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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2003
Commission File No. 1-8726
RPC, INC.
DELAWARE 58-1550825
(State of Incorporation) (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 NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $0.10 PAR VALUE 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. [X] Yes [ ]No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): [X] Yes [ ] No
The aggregate market value of RPC, Inc. Common Stock held by non-affiliates on
June 30, 2003 was $104,778,630 based on the closing price on the New York Stock
Exchange on June 30, 2003 the last business day of the registrant's most
recently completed second fiscal quarter of $11.00 per share.
RPC, Inc. had 28,633,524 shares of Common Stock outstanding as of February 27,
2004.
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. [ ]
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2004 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.
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") (MPX:AMEX).
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, (6)
firefighting and well control, and (7) marine services. RPC acts as a holding
company for its operating business units, Cudd Pressure Control, Patterson
Services, Bronco Oilfield Services (acquired in April 2003), Thru-Tubing
Solutions, Well Control School, International Hammer and others.
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 overhead crane fabricator
and an interactive training software developer.
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 an 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, wire line, 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, Latin
America, Middle East, and Canada. 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
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for this segment include the United States, Gulf of Mexico and mid-continent
regions. Customers primarily include domestic operations of major multi-national
and independent oil and gas producers.
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
29 percent of revenues during 2003, are provided to customers throughout the
Gulf Coast and mid-continent regions of the United States and are generally
utilized in production. 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 11 percent of 2003
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 in a pressurized environment. 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 2003 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
five 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
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.
NITROGEN. 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 to fracturing, nitrogen serves as a complement to our
snubbing and coiled tubing service lines. 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
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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 Argentina, Australia, Bolivia, Colombia,
Egypt, India, Peru, Taiwan 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 16 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 pressure
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 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. The Company started a fishing service line in late 2003. Fishing
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. RPC rents specialized equipment for use with onshore and offshore
oil and gas well drilling, completion and workover activities. The drilling and
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.
RPC is strategically located to serve the major staging points for oil and gas
activities in the Gulf of Mexico and mid-continent regions.
RPC, through 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
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MARINE SERVICES. A liftboat is a self-propelled, self-elevating work platform
with legs, cranes and living accommodations. Our fleet consists of four
liftboats, two of which have leg lengths of 200 feet. Upon arriving at a
destination, a liftboat hydraulically lowers its legs until they are positioned
on the ocean floor, and then jacks up until the work platform is sufficiently
above the water level. Once positioned, the stability, open deck area, crane
capacity, and relatively low cost of operation make liftboats ideal work
platforms for a wide range of offshore activities, including platform
construction, plug and abandonment services, and other non-oilfield related
construction work. Our liftboats have either one or two cranes with lift
capacities up to 75 tons. A liftboat's capability to reposition at a work site
or to move to another work location within a short timeframe adds to its
versatility. In addition, liftboat services are also highly complementary to
RPC's service lines within the Technical Services business segment as it relates
to providing services offshore.
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 RPC'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. RPC's 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.
INDUSTRY
UNITED STATES. RPC provides its services to its domestic customers through a
network of locations strategically positioned 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 and again in
1999, with April 1999 recording the lowest U.S. drilling rig count in the
industry's history.
At the end of 2002, there were 862 domestic working drilling rigs, down 33
percent from the third quarter 2001 peak. U.S. domestic drilling activity in
2003 declined in the beginning of the first quarter, but began a gradual
recovery in the first quarter and rose during the year to a high at the end of
the year of 1,126. This represents a 31 percent increase over the beginning of
2003, but was still 13 percent lower than the 2001 peak. The price of natural
gas rose by 64 percent during 2003 and the price of oil rose by 19 percent
during the period, but drilling activity was not as highly correlated with these
increases in commodity prices as in past cycles.
Historically, gas drilling rigs have typically represented just over 50 percent
of the total drilling rig count. However, gas-directed drilling rigs averaged
approximately 85 percent of the total domestic drilling rig count during 2003.
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 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
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 as the domestic economy improves and
current storage levels of natural gas decrease.
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INTERNATIONAL. RPC has operated in several countries including the major
international oil and natural gas producing areas of Algeria, Argentina,
Bolivia, Canada, Cameroon, Colombia, Gabon, Indonesia, Mexico and Venezuela.
During 2003, RPC performed well control work in Colombia and snubbing work in
Cameroon, Canada and Gabon, and realized an immaterial amount of revenues
through Well Control School in Venezuela and Argentina. We are evaluating new
business opportunities in each of these markets and may resume our operations in
one or all of these markets.
Beginning in the second quarter of 2002 and throughout 2003, the Company had
less international revenues than it had in the previous five years. As part of a
focus on developing other international opportunities, the Company is beginning
work in Kuwait and Egypt during the first quarter of 2004.
RPC provides services to its international customers through wholly-owned
foreign subsidiaries or branch locations. The international market is somewhat
less volatile than the U.S. market although prone to political uncertainties,
including the risk of civil unrest and conflicts. 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.
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 13 in the Notes to Consolidated
Financial Statements for further information on 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 workover activity
worldwide. RPC's principal customers consist of major and independent oil and
natural gas producing companies. During 2003, 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.
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 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, 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.
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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. RPC also owns and operates four offshore
liftboats. For additional information with respect to RPC's lease commitments,
see Note 10 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 operations. 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 and has done so since November 15, 2002.
RISK FACTORS
DEMAND FOR OUR PRODUCTS AND SERVICES IS AFFECTED BY THE VOLATILITY OF OIL
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 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. During 2003, the price of natural gas rose
by 64 percent and the price of oil rose by 19 percent. Although drilling
activity rose as well, it was not as highly correlated with the prices of oil
and natural gas as in past industry cycles. 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
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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 the Gulf of
Mexico and Gulf Coast regions. Due to seasonal differences in weather patterns,
our crews may operate more days in some periods than others. Rainy weather,
hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf
Coast throughout the year may also affect our operations. Accordingly, our
operating results may vary from quarter to quarter, depending on factors outside
of our control.
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.
8
OUR INTERNATIONAL OPERATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
Our operations in various countries including, but not limited to, Africa,
Canada and Latin America 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 65
percent of RPC's outstanding 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. In addition,
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.
ITEM 2. PROPERTIES
RPC owns or leases 61 offices and operating facilities. In addition, RPC leases
6,165 square feet of office space in Atlanta, Georgia that serves as its
headquarters. 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 - Oil and gas administrative office
Houston, Texas - Pipe storage terminal, inspection shed, and pipe coating
facility
Houston, Texas - Operations, sales and administrative office
Irving, Texas - Crane fabrication plant
Morgan City, Louisiana - Pipe cleaning facility
LEASED LOCATIONS
Seminole, Oklahoma - Pumping services facility
Kilgore, Texas - Pumping services facility
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 2003.
9
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.
Date First Elected
------------------
Name and Office with Registrant Age to Present Office
------------------------------- --- -----------------
R. Randall Rollins (1) 72 1/24/84
Chairman of the Board
Richard A. Hubbell (2)
President and
Chief Executive Officer 59 4/22/03
Linda H. Graham (3)
Vice President and
Secretary 67 1/27/87
Ben M. Palmer (4)
Vice President
Chief Financial Officer and Treasurer 43 7/8/96
(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 21, 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 SunTrust Banks, Inc., SunTrust
Banks of Georgia, Dover Downs Gaming and Entertainment, Inc., and Dover
Motorsports, Inc.
(2) Richard A. Hubbell has been the President of RPC, Inc. since 1987 and CEO
since April 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 Vice President and Secretary of RPC, Inc. since
1987 and 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 Vice President, Chief Financial Officer and
Treasurer of RPC, Inc. since 1996 and has served the same roles at Marine
Products Corporation since it was spun off in February 2001.
10
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. At the close of business on February 27, 2004, there were
approximately 2,123 holders of record of the Company's 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, 2003 and 2002 and the quarterly
dividends paid in those periods:
2003 2002
---------------------------------- ---------------------------------
Quarter High Low Dividends High Low Dividends
- ----------------------------------------------------------------------------------------------------
First $ 12.34 $ 9.00 $ 0.025 $ 17.80 $ 12.77 $ 0.025
Second 11.70 9.34 0.025 16.70 8.50 0.025
Third 12.25 9.37 0.025 14.30 9.70 0.025
Fourth 11.17 9.59 0.025 12.75 8.80 0.025
- ----------------------------------------------------------------------------------------------------
The Company has paid cash dividends since the third quarter of 1997. 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.
11
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial data of RPC highlights selected historical
financial and other data and should be read in conjunction with the consolidated
financial statements included elsewhere in this document.
STATEMENT OF OPERATIONS DATA:
Years Ended December 31, 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except employee and per share amounts)
Revenues $ 270,527 $ 209,030 $ 284,521 $ 201,958 $ 119,908
Cost of services rendered and goods sold 168,766 143,362 168,152 124,989 83,762
Selling, general and administrative expenses 52,268 44,852 52,873 37,076 24,722
Depreciation and amortization 33,094 31,242 25,434 17,805 15,837
- ----------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) 16,399 (10,426) 38,062 22,088 (4,413)
Interest expense (income) 153 74 65 (1,443) (1,485)
Other income, net 1,324 2,346 3,126 2,446 1,358
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 17,570 (8,154) 41,123 25,977 (1,570)
Income tax provision (benefit) 6,677 (2,894) 15,627 9,850 (603)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 10,893 (5,260) 25,496 16,127 (967)
Income from discontinued operation,
net of income taxes - - 1,486 13,961 9,118
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 10,893 $ (5,260) $ 26,982 $ 30,088 $ 8,151
- ----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share - basic:
Income (loss) from continuing operations 0.38 (0.19) 0.91 0.58 (0.03)
Income from discontinued operation - - 0.05 0.50 0.32
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ (0.19) $ 0.96 $ 1.08 $ 0.29
- ----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share - diluted:
Income (loss) from continuing operations 0.38 (0.19) 0.89 0.57 (0.03)
Income from discontinued operation - - 0.05 0.49 0.32
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ (0.19) $ 0.94 $ 1.06 $ 0.29
- ----------------------------------------------------------------------------------------------------------------------------
Dividends paid per share $ 0.10 $ 0.10 $ 0.11 $ 0.14 $ 0.14
- ----------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Operating margin percent 6.1% (5.0%) 13.4% 10.9% (3.7%)
Net cash provided by continuing operations $ 50,631 $ 27,556 $ 55,938 $ 11,272 $ 16,419
Net cash used for investing activities (34,670) (21,831) (46,357) (19,890) (16,352)
Net cash used for financing activities (5,192) (4,927) (4,283) (4,392) (9,388)
Depreciation and amortization(a) 33,182 31,342 25,536 17,995 15,962
Capital expenditures $ 30,356 $ 22,481 $ 45,850 $ 35,526 $ 20,319
Employees at end of period(b) 1,529 1,419 1,533 1,487 1,066
BALANCE SHEET DATA AT END OF YEAR:
Accounts receivable, net $ 53,719 $ 40,168 $ 46,928 $ 55,485 $ 33,454
Working capital 63,226 52,646 42,513 47,794 25,851
Property, plant and equipment, net 109,163 105,338 115,046 85,032 68,758
Total assets(c) 226,750 195,954 202,402 277,915 235,715
Long-term debt 4,800 2,410 2,937 848 1,547
Total stockholders' equity(c) $ 151,106 $ 145,081 $ 156,436 $ 169,319 $ 142,808
(a) Depreciation and amortization was derived from the statements of cash
flows. This amount 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.
(b) Represents employees of continuing operations for all periods presented.
(c) Includes assets and stockholders' equity associated with the discontinued
operation prior to 2001.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
RPC provides a broad range of specialized oilfield services primarily to
independent and major oilfield companies engaged in exploration, production and
development of oil and gas properties throughout the United States, including
the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions, and
selected international locations. RPC's business is affected by geopolitical
factors such as political instability in the petroleum-producing regions of the
world, overall economic conditions and weather in the United States, the prices
of oil and natural gas, and our customers' drilling and production activities.
The Company's revenues are earned 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. RPC's
management is presently focused on opportunities to increase its revenues and
earnings through expansion in the Middle East and selected domestic markets, as
well as assessing current operations and focusing on means to reduce costs. The
Company's management also continues to monitor factors that impact the level of
current and expected customer activities, such as the price of oil and natural
gas, among other factors.
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.
OUTLOOK
Drilling activity in the U.S. domestic oilfield, as measured by the rotary rig
count, is stronger than it has been during the past 12 months, but the outlook
continues to be uncertain. The overall domestic rig count during the first two
months of 2004 is approximately 28 percent higher than in the comparable period
in 2003, and all of the increase is attributed to an increase in the rig count
related to drilling for natural gas. This is a favorable trend for the Company's
revenues and earnings because our services tend to be better suited for deep,
high pressure wells, which tend to be the types of wells that produce natural
gas. However, drilling activity in the Gulf of Mexico remains weak, which is an
unfavorable trend because of the Company's presence in this geographic market.
In addition, the prices of oil and natural gas are slightly lower in the first
two months of 2004 than in the comparable period in 2003. If this trend
continues, the result may be lower activity levels among our customers, which
would have a negative impact on our near-term results. The Company's response to
these known uncertainties has been to maintain a high cash balance and make
selective capital expenditures in areas where we believe there is a higher
likelihood of strong customer activity, such as the Rocky Mountains and in
selected markets in the Middle East.
In addition to these known uncertainties impacting the near-term outlook for our
business, our results could also be impacted by the strength of the recovery in
the U.S. economy, renewed tensions in the Middle East and other oil-producing
nations, and the weather in the United States during 2004.
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. The Company believes that, of its
significant accounting policies, the following involve a higher degree of
judgment and complexity:
Allowance for doubtful accounts - Accounts receivable are reduced by an
allowance for amounts that may not be collected in the future. 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. We have established credit evaluation procedures
that 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. The estimated allowance for
doubtful accounts is based on management's evaluation of the overall trends in
the oil and gas industry, financial condition of our customers, our historical
experience, and in the case of foreign customers, our judgments about the
economic and political environment of the related country and region.
Historically, we have had favorable collections experience with most of our
customers.
13
Income taxes - The determination of our income tax provision is complex due to
operations in several tax jurisdictions outside the United States which may be
subject to certain risks that ordinarily would not be expected in the United
States. Tax regimes in certain jurisdictions are subject to significant changes,
which may be applied on a retroactive basis. If this were to occur, our tax
expense could be materially different than the amounts reported. Furthermore, in
determining the requirement for any valuation allowance related to deferred tax
assets, we estimate taxable income into the future and determine the magnitude
of deferred tax assets that are more likely than not to be realized.
Accrued insurance liabilities - The Company has exposure to various contingent
liabilities and future claims. The Company self insures, up to specified limits,
certain risks related to general liability, workers' compensation, vehicle and
equipment liability, and employee health insurance plan costs. The 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. These claims are monitored and the cost estimates are
revised as developments occur relating to such claims. To estimate the ultimate
cost of the claims, the Company applies loss development factors to its
outstanding claims and uses its experience and, where appropriate, the advice of
outside counsel or other experts. The non-current portion of these estimated
outstanding claims is classified as long-term accrued insurance expenses. Upon
the ultimate resolution of these uncertainties, our future financial results
will be impacted by the difference between our estimates and the actual amounts
paid to settle the liabilities.
Depreciable life of assets - The selection of the useful lives of many of the
assets requires the judgment of our personnel to estimate the length of their
useful lives. To the extent that the estimate differs from the actual life of
the assets, our future financial results could be impacted by any changes to the
depreciable lives. We believe the current estimates of the useful lives are
reasonable.
Pension liabilities - Pension costs are actuarially determined and affected by
assumptions including the discount rate, the estimated future return on plan
assets and other factors. The Company evaluates assumptions used on a periodic
basis and makes adjustments to these liabilities as necessary. The Company
utilizes the Moody's Aa long-term corporate bond yield as a basis for
determining the discount rate with a yield adjustment made for the longer
duration of the Company's obligations. The Company evaluates its assumption
regarding the estimated long-term rate of return on plan assets based on its
historical experience and future expectation on investment returns and asset
allocation. The Company chooses a rate of return on plan assets that it believes
is an appropriate long-term average return. The expected return on plan assets
takes into account estimated future investment returns for various asset classes
held in the plans' portfolio. To the extent changes are required in the
assumptions discussed above, the Company's recorded liabilities may have to be
adjusted and may result in a material impact to the results of operations.
14
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Consolidated revenues [IN THOUSANDS] $ 270,527 $ 209,030 $ 284,521
Revenues by business segment [IN THOUSANDS] :
Technical $ 216,321 $ 163,593 $ 214,361
Support 43,909 35,784 57,932
Other 10,297 9,653 12,228
Consolidated operating profit (loss) [IN THOUSANDS] $ 16,399 $ (10,426) $ 38,062
Operating profit (loss) by business segment [IN THOUSANDS] :
Technical $ 22,433 $ (1,162) $ 33,455
Support 2,641 (3,154) 10,136
Other (1,355) (1,603) (1,096)
Corporate expenses $ (7,320) $ (4,507) $ (4,433)
Percentage cost of services rendered & goods sold to revenues 62% 69% 59%
Percentage selling, general & administrative expenses to
revenues 19% 21% 19%
Percentage depreciation and amortization expense to revenues 12% 15% 9%
Average U.S. domestic rig count 1,029 830 1,156
Average natural gas price (per thousand cubic feet (mcf)) $ 5.41 $ 3.29 $ 3.92
Average oil price (per barrel) $ 31.23 $ 26.16 $ 26.00
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
REVENUES. For the year ended December 31, 2003, consolidated revenues increased
29 percent compared to last year 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. During 2003, the average domestic rig count increased 24 percent
compared to 2002. The average price of natural gas increased 64 percent during
2003 compared to 2002, while the average price of oil increased 19 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 percent for the year ended December 31,
2003 compared to the prior year 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. Support Services revenues increased 23 percent for the year ended
December 31, 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 as compared to 2002.
COST OF SERVICES RENDERED AND GOODS SOLD. Cost of services rendered and goods
sold was $168,766,000 in 2003 compared to $143,362,000 in 2002, an 18 percent
increase. As a percentage of revenues, these costs decreased from 69 percent in
2002 to 62 percent in 2003 because of higher utilization of equipment and
personnel. Cost of services rendered and goods sold for Technical Services was
$134,476,000 in 2003 compared to $109,786,000 in 2002, a 22 percent increase.
This increase was due to higher customer activity levels in 2003 compared to
2002, because many of these costs vary directly with activity levels. In
particular, materials and supplies expense within this segment increased in 2003
compared to 2002, because of increases in revenues in several service lines
within the Technical Services segment which require a large amount of materials
for their operations, including Pressure Pumping and Coiled Tubing. Cost of
15
services rendered and goods sold in the Support Services segment was $24,543,000
in 2003 compared to $23,635,000 in 2002, a 4 percent increase. This increase was
due to increases in insurance expense, particularly related to the marine
liftboats, and higher overtime personnel expense. Cost of services rendered and
goods sold in this segment increased less than in Technical Services due to the
relatively fixed nature of some of the personnel and equipment expenses in many
of the services within Support Services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $52,268,000 in 2003 compared to $44,852,000 in
2002. This increase of $7,416,000, or 17 percent, was due to 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. Selling, general and administrative expenses as a percent of
revenues decreased from 21 percent in 2002 to 19 percent in 2003 due to improved
operating leverage.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $33,094,000 in
2003, an increase of $1,852,000 or 6 percent compared to $31,242,000 in 2002.
The increase in depreciation and amortization resulted from the cumulative
effect of the higher levels of growth capital expenditures.
OPERATING PROFIT (LOSS). Operating profit was $16,399,000 in 2003, an increase
of $26,825,000, compared to an operating loss of $10,426,000 in 2002. This
significant increase in operating results was due mainly to an overall
improvement in industry operating conditions, and the resulting increased
revenues, as discussed above.
INTEREST EXPENSE (INCOME), NET. Interest expense increased 107% in 2003 compared
to 2002. RPC's interest expense relates primarily to notes payable to the former
owners of acquired businesses, and is offset by interest income from investment
of its available cash. The Company's available cash is primarily invested in
short-term marketable debt securities. The increase in interest expense, net of
interest income, was due to new notes payable associated with an acquisition
consummated in 2003, lower investment returns due to declining interest rates,
and lower cash and marketable securities balances during 2003. See "Liquidity
and Capital Resources" for additional explanations.
OTHER INCOME, NET. Other income, net was $1,324,000 in 2003, a decrease of
$1,022,000, compared to other income, net of $2,346,000 in 2002. During 2003,
other income includes a gain from the settlement of an insurance claim of
$410,000, proceeds from a settlement of a dispute with a vendor of $200,000, and
gains related to the sale of operating equipment, partially offset by the
recognition of a loss sustained on damaged operating equipment of $289,000.
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
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.
NET INCOME (LOSS). RPC's net income during 2003 was $10,893,000, an increase of
$16,153,000, compared to a net loss of $5,260,000 in 2002. This increase is
consistent with the increases in operating profit and other various factors as
discussed above.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES. RPC generated revenues of $209,030,000 in 2002 compared to
$284,521,000 in 2001, a decrease of $75,491,000 or 27 percent. Revenues
decreased as a result of weak drilling activity domestically and the shut down
of operations in Algeria and Venezuela early in the second quarter, which were
previously our largest international operations. The assets and personnel
involved in these operations related to both the Technical and Support Services
business segments and were re-deployed to the extent possible in our domestic
market areas. The domestic rig count continued the decline begun in the fourth
quarter of 2001 and hit a low of 738 early in the second quarter of 2002. The
average domestic rig count was 830 in 2002 compared to 1,156 in 2001, a 28
percent decrease.
Although oil prices increased 29 percent from the first quarter 2002 to the
fourth quarter 2002 and natural gas prices rose 65 percent during the same
period, the rise in commodity prices failed to lead to a significant increase in
drilling activity during the year. Some of the factors causing this continued
depressed activity during 2002 were U.S. domestic economic weakness, global
political uncertainty, and a warmer than average winter.
COST OF SERVICES RENDERED AND GOODS SOLD. Cost of services rendered and goods
sold was $143,362,000 in 2002 compared to $168,152,000 in 2001, a 15 percent
decrease. This decrease was due to lower customer activity levels and RPC's cost
reduction efforts. Cost of services rendered and goods sold increased from 59
16
percent of revenues in 2001 to 69 percent in 2002. This percentage increase
resulted from lower utilization of equipment and personnel during the period and
because of the fixed nature of many of these expenses. The rate of decline in
cost of services rendered and goods sold was lower than the corresponding rate
of decline in revenues, because of weaker industry conditions, resulting in
significantly lower pricing for our services. Beginning in the fourth quarter of
2001 and continuing throughout 2002, the Company made efforts to reduce its
costs of providing services including reducing its employee headcount.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $44,852,000 in 2002 compared to $52,873,000 in
2001. This decrease of $8,021,000, or 15 percent, was primarily the result of
decreased employment costs from expense reduction efforts prompted by reduced
revenues and reduction in activity. Selling, general and administrative expenses
as a percent of revenues increased from 19 percent in 2001 to 21 percent in
2002. The decrease also resulted from the elimination of several small
non-oilfield business units which did not incur expenses during 2002. Selling,
general and administrative expenses also declined as a result of the shut down
of our operations in Algeria and Venezuela and the deployment of those resources
to lower cost operating environments. However, the rate of decline in selling,
general and administrative expenses was lower than the rate of decline in
revenues, due to the fixed nature of many of these expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $31,242,000
in 2002, an increase of $5,808,000 or 23 percent compared to $25,434,000 in
2001. The increase in depreciation and amortization resulted from the cumulative
effect of the higher levels of growth capital expenditures made during the past
few years, offset slightly by relatively lower capital expenditures during 2002
and the cessation of goodwill amortization. Beginning in 2002, RPC ceased
amortizing goodwill pursuant to SFAS 142. In 2001, the amortization of goodwill
was approximately $382,000.
OPERATING PROFIT (LOSS). Operating loss was $10,426,000 in 2002, a decrease of
$48,488,000, compared to an operating profit of $38,062,000 in 2001. This
significant decline resulted from an overall weakening in industry conditions,
offset somewhat by RPC's cost reduction efforts, as discussed above.
INTEREST EXPENSE (INCOME), NET. Interest expense was $74,000 in 2002 compared to
$65,000 in 2001. RPC's interest expense relates to notes payable to the former
owners of acquired businesses, and is offset by interest income from investment
of its available cash. RPC's available cash is invested in short-term marketable
debt securities. The increase in interest expense, net of interest income, was
due to notes associated with acquisitions consummated in 2001, lower investment
returns due to declining interest rates, and lower cash and marketable
securities balances during 2002. See "Liquidity and Capital Resources" for
additional explanations.
OTHER INCOME, NET. Other income, net was $2,346,000 in 2002, a decrease of
$780,000, compared to other income, net of $3,126,000 in 2001. 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. During 2001, other income included primarily gains
relating to the sale of operating equipment and settlements from various
property claims.
INCOME TAX PROVISION (BENEFIT). The effective income tax rate for 2002 was 35.5
percent while the rate for 2001 was 38 percent. The slight decrease in the
effective tax rate is due to the effect of permanant tax differences between
book and taxable income.
INCOME (LOSS) FROM CONTINUING OPERATIONS (NET OF INCOME TAXES). RPC's loss from
continuing operations was $5,260,000, a decrease of $30,756,000 compared to an
income of $25,496,000 in 2001. This decline is consistent with the decreases in
operating profit.
INCOME FROM DISCONTINUED OPERATION (NET OF INCOME TAXES). RPC realized no income
or loss from the discontinued operation in 2002, compared to net income from
discontinued operation of $1,486,000 in 2001. This decrease is due to the
spin-off of RPC's powerboat manufacturing segment in February 2001, which was
classified as a discontinued operation during 2001.
17
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2003 2002 2001
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 50,631 $ 27,556 $ 55,938
Net cash (used for) investing activities (34,670) (21,831) (46,357)
Net cash used for financing activities $ (5,192) $ (4,927) $ (4,283)
--------------------------------------------------------------------------------------------------------
In February 2001, the Company spun off its powerboat manufacturing segment in a
tax-free spin-off. Historically, the powerboat manufacturing segment generated
more cash than it needed to fund its operations and the excess was transferred
to RPC. Subsequent to the spin-off, any excess cash generated by the spun-off
segment is no longer available to the Company.
The Company's decisions about the amount of cash to be used for investing and
financing purposes are influenced by our capital position and the amount of cash
expected to be provided by operations. The Company's available liquidity is used
to fund expansion of our working capital as business activity levels increase,
to fund growth and maintenance capital expenditures and to fund acquisitions of
businesses. In addition, the Company uses its liquidity to pay dividends to its
common stockholders and to repurchase common stock on the open market.
Our primary sources of liquidity have been cash provided from operations and
debt financing provided by sellers of acquired businesses, supplemented where
needed, by access to a $25 million credit facility, of which $11 million is
currently available, with a financial institution encompassing letters of credit
and a demand note. The credit facility is renewable annually with interest
payable monthly on outstanding advances under the demand note generally at LIBOR
plus 50 basis points. The portion of the credit facility that is not currently
available supports letters of credits relating to self-insurance programs or
contract bids. There were no outstanding borrowings under the credit facility at
February 27, 2004. Generally we have not maintained balances under this bank
note for extended periods of time. Unless we were to make a large, strategic
business acquisition, we do not currently anticipate maintaining large
outstanding debt balances in the future. Beginning in the fourth quarter of 2001
and throughout 2002, the Company reduced its capital expenditure levels in
response to weaker industry conditions and uncertainty with regard to the
timing of a recovery in customer activity levels. During 2003, the Company
increased its capital expenditures for operating equipment in order to take
advantage of improving industry conditions. In addition, the Company has been
assessing current operations and focusing on reducing costs to enhance the
Company's financial performance. Due to improving industry conditions and the
corresponding ability to generate more cash from operating activities, the
Company anticipates increasing its capital expenditures to approximately $40
million during 2004, however, based on industry conditions management will
adjust the level of expenditures to the extent it deems advisable.
Cash provided by operating activities in 2003 increased $23,075,000, or 84
percent, compared to 2002. Cash provided by operating activities increased
primarily due to improved operating results coupled with receipt of a tax refund
in the third quarter of 2003 resulting from carryback of prior year net
operating losses. These increases were partially offset by higher working
capital requirements during the current year 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 $12,839,000, or 59 percent,
compared to 2002, primarily as a result of increased capital expenditures with
improved business conditions and the acquisition completed during the second
quarter of 2003. In accordance with the respective purchase agreements of
certain business acquisitions, earnout payments to sellers of acquired
businesses may be paid on an annual basis and are recorded as goodwill when the
earnout payment amounts are determinable. Earnout payments were made to sellers
of acquired businesses totaling $1,885,000 in 2002 and $286,000 in 2001, and
were recorded as an increase to the purchase price of the respective business.
Estimated earnouts totaling $2,835,000 have been recorded as of December 31,
2003 as additional goodwill and will be paid in early 2004.
Cash used in financing activities for 2003 increased $265,000, or 5 percent,
compared to 2002. The increase is primarily as 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. Under a plan authorized by its Board of Directors, the
Company has purchased an aggregate of 1,839,000 shares of its common stock on
the open market during the current and prior periods and can purchase up to
161,000 additional shares. At the January 27, 2004 Board of Directors' Meeting,
the Board approved a 20 percent increase in the quarterly cash dividend, from
$0.025 to $0.03 to common shareholders of record on February 10, 2004 payable
March 10, 2004. At this meeting, the Board also approved an increase of 1.5
million shares to the previous stock repurchase program.
18
The prices for oil and natural gas remain historically strong, but until
recently, have failed to lead to an increase in drilling activity. Prices have
also been volatile in the last several quarters, due to uncertainties over the
conflict in the Middle East and fluctuating natural gas storage levels. Although
the weekly domestic rig count has increased, the Company still believes that the
operating environment for our services is uncertain in the near term. As a
result of this uncertainty, RPC is monitoring customer exploration and
production activity levels very closely, and is only making capital expenditures
to support known customer requirements or to maintain our existing fleet of
operating equipment.
The Company's Retirement Income Plan, a trusteed defined benefit pension plan,
provides monthly benefits upon retirement at age 65 to eligible employees. In
conjunction with the spin off of Chaparral in February 2001, the Company and
Marine Products entered into an employee benefits agreement that provides for
Marine Products to continue participating in the Plan. As of February 28, 2001,
the plan became a multiple employer plan, with Marine Products as an adopting
employer. In the first quarter of 2002, the Company's Board of Directors
approved a resolution to cease all future retirement benefit accruals under the
Retirement Income Plan effective March 31, 2002. However, the adverse conditions
in the equity markets, along with the low interest rate environment, have had an
unfavorable impact on the funded status of the Company's defined benefit pension
plan. Additional contributions to the pension plan of approximately $4,800,000
will be required in 2004 to achieve the Company's funding objectives.
We believe the liquidity provided by our existing cash, cash equivalents and
marketable securities, and cash expected to be generated from operations, will
be sufficient to meet our liquidity requirements through at least December 31,
2004. We believe our liquidity and overall strong capital position will allow us
to continue to grow and provide the opportunity to take advantage of business
opportunities that may arise.
ACQUISITION
On April 1, 2003, RPC purchased all of the assets of Bronco Oilfield Services,
Inc. ("Bronco"), a privately-held company, specializing in surface pressure
control services and equipment. The aggregate purchase price was $11,033,000,
including $5,533,000 of cash, $3,500,000 in seller financed debt and RPC common
stock valued at $2,000,000. Interest on the seller financed debt accrues at 6
percent, with principal to be repaid over five years in equal annual
installments. Additionally, Bronco's former owners, who have remained as
employees, are eligible for an earnout to be paid in cash and stock, based upon
future earnings in accordance with the agreement on an annual basis. The results
of Bronco's acquisition have been included in the consolidated financial
statements since the date of acquisition. Further information related to the
acquisition has been included in the accompanying notes to the consolidated
financial statements.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any material off balance sheet arrangements.
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 contractual
obligations as of December 31, 2003:
Contractual obligations Payments due by period
- ------------------------------------------------------------------------------------------------
Less than 1-3 3-5 More than
[IN THOUSANDS] Total 1 year years years 5 years
- ------------------------------------------------------------------------------------------------
Long-term debt $ 5,910 $ 1,110 $ 4,100 $ 700 $ -
Capital lease obligations - - - - -
Operating leases (1) 3,614 1,579 1,961 74 -
Purchase obligations (2) - - - - -
Other long-term liabilities (3) 2,835 2,835 - - -
- ------------------------------------------------------------------------------------------------
Total contractual obligations $ 12,359 $ 5,524 $ 6,061 $ 774 $ -
- ------------------------------------------------------------------------------------------------
(1) Operating leases represent agreements for various office locations and
equipment.
(2) 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.
(3) Long-term liabilities on the balance sheet primarily represent pension
obligations, deferred taxes and earnout payments. Minimum pension
funding contributions are not included as such amounts have not been
determined. The Company expects to make a contribution to the multiple
employer pension plan of approximately $4,800,000 in 2004 which it
expects to fund with available cash or from cash generated from
operating activities. Estimated earnout payments to be paid in 2004
are based on 2003 results of certain acquired businesses and total
$2,835,000.
19
RELATED PARTY TRANSACTIONS
Effective February 28, 2001, the Company began providing certain administrative
services to Marine Products. The service agreements are more fully described in
Note 2 to the consolidated financial statements. Charges from the Company (or
from corporations that are subsidiaries of the Company) for such services
aggregated approximately $496,000 in 2003, $588,000 in 2002 and $868,000 in
2001. The Company's directors are also directors of Marine Products and certain
officers are employees of both the Company and Marine Products.
The Company periodically purchases in the ordinary course of business products
or services from vendors who are owned by significant officers or shareholders,
or affiliated with the directors of RPC. Total amounts paid to these affiliated
parties were approximately $1,058,000 in 2003 and $502,000 in 2002. In addition,
the overhead crane fabrication division of RPC recorded revenues of $171,000 in
2003 and $332,000 in 2002 from Marine Products related to the sale, installation
and service of overhead cranes.
RPC sponsors a multiple employer plan that includes Marine Products. 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.
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation (FIN) No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES. The
Interpretation requires that a variable interest entity, as defined, be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements apply to entities created
prior to January 31, 2003 in the first fiscal year or interim period beginning
after December 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company has not entered into any
agreements subject to FIN 46 since January 31, 2003 and does not have any
agreements in place that were executed prior to January 31, 2003 that will be
subject to the Interpretation's provisions when it becomes fully effective in
the first quarter of 2004. As a result, the Company believes the adoption of
the Interpretation will not have an impact on the financial position, results of
operations or liquidity of the Company.
In December 2003, the FASB reissued Statement of Financial Accounting Standard
("SFAS") 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits," that replaced the existing pronouncement. The revised SFAS does not
change the measurement or recognition provisions; however, it requires
additional disclosures about assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other post retirement benefit
plans. The disclosure rules apply to annual financial statements for fiscal
years ending after December 15, 2003. In addition, there are additional
disclosure requirements for the interim-period financial reports starting the
first quarter of 2004. The Company has adopted the provisions of SFAS 132 and
presented the additional disclosures in the notes to the consolidated financial
statements. The adoption of SFAS 132 did not have a material effect on the
financial position, results of operations or liquidity of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RPC maintains an investment portfolio, comprised of U.S. Government, corporate
and municipal debt securities, which is subject to interest rate risk exposure.
As of December 31, 2003, we are not subject to material interest rate risk
exposure on these securities since they are highly liquid with maturities of
three months or less. 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, 2003, RPC had debt with variable interest rates that
exposes RPC to certain market risks. RPC has performed an interest rate
sensitivity analysis related to the debt instruments using a duration model over
the near term of the securities and the term of the debt with a 10 percent
change in interest rates. RPC is not subject to material interest rate risk
exposure based on this analysis, and no material changes in market risk
exposures or how those risks are managed is expected.
As of December 31, 2003, RPC had accounts receivable of approximately $54
million (net of an allowance for doubtful accounts of approximately $2.5
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.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
RPC, INC. AND SUBSIDIARIES
(IN THOUSANDS EXCEPT SHARE INFORMATION)
DECEMBER 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 22,302 $ 11,533
Accounts receivable, net 53,719 40,168
Inventories 10,057 9,206
Deferred income taxes 6,394 5,873
Income taxes receivable 4,149 8,817
Prepaid expenses and other current assets 3,614 3,478
- ------------------------------------------------------------------------------------------------------------------------
Current assets 100,235 79,075
- ------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 109,163 105,338
Intangibles, net 15,488 9,609
Other assets 1,864 1,932
- ------------------------------------------------------------------------------------------------------------------------
Total assets $226,750 $195,954
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 19,603 $ 12,280
Accrued payroll and related expenses 8,526 7,641
Accrued insurance expenses 2,852 2,800
Accrued state, local and other taxes 1,549 1,659
Current portion of long-term debt 1,110 552
Other accrued expenses 3,369 1,497
- ------------------------------------------------------------------------------------------------------------------------
Current liabilities 37,009 26,429
- ------------------------------------------------------------------------------------------------------------------------
Long-term accrued insurance expenses 5,856 4,898
Long-term debt 4,800 2,410
Long-term pension liability 12,972 6,931
Deferred income taxes 13,296 8,888
Other long-term liabilities 1,711 1,317
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 75,644 50,873
- ------------------------------------------------------------------------------------------------------------------------
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,
28,626,320 shares issued in 2003 and 28,607,601 shares issued in 2002 2,862 2,861
Capital in excess of par value 26,796 26,431
Retained earnings 128,824 120,805
Deferred compensation (1,076) (1,186)
Accumulated other comprehensive loss (6,300) (3,830)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 151,106 145,081
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $226,750 $195,954
========================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
21
CONSOLIDATED STATEMENTS OF OPERATIONS
RPC, INC. AND SUBSIDIARIES
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
REVENUES $270,527 $209,030 $284,521
COSTS AND EXPENSES:
Cost of services rendered and goods sold 168,766 143,362 168,152
Selling, general and administrative expenses 52,268 44,852 52,873
Depreciation and amortization 33,094 31,242 25,434
- -------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) 16,399 (10,426) 38,062
Interest expense, net 153 74 65
Other income, net 1,324 2,346 3,126
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 17,570 (8,154) 41,123
Income tax provision (benefit) 6,677 (2,894) 15,627
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 10,893 (5,260) 25,496
Income from discontinued operation, net of income
taxes of $834 in 2001 - - 1,486
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 10,893 $(5,260) $ 26,982
=========================================================================================================================
EARNINGS (LOSS) PER SHARE - BASIC
Income (loss) from continuing operations $ 0.38 $ (0.19) $ 0.91
Income from discontinued operation - - 0.05
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ (0.19) $ 0.96
=========================================================================================================================
EARNINGS (LOSS) PER SHARE - DILUTED
Income (loss) from continuing operations $ 0.38 $ (0.19) $ 0.89
Income from discontinued operation - - 0.05
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ (0.19) $ 0.94
=========================================================================================================================
Dividends paid per share $ 0.10 $ 0.10 $ 0.11
=========================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
RPC, INC. AND SUBSIDIARIES (IN THOUSANDS)
Common Stock
================= Accumulated
Comprehensive Capital in Other
Three Years Ended Income Excess of Deferred Retained Comprehensive
December 31, 2003 (Loss) Shares Amount Par Value Compensation Earnings Loss Total
===========================================================================================================================
Balance,
December 31, 2000 28,303 $2,830 $ 22,541 $ (1,337) $ 145,285 $ - $ 169,319
- ---------------------------------------------------------------------------------------------------------------------------
Stock issued for stock
incentive plans, net 169 17 1,489 (298) - - 1,208
Stock purchased and
retired (61) (6) (820) - - - (826)
Spin-off of Marine
Products Corporation - - (51) (40,199) - (40,250)
Stock issued in
connection with
purchase of business 280 28 3,972 - - - 4,000
Net income $ 26,982 - - - 26,982 - 26,982
Minimum pension
liability adjustment,
net of taxes of $528 (861) - - - - (861) (861)
----------
Comprehensive income $ 26,121
==========
Dividends declared - - - (3,136) - (3,136)
- ---------------------------------------------------------------------------------------------------------------------------
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 adjustment,
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)
- ---------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2002 28,607 2,861 26,431 (1,186) 120,805 (3,830) 145,081
- ---------------------------------------------------------------------------------------------------------------------------
Stock issued for stock 29 3 233 110 - - 346
incentive plans, net
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 adjustment,
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)
- ---------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2003 28,626 $2,862 $ 26,796 $ (1,076) $ 128,824 $ (6,300) $ 151,106
===========================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
RPC, INC. AND SUBSIDIARIES
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 10,893 $ (5,260) $ 26,982
Noncash charges (credits) to earnings:
Depreciation and amortization 33,182 31,342 25,536
Gain on sale of equipment and property (36) (1,353) (1,642)
Deferred income tax provision 5,401 9,193 1,400
Income from discontinued operation - - (1,486)
(Increase) decrease in assets:
Accounts receivable (13,551) 6,760 8,557
Income taxes receivable 4,668 (6,564) (2,072)
Inventories (455) (794) (883)
Prepaid expenses and other current assets (117) 461 (1,382)
Other noncurrent assets 497 (501) (234)
Increase (decrease) in liabilities:
Accounts payable 7,323 205 1,838
Income taxes payable - - (2,717)
Accrued payroll and related expenses 2,888 (2,482) 4,061
Accrued insurance expenses 1,010 (2,403) (833)
Accrued state, local and other taxes (110) (1,237) (1,187)
Other accrued expenses (962) 189 -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 50,631 27,556 55,938
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (30,356) (22,481) (45,850)
Purchase of businesses (6,210) (1,885) (8,391)
Proceeds from sale of assets 1,896 2,535 3,961
Net sale of marketable securities - - 17,756
Transfer of cash and marketable securities to discontinued operation - - (13,833)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (34,670) (21,831) (46,357)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of dividends (2,874) (2,867) (3,136)
Payments on debt (552) (1,365) (241)
Cash paid for common stock purchased and retired (1,870) (882) (826)
Proceeds received upon exercise of stock options 104 187 534
Payment to discontinued operation - - (614)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (5,192) (4,927) (4,283)
Net increase in cash and cash equivalents 10,769 798 5,298
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 11,533 10,735 5,437
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 22,302 $ 11,533 $ 10,735
=======================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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. On February 28, 2001, the
Company distributed its powerboat manufacturing segment to RPC stockholders
through a tax-free spin-off transaction (the "spin-off"). Accordingly, as
discussed in Note 2, this segment has been accounted for as a discontinued
operation and the accompanying consolidated financial statements for 2001 have
been restated to report separately the cashflows and operating results of this
discontinued operation.
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.
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
The Company recognizes revenue in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition," which
clarifies the basic criteria for recognizing revenue. RPC recognizes revenue
when an agreement exists, prices are determinable, services and products are
delivered and collectibility is reasonably assured.
During 2002, the Company adopted Emerging Issues Task Force ("EITF") No. 01-14
"Income Statement Characterization of Reimbursements Received for
'Out-of-Pocket' Expenses Incurred," which clarifies that the classification of
such expenses be reported gross in the statement of operations. The effect of
this adoption was to increase revenues and cost of services rendered and goods
sold by $3,312,000 and $4,595,000 for the years ended December 31, 2002 and
2001. In conjunction with the adoption of EITF No. 01-14 in the fourth quarter
of 2002, the Company determined that certain other pass through costs and
expenses billable to customers are more appropriately classified as gross in the
statement of operations. This change resulted in a corresponding increase in
revenues and cost of services rendered and goods sold of $10,192,000 in 2002 and
$14,984,000 in 2001. These changes in presentation had no impact on operating
profit, net income, or earnings per share.
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.
25
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 several large, well-capitalized financial institutions, and
RPC's policy restricts investment in any securities rated less than "investment
grade" by national rating services.
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. Realized gains and losses and declines in
value judged to be other than temporary with respect to available-for-sale
securities are included in interest income. The cost of securities sold is based
on the specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest income. The Company
did not realize any gains on securities during 2003, 2002 and 2001. Management
determines the appropriate classification of debt securities 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
allowance for doubtful accounts is estimated based upon historical write-off
percentages, known problem accounts, and current economic conditions. 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 provisions for depreciation and amortization are 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 recorded. Management believes
that the long-lived assets in the accompanying balance sheets are appropriately
valued.
INTANGIBLES
Intangibles consist primarily of goodwill and non-compete agreements related to
businesses acquired. Goodwill represents the excess of the purchase price over
the fair value of net assets of businesses acquired. The carrying amount of
goodwill was $15,396,000 at December 31, 2003 and $9,476,000 at December 31,
2002. During 2001, the values assigned to all intangible assets, including
goodwill, were amortized on a straight-line basis over the estimated useful
lives of the assets, which did not exceed 20 years. In connection with the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", the Company
reviewed the classification of its goodwill and other intangible assets.
Goodwill is no longer amortized to earnings, but instead is subject to an annual
test for impairment. The Company completed an initial impairment analysis upon
adoption of SFAS No. 142 and a subsequent analysis during the fourth quarter of
2003. Based upon the results of these analyses, the Company has concluded that
no impairment of its goodwill has occurred.
26
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, based on the estimated
useful life.
The carrying amount and accumulated amortization for non-compete agreements are
as follows:
December 31, 2003 2002
----------------------------------------------------------------------
Non-compete agreements $ 450,000 $ 450,000
Less: accumulated amortization (371,683) (331,675)
----------------------------------------------------------------------
$ 78,317 $ 118,325
======================================================================
Had the Company adopted the provisions of SFAS No. 142 as of January 1, 2001,
the effects on income from continuing operations, discontinued operation and net
income would have been as follows:
Years ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------
(IN THOUSANDS)
Income (loss) from continuing operations $ 10,893 $ (5,260) $ 25,496
Income from discontinued operation - - 1,486
---------------------------------------------------------------------------------------------
Net income (loss) - as reported 10,893 (5,260) 26,982
Effect of goodwill amortization, net of taxes:
Continuing operations - - 237
Discontinued operation - - 71
---------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 10,893 $ (5,260) $ 27,290
=============================================================================================
Pro forma basic (loss) income per share:
Continuing operations $ 0.38 $ (0.19) $ 0.92
Discontinued operation - - 0.06
---------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ (0.19) $ 0.98
=============================================================================================
Pro forma diluted (loss) income per share:
Continuing operations $ 0.38 $ (0.19) $ 0.90
Discontinued operation - - 0.05
---------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ (0.19) $ 0.95
=============================================================================================
Amortization of non-compete agreements was approximately $40,000 in 2003,
$80,000 in 2002, and $43,000 in 2001. Goodwill amortization was $382,000 in
2001. Estimated amortization for the remaining useful lives of non-compete
agreements is as follows:
2004 $ 40,000
2005 28,300
2006 10,000
INSURANCE EXPENSES
RPC self insures, up to certain policy-specified limits, certain risks related
to general liability, product liability, workers' compensation, vehicle and
equipment liability, and employee health insurance plan costs. The estimated
cost of claims under these self-insurance programs are 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.
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
27
shares included in diluted earnings per share, but excluded from basic earnings
per share. A reconciliation of the weighted shares outstanding is as follows:
2003 2002 2001
------------------------------------------------------------------------------------------------
Basic 28,370,148 28,262,016 28,077,514
Dilutive effect of stock options and
restricted shares 399,323 - 515,288
------------------------------------------------------------------------------------------------
Diluted 28,769,471 28,262,016 28,592,802
================================================================================================
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 notes payable. 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 long-term debt approximates fair value since the interest rates are
market based and are generally adjusted annually.
NEW ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards
Board ("FASB") issued FASB Interpretation (FIN) No. 46, "Consolidation of
Variable Interest Entities." The Interpretation requires that a variable
interest entity, as defined, be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to entities created prior to January 31, 2003 in the first fiscal year or
interim period ending after December 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
not entered into any agreements subject to FIN 46 since January 31, 2003 and
does not have any agreements in place that were executed prior to January 31,
2003 that will be subject to the Interpretation's provisions when it becomes
fully effective in the first quarter of 2004. As a result, the Company believes
that the adoption of the Interpretation will not have an impact on the financial
position, results of operations or liquidity of the Company.
In December 2003, the FASB reissued Statement of Financial Accounting Standard
("SFAS") No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits," that replaced the existing pronouncement. The revised SFAS does not
change the measurement or recognition provisions; however, it requires
additional disclosures about assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other post retirement benefit
plans. The disclosure rules apply to annual financial statements for fiscal
years ending after December 15, 2003. In addition, there are additional
disclosure requirements for the interim-period financial reports starting the
first quarter of 2004. The Company has adopted the provisions of SFAS 132 and
presented the additional disclosures in Note 11 to the consolidated financial
statements. The adoption of SFAS 132 did not have a material effect on the
financial position, results of operations or liquidity of the Company.
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 over the vesting period for the shares.
RPC recorded amortization of deferred compensation totaling $241,000 in 2003,
$255,000 in 2002, and $455,000 in 2001 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:
28
Years ended December 31, 2003 2002 2001
--------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Income (loss) from continuing operations $ 10,893 $ (5,260) $ 25,496
Income from discontinued operation - - 1,486
--------------------------------------------------------------------------------------------------------------
Net income (loss) - as reported 10,893 (5,260) 26,982
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax 150 164 282
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effect 957 767 728
--------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 10,086 $ (5,863) $ 26,536
==============================================================================================================
Basic (loss) income per share as reported:
Continuing operations $ 0.38 $ (0.19) $ 0.91
Discontinued operation - - 0.05
Net income (loss) $ 0.38 $ (0.19) $ 0.96
Pro forma basic (loss) income per share:
Continuing operations $ 0.36 $ (0.21) $ 0.89
Discontinued operation - - 0.05
--------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.36 $ (0.21) $ 0.94
==============================================================================================================
Diluted (loss) income per share as reported:
Continuing operations $ 0.38 $ (0.19) $ 0.89
Discontinued operation - - 0.05
--------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ (0.19) $ 0.94
==============================================================================================================
Pro forma diluted (loss) income per share:
Continuing operations $ 0.35 $ (0.21) $ 0.88
Discontinued operation - - 0.05
--------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.35 $ (0.21) $ 0.93
==============================================================================================================
The Company has computed for pro forma disclosure purposes the value of all
options granted during 2003, 2002, and 2001 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following weighted average
assumptions for grants:
2003 2002 2001
- ------------------------------------------------------------------------------
Risk-free interest rate 1.1% 2.9% 4.9%
Expected dividend yield 1% 1% 1%
Expected lives 7 years 7 years 7 years
Expected volatility 43-46% 43-46% 43-46%
==============================================================================
The total fair value of options granted to RPC employees were $2,534,000 in
2003, $663,000 in 2002 and $2,913,000 in 2001.
NOTE 2: DISCONTINUED OPERATION
In January 2000, the Board of Directors of RPC announced that it planned to
spin-off to stockholders the business conducted through Chaparral Boats, Inc.
("Chaparral"), RPC's powerboat manufacturing segment. The spin-off transaction
was approved by RPC's Board of Directors on February 12, 2001. 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
29
Products to RPC stockholders. RPC stockholders received 0.6 shares of Marine
Products common stock for each share of RPC common stock owned as of the record
date. Based on an Internal Revenue Service Private Letter ruling, the spin-off
was tax-free to RPC and RPC stockholders, except for cash received for any
fractional shares. The spin-off was consummated on February 28, 2001, with
17,012,277 shares of Marine Products common stock distributed to RPC
stockholders.
For the first two months of 2001, the powerboat manufacturing segment of RPC has
been accounted for as a discontinued operation and, accordingly, the
accompanying consolidated financial statements of RPC have been restated to
report separately the operating results of this discontinued operation.
30
A summary of the operating results of RPC's powerboat manufacturing segment for
the two months in 2001 is as follows:
YEARS ENDED DECEMBER 31, 2001
- --------------------------------------------------------------
(IN THOUSANDS)
Revenues $ 24,092
Operating income 2,747
Income before income taxes 2,320
Income tax provision 834
- --------------------------------------------------------------
Net income $ 1,486
==============================================================
The Transition Support Services Agreement executed in connection with the
spin-off stipulates that RPC provide certain services, including financial
reporting and income tax administration, acquisition assistance, etc. to Marine
Products until the agreement is terminated by either party. RPC charged Marine
Products $496,000 in 2003, $588,000 in 2002 and $868,000 in 2001 for these
services. Certain costs allocated by RPC to Marine Products in 2001 are now
incurred directly by Marine Products.
Refer to Note 12 for details regarding certain officers being employees of both
RPC and Marine Products.
NOTE 3: 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. During 2001, the Company completed two
acquisitions. All acquisitions were accounted for under the purchase method of
accounting. Pro forma results of operations have not been presented for these
acquisitions because the effects of them were not material to the Company on
either an individual or aggregate basis. The results of operations of each
acquisition are included in the Company's consolidated statements of operations
from the respective dates of acquisition. All goodwill related to these
acquisitions has been assigned to the Technical Services segment.
A summary of the Company's purchase transactions is included in the following
table (in thousands, except share amounts):
Entity
Name
and
Description Operating Other
of Business equipment Non-compete fixed
Acquired Date Consideration Inventory and vehicles Goodwill agreements assets Form of consideration
- --------------------------------------------------------------------------------------------------------------------------------
Bronco >$5,533 in cash
Oilfield 4/03 $ 11,033 $ 395 $ 8,189 $ 2,449 $ - $ - >179,191 restricted
Services, shares valued at $2,000
Inc. >$3,500 in promissory
(Production note payable in five
Rental annual installments
Equipment) plus interest at 6
percent fixed rate
>Potential earnout
Mathews 7/01 $ 11,000 $ - $ 7,396 $ 2,856 $ 100 $ 648 >$5,000 in cash
Energy >280,446 restricted
Services, shares valued at $4,000
Inc. >$2,000 in promissory
(Pressure note, payable in full
Pumping) after four years,
plus interest payable
quarterly at prime rate
>Potential earnout
Sooner 2/01 $ 4,355 $ 317 $ 2,788 $ 1,250 $ - $ - >$3,105 in cash
Testing, Inc. >$1,250 in promissory
(Pressure note payable in three
Pumping) annual installments
plus interest at
prime rate
>Potential earnout
31
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. The consolidated
statements 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. The consolidated statements of cash
flows for the year ended December 31, 2001 excludes the $3,250,000 of promissory
notes payable in connection with these acquisitions and the $4,000,000 common
stock issuance. Earnout payments due to sellers of acquired businesses totaled
$286,000 in 2001 and $1,885,000 in 2002. These payments which were paid
subsequent to each respective year end, were recorded as goodwill. Estimated
earnouts relating to 2003 operating results totaling $2,835,000 have been
recorded as of December 31, 2003 and included in goodwill and other accrued
expenses. No earnouts were payable in 2003 related to 2002 operating results.
NOTE 4: ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for doubtful accounts of
$2,539,000 at December 31, 2003 and $2,461,000 at December 31, 2002.
NOTE 5: INVENTORIES
Inventories consist of the following:
December 31, 2003 2002
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Raw materials and supplies $ 8,251 $6,920
Work in process 317 428
Finished goods 1,489 1,858
- --------------------------------------------------------------------------------------------------------
Total inventories $10,057 $9,206
========================================================================================================
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are presented at cost net of accumulated
depreciation and consist of the following:
December 31, 2003 2002
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Land $ 5,464 $ 5,298
Buildings and leasehold improvements 30,444 28,789
Operating equipment 221,770 206,016
Capitalized software 11,556 10,676
Furniture and fixtures 2,710 2,010
Vehicles 47,124 40,337
Construction in progress 3,449 850
- --------------------------------------------------------------------------------------------------------
Gross property, plant and equipment 322,517 293,976
Less: accumulated depreciation 213,354 188,638
- --------------------------------------------------------------------------------------------------------
Net property, plant and equipment $109,163 $105,338
========================================================================================================
Depreciation expense was $32,901,000 in 2003, $31,007,000 in 2002, and
$24,656,000 in 2001. The original cost of equipment under capital lease was
$846,000, and accumulated depreciation at December 31, 2002 was $357,000. There
are no capital leases outstanding as of December 31, 2003.
32
NOTE 7: INCOME TAXES
The following table lists the components of the provision (benefit) for income taxes from continuing operations:
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Current:
Federal $ 925 $ (11,882) $12,119
State 164 (380) 1,271
Foreign 187 175 837
Deferred:
Federal 4,975 8,467 1,289
State 426 726 111
- --------------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $6,677 $ (2,894) $15,627
========================================================================================================
Reconciliation between the federal statutory rate and RPC's effective tax rate is as follows:
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 34.0% 35.0%
State income taxes 4.8 3.1 3.0
Other (1.8) (1.6) -
- --------------------------------------------------------------------------------------------------------
Effective tax rate 38.0% 35.5% 38.0%
========================================================================================================
Significant components of the Company's deferred tax assets and liabilities are as follows:
December 31, 2003 2002
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Deferred tax assets:
Self-insurance $ 3,848 $ 3,221
Pension 4,153 1,924
State net operating loss carryforwards 2,421 1,431
Bad debts 1,046 803
Accrued payroll 492 380
All others 355 607
Valuation allowance (977) (978)
- --------------------------------------------------------------------------------------------------------
Gross deferred tax assets 11,338 7,388
- --------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $(17,657) (9,619)
Stock-based compensation (34) (35)
All others (549) (749)
- --------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities (18,240) (10,403)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ (6,902) $ (3,015)
- --------------------------------------------------------------------------------------------------------
The Company and Marine Products Corporation have entered into a tax-sharing and indemnification agreement
whereby any subsequent income tax adjustment resulting in a change in income tax assets or liabilities of
either RPC or Marine Products prior to the spin-off will be settled through an exchange of cash. No
settlements occurred in 2003 and approximately $140,000 was paid by RPC in settlements in 2002.
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.
33
RPC has net operating loss carryforwards related to state income taxes of
approximately $2.4 million that expire in 2003 through 2017. The Company has
booked a valuation allowance of approximately $1.0 million against this amount
that represents carryforwards that the Company does not expect to utilize.
Total income tax (refunds) payments, net, were $(3,263,000) in 2003,
($4,097,000) in 2002 and $15,615,000 in 2001.
NOTE 8: LONG-TERM DEBT
At December 31, 2003, future minimum payments on long-term debt were as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 $1,110
2005 2,700
2006 700
2007 700
2008 700
- --------------------------------------------------------------------------------
Total minimum principal payments $5,910
================================================================================
Cash interest paid was approximately $79,000 in 2003, $266,000 in 2002 and
$262,000 in 2001.
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 $13,390,000 as of December 31, 2003
and for $10,587,000 as of December 31, 2002.
The long-term debt of RPC as of December 31, 2003 and 2002 is summarized as
follows:
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------
Maturity Range of
Type Dates Interest Rates 2003 2002
- ------------------------------------------------------------------------------------------------
Notes payable related to acquisitions 2004 - 2008 Prime $ 5,910 $ 2,830
Capital lease 2003 11.76% - 132
- ------------------------------------------------------------------------------------------------
Total debt 5,910 2,962
Less: current portion 1,110 552
- ------------------------------------------------------------------------------------------------
Long-term debt $ 4,800 $ 2,410
================================================================================================
NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of the following (in thousands):
Minimum Unrealized Total
pension gain (loss) on
liability securities
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ (861) $ - $ (861)
Change during 2002:
Before-tax amount (5,023) 235 (4,788)
Tax (expense) benefit 1,909 (90) 1,819
- -------------------------------------------------------------------------------------------------------------------------
Total activity in 2002 (3,114) 145 (2,969)
- -------------------------------------------------------------------------------------------------------------------------
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)
=========================================================================================================================
34
NOTE 10: COMMITMENTS AND CONTINGENCIES
Minimum annual rentals, principally for noncancelable real estate leases with
terms in excess of one year, in effect at December 31, 2003, are summarized in
the following table:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 $1,579
2005 1,211
2006 514
2007 236
2008 74
- --------------------------------------------------------------------------------
Total rental commitments $3,614
================================================================================
Total rental expense charged to operations was approximately $4,120,000 in 2003,
$3,930,000 in 2002, and $4,164,000 in 2001.
RPC is a defendant in a number of lawsuits that allege that plaintiffs have been
damaged as a result of the rendering of services by RPC personnel and equipment.
RPC is vigorously contesting these actions. Management, after consultation with
legal counsel, is of the opinion that the outcome of these lawsuits will not
have a material adverse effect on the financial position, results of operations
or liquidity of RPC.
NOTE 11: EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The Company's Retirement Income Plan, a trusteed defined benefit pension plan,
provides monthly benefits upon retirement at age 65 to eligible employees. In
conjunction with the spin-off of Chaparral in February 2001, the Company and
Marine Products entered into an employee benefits agreement that provides for
Marine Products to continue participating in the Plan. 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 Retirement
Income 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 expected to be made over a seven year period
beginning in 2002 to either a non-qualified Supplemental Executive 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 $479,000 for 2003 and $437,000 for 2002. The Company permits
eligible employees to defer a portion of their compensation into the
nonqualified plan.
The following table sets forth the funded status of the retirement income plan
and the amounts recognized in RPC's consolidated balance sheets:
35
December 31, 2003 2002
- -------------------------------------------------------------------------------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 24,368 $ 24,984
Service cost - 332
Interest cost 1,937 1,749
Amendments - 154
Actuarial loss 7,079 4,039
Liability transfer (3,314) -
Benefits paid (1,100) (929)
Curtailments - (5,961)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $ 28,970 $ 24,368
- -------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 17,682 $ 18,794
Actual return on plan assets 2,546 (1,475)
Asset transfer (2,517) -
Employer contribution - 1,258
Benefits paid (1,100) (929)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year 16,611 17,648
- -------------------------------------------------------------------------------
Funded status (12,359) (6,720)
Unrecognized net loss 10,450 6,412
- -------------------------------------------------------------------------------
Net accrued cost $ (1,909) $ (308)
===============================================================================
The accumulated benefit obligation for the defined benefit pension plan was
$28,970,000 at December 31, 2003 and $24,368,000 at December 31, 2002. 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
$4,037,000 in 2003 and $5,023,000 in 2002. As there were no previously
unrecognized prior service costs as of December 31, 2003 and 2002, 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, 2003 2002
-------------------------------------------------------------------------
(IN THOUSANDS)
-------------------------------------------------------------------------
Net accrued benefit cost $ (1,909) $ (308)
Minimum pension liability (10,450) (6,412)
SERP employer contributions (465) (211)
SERP employee deferrals (148) -
-------------------------------------------------------------------------
Net amount recognized $ (12,972) $ (6,931)
=========================================================================
RPC's funding policy is to contribute to the retirement income plan the amount
required, if any, under the Employee Retirement Income Security Act of 1974. RPC
contributed $0 in 2003, $1,258,000 in 2002, and $118,000 in 2001.
The components of net periodic benefit cost are summarized as follows:
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Service cost for benefits earned
during the period $ - $ 332 $ 954
Interest cost on projected
benefit obligation 1,937 1,749 1,751
Expected return on plan assets (1,363) (1,622) (1,836)
Net amortization and deferral 1,027 72 (176)
Curtailments - 150 -
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 1,601 $ 681 $ 693
================================================================================
36
The weighted average assumptions as of December 31 used to determine the
projected benefit obligation and net benefit cost were as follows:
December 31, 2003 2002
- ------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION:
Discount rate 6.250% 6.875%
Rate of compensation increase N/A N/A
Net Benefit Cost:
Discount rate 6.875% 7.375%
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, 2003 and 2002, 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, 2003 and 2002 by asset category along with the
target allocation for 2004 are as follows:
Target Percentage of Percentage of
Allocations Plan Assets as of Plan Assets as of
Asset Category for 2004 December 31, 2003 December 31, 2002
-----------------------------------------------------------------------------------------------
Equity Securities 52.0% 53.2% 51.1%
Debt Securities - core fixed income 41.0% 41.4% 42.6%
Debt Securities - high yield 0% 0% 0%
Real Estate 0% 0% 0%
Other 7.0% 5.4% 6.3%
-----------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
-----------------------------------------------------------------------------------------------
The Company's investment strategy for its 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 $4,800,000 to the
pension plan in 2004.
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.
Employees vest in the RPC contributions after three years of service. The
Company's matching contributions were $884,000 in 2003, $858,000 in 2002, and
$380,000 in 2001.
STOCK INCENTIVE PLANS
RPC has an Employee Incentive Stock Option Plan (the "1984 Plan") under which
1,000,000 shares of common stock were reserved for issuance. The 1984 Plan
expired in October 1994. On January 25, 1994, RPC adopted a new 10-year Employee
Stock Incentive Plan (the "1994 Plan") under which 1,000,000 shares of common
stock were reserved for issuance. During 1997, an additional 1,600,000 shares
were reserved for issuance under this plan. These plans provide for the issuance
37
of various forms of stock incentives, including, among others, incentive and
non-qualified stock options and restricted stock. Historically, certain RPC
employees, including employees of Marine Products, have participated in these
RPC Stock Incentive Plans (the "RPC SIP"). The options generally vest over five
years and expire in 10 years.
On January 27, 2004, the RPC, Inc.'s Board of Directors recommended adopting a
new 10-year Stock Incentive Plan (the "2004 Plan") under which 1,500,000 shares
of common stock have been reserved for issuance. The 2004 Plan is to be voted
upon at the Annual Meeting of Stockholders to be held on April 27, 2004. This
plan provides for the issuance of various forms of stock incentives, including,
among others, incentive and non-qualified stock options and restricted stock.
Following the spin-off, outstanding stock option grants under the RPC SIP held
by Marine Products employees who did not also become RPC employees were replaced
with the Marine Products Stock Incentive Plan stock option grants. After the
spin-off, 180,464 RPC SIP stock options held by Marine Products employees were
replaced with Marine Products Stock Incentive Plan stock option grants. As of
December 31, 2003, there were 378,581 shares available for the granting of
options or other awards under the RPC SIP.
STOCK OPTIONS
Transactions involving the RPC SIP were as follows:
- -------------------------------------------------------------------------
Weighted
Total Average
Shares Price
- -------------------------------------------------------------------------
Outstanding December 31, 2000 678,475 $ 8.26
Granted 457,500 13.10
Spin-off adjustments (119,935) 9.80
Canceled (8,405) 8.77
Exercised (92,053) 5.80
- -------------------------------------------------------------------------
Outstanding December 31, 2001 915,582 $10.25
Granted 104,500 14.06
Canceled (130,241) 11.33
Exercised (27,243) 6.89
- -------------------------------------------------------------------------
Outstanding December 31, 2002 862,598 $10.65
Granted 637,500 9.57
Canceled (15,081) 11.86
Exercised (16,462) 6.26
- -------------------------------------------------------------------------
Outstanding December 31, 2003 1,468,555 $10.22
=========================================================================
As of December 31, 2003, the options outstanding and the range of exercise
prices together with the weighted-average remaining contractual life are as
follows:
Weighted average
Weighted average remaining
Range of exercise prices Number of Options exercise prices contractual life
-----------------------------------------------------------------------------------------------------
Total Exercisable Total Exercisable
-----------------------------------------------------------------------------------------------------
$ 3.52 - $ 3.91 61,295 61,295 $ 3.74 $ 3.74 1.3 years
$ 6.06 - $ 6.61 188,040 154,712 $ 6.19 $ 6.22 4.6 years
$ 9.49 - $ 14.06 1,219,220 304,720 $11.16 $12.25 7.9 years
-----------------------------------------------------------------------------------------------------
1,468,555 520,727 $10.22 $ 9.45 7.3 years
=====================================================================================================
38
2003 2002 2001
- --------------------------------------------------------------------------------
Exercisable at December 31, 520,727 364,496 280,923
Weighted average exercise price of
exercisable options $9.45 $8.51 $7.22
================================================================================
RESTRICTED STOCK
RPC has granted employees two forms of restricted stock: performance restricted
and time lapse restricted. 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. Time
lapse restricted shares vest 10 years from the grant date. During these 10
years, grantees receive all dividends declared and retain voting rights for the
granted shares. Units granted under these restricted stock programs were 25,000
in 2003, 0 in 2002, and 87,000 in 2001. Under the plans, employees earned
performance shares of 3,000 shares in 2003, 5,700 shares in 2002 and 17,385
shares in 2001. Employees forfeited 11,350 shares in 2003, 30,404 shares in 2002
and 0 shares in 2001. The fair market value of the stock, on the date of
issuance, is being amortized and charged to income over the respective vesting
periods.
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 RPC SIP 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. Restricted stock vested and
were released to the applicable employees as follows: 0 shares in 2003, 56,400
shares in 2002, and 60,800 shares in 2001.
NOTE 12: RELATED PARTY TRANSACTIONS
Effective with the spin-off, the Company established a cash balance at Marine
Products of approximately $15 million by transferring a total of $13.8 million
in cash and marketable securities. Effective February 28, 2001, the Company
began providing certain administrative services to Marine Products. The service
agreements are more fully described in Note 2. Charges from the Company (or from
corporations that are subsidiaries of the Company) for such services aggregated
approximately $496,000 in 2003, $588,000 in 2002 and $868,000 in 2001. The
Company's directors are also directors of Marine Products and certain officers
are employees of both the Company and Marine Products.
The Company periodically purchases in the ordinary course of business products
or services from vendors, 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 $1,058,000 in 2003 and $502,000 in 2002.
In addition, during 2003 and 2002, the overhead crane fabrication division of
RPC recorded $171,000 and $332,000 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 sponsors a multiple employer plan that includes Marine Products. 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.
NOTE 13: 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 overhead crane
fabricator and an interactive training software producer. Corporate includes
selected administrative costs incurred by the Company.
Technical Services include RPC's oilfield 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 fracturing and acidizing
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
39
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 and Latin America.
Customers include major multi-national and independent oil and gas producers,
and selected nationally-owned oil companies.
Support Services include RPC's oilfield service lines that primarily provide
equipment for customer use or services to assist customer operations. The
equipment and services include drill pipe and related tools, pipe handling,
inspection and storage services, work platform 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. Customers include domestic operations of major
multi-national and independent oil and gas producers.
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 and operating profits.
Summarized financial information concerning RPC's reportable segments from
continuing operations for the years ended December 31, 2003, 2002 and 2001 are
shown in the following table.
Technical Support
(IN THOUSANDS) Services Services Other Corporate Total
- -------------------------------------------------------------------------------------------------------------------
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 44,955 226,750
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
2001
Revenues $214,361 $57,932 $ 12,228 $ - $284,521
Operating profit (loss) 33,455 10,136 (1,096) (4,433) 38,062
Capital expenditures (1) 36,236 7,649 544 1,421 45,850
Depreciation and amortization 17,331 6,954 149 1,102 25,536
Identifiable assets 123,498 46,617 5,520 26,767 202,402
- -------------------------------------------------------------------------------------------------------------------
(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, 2003, 2002 and
2001. The revenues are presented based on the location of the use of the product
40
or service. Assets related to international operations are less than 10 percent
of RPC's consolidated assets, and therefore are not presented.
Years ended December 31, 2003 2002 2001
- ----------------------------------------------------------------------------
(IN THOUSANDS)
United States
Revenues $263,684 $198,944 $259,532
International
Revenues 6,843 10,086 24,989
- --------------------------------------------------------------------------------
$270,527 $209,030 $284,521
================================================================================
41
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, 2003 (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 President and Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of the Evaluation Date.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING - There were no changes in
the Company's internal control over financial reporting that occurred during the
Company's most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers is included in the RPC
Proxy for its 2004 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 10 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) is included in the RPC Proxy for its 2004 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 adopted a Code of Business Conduct that applies to all employees.
In addition, the Company has adopted 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information regarding compliance with Section 16(a) of the Exchange Act is
included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy for its 2004 Annual Meeting of Stockholders, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the RPC Proxy for
its 2004 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 is included in the RPC Proxy Statement
for its 2004 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 is included in
the section titled, "Executive Compensation" in the RPC Proxy Statement for its
2004 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 is
included in the RPC Proxy for its 2004 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 is included in the
section titled, "Independent Public Accountants" in the RPC Proxy for its 2004
Annual Meeting of Stockholders. This information is incorporated herein by
reference.
43
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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 RPC's 1994 Employees Stock Incentive Plan (incorporated herein by
reference to Exhibit A of the definitive Proxy Statement dated
March 20, 1994).
10.6 Form of stock option grant agreement (incorporated herein by
reference to Exhibit 10.6 to Form 10-K filed on March 21, 2003).
10.7 Form of time lapse restricted stock grant agreement (incorporated
herein by reference to Exhibit 10.7 to Form 10-K filed on March 21,
2003).
10.8 Form of performance restricted stock grant agreement (incorporated
herein by reference to Exhibit 10.8 to Form 10-K filed on March 21,
2003).
44
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.
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 RPC's 1994 Employees Stock Incentive Plan (incorporated herein by reference to Exhibit A of the definitive Proxy
Statement dated March 20, 1994).
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 10.6 to Form 10-K filed on March
21, 2003).
10.7 Form of time lapse restricted stock grant agreement (incorporated herein by reference to Exhibit 10.7 to Form 10-K
filed on March 21, 2003).
10.8 Form of performance restricted stock grant agreement (incorporated herein by reference to Exhibit 10.8 to Form 10-K
filed on March 21, 2003).
21 Subsidiaries of RPC.
23 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
45
REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------------------------------------------
DATE OF
DATE FILED EARLIEST EVENT DESCRIPTION OF EVENT
- --------------------------------------------------------------------------------------------------------------------
October 29, 2003 October 29, 2003 Item 5 and Item 7: Press release announcing 2003 Third Quarter results
- --------------------------------------------------------------------------------------------------------------------
October 29, 2003 October 29, 2003 Item 5 and Item 7: Press release announcing Third Quarter Cash Dividend
- --------------------------------------------------------------------------------------------------------------------
October 29, 2003 October 29, 2003 Item 5 and Item 7: Press release announcing appointment of Dr. David
Tannich to the position of President of Well Control School
- --------------------------------------------------------------------------------------------------------------------
46
SIGNATURES
Pursuant to the requirements of Section 13 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 Corporation
By: /s/ RICHARD A. HUBBELL
---------------------------------
Richard A. Hubbell
President and Chief Executive Officer
March 5, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
- --------------------------------------------------------------------------------------------------------
NAME TITLE DATE
---- ----- ----
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
/s/ RICHARD A. HUBBELL President and Chief Executive Officer March 5, 2004
- --------------------------------------------------------------------------------------------------------
Richard A. Hubbell (Principal Executive Officer)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
/s/ BEN M. PALMER Chief Financial Officer March 5, 2004
- --------------------------------------------------------------------------------------------------------
Ben M. Palmer (Principal Financial and Accounting Officer)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
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
/s/ RICHARD A. HUBBELL
- --------------------------------
Richard A. Hubbell
Director and as Attorney-in-fact
March 5, 2004
47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE (ITEM 15(a))
FINANCIAL STATEMENTS PAGE
- -----------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets as of December 31, 2003 and 2002 22
Consolidated Statements of Operations for the three years ended December 31, 2003 23
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2003 24
Consolidated Statements of Cash Flows for the three years ended December 31, 2003 25
Notes to Consolidated Financial Statements 26-41
SCHEDULES
- -----------------------------------------------------------------------------------------------------------------------
Schedule II - Valuation and Qualifying Accounts 49
Schedules not listed above have been omitted because they are not applicable or the required informatioin is included
in the consolidated financial statements or notes thereto.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
RPC, INC. AND SUBSIDIARIES
(IN THOUSANDS)
Balance at Charged to Deductions Balance
Beginning Costs and (Recoveries) at End of
of Period Expenses Period
For the years ended December 31, 2003, 2002 and 2001
- -----------------------------------------------------------------------------------------------------------------------
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 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 valuation allowance $ 0 $ 978 $ 0 $ 978
Year ended December 31, 2001
Allowance for doubtful accounts $ 4,994 $ 300 $ (1,176) (1) $ 4,118
Inventory reserves $ 219 $ 55 $ 76 (2) $ 350
Deferred tax valuation allowance $ 0 $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------------
(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.
48
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
RPC, Inc.
We have audited the accompanying consolidated balance sheets of RPC, Inc. and
Subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss)
and cash flows for the years then ended. Our audits also included the financial
statement schedule for the years ended December 31, 2003 and 2002, listed in the
Index at Item 15(a). 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. The
consolidated financial statements and schedule of RPC, Inc. and Subsidiaries for
the year ended December 31, 2001, were audited by other auditors who have ceased
operations and whose report dated February 28, 2002 expressed an unqualified
opinion on those statements and schedule before the restatement adjustments
reflected on the balance sheet and statements of cash flows and in Notes 1, 7
and 13.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 2003 and 2002 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 2002, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule for the years
ended December 31, 2003 and 2002, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As described in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets to conform with Statement of Financial Accounting
Standard No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
As discussed above, the consolidated financial statements and schedule of RPC,
Inc. and Subsidiaries for the year ended December 31, 2001 were audited by other
auditors who have ceased operations. In the 2001 statement of cash flows
presented, the Company reclassified certain investments previously classified as
marketable securities to cash and cash equivalents and reflected such changes in
the statement of cash flows. Our audit procedures with respect to the
restatements of these amounts in the 2001 statement of cash flows included
(a) agreeing the investment balance to the investment statement and verifying
maturity dates to determine proper classification, (b) agreeing the changes to
the statement of cash flows to the changes in the balance sheet and (c) testing
the mathematical accuracy of the restatement of the amounts in the statements of
cash flows.
The disclosures in Note 7 of the consolidated financial statements of RPC, Inc.
and Subsidiaries for the year ended December 31, 2001 have been revised to
disclose additional detail with respect to the components of the provision for
income taxes. Our audit procedures with respect to the disclosures in Note 7
49
with respect to 2001 included agreeing the components of the provision for
income taxes to the Company's underlying records obtained from management.
As described in Note 1, the statements of operations for the year ended December
31, 2001 have been restated to present certain costs and expenses billable to
customers gross in the statement of operations. Our audit procedures with
respect to the restatements of these amounts in the statement of operations and
the corresponding disclosures in Note 1 and Note 13 for 2001 included (a)
agreeing revenue restatements to the Company's underlying records and (b)
testing the mathematical accuracy of the restatements.
As also discussed in Note 1, the consolidated financial statements of RPC, Inc.
and Subsidiaries for the year ended December 31, 2001 have been revised to
include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, which was
adopted by the Company as of January 1, 2002. Our audit procedures with respect
to the disclosures in Note 1 with respect to 2001 included (a) agreeing the
previously reported net income to the previously issued financial statements,
(b) agreeing the adjustments to reported net income representing amortization
expense (including any related tax effects) recognized in 2001 related to
goodwill that is no longer being amortized as a result of initially applying
Statement No. 142 (including any related tax effects) to the Company's
underlying records obtained from management, (c) agreeing all 2001 expense
balances as disclosed for individual intangibles to the Company's underlying
accounting records obtained from management, and (d) testing the mathematical
accuracy of the reconciliation of pro forma net income to reported net income.
As also discussed in Note 1, the consolidated financial statements of RPC, Inc.
and Subsidiaries for the year ended December 31, 2001 have been revised to
include the disclosures required by Statement of Financial Accounting Standards
No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE,
which was adopted by the Company as of December 31, 2002. Our audit procedures
with respect to the disclosures in Note 1 for 2001 included (a) agreeing the
previously reported net income to the previously issued financial statements,
(b) agreeing the adjustments to reported net income representing compensation
expense and pro forma compensation expense (including any related tax effects)
related to 2001 to the Company's underlying records obtained from management and
(c) testing the mathematical accuracy of the reconciliation of pro forma net
income to reported net income and related earnings per share amounts.
In our opinion, the adjustments and disclosures for 2001 in the statements of
operations and cash flows and in Notes 1, 7 and 13 with respect to the matters
referred to in the preceding five paragraphs are appropriate. However, we were
not engaged to audit, review, or apply any procedures to the 2001 consolidated
financial statements of the Company other than with respect to such adjustments
and disclosures and, accordingly, we do not express an opinion or any other form
of assurance on the 2001 consolidated financial statements taken as a whole.
Ernst & Young LLP
Atlanta, Georgia
February 27, 2004
50
NOTE: THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP ("ANDERSEN") IS A COPY OF THE
REPORT PREVIOUSLY ISSUED BY ANDERSEN ON FEBRUARY 28, 2002. THE REPORT OF
ANDERSEN IS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO RULE 2-02(E)
OF REGULATION S-X. THE COMPANY HAS NOT BEEN ABLE TO OBTAIN A REISSUED REPORT
FROM ANDERSEN. ANDERSEN HAS NOT CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS
ANNUAL REPORT ON FORM 10-K. BECAUSE ANDERSEN HAS NOT CONSENTED TO THE INCLUSION
OF ITS REPORT IN THIS ANNUAL REPORT, IT MAY BE DIFFICULT TO SEEK REMEDIES
AGAINST ANDERSEN, AND THE ABILITY TO SEEK RELIEF AGAINST ANDERSEN MAY BE
IMPAIRED.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RPC, Inc.:
We have audited the accompanying consolidated balance sheets of RPC, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements and the schedule referred to below 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
from 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 financial position of RPC, Inc. and subsidiaries as
of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14 is presented for the
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in our audit of the basic financial statements
and, in our opinion, fairly states in all material respects, the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Atlanta, Georgia Arthur Andersen LLP
February 28, 2002
51
SELECTED QUARTERLY FINANCIAL DATA
Quarters Ended March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
2003
Revenues $ 60,700 $ 70,864 $ 69,244 $ 69,719
Net income (loss) $ 305 $ 4,705 $ 2,577 $ 3,306
============================================================================================================
Net income (loss) per share - basic: $ 0.01 $ 0.17 $ 0.09 $ 0.12
Net income (loss) per share - diluted: 0.01 0.16 0.09 0.11**
============================================================================================================
2002
Revenues $ 50,766 $ 49,821 $ 53,370 $ 55,073
Net income (loss) $ (1,167) $(1,953) $ (1,040) $(1,100)
============================================================================================================
Net income (loss) per share - basic: $ (0.04) $ (0.07) $ (0.04) $ (0.04)
Net income (loss) per share - diluted: (0.04) (0.07) (0.04) (0.04)
============================================================================================================
** 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.
52