Diluted |
|
|
43,429,439 |
|
|
43,154,207 |
|
|
42,393,024 |
|
The
effect of the Company’s stock options and restricted shares have been excluded
from the calculation of diluted earnings per share in 2002, as their effect
would have been antidilutive.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist primarily of cash and cash equivalents,
accounts receivable, accounts payable and debt. The carrying value of cash,
accounts receivable and accounts payable approximate their fair value due to the
short-term nature of such instruments. The carrying value of debt approximates
fair value since the interest rates are market based and are generally adjusted
annually.
New
Accounting Standards
In
December 2003, the FASB issued Statement of Financial Accounting Standard No.
132 (revised 2003) (“SFAS 132R”), “Employers’ Disclosures about Pensions and
Other Post-Retirement Benefits.” SFAS 132R does not change the measurement or
recognition provisions for defined benefit pensions and other post-retirement
benefits; however, it requires additional annual disclosures about assets,
obligations, cash flows, net periodic benefit cost and projected benefit
payments of those plans. The Company has adopted the provisions of SFAS 132R and
presented the disclosures in Note 10 to the consolidated financial
statements.
In March
2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.
03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments.” EITF 03-1 applies to investments accounted for under SFAS
No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and
SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit
Organizations.” In September 2004, the FASB delayed the accounting provisions of
EITF No. 03-1; however, qualitative and quantitative disclosures are effective
for the fiscal year ending December 31, 2004. The adoption of EITF 03-1 did not
have a material impact on the financial position, results of operations or
liquidity of the Company.
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs—An
Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs be recognized as current-period charges regardless
of whether they meet the criterion of "so abnormal" as stated in ARB
No. 43. Additionally, SFAS 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and is required to be adopted by the Company
in the first quarter of fiscal 2006, beginning on January 1, 2006. The Company
is currently evaluating the effect that the adoption of SFAS 151 will have
on its consolidated results of operations and financial condition but does not
expect SFAS 151 to have a material impact.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values beginning with the first interim or annual period that begins after
June 15, 2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. The Company is required to adopt SFAS 123R
in the third quarter of fiscal 2005. Under SFAS 123R, the Company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and
restricted stock at the beginning of the first quarter of adoption of
SFAS 123R, while the retroactive methods would record compensation expense
for all unvested stock options and restricted stock beginning with the first
period restated. The Company is currently evaluating the impact of applying the
various provisions of SFAS 123R.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS 153"). The amendments made by SFAS 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for non-monetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. By focusing the exception on exchanges that
lack commercial substance, SFAS 153 intends to produce financial reporting that
more faithfully represents the economics of the transaction. SFAS 153 is
effective for the fiscal periods beginning after June 15, 2005 with earlier
application permitted for nonmonetay exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions are to be applied
prospectively. The Company is currently evaluating the effect that the adoption
of SFAS 153 will have on its consolidated results of operations and
financial condition but does not expect it to have a material impact.
FASB
Staff Position ("FSP") No. 109-2, "Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004" ("FSP 109-2"), issued in December 2004, is intended to provide
limited relief in the application of the indefinite reinvestment criterion due
to ambiguities surrounding the implementation of the Act. The Jobs Act was
enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed
time beyond the financial reporting period of enactment to evaluate the effect
of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings
for purposes of applying FASB Statement No. 109. RPC has not yet completed
evaluating the impact of the repatriation provisions.
Stock-Based
Compensation
RPC
accounts for the stock incentive plan using the intrinsic value method
prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees.” RPC records deferred compensation related to the
restricted stock grants based on the fair market value of the shares at the
issue date and amortizes such amounts ratably over the vesting period for the
shares. Fair value of restricted shares granted was $3,273,000 in 2004, $132,000
in 2003 and $93,000 in 2002. RPC recorded amortization of deferred compensation
totaling $822,000 in 2004, $241,000 in 2003 and $255,000 in 2002 related to
these restricted stock grants.
If RPC
had accounted for the stock incentive plans in accordance with the provisions of
SFAS No. 123, “Accounting for Stock-Based Compensation” the total fair value of
awards granted would be amortized over the vesting period of the awards, and
RPC’s reported net income (loss) and diluted net income (loss) per share would
have been as follows:
|
Years
ended December 31, |
|
2004
|
|
2003
|
|
2002
|
|
(in
thousands) |
|
|
|
|
|
|
|
|
Net
income (loss) — as reported |
|
$ |
34,773 |
|
$ |
10,893 |
|
$ |
(5,260 |
) |
|
Add:
Stock-based employee compensation expense included in reported net income
(loss), net of related tax |
|
|
510 |
|
|
150 |
|
|
164 |
|
|
Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax
effect
|
|
|
1,193 |
|
|
957 |
|
|
767 |
|
|
Pro
forma net income (loss) |
|
$ |
34,090 |
|
$ |
10,086 |
|
$ |
(5,863 |
) |
|
Pro
forma income (loss) per share would have been as follows: |
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported |
|
$ |
0.82 |
|
$ |
0.26 |
|
$ |
(0.12 |
) |
|
Basic
- pro forma |
|
$ |
0.80 |
|
$ |
0.24 |
|
$ |
(0.14 |
) |
|
Diluted
- as reported |
|
$ |
0.80 |
|
$ |
0.25 |
|
$ |
(0.12 |
) |
|
Diluted
- pro forma |
|
$ |
0.78 |
|
$ |
0.23 |
|
$ |
(0.14 |
) |
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
The
Company has computed, for pro forma disclosure purposes, the value of all
options granted during 2003 and 2002 using the Black-Scholes option pricing
model as prescribed by SFAS No. 123 using the following weighted average
assumptions for grants:
| |
|
2004 |
|
2003 |
|
2002
|
|
|
Risk-free
interest rate |
|
|
N/A |
|
|
1.1 |
% |
|
2.9 |
% |
|
Expected
dividend yield |
|
|
N/A |
|
|
1 |
% |
|
1 |
% |
|
Expected
lives |
|
|
N/A |
|
|
7
years |
|
|
7
years |
|
|
Expected
volatility |
|
|
N/A |
|
|
43-46 |
% |
|
43-46 |
% |
The total
fair value of options granted to RPC employees were $0 in 2004, $2,534,000 in
2003 and $663,000 in 2002.
Three-for-Two
Stock Split
The Board
of Directors, at their quarterly meeting on January 25, 2005, authorized a
three-for-two stock split by the issuance on March 10, 2005 of one additional
common share for every two common shares held of record as of February 10, 2005.
Accordingly, the par value of additional shares issued will be adjusted between
common stock and capital in excess of par value, and fractional shares resulting
from the stock split will be settled in cash. All share and per share data
appearing in the consolidated financial statements and related footnotes have
been retroactively adjusted for this split.
Note
2: Acquisitions
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 acquisition was accounted for under the purchase
method of accounting. Pro forma results of operations have not been presented
for this acquisition because the effect was not material to the Company. The
results of operations of the acquisition are included in the Company’s
consolidated statements of operations from the date of acquisition. Goodwill
related to the acquisition has been assigned to the Technical Services segment.
A summary
of the Company’s purchase transaction is included in the following table (in
thousands, except share amounts):
|
Entity
Name and
Description
of
Business
Acquired |
|
Date |
|
Consideration |
|
Inventory |
|
Operating
Equipment
and
Vehicles |
|
Goodwill |
|
Form
of Consideration |
|
Bronco
Oilfield
Services,
Inc.
(Production
Rental Equipment) |
|
|
4/03 |
|
$ |
11,033 |
|
$ |
395 |
|
$ |
8,189 |
|
$ |
2,449 |
|
|
•
$5,533
in cash
•
179,191
restricted shares valued at $2,000
•
$3,500
in promissory note payable in five annual installments plus interest at 6
percent fixed rate
•
Potential
earnout |
|
The
consolidated statement of cash flows for the year ended December 31, 2003
excludes the $3,500,000 of promissory notes payable and the $2,000,000 common
stock issued in connection with the Bronco acquisition. Earnout payments to
sellers of acquired businesses may have to be paid in accordance with the
respective agreements on an annual basis and are recorded as goodwill when the
earnout payment amounts are determinable. Earnout payments made to sellers of
acquired businesses totaled $3,310,000 in 2004, based on 2003 operating results.
There were no earnouts paid in 2003, based on 2002 operating results and
$1,885,000 was paid in 2002, based on 2001 operating results. Estimated earnouts
based on 2004 operating results totaling $4,262,000 are reflected in other
accrued expenses in the consolidated balance sheet.
Note
3: Accounts Receivable
Accounts
receivable are stated net of allowances for doubtful accounts of $2,576,000 at
December 31, 2004 and $2,539,000 at December 31, 2003.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
Note
4: Inventories
Inventories
consist of the following:
|
December
31, |
|
2004 |
|
2003
|
|
(in
thousands)
|
|
|
|
|
|
|
Raw
materials and supplies |
|
$ |
10,587 |
|
$ |
8,251 |
|
|
Work
in process |
|
|
- |
|
|
317
|
|
|
Finished
goods |
|
|
- |
|
|
1,489
|
|
|
Total
inventories |
|
$ |
10,587 |
|
$ |
10,057 |
|
Work in
process and finished goods balances at December 31, 2003 represented inventory
held by a subsidiary which was sold during the second quarter of
2004.
Note
5: Property, Plant and Equipment
Property,
plant and equipment are presented at cost net of accumulated depreciation and
consist of the following:
|
December
31, |
|
2004 |
|
2003
|
|
(in
thousands)
|
|
|
|
|
|
|
Land |
|
$ |
5,022 |
|
$ |
5,464 |
|
|
Buildings
and leasehold improvements |
|
|
31,509 |
|
|
30,444 |
|
|
Operating
equipment |
|
|
234,647 |
|
|
221,770 |
|
|
Capitalized
software |
|
|
12,212 |
|
|
11,556 |
|
|
Furniture
and fixtures |
|
|
2,938 |
|
|
2,710 |
|
|
Vehicles |
|
|
51,869 |
|
|
47,124 |
|
|
Construction
in progress |
|
|
2,407 |
|
|
3,449 |
|
|
Gross
property, plant and equipment |
|
|
340,604 |
|
|
322,517 |
|
|
Less:
accumulated depreciation |
|
|
226,382 |
|
|
213,354 |
|
|
Net
property, plant and equipment |
|
$ |
114,222 |
|
$ |
109,163 |
|
Depreciation
expense was $34,397,000 in 2004, $32,901,000 in 2003 and $31,007,000 in 2002.
There are no capital leases outstanding as of December 31, 2004 and December 31,
2003.
Note
6: Income Taxes
The
following table lists the components of the provision (benefit) for income
taxes:
|
Years
ended December 31, |
|
2004
|
|
2003
|
|
2002
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Current
provision (benefit): |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
16,028 |
|
$ |
925 |
|
$ |
(11,882 |
) |
|
State |
|
|
2,300 |
|
|
164 |
|
|
(380 |
) |
|
Foreign |
|
|
858 |
|
|
187 |
|
|
175 |
|
|
Deferred
(benefit) provision: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,210 |
) |
|
4,975 |
|
|
8,467 |
|
|
State |
|
|
454 |
|
|
426 |
|
|
726 |
|
|
Total
income tax provision (benefit) |
|
$ |
18,430 |
|
$ |
6,677 |
|
$ |
(2,894 |
) |
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
Reconciliation
between the federal statutory rate and RPC’s effective tax rate is as follows:
|
Years
ended December 31, |
|
2004 |
|
2003 |
|
2002
|
|
|
Federal
statutory rate |
|
|
35.0 |
% |
|
35.0 |
% |
|
34.0 |
% |
|
State
income taxes |
|
|
5.2 |
|
|
4.8 |
|
|
3.1
|
|
|
Tax
credits |
|
|
(3.0 |
) |
|
(2.1 |
) |
|
(3.6 |
) |
|
Adjustments
to foreign tax liabilities |
|
|
(1.2 |
) |
|
0.0 |
|
|
0.0 |
|
|
Other |
|
|
(1.4 |
) |
|
0.3 |
|
|
2.0
|
|
|
Effective
tax rate |
|
|
34.6 |
% |
|
38.0 |
% |
|
35.5 |
% |
Significant
components of the Company’s deferred tax assets and liabilities are as follows:
|
December
31, |
|
2004
|
|
2003
|
|
(in
thousands)
|
|
|
|
|
|
|
Deferred
tax assets: |
|
|
|
|
|
|
|
|
Self-insurance |
|
$ |
4,312 |
|
$ |
3,848 |
|
|
Pension |
|
|
4,399 |
|
|
4,153 |
|
|
State
net operating loss carryforwards |
|
|
1,875 |
|
|
2,421 |
|
|
Bad
debts |
|
|
1,065 |
|
|
1,046 |
|
|
Accrued
payroll |
|
|
1,081 |
|
|
492 |
|
|
Stock-based
compensation |
|
|
520 |
|
|
0 |
|
|
Foreign
tax credits |
|
|
1,292 |
|
|
0 |
|
|
All
others |
|
|
247 |
|
|
355 |
|
|
Valuation
allowance |
|
|
(2,451 |
) |
|
(977 |
) |
|
Total
deferred tax assets |
|
|
12,340 |
|
|
11,338 |
|
|
Deferred
tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(16,971 |
) |
|
(17,657 |
) |
|
Stock-based
compensation |
|
|
0 |
|
|
(34 |
) |
|
Goodwill |
|
|
(1,049 |
) |
|
(549 |
) |
|
All
others |
|
|
(121 |
) |
|
0 |
|
|
Total
deferred tax liabilities |
|
|
(18,141 |
) |
|
(18,240 |
) |
|
Net
deferred tax liabilities |
|
$ |
(5,801 |
) |
$ |
(6,902 |
) |
Undistributed
earnings of the Company’s foreign subsidiaries are considered indefinitely
reinvested and, accordingly, no provision for U.S. federal income taxes has been
accrued. Upon distribution of those earnings in the form of dividends or
otherwise, RPC would be subject to both U.S. income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to the various
countries. Determining the amount of unrecognized deferred U.S. income tax
liability is not practicable.
The
Company has filed amended federal and state tax returns for the years 1999, 2000
and 2001 to claim higher deductions for certain expenses and additional foreign
tax credits representing potential tax benefits totaling up to approximately
$3.5 million. These returns are currently being reviewed by the Internal Revenue
Service before going to Joint Committee. There is significant uncertainty
surrounding the amount and timing of the tax benefits that will be ultimately
realized. The Company believes it has supportable positions for claiming these
deductions and credits, but the amounts are subject to Joint Committee approval.
Accordingly, the Company has not reflected these potential tax benefits in its
financial statements. No tax benefits will be recognized in the financial
statements until these gain contingencies are resolved through the eventual
disposition with the respective tax authorities.
The
Company has remaining foreign tax credit carryforwards of approximately $1.3
million that expire in 2012 and 2013. During 2004, the Company recognized $0.5
million of previously unutilized foreign tax credits generated in prior years.
As of December 31, 2004, the valuation allowance and deferred tax assets were
increased by $1.3 million to reflect foreign tax credit carryforwards and a
corresponding valuation allowance on a gross rather than a net basis. The
valuation allowance for these foreign tax credit carryforwards has been
established because the Company does not expect to utilize these credit
carryforwards.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
The
Company has net operating loss carryforwards related to state income taxes of
approximately $43.8 million that expire in 2005 through 2017. A valuation
allowance of approximately $1.2 million, representing the tax affected amount of
loss carryforwards that the Company does not expect to utilize, has been
established against the corresponding deferred tax asset.
Total
income tax payments (refunds), net were $14,692,000 in 2004, $(3,263,000) in
2003 and $(4,097,000) in 2002.
Note
7: Long-Term Debt
At
December 31, 2004, future minimum payments on long-term debt were as follows:
|
(in
thousands) |
|
|
2005 |
|
$ |
2,700 |
|
|
2006 |
|
|
700
|
|
|
2007 |
|
|
700
|
|
|
2008 |
|
|
700
|
|
|
Total
minimum principal payments |
|
$ |
4,800 |
|
Cash
interest paid was approximately $309,000 in 2004, $79,000 in 2003 and $266,000
in 2002.
The
Company has access to a $25 million credit facility with a financial institution
encompassing letters of credit and a demand note. The credit facility requires
interest payments monthly on outstanding advances generally at LIBOR plus 50
basis points. Any outstanding advances are due upon demand by the lender and the
facility remains outstanding until cancelled by either party. Under this
facility, there were letters of credit relating to self insurance programs and
contract bids outstanding for $15,067,000 as of December 31, 2004 and for
$13,390,000 as of December 31, 2003.
The
long-term debt of RPC as of December 31, 2004 and 2003 is summarized as
follows:
|
Type |
|
Maturity
Dates |
|
Range
of
Interest
Rates |
|
2004 |
|
2003 |
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Notes
payable related to acquisitions: |
|
|
2005-2008 |
|
|
6% |
|
$ |
2,800 |
|
$ |
3,910 |
|
| |
|
|
2005 |
|
|
Prime |
|
|
2,000 |
|
|
2,000 |
|
| |
|
|
|
|
|
|
|
|
4,800 |
|
|
5,910 |
|
|
Less:
current portion |
|
|
|
|
|
|
|
|
2,700 |
|
|
1,110 |
|
|
Long-term
debt |
|
|
|
|
|
|
|
$ |
2,100 |
|
$ |
4,800 |
|
Subsequent
to December 31, 2004, the Company prepaid a $2.8 million promissory note which
extinguished a portion of the total outstanding debt.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
Note
8: Accumulated Other Comprehensive (Loss) Income
Accumulated
other comprehensive (loss) income consists of the following (in thousands):
| |
|
Minimum
Pension
Liability |
|
Unrealized
Gain
(Loss) On
Securities |
|
Total |
|
|
Balance
at December 31, 2002 |
|
$ |
(3,975 |
) |
$ |
145 |
|
$ |
(3,830 |
) |
|
Change
during 2003: |
|
|
|
|
|
|
|
|
|
|
|
Before-tax
amount |
|
|
(4,037 |
) |
|
53 |
|
|
(3,984 |
) |
|
Tax
(expense) benefit |
|
|
1,534 |
|
|
(20 |
) |
|
1,514
|
|
|
Total
activity in 2003 |
|
|
(2,503 |
) |
|
33 |
|
|
(2,470 |
) |
|
Balance
at December 31, 2003 |
|
|
(6,478 |
) |
|
178 |
|
|
(6,300 |
) |
|
Change
during 2004: |
|
|
|
|
|
|
|
|
|
|
|
Before-tax
amount |
|
|
(975 |
) |
|
125 |
|
|
(850 |
) |
|
Tax
(expense) benefit |
|
|
370 |
|
|
(47 |
) |
|
323
|
|
|
Reclassification
adjustment, net of taxes |
|
|
- |
|
|
(59 |
) |
|
(59 |
) |
|
Total
activity in 2004 |
|
|
(605 |
) |
|
19 |
|
|
(586 |
) |
|
Balance
at December 31, 2004 |
|
$ |
(7,083 |
) |
$ |
197 |
|
$ |
(6,886 |
) |
Note
9: Commitments and Contingencies
Minimum
annual rentals, principally for noncancelable real estate leases with terms in
excess of one year, in effect at December 31, 2004, are summarized in the
following table:
|
(in
thousands) |
|
|
|
|
2005 |
|
$ |
1,597 |
|
|
2006 |
|
|
1,231
|
|
|
2007 |
|
|
822
|
|
|
2008 |
|
|
526 |
|
|
2009 |
|
|
159 |
|
|
Total
rental commitments |
|
$ |
4,335 |
|
Total
rental expense charged to operations was approximately $4,203,000 in 2004,
$4,120,000 in 2003 and $3,930,000 in 2002.
In
accordance with the respective purchase agreements, earnout payments to sellers
of acquired businesses may be paid on an annual basis. The Company accrued
estimated earnout payments of approximately $4.3 million to be made in 2005
related to 2004 operating results.
RPC is a
party to various routine legal proceedings primarily involving commercial
claims, workers’ compensation claims and claims for personal injury. RPC insures
against these risks to the extent deemed prudent by its management, but no
assurance can be given that the nature and amount of such insurance will, in
every case, fully indemnify RPC against liabilities arising out of pending and
future legal proceedings related to its business activities. While the outcome
of these lawsuits, legal proceedings and claims cannot be predicted with
certainty, management, after consultation with legal counsel, believes that the
outcome of all such proceedings, even if determined adversely, would not have a
material adverse effect on the Company’s business or financial condition.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
Note
10: Employee Benefit Plans
Defined
Benefit Pension Plan
The
Company’s Retirement Income Plan, a trusteed defined benefit pension plan,
provides monthly benefits upon retirement at age 65 to eligible employees. As of
February 28, 2001, the plan became a multiple employer plan, with Marine
Products as an adopting employer. Following the spin-off, RPC charged Marine
Products for, and Marine Products has been obligated to pay, its allocable share
of pension costs and the associated funding obligation related to the prior
service liabilities of Chaparral employees. Effective December 2003, the related
prior service liabilities totaling $3,314,000 and pension assets totaling
$2,517,000 were transferred within the multiple employer plan from RPC to Marine
Products.
In the
first quarter of 2002, the Company’s Board of Directors approved a resolution to
cease all future retirement benefit accruals under the defined benefit pension
plan effective March 31, 2002. In lieu thereof, the Company began providing
enhanced benefits in the form of cash contributions for certain longer serviced
employees that had not reached the normal retirement age of 65 as of March 31,
2002. The contributions are discretionary and made annually based on continued
employment over a seven year period beginning in 2002. These discretionary
contributions are made to either a non-qualified Supplemental Retirement Plan
(“SERP”) established by the Company or to the 401(k) plan for each employee that
is entitled to the enhanced benefit. The expense related to the enhanced
benefits was $415,000 for 2004, $479,000 for 2003 and $437,000 for 2002.
Beginning
late in 2002, the Company began permitting selected highly compensated employees
to defer a portion of their compensation into the nonqualified SERP. The SERP
assets are marked to market and totaled $994,000 as of December 31, 2004 and
$608,000 as of December 31, 2003. The assets are reported in other assets on the
balance sheet and changes related to the fair value of assets are recorded in
the consolidated statement of income as part of other income, net. The SERP
deferrals and the contributions are recorded on the balance sheet in pension
liabilities with any change in the fair value of the liabilities recorded as
compensation cost in the statement of income.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
The
following table sets forth the funded status of the retirement income plan and
the amounts recognized in RPC’s consolidated balance sheets:
|
December
31, |
|
2004
|
|
2003
|
|
(in
thousands)
|
|
|
|
|
|
|
CHANGE
IN BENEFIT OBLIGATION: |
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year |
|
$ |
28,970 |
|
$ |
24,368 |
|
|
Service
cost |
|
|
— |
|
|
— |
|
|
Interest
cost |
|
|
1,747 |
|
|
1,937 |
|
|
Amendments |
|
|
— |
|
|
— |
|
|
Actuarial
loss |
|
|
1,711 |
|
|
7,079 |
|
|
Liability
transfer |
|
|
— |
|
|
(3,314 |
) |
|
Benefits
paid |
|
|
(1,158 |
) |
|
(1,100 |
) |
|
Benefit
obligation at end of year |
|
$ |
31,270 |
|
$ |
28,970 |
|
|
CHANGE
IN PLAN ASSETS: |
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year |
|
$ |
16,611 |
|
$ |
17,682 |
|
|
Actual
return on plan assets |
|
|
1,259 |
|
|
2,546 |
|
|
Asset
transfer |
|
|
— |
|
|
(2,517 |
) |
|
Employer
contribution |
|
|
4,176 |
|
|
— |
|
|
Benefits
paid |
|
|
(1,158 |
) |
|
(1,100 |
) |
|
Fair
value of plan assets at end of year |
|
|
20,888 |
|
|
16,611 |
|
|
Funded
status |
|
|
(10,382 |
) |
|
(12,359 |
) |
|
Unrecognized
net loss |
|
|
11,425 |
|
|
10,450 |
|
|
Net
prepaid (accrued) benefit cost |
|
$ |
1,043 |
|
$ |
(1,909 |
) |
The
accumulated benefit obligation for the defined benefit pension plan at December
31, 2004 and 2003 has been disclosed above. The Company uses a December 31
measurement date for its qualified plan.
Pursuant
to the provisions of SFAS No. 87, “Employers’ Accounting for Pensions,” the
Company recorded an additional pretax minimum pension liability of $975,000 in
2004 and $4,037,000 in 2003. As there were no previously unrecognized prior
service costs as of December 31, 2004 and 2003, the full amount of the
adjustments, net of related deferred tax benefits, are reflected as a reduction
of stockholders’ equity. Amounts recognized in the consolidated balance sheets
consist of:
|
December
31, |
|
2004
|
|
2003
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Net
prepaid (accrued) benefit cost |
|
$ |
1,043 |
|
$ |
(1,909 |
) |
|
Minimum
pension liability |
|
|
(11,425 |
) |
|
(10,450 |
) |
|
SERP
employer contributions |
|
|
(738 |
) |
|
(465 |
) |
|
SERP
employee deferrals |
|
|
(259 |
) |
|
(148 |
) |
|
Net
amount recognized |
|
$ |
(11,379 |
) |
$ |
(12,972 |
) |
RPC’s
funding policy is to contribute to the defined benefit pension plan the amount
required, if any, under the Employee Retirement Income Security Act of 1974. RPC
contributed $4,176,000 in 2004 and $0 in 2003. The components
of net periodic benefit cost are summarized as follows:
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
|
Years
ended December 31, |
|
2004
|
|
2003
|
|
2002
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Service
cost for benefits earned during the period |
|
$ |
— |
|
$ |
— |
|
$ |
332 |
|
|
Interest
cost on projected benefit obligation |
|
|
1,747 |
|
|
1,937 |
|
|
1,749 |
|
|
Expected
return on plan assets |
|
|
(1,445 |
) |
|
(1,363 |
) |
|
(1,622 |
) |
|
Net
amortization and deferral |
|
|
922 |
|
|
1,027 |
|
|
72 |
|
|
Curtailments |
|
|
— |
|
|
— |
|
|
150 |
|
|
Net
periodic benefit cost |
|
$ |
1,224 |
|
$ |
1,601 |
|
$ |
681 |
|
The
weighted average assumptions as of December 31 used to determine the projected
benefit obligation and net benefit cost were as follows:
|
December
31, |
|
2004
|
|
2003
|
|
|
Projected
Benefit Obligation: |
|
|
|
|
|
|
|
|
Discount
rate |
|
|
5.750 |
% |
|
6.250 |
% |
|
Rate
of compensation increase |
|
|
N/A |
|
|
N/A
|
|
|
Net
Benefit Cost: |
|
|
|
|
|
|
|
|
Discount
rate |
|
|
6.250 |
% |
|
6.875 |
% |
|
Expected
return on plan assets |
|
|
8.000 |
% |
|
8.000 |
% |
|
Rate
of compensation increase |
|
|
N/A |
|
|
N/A |
|
The
Company’s expected return on assets assumption is derived from a detailed
periodic assessment conducted by its management and its investment adviser. It
includes a review of anticipated future long-term performance of individual
asset classes and consideration of the appropriate asset allocation strategy
given the anticipated requirements of the plan to determine the average rate of
earnings expected on the funds invested to provide for the pension plan
benefits. While the study gives appropriate consideration to recent fund
performance and historical returns, the rate of return assumption is derived
primarily from a long-term, prospective view. Based on its recent assessment,
the Company has concluded that its expected long-term return assumption of eight
percent is reasonable.
At
December 31, 2004 and 2003, the Plan’s assets were comprised of listed common
stocks and U.S. Government and corporate securities. The Plan’s weighted average
asset allocation at December 31, 2004 and 2003 by asset category along with the
target allocation for 2005 are as follows:
|
Asset
Category |
|
Target
Allocation
for
2005 |
|
Percentage
of
Plan
Assets
as
of
December
31,
2004 |
|
Percentage
of
Plan
Assets
as
of
December
31,
2003
|
|
|
Equity
Securities |
|
|
53.0 |
% |
|
51.2 |
% |
|
53.2 |
% |
|
Debt
Securities — Core Fixed Income |
|
|
25.0 |
% |
|
29.5 |
% |
|
41.4 |
% |
|
Tactical
— Fund of Equity and Debt Securities |
|
|
5.0 |
% |
|
2.7 |
% |
|
0 |
% |
|
Real
Estate |
|
|
5.0 |
% |
|
5.1 |
% |
|
0 |
% |
|
Other |
|
|
12.0 |
% |
|
11.5 |
% |
|
5.4 |
% |
|
Total |
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
The
Company’s investment strategy for its defined benefit pension plan is to
maximize the long-term rate of return on plan assets within an acceptable level
of risk in order to minimize the cost of providing pension benefits. The
investment policy establishes a target allocation for each asset class, which is
rebalanced as required. The Company utilizes a number of investment approaches,
including individual market securities, equity and fixed income funds in
which the underlying securities are marketable, and debt
funds to achieve this target allocation. The Company expects to contribute
approximately $1,600,000 to the defined benefit pension plan in
2005.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
The
Company estimates that the future benefits payable for the defined benefit
pension plan over the next ten years are as follows: $1,332,000 in 2005,
$1,390,000 in 2006, $1,455,000 in 2007, $1,555,000 in 2008, $1,597,000 in 2009
and $9,000,000 for 2010 through 2014.
401(k)
Plan
RPC
sponsors a defined contribution 401(k) plan that is available to substantially
all full-time employees with more than six months of service. This plan allows
employees to make tax-deferred contributions from one to 25 percent of their
annual compensation, not exceeding the permissible contribution imposed by the
Internal Revenue Code. RPC matches 50 percent of each employee’s contributions
that do not exceed six percent of the employee’s compensation, as defined by the
plan. Employees vest in the RPC contributions after three years of service. The
charges to expense for the Company’s contributions to the 401(k) plan were
approximately $990,000 in 2004, $884,000 in 2003 and $858,000 in 2002.
Stock
Incentive Plans
On
January 25, 1994, RPC adopted a 10-year Employee Stock Incentive Plan (the “1994
Plan”) under which shares of common stock were reserved for issuance including
1,500,000 shares in 1994 and an additional 2,400,000 shares in 1997.
This plan expired in January 2004 and provided for the issuance of various forms
of stock incentives. On April 27, 2004, the Company adopted a new 10-year Stock
Incentive Plan (the “2004 Plan”) under which 2,250,000 shares of common stock
have been reserved for issuance. This plan provides for the issuance of various
forms of stock incentives, including, among others, incentive and non-qualified
stock options and restricted stock. As of December 31, 2004, 1,930,500 shares
were available for grants under the 2004 Plan.
Stock
Options
Transactions
involving the RPC stock options were as follows:
| |
|
Total
Shares |
|
Weighted
Average
Price |
|
|
Outstanding
December 31, 2001 |
|
|
1,373,373 |
|
$ |
6.83 |
|
|
Granted |
|
|
156,750 |
|
|
9.37
|
|
|
Canceled |
|
|
(195,362 |
) |
|
7.55
|
|
|
Exercised |
|
|
(40,864 |
) |
|
4.59
|
|
|
Outstanding
December 31, 2002 |
|
|
1,293,897 |
|
$ |
7.10 |
|
|
Granted |
|
|
956,250 |
|
|
6.38
|
|
|
Canceled |
|
|
(22,621 |
) |
|
7.91
|
|
|
Exercised |
|
|
(24,693 |
) |
|
4.17
|
|
|
Outstanding
December 31, 2003 |
|
|
2,202,833 |
|
$ |
6.81 |
|
|
Granted |
|
|
- |
|
|
-
|
|
|
Canceled |
|
|
(55,260 |
) |
|
8.12
|
|
|
Exercised |
|
|
(216,996 |
) |
|
4.71
|
|
|
Outstanding
December 31, 2004 |
|
|
1,930,577 |
|
$ |
7.01 |
|
Options
exercised during 2004 include transactions that involved exchange of shares and
cash. The fair value of shares tendered to exercise employee stock options
totaled approximately $602,000 and has been excluded from the consolidated
statement of cash flows. There were no expirations of stock options during 2004,
2003 and 2002. As of December 31, 2004, the options outstanding and the
range of exercise prices together with the weighted-average remaining
contractual life are as follows:
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
| |
|
Number
of Options |
|
Weighted
Average
Exercise
Prices |
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Range
of Exercise Prices |
|
Total |
|
Exercisable |
|
Total |
|
Exercisable |
|
$2.61 |
|
|
45,404 |
|
|
45,404 |
|
$ |
2.61 |
|
$ |
2.61 |
|
|
1.1
years |
|
$4.04
-
$4.41 |
|
|
177,812 |
|
|
177,812 |
|
$ |
4.14 |
|
$ |
4.14 |
|
|
3.5
years |
|
|
$6.33
-
$9.37 |
|
|
1,707,361 |
|
|
697,352 |
|
$ |
7.43 |
|
$ |
7.89 |
|
|
6.8
years |
|
| |
|
|
1,930,577 |
|
|
920,568 |
|
$ |
7.01 |
|
$ |
6.90 |
|
|
6.3
years |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002
|
|
|
Exercisable
at December 31, |
|
|
920,568 |
|
|
781,091 |
|
|
546,744
|
|
|
Weighted
average exercise price of
exercisable
options |
|
$ |
6.90 |
|
$ |
6.30 |
|
$ |
5.67 |
|
Restricted
Stock
RPC has
granted employees two forms of restricted stock: performance restricted and time
lapse restricted.
Performance
restricted shares
The
performance restricted shares are granted, but not earned and issued, until
certain five-year tiered performance criteria are met. The performance criteria
are predetermined market prices of RPC stock. On the date the stock appreciates
to each level (determination date), 20 percent of performance shares are earned.
Once earned, the performance shares vest five years from the determination date.
After the determination date, the grantee will receive all dividends declared
and also
voting rights to the shares. Under the plans, employees earned performance
shares totaling 22,500 shares in 2004, 4,500 shares in 2003 and 8,550 shares in
2002.
Time
lapse restricted shares
Time
lapse restricted shares vest after certain stipulated number of years from the
grant date, depending on the terms of the issue. The Company has issued time
lapse restricted shares that vest over ten years in prior years; however, in
2004 the Company issued time lapse restricted shares that vest in 20 percent
increments starting with the second anniversary of the grant, over the six year
period beginning on the date of grant. Grantees receive all dividends declared
and retain voting rights for the granted shares.
Units
granted under these restricted stock programs totaled 319,500 in 2004, 37,500 in
2003, and 0 in 2002. Employees forfeited 27,510 shares in 2004, 17,025 shares in
2003 and 45,606 shares in 2002. Compensation cost on restricted shares is
recorded at the fair value on the date of issuance and amortized ratably over
the respective vesting periods. Shares of restricted stock that vested and were
released to the applicable employees totaled 208,800 in 2004, 0 in 2003 and
84,600 in 2002. The tax benefit aggregating $466,000 for compensation tax
deductions in excess of compensation expense was credited to capital in excess
of par value and has been excluded from the consolidated statement of cash flows
for the year ended December 31, 2004.
The
agreements under which the restricted stock is issued provide that shares
awarded may not be sold or otherwise transferred until restrictions established
under the stock plans have lapsed. Upon termination of employment from RPC or,
in certain cases, termination of employment from Marine Products or Chaparral,
shares with restrictions must be returned to RPC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
Note
11: Related Party Transactions
Marine
Products Corporation
Effective
February 28, 2001, the Company spun-off the business conducted through Chaparral
Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC
accomplished the spin-off by contributing 100 percent of the issued and
outstanding stock of Chaparral to Marine Products Corporation (a Delaware
corporation) (“Marine Products”), a newly formed wholly-owned subsidiary of RPC,
and then distributing the common stock of Marine Products to RPC stockholders.
In conjunction with the spin-off, RPC and Marine Products entered into various
agreements that define the companies’ relationship.
In
accordance with a Transition Support Services Agreement, which may be terminated
by either party, RPC provides certain administrative services, including
financial reporting and income tax administration, acquisition assistance, etc.,
to Marine Products. Charges from the Company (or from corporations that are
subsidiaries of the Company) for such services aggregated approximately $546,000
in 2004, $496,000 in 2003 and $588,000 in 2002. The Company’s directors are also
directors of Marine Products and certain officers are employees of both the
Company and Marine Products.
The
Employee Benefits Agreement provides for, among other things, Marine Products to
participate in two RPC sponsored benefit plans, specifically, the defined
contribution 401(k) plan and the defined benefit pension plan.
The Tax
Sharing and Indemnification Agreement provides for, among other things, the
treatment of income tax matters for periods through the date of the spin-off and
responsibility for any adjustments as a result of audit by any taxing authority.
The general terms provide for the indemnification for any tax detriment incurred
by one party caused by the other party’s action. The amounts transferred as
settlements from RPC to Marine
Products totaled approximately $19,000 in 2004, $0 in 2003 and $140,000
in 2002.
Other
The
Company periodically purchases in the ordinary course of business products or
services from suppliers, who are owned by significant officers or shareholders,
or affiliated with the directors of RPC. The total amounts paid to these
affiliated parties were approximately $529,000 in 2004, $1,058,000 in 2003 and
$502,000 in 2002. In addition, the overhead crane fabrication division of RPC
recorded $171,000 in 2003 and $332,000 in 2002 in revenues from the powerboat
manufacturing segment that is now a subsidiary of Marine Products pursuant to
the spin-off, related to the sale, installation and service of overhead cranes.
RPC
receives certain administrative services and rents office space from Rollins,
Inc. (a company of which Mr. R. Randall Rollins is also Chairman). The service
agreements between Rollins, Inc. and the Company provide for the provision of
services on a cost reimbursement basis and are terminable on six months notice.
The services covered by these agreements include office space, administration of
certain employee benefit programs, and other administrative services. Charges to
the Company (or to corporations which are subsidiaries of the Company) for such
services and rent aggregated $76,000 in 2004 and $105,000 in 2003.
Note
12: Business Segment Information
RPC’s
service lines have been aggregated into two reportable oil and gas services
segments — Technical Services and Support Services — because of the similarities
between the financial performance and approach to managing the service lines
within each of the segments, as well as the economic and business conditions
impacting their business activity levels. The other business segment includes
information concerning RPC’s business units that do not qualify for separate
segment reporting. These business units include an interactive training software
developer and an overhead crane fabricator, prior to its disposition in April
2004. Corporate includes selected administrative costs incurred by the Company.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
Technical
Services include RPC’s oil and gas service lines that utilize people and
equipment to perform value-added completion, production and maintenance services
directly to a customer’s well. These services include pressure pumping services,
snubbing, coiled tubing, nitrogen pumping, well control consulting and
firefighting, down-hole tools, wireline, fluid pumping, and casing installation
services. These Technical Services are primarily used in the completion,
production and
maintenance of oil and gas wells. The principal markets for this segment include
the United States, including the Gulf of Mexico, the mid-continent, southwest
and Rocky Mountain regions, and international locations including primarily
Africa, Canada, China, Latin America and the Middle East. Customers include
major multi-national and independent oil and gas producers, and selected
nationally-owned oil companies.
Support
Services include RPC’s oil and gas service lines that primarily provide
equipment for customer use or services to assist customer operations. The
equipment and services include drill pipe and related tools, pipe handling,
inspection and storage services, work platform marine vessels, and oilfield
training services. The demand for these services tends to be influenced
primarily by customer drilling-related activity levels. The principal markets
for this segment include the United States, including the Gulf of Mexico and the
mid-continent regions, and international locations, including primarily Canada,
Latin America, and the Middle East. Customers include domestic operations of
major multi-national and independent oil and gas producers, and selected
nationally-owned oil companies.
The
accounting policies of the reportable segments are the same as those described
in Note 1 to these consolidated financial statements. RPC evaluates the
performance of its segments based on revenues,
operating profits and return on invested capital.
Summarized
financial information concerning RPC’s reportable segments for the years ended
December 31, 2004, 2003 and 2002 are shown in the following table.
| |
|
Technical
Services |
|
Support
Services |
|
Other |
|
Corporate |
|
Total
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
279,070 |
|
$ |
56,917 |
|
$ |
3,805 |
|
$ |
— |
|
$ |
339,792 |
|
|
Operating
profit (loss) |
|
|
47,027 |
|
|
8,287 |
|
|
(975 |
) |
|
(8,550 |
) |
|
45,789 |
|
|
Capital
expenditures (1) |
|
|
34,765 |
|
|
14,026 |
|
|
— |
|
|
1,078 |
|
|
49,869
|
|
|
Depreciation
and amortization |
|
|
25,161 |
|
|
7,785 |
|
|
302 |
|
|
1,252 |
|
|
34,500 |
|
|
Identifiable
assets |
|
|
145,196 |
|
|
69,399 |
|
|
661 |
|
|
47,686 |
|
|
262,942
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
216,321 |
|
$ |
43,909 |
|
$ |
10,297 |
|
$ |
— |
|
$ |
270,527 |
|
|
Operating
profit (loss) |
|
|
22,433 |
|
|
2,641 |
|
|
(1,355 |
) |
|
(7,320 |
) |
|
16,399
|
|
|
Capital
expenditures (1) |
|
|
19,445 |
|
|
8,234 |
|
|
37 |
|
|
2,640 |
|
|
30,356
|
|
|
Depreciation
and amortization |
|
|
24,382 |
|
|
7,220 |
|
|
336 |
|
|
1,244 |
|
|
33,182
|
|
|
Identifiable
assets |
|
|
111,718 |
|
|
65,026 |
|
|
5,051 |
|
|
45,069 |
|
|
226,864
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
163,593 |
|
$ |
35,784 |
|
$ |
9,653 |
|
$ |
— |
|
$ |
209,030 |
|
|
Operating
profit (loss) |
|
|
(1,162 |
) |
|
(3,154 |
) |
|
(1,603 |
) |
|
(4,507 |
) |
|
(10,426 |
) |
|
Capital
expenditures (1) |
|
|
11,222 |
|
|
7,370 |
|
|
312 |
|
|
3,577 |
|
|
22,481
|
|
|
Depreciation
and amortization |
|
|
22,742 |
|
|
7,394 |
|
|
224 |
|
|
982 |
|
|
31,342
|
|
|
Identifiable
assets |
|
|
105,586 |
|
|
47,243 |
|
|
5,629 |
|
|
37,496 |
|
|
195,954
|
|
(1)
Excludes
assets acquired as part of purchases of new businesses during the year.
The
following summarizes selected information between the United States and all
international locations combined for the years ended December 31, 2004, 2003 and
2002. The revenues are presented based on the location of the use of the product
or service. Assets related to international operations are less than 10 percent
of RPC’s consolidated assets, and therefore are not presented.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2004, 2003 and 2002
|
Years
ended December 31, |
|
2004 |
|
2003 |
|
2002
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
United
States Revenues |
|
$ |
323,910 |
|
$ |
263,684 |
|
$ |
198,944 |
|
|
International
Revenues |
|
|
15,882
|
|
|
6,843
|
|
|
10,086
|
|
| |
|
$ |
339,792 |
|
$ |
270,527 |
|
$ |
209,030 |
|
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and Procedures
Evaluation
of disclosure controls and procedures — The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Commission’s rules and forms, and that such information is accumulated
and communicated to its management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
As of the
end of the period covered by this report, December 31, 2004 (the “Evaluation
Date”), the Company carried out an evaluation, under the supervision and with
the participation of its management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures. Based upon this evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of the Evaluation Date.
Management’s
report on internal control over financial reporting —
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Management’s report on internal control over financial
reporting is included on page 28 of this report. Grant Thornton LLP, the
Company’s independent registered public accounting firm, has audited
management’s assessment of the effectiveness of internal control as of December
31, 2004 and issued a report thereon which is included on page 29 of this
report.
Changes
in internal control over financial reporting — During
the fourth quarter of 2004, the Company implemented enhanced system access
controls within several of its key financial systems. Also, the Company
completed the initial implementation of a new automated job activity and
customer billing system (“new billing system”) that is used to invoice and
record revenues in areas of the Company that generate approximately 70 percent
of consolidated revenues. Benefits expected to be realized with the billing
system are:
| · |
Reduction
in manual processing |
| · |
Enhanced
billing system access controls |
| · |
Improved
analytical capabilities surrounding
revenues |
Planned
development of this new billing system and related processes include expanding
the use of electronic approvals and integration of the capturing, recording and
approving of earned, but unbilled revenues.
Item
9B. Other Information
None.
PART
III
Item
10. Directors and Executive Officers of the Registrant
Information
concerning directors and executive officers will be included in the RPC Proxy
for its 2005 Annual Meeting of Stockholders, in the section titled “Election of
Directors.” This information is incorporated herein by reference. Information
about executive officers is contained on page 12 of this document.
Audit
Committee and Audit Committee Financial Expert
Information
concerning the Audit Committee of the Company and the Audit Committee Financial
Expert(s) will be included in the RPC Proxy Statement for its 2005 Annual
Meeting of Stockholders, in the section titled “Corporate Governance and Board
of Directors Compensation, Committees and Meetings.” This information is
incorporated herein by reference.
Code
of Ethics
RPC, Inc.
has a Code of Business Conduct that applies to all employees. In addition, the
Company has a Supplemental Code of Business Conduct and Ethics for Directors,
the Principal Executive Officer and Principal Financial and Accounting Officer.
Both of these documents are available on the Company’s website at www.rpc.net. Copies
are available at no charge by writing to Attention: Human Resources, RPC Inc.,
2170 Piedmont Road, N.E., Atlanta, GA 30324.
Section
16(a) Beneficial Ownership Reporting Compliance
Information
regarding compliance with Section 16(a) of the Exchange Act will be included
under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s
Proxy Statement for its 2005 Annual Meeting of Stockholders, which is
incorporated herein by reference.
Item
11. Executive Compensation
Information
concerning executive compensation will be included in the RPC Proxy Statement
for its 2005 Annual Meeting of Stockholders, in the section titled, “Executive
Compensation.” This information is incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management
Information
concerning security ownership will be included in the RPC Proxy Statement for
its 2005 Annual Meeting of Stockholders, in the sections titled, “Capital Stock”
and “Election of Directors.” This information is incorporated herein by
reference.
Information
regarding RPC’s equity compensation plans including plans approved by security
holders and plans not approved by security holders will be included in the
section titled, “Executive Compensation” in the RPC Proxy Statement for its 2005
Annual Meeting of Stockholders, which is incorporated herein by reference.
Item
13. Certain Relationships and Related Party Transactions
Information
concerning certain relationships and related party transactions will be included
in the RPC Proxy Statement for its 2005 Annual Meeting of Stockholders, in the
sections titled, “Certain Relationships and Related Party Transactions” and
“Compensation Committee Interlocks and Insider Participation.” This information
is incorporated herein by reference.
Item
14. Principal Accountant Fees and Services
Information
regarding principal accountant fees and services will be included in the section
titled, “Independent Public Accountants” in the RPC Proxy Statement for its 2005
Annual Meeting of Stockholders. This information is incorporated herein by
reference.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
Consolidated
Financial Statements, Financial Statement Schedule and Exhibits.
1. Consolidated
financial statements listed in the accompanying Index to Consolidated Financial
Statements and Schedule are filed as part of this report.
2. The
financial statement schedule listed in the accompanying Index to Consolidated
Financial Statements and Schedule is filed as part of this report.
3. Exhibits
listed in the accompanying Index to Exhibits are filed as part of this report.
The following such exhibits are management contracts or compensatory plans or
arrangements:
| |
10.1 |
2004
Stock Incentive Plan (incorporated herein by reference to Appendix B to
the Registrant’s definitive Proxy Statement filed on March 24, 2004).
|
| |
10.6 |
Form
of stock option grant agreement (incorporated herein by reference to
Exhibit 10.1 to Form 10-Q filed on November 2, 2004). |
| |
10.7 |
Form
of time lapse restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.2 to Form 10-Q filed on November 2, 2004).
|
| |
10.8 |
Form
of performance restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.3 to Form 10-Q filed on November 2,
2004). |
| |
10.9 |
Summary
of ‘at will’ compensation arrangements with the Executive
Officers. |
| |
10.10
|
Summary
of compensation arrangements with the Directors. |
| |
10.11 |
Supplemental
Retirement Plan. |
Exhibits
(inclusive of item 3 above):
|
Exhibit
Number
|
Description
|
|
3.1 |
Restated
certificate of incorporation of RPC, Inc. (incorporated herein by
reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1999). |
|
3.2
|
Bylaws
of RPC, Inc. (incorporated herein by reference to Exhibit 3.2 to the Form
10-Q filed on May 5, 2004). |
|
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).
|
|
10.1
|
2004
Stock Incentive Plan (incorporated herein by reference to Appendix B to
the Registrant’s definitive Proxy Statement filed on March 24,
2004). |
|
10.2
|
Agreement
Regarding Distribution and Plan of Reorganization, dated February 12,
2001, by and between RPC, Inc. and Marine Products Corporation
(incorporated herein by reference to Exhibit 10.2 to the Form 10 filed on
February 13, 2001). |
|
10.3
|
Employee
Benefits Agreement dated February 12, 2001, by and between RPC, Inc.,
Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein
by reference to Exhibit 10.3 to the Form 10 filed on February 13, 2001).
|
|
10.4
|
Transition
Support Services Agreement dated February 12, 2001 by and between RPC,
Inc. and Marine Products Corporation (incorporated herein by reference to
Exhibit 10.4 to the Form 10 filed on February 13, 2001).
|
|
10.5
|
Tax
Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and
Marine Products Corporation (incorporated herein by reference to Exhibit
10.5 to the Form 10 filed on February 13, 2001). |
|
10.6 |
Form
of stock option grant agreement (incorporated herein by reference to
Exhibit 10.1 to the Form 10-Q filed on November 2,
2004). |
|
10.7 |
Form
of time lapse restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.2 to the Form 10-Q filed on November 2,
2004). |
|
10.8 |
Form
of performance restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.3 to the Form 10-Q filed on November 2,
2004). |
|
10.9 |
Summary
of ‘at will’ compensation arrangements with the Executive
Officers. |
|
10.10 |
Summary
of compensation arrangements with the Directors. |
|
10.11 |
Supplemental
Retirement Plan. |
|
21 |
Subsidiaries
of RPC. |
|
23.1 |
Consent
of Grant Thornton LLP. |
|
23.2 |
Consent
of Ernst & Young LLP. |
|
24 |
Powers
of Attorney for Directors. |
|
31.1 |
Section
302 certification for Chief Executive Officer |
|
31.2 |
Section
302 certification for Chief Financial Officer |
|
32.1 |
Section
906 certifications for Chief Executive Officer and Chief Financial
Officer |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
| |
 |
| |
Richard
A. Hubbell
President
and Chief Executive Officer
(Principal
Executive Officer)
March
14, 2005 |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name |
Title |
Date
|
| |
|
|
|
Richard
A. Hubbell |
President
and Chief Executive Officer
(Principal
Executive Officer) |
March
14, 2005 |
|
|
| |
|
 |
|
|
|
Ben
M. Palmer |
Chief
Financial Officer
(Principal
Financial and Accounting Officer) |
March
14, 2005 |
The
Directors of RPC (listed below) executed a power of attorney, appointing Richard
A. Hubbell their attorney-in-fact, empowering him to sign this report on their
behalf.
|
R.
Randall Rollins, Director |
James
B. Williams, Director |
|
Wilton
Looney, Director |
James
A. Lane, Jr., Director |
|
Gary
W. Rollins, Director |
Linda
H. Graham, Director |
|
Henry
B. Tippie, Director |
Bill
J. Dismuke, Director |
Richard
A. Hubbell
Director
and as Attorney-in-fact
March 14,
2005
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND
SCHEDULE
The
following documents are filed as part of this report.
|
FINANCIAL
STATEMENTS AND REPORTS |
PAGE |
|
Management's
Report on Internal Control Over Financial Reporting |
28 |
|
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting |
29 |
|
Consolidated
Balance Sheets as of December 31, 2004 and 2003 |
30 |
|
Consolidated
Statements of Operations for the three years ended December 31,
2004 |
31 |
|
Consolidated
Statements of Stockholders' Equity for the three years ended December 31,
2004 |
32 |
|
Consolidated
Statements of Cash Flows for the three years ended December 31,
2004 |
33 |
|
Notes
to Consolidated Financial Statements |
34 -
51 |
|
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements (for 2004) |
58 |
|
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements (for 2003 and 2002) |
59 |
|
SCHEDULE |
|
| |
|
|
Schedule
II — Valuation and Qualifying
Accounts |
57
|
Schedules
not listed above have been omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
RPC,
Inc. and Subsidiaries
| |
|
For
the years ended
December
31, 2004, 2003 and 2002 |
|
|
|
Balance
at
Beginning
of
Period |
|
Charged
to
Costs
and
Expenses |
|
Net
(Deductions)
Recoveries |
|
Balance
at
End of
Period
|
|
|
(in
thousands) |
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts |
$ |
2,539 |
|
$ |
1,155 |
|
$ |
(1,118 |
) |
|
(1 |
) |
$ |
2,576 |
|
|
Inventory
reserves |
$ |
134 |
|
$ |
0 |
|
$ |
(134 |
) |
|
(2 |
) |
$ |
0 |
|
|
Deferred
tax asset valuation allowance |
$ |
977 |
|
$ |
190 |
|
$ |
1,284 |
|
|
(3 |
) |
$ |
2,451 |
|
|
Year
ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts |
$ |
2,461 |
|
$ |
(765 |
) |
$ |
843 |
|
|
(1 |
) |
$ |
2,539 |
|
|
Inventory
reserves |
$ |
130 |
|
$ |
55 |
|
$ |
(51 |
) |
|
(2 |
) |
$ |
134 |
|
|
Deferred
tax asset valuation allowance |
$ |
978 |
|
$ |
0 |
|
$ |
(1 |
) |
|
|
|
$ |
977 |
|
|
Year
ended December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts |
$ |
4,118 |
|
$ |
(400 |
) |
$ |
(1,257 |
) |
|
(1 |
) |
$ |
2,461 |
|
|
Inventory
reserves |
$ |
350 |
|
$ |
53 |
|
$ |
(273 |
) |
|
(2 |
) |
$ |
130 |
|
|
Deferred
tax asset valuation allowance |
$ |
0 |
|
$ |
978 |
|
$ |
0 |
|
|
|
|
$ |
978 |
|
(1)
Deductions in the allowance for doubtful accounts principally reflect the
write-off of previously reserved accounts net of recoveries.
(2)
Deductions in the reserve for inventory obsolescence and adjustment principally
reflect the sale or disposal of related inventory. Balance represented allowance
for inventory held by a subsidiary which was sold during the second quarter of
2004.
(3)
Allowance was increased $1,292,000 during 2004 to reflect foreign tax credit
carryforwards on a gross rather than a net basis. Amount includes addition of
$1,770,000 representing previously unutilized foreign tax credits generated in
prior years and a deduction of $478,000 for those credits utilized during
2004.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED
FINANCIAL
STATEMENTS
Board
of Directors and Stockholders of RPC,
Inc.
We have
audited the accompanying consolidated balance sheet of RPC, Inc. (a Delaware
corporation) and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the year then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of RPC, Inc. and subsidiaries
as of December 31, 2004, and the results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
Our audit
was conducted for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. Schedule II for the year ended
December 31, 2004, listed in the Index, is presented for purposes of additional
analysis and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of RPC, Inc.’s internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
March 11, 2005 expressed an unqualified opinion.
Atlanta,
Georgia
March 11,
2005
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
RPC, Inc.
We have
audited the accompanying consolidated balance sheet of RPC, Inc. and
Subsidiaries as of December 31, 2003, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income (loss) and cash flows
for each of the two years in the period ended December 31, 2003. Our audits also
included the financial statement schedule for each of the two years in the
period ended December 31, 2003, listed in the Index. These financial statements
and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of RPC, Inc. and
Subsidiaries at December 31, 2003, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2003, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule for
each of the two years in the period ended December 31, 2003, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
Atlanta,
Georgia
February
27, 2004 except for the matter discussed in the last paragraph
of Note
1, as to which the date is March 11, 2005
SELECTED
QUARTERLY FINANCIAL DATA
|
Quarters
ended |
|
March
31 |
|
June
30 |
|
September
30 |
|
December
31 |
|
(in
thousands except per share data) |
|
|
|
|
|
|
|
|
|
|
Restated
for the three-for-two stock split effective March 10, 2005 for shares held
on February 10, 2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
80,002 |
|
$ |
85,426 |
|
$ |
88,721 |
|
$ |
85,643 |
|
|
|
|
Net
income |
|
$ |
5,801 |
|
$ |
7,474 |
|
$ |
10,237 |
|
$ |
11,261 |
|
|
|
|
Net
income per share — basic: |
|
$ |
0.14 |
|
$ |
0.18 |
|
$ |
0.24 |
|
$ |
0.26 |
|
|
|
|
Net
income per share — diluted: |
|
$ |
0.13 |
|
$ |
0.17 |
|
$ |
0.24 |
|
$ |
0.26 |
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
60,700 |
|
$ |
70,864 |
|
$ |
69,244 |
|
$ |
69,719 |
|
|
|
|
Net
income |
|
$ |
305 |
|
$ |
4,705 |
|
$ |
2,577 |
|
$ |
3,306 |
|
|
|
|
Net
income per share — basic: |
|
$ |
0.01 |
|
$ |
0.11 |
|
$ |
0.06 |
|
$ |
0.08 |
|
|
|
|
Net
income per share — diluted: |
|
$ |
0.01 |
|
$ |
0.11 |
|
$ |
0.06 |
|
$ |
0.08 |
|
** |
|
** The
sum of the earnings per share for the four quarters differs from annual earnings
per share due to the required method of computing the weighted average shares in
interim periods.
60