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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 1-8726
RPC, INC.
(exact name of registrant as specified in its charter)
DELAWARE 58-1550825
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2170 PIEDMONT ROAD, NE, ATLANTA, GEORGIA 30324
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code -- (404) 321-2140
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
As of April 15, 2004, RPC, Inc. had 28,641,092 shares of common stock
outstanding.
RPC, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -
As of March 31, 2004 and December 31, 2003 3
Consolidated statements of operations -
For the three months ended March 31, 2004 and 2003 4
Consolidated statements of cash flows -
For the three months ended March 31, 2004 and 2003 5
Notes to consolidated financial statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer purchases
of Equity Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
RPC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
(In thousands)
(Unaudited)
MARCH 31, December 31,
2004 2003
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 13,229 $ 22,302
Accounts receivable, net 66,338 53,719
Inventories 10,838 10,057
Deferred income taxes 5,250 6,394
Taxes receivable 2,074 4,149
Prepaid expenses and other current assets 3,363 3,614
- --------------------------------------------------------------------------------
Total current assets 101,092 100,235
Equipment and property, net 108,916 109,163
Intangibles, net 15,905 15,488
Other assets 1,870 1,864
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 227,783 $ 226,750
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 22,038 $ 19,603
Accrued payroll and related expenses 6,227 8,526
Accrued insurance expenses 3,130 2,852
Accrued state, local and other taxes 950 1,549
Current portion of long-term debt 700 1,110
Other accrued expenses 3,793 3,369
- --------------------------------------------------------------------------------
Total current liabilities 36,838 37,009
Long-term accrued insurance expenses 5,798 5,856
Long-term debt 4,800 4,800
Pension liabilities 9,220 12,972
Deferred income taxes 13,415 13,296
Other long-term liabilities 1,598 1,711
- --------------------------------------------------------------------------------
Total liabilities 71,669 75,644
- --------------------------------------------------------------------------------
Common stock 2,863 2,862
Capital in excess of par value 26,833 26,796
Retained earnings 133,766 128,824
Deferred compensation (1,015) (1,076)
Accumulated other comprehensive loss (6,333) (6,300)
- --------------------------------------------------------------------------------
Total stockholders' equity 156,114 151,106
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 227,783 $ 226,750
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(In thousands except per share data)
(Unaudited)
Three months ended March 31,
--------------------------------
2004 2003
- --------------------------------------------------------------------------------
REVENUES $ 80,002 $ 60,700
- ------------------------------------------------------------------------------
Cost of services rendered and goods sold 47,107 39,926
Selling, general and administrative expenses 15,126 11,953
Depreciation and amortization 8,536 7,996
- ------------------------------------------------------------------------------
Operating profit 9,233 825
Interest expense, net 25 15
Other income (expense), net 149 (318)
- ------------------------------------------------------------------------------
Income before income taxes 9,357 492
Income tax provision 3,556 187
- ------------------------------------------------------------------------------
NET INCOME $ 5,801 $ 305
==============================================================================
EARNINGS PER SHARE
Basic $ 0.21 $ 0.01
=========== ===========
Diluted 0.20 0.01
=========== ===========
DIVIDENDS PER SHARE $ 0.030 $ 0.025
=========== ===========
AVERAGE SHARES OUTSTANDING
Basic 28,267 28,257
=========== ===========
Diluted 28,714 28,657
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 and 2003
(In thousands)
(Unaudited)
Three months ended March 31,
----------------------------
2004 2003
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
NET INCOME $ 5,801 $ 305
Noncash charges (credits) to earnings:
Depreciation and amortization 8,555 8,022
(Gain) loss on sale of equipment and property (65) 587
Deferred income tax provision (benefit) 1,283 (570)
(Increase) decrease in assets:
Accounts receivable (12,619) (5,147)
Taxes receivable 2,075 (72)
Inventories (781) 460
Prepaid expenses and other current assets 182 22
Other non-current assets 10 215
Increase (decrease) in liabilities:
Accounts payable 2,435 185
Accrued payroll and related expenses (2,299) (2,904)
Pension liabilities (3,752) 0
Accrued insurance expenses 220 633
Accrued state, local and other expenses (599) (208)
Other accrued expenses (116) 488
- -------------------------------------------------------------------------------
Net cash provided by operating activities 330 2,016
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (8,625) (8,253)
Purchase of businesses 0 (625)
Proceeds from sale of assets 453 210
- -------------------------------------------------------------------------------
Net cash used in investing activities (8,172) (8,668)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of dividends (859) (715)
Payments on debt (410) (474)
Cash paid for common stock purchased and retired (6) (7)
Proceeds received upon exercise of stock options 44 11
- -------------------------------------------------------------------------------
Net cash used in financing activities (1,231) (1,185)
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (9,073) (7,837)
Cash and cash equivalents at beginning of period 22,302 11,533
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,229 $ 3,696
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
5
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited condensed consolidated financial statements
include the accounts of RPC, Inc. and its wholly-owned subsidiaries ("RPC"
or the "Company") and have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month
period ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004.
The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2003.
2. EARNINGS PER SHARE
Basic and diluted earnings per share are computed by dividing net income by
the weighted average number of shares outstanding during the respective
periods. A reconciliation of the weighted average shares outstanding is as
follows:
THREE MONTHS ENDED MARCH 31,
(In thousands)
2004 2003
---- ----
Basic 28,267 28,257
Dilutive effect of stock options and
restricted shares 447 400
---------------- --------------
Diluted 28,714 28,657
================ ==============
6
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RECENT ACCOUNTING PRONOUNCEMENTS
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 are subject to the
Interpretation's provisions. As a result, the Company believes that the
adoption of the Interpretation did not have an impact on the financial
position, results of operations or liquidity of the Company.
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accountings Standard No. 132 (revised 2003) ("SFAS
132R"), "Employers' Disclosures about Pensions and Other Post-Retirement
Benefits." SFAS 132R does not change the measurement or recognition
provisions for defined benefit pensions and other post-retirement benefits;
however, it requires additional annual disclosures about assets,
obligations, cash flows and net periodic benefit cost of those plans. SFAS
132R also requires interim disclosure of the elements of net periodic
benefit cost and the total amount of contributions paid or expected to be
paid during the current fiscal year if significantly different from
previous amounts disclosed. The disclosure rules apply to annual financial
statements for fiscal years ending after December 15, 2003 and for interim
periods beginning after December 15, 2003. The Company has adopted the
provisions of SFAS 132R and presented the disclosures in Note 8 to the
consolidated financial statements.
7
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three months ended
------------------
March 31,
---------
(In thousands)
2004 2003
---- ----
Net income as reported $ 5,801 $ 305
Change in unrealized gain on
marketable securities, net of
taxes of ($20) and ($43) (33) (70)
------------------------------
Comprehensive income $ 5,768 $ 235
==============================
5. STOCK-BASED COMPENSATION
RPC accounts for its stock incentive plan using the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has computed for
pro forma disclosure purposes the value of all options granted during the
three months ended March 31, 2004 and 2003 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 "Accounting for Stock-Based
Compensation. If RPC had accounted for the stock incentive plans in
accordance with SFAS No. 123, RPC's reported net income per share would
have been as follows:
8
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended
March 31,
- -------------------------------------------------------------------------------
2004 2003
---- ----
(IN THOUSANDS)
Net income - as reported $ 5,801 $ 305
Add: Stock-based employee
compensation cost,
included in reported net
income, net of related
tax effect
38 37
Deduct: Stock-based employee
compensation cost,
computed using the
Black Scholes option
pricing model, for all
awards, net of related tax (227) (239)
effect
- -------------------------------------------------------------------------------
Pro forma net income $ 5,612 $ 103
===============================================================================
Earnings per share, as reported
Basic $ 0.21 $ 0.01
Diluted 0.20 0.01
Pro forma earnings per share
Basic $ 0.20 $ 0.00
Diluted 0.20 0.00
6. BUSINESS SEGMENT INFORMATION
RPC has two reportable segments: Technical Services and Support Services.
Technical Services includes RPC's oil and gas service lines that utilize
people and equipment to perform value-added completion, production and
maintenance services directly to a customer's well. These services are
generally directed toward improving the flow of oil and natural gas from
producing formations or to address well control issues. The Technical
Services business segment consists primarily of snubbing, coiled tubing,
pressure pumping, nitrogen, well control, downhole tools, wire line, fluid
pumping, surface production equipment and casing installation services. The
principal markets for this business segment include the United States,
including the Gulf of Mexico, mid-continent, southwest and Rocky Mountain
regions, and selected international locations. Customers include major
multi-national and independent oil and gas producers, and selected
nationally owned oil companies. Support Services includes RPC's oilfield
service lines that primarily provide equipment for customer use
9
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or services to assist customer operations. The equipment and services
include drill pipe and related tools, pipe handling, inspection and storage
services, work platform vessels, and oilfield training services. The demand
for these services tends to be influenced primarily by customer
drilling-related activity levels. The principal markets for this segment
include the United States, Gulf of Mexico and mid-continent regions.
Customers include domestic operations of major multi-national and
independent oil and gas producers.
Certain information with respect to RPC's business segments is set forth in
the following table:
Three months ended March 31,
2004 2003
(IN THOUSANDS)
REVENUES:
Technical Services $ 65,486 $ 47,818
Support Services 11,700 9,698
Other 2,816 3,184
--------------------------------------- ------------ -------------
Total revenues $ 80,002 $ 60,700
======================================= ============ =============
OPERATING PROFIT (LOSS):
Technical Services $ 11,150 $ 2,717
Support Services 139 (25)
Other (211) (238)
Corporate expenses (1,845) (1,629)
--------------------------------------- ------------ -------------
Total operating profit (loss) $ 9,233 $ 825
--------------------------------------- ------------ -------------
Other income (expense), net 149 (318)
Interest expense, net 25 15
--------------------------------------- ------------ -------------
Income before income taxes $ 9,357 $ 492
======================================= ============ =============
10
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVENTORIES
Inventories consist of the following:
MARCH 31, 2004 December 31, 2003
----------------------------------------------------------------------------------------------
(IN THOUSANDS)
Raw materials and supplies $ 10,203 $ 8,251
Work in process 420 317
Finished goods 215 1,489
----------------------------------------------------------------------------------------------
Total inventories $ 10,838 $ 10,057
==============================================================================================
8. EMPLOYEE BENEFIT PLAN
The following represents the net periodic defined benefit cost and related
components in accordance with SFAS 132R described in Note 3.
Three months ended March 31
2004 2003
-----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Service cost $ - $ -
Interest cost 437 484
Expected return on plan assets (361) (341)
Amortization of:
Prior service cost - -
Unrecognized net (gains) and losses 230 257
-----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 306 $ 400
===========================================================================================================
RPC disclosed in its most recent Form 10K that it expected to contribute
$4,800,000 to its defined benefit plan in 2004. As of March 31, 2004, the
Company has contributed approximately $4,200,000 to the pension plan. The
Company is currently evaluating its funding obligations for the remainder of
2004 under the Pension Funding Equity Act of 2004 legislation that was passed in
April 2004 and will then re-evaluate the level of additional funding for the
remainder of the year.
11
RPC, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
- --------
RPC provides a broad range of specialized oilfield services primarily to
independent and major oilfield companies engaged in exploration, production and
development of oil and gas properties throughout the United States, including
the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions, and
selected international locations. 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.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The discussion on Critical Accounting Polices is incorporated herein by
reference from the Company's annual report on Form 10-K for the fiscal year
ended December 31, 2003. There have been no significant changes in the critical
accounting policies since year-end.
GENERAL
- -------
The Company's operations are influenced by U.S. domestic oil and natural gas
well drilling, which relates to new wells, and production activity, which
relates to existing wells. Factors within the drilling and production industry
that impact the Company's business include the geographic location of wells, the
conditions under which they are drilled, and the production enhancement services
which they require. The Technical Services segment provides completion,
production, and maintenance services to a customer's well. The demand for these
services is more influenced by production activities than drilling activities;
however, production activity typically increases at the same time drilling
activity increases. The Support Services segment primarily provides equipment
for customer operations, and the demand for these services tends to depend more
on drilling activities than production activities. Drilling activity is
influenced by the price of oil and natural gas. We believe that our activity
levels are affected more by natural gas prices than oil prices, due to the
nature of our services and our current geographic concentration in the domestic
U.S. market. The prices of oil and natural gas are influenced by a wide variety
of factors
12
RPC, INC. AND SUBSIDIARIES
and can be very volatile. This volatility can cause a great deal of fluctuation
in the Company's revenues, profitability, and cash flow.
Although the Company has historically generated revenues internationally, the
majority of revenues generated during the three months ended March 31, 2004 were
from the U.S. domestic oilfields. Domestic drilling activity, as measured by the
weekly active rig count, reached its most recent cyclical peak in July 2001 with
1,293 active oil and gas rigs in operation. Activity began to decline in the
third and fourth quarter of 2001 due to decreased demand and high natural gas
storage levels. This depressed rig count continued in early 2002 and reached a
weekly low of 738 during the third quarter of 2002. The average weekly rig count
for the three months ended March 31, 2004 was 1,119, which was 25.3 percent
higher than the average weekly rig count during the three months ended March 31,
2003. The Company believes that the rig count has stabilized for the near term,
but is susceptible to further fluctuation based on the strength and timing of
the economic recovery, near term weather conditions in the United States, the
actions of the OPEC cartel, the supply of oil and natural gas in the United
States, and the prospect of continued tensions in the oil-producing countries of
the Middle East.
RESULTS OF OPERATIONS
- ---------------------
- -------------------------------------------------------------------------------------------------------
2004 2003
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------------------------
Consolidated revenues [IN THOUSANDS] $ 80,002 $ 60,700
Revenues by business segment [IN THOUSANDS] :
Technical $ 65,486 $ 47,818
Support 11,700 9,698
Other 2,816 3,184
Consolidated operating profit [IN THOUSANDS] $ 9,233 $ 825
Operating profit (loss) by business segment [IN THOUSANDS]:
Technical $ 11,150 $ 2,717
Support 139 (25)
Other (211) (238)
Corporate expenses $ (1,845) $ (1,629)
Percentage cost of services rendered & goods sold to revenues 58.9% 65.8%
Percentage selling, general & administrative expenses to
revenues 18.9% 19.7%
Percentage depreciation and amortization expense to revenues 10.7% 13.2%
Average U.S. domestic rig count 1,119 893
Average natural gas price (per thousand cubic feet (mcf)) $ 5.63 $ 6.13
Average oil price (per barrel) $ 34.14 $ 35.12
- -------------------------------------------------------------------------------------------------------
13
RPC, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
- -------------------------------------------------------------------------------
REVENUES for the three months ended March 31, 2004 increased $19,302,000 or 31.8
percent compared to the three months ended March 31, 2003. The Technical
Services segment revenues increased 37.0 percent from last year's first quarter
revenues. The Support Services segment revenues for the quarter ended March 31,
2004 increased 20.6 percent from last year's first quarter revenues. Revenues
increased compared to prior year due to higher overall activity and pricing
levels, despite slightly lower oil and gas prices, in most of our service lines.
Domestic revenues increased during the quarter due to higher customer drilling
activity. The average domestic rig count during the first quarter was 25.3
percent higher than the same period in 2003. Our consolidated revenues grew at a
higher rate than the overall domestic rig count, principally because of the
effect of our new operations in Kuwait and our Bronco Oilfield Services
acquisition, which was closed in the second quarter of 2003. These increases
were partially offset by continued weakness in the Gulf of Mexico market. At the
end of the quarter, the Gulf of Mexico rig count was 88, or 10 percent lower
than the prior year. In addition, the average price of natural gas declined by 8
percent during the period as compared to the prior year. We believe that our
activity levels are affected more by natural gas prices than by the price of
oil. Foreign revenues increased significantly during the three months ended
March 31, 2004 as compared to the prior year due to the inception of our new
operations in Kuwait; however, foreign revenues remain a small percentage of
total revenues.
COST OF SERVICES RENDERED AND GOODS SOLD for the three months ended March 31,
2004 was $47,107,000 compared to $39,926,000 for the three months ended March
31, 2003, an increase of $7,181,000 or 18.0 percent. This increase was due to
higher activity levels, which resulted in increased direct employment costs and
increases in other operational expenses such as materials and supplies expenses,
sub-rental expense and fuel costs partially offset by lower casualty insurance
expenses due to improved claims experience during the first quarter of 2004
compared to 2003. Cost of services rendered and goods sold, as a percent of
revenues, decreased from the first quarter of 2003 compared to the first quarter
of 2004 as a result of improved leverage due to overall higher utilization of
personnel and operating equipment and increased revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended March
31, 2004 were $15,126,000 compared to $11,953,000 for the three months ended
March 31, 2003, an increase of $3,173,000 or 26.5 percent. These expenses
increased primarily due to higher employment costs mainly as a result of an
increase in number of employees and
14
RPC, INC. AND SUBSIDIARIES
higher incentive compensation expenses consistent with improved operating
results. Selling, general and administrative expenses as a percent of revenues
decreased from the first quarter of 2003 compared to the first quarter of 2004
due primarily to a large amount of fixed costs leveraged over a higher revenue
base.
DEPRECIATION AND AMORTIZATION was $8,536,000 for the three months ended March
31, 2004, an increase of $540,000 or 6.8 percent compared to $7,996,000 for the
quarter ended March 31, 2003. This increase in depreciation and amortization
resulted from various capital expenditures during the previous twelve months
within Support Services and Technical Services, and from the effect of the
acquisition completed during the second quarter of 2003.
OPERATING PROFIT for the three months ended March 31, 2004 increased $8,408,000
compared to the three months ended March 31, 2003. This improvement is the
result of increased revenues because of higher customer activity levels,
partially offset by the increases in costs of services rendered and goods sold,
selling, general and administrative expenses, and depreciation and amortization,
as discussed above.
OTHER INCOME (EXPENSE), NET for the three months ended March 31, 2004 was
$149,000, an increase of $467,000 compared to expense of $318,000 for the three
months ended March 31, 2003. For the three months ended March 31, 2004 and 2003,
other income (expense), net primarily reflects net gains and losses related to
the sale of operating equipment.
INTEREST EXPENSE, NET was $25,000 for the three months ended March 31, 2004
compared to $15,000 for the quarter ended March 31, 2003. The increase in
interest expense, net resulted primarily from interest expense on promissory
notes issued in connection with acquisitions. RPC generates interest income from
investment of its available cash primarily in highly liquid investments with
original maturities of three months or less. Interest income did not vary in the
current period compared to the prior year.
INCOME TAX PROVISION was $3,556,000 during the three months ended March 31,
2004, compared to $187,000 in 2003. This increase was due to the increase in
operating profit during the period, as the effective tax rate was the same for
the three months ended March 31, 2004 and 2003.
15
RPC, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
-----------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003
-----------------------------------------------------------------------------
Net cash provided by operating activities $ 330 $ 2,016
Net cash used for investing activities (8,172) (8,668)
Net cash used for financing activities (1,231) (1,185)
-----------------------------------------------------------------------------
The Company's decisions about the amount of cash to be used for investing and
financing purposes are influenced by its capital position and the expected
amount of cash to be provided by operations.
Cash provided by operating activities for the three months ended March 31, 2004
decreased $1,686,000 or 83.6 percent compared to the three months ended March
31, 2003. Although net income improved $5,496,000, cash provided from operating
activities decreased due to increased working capital requirements consistent
with the Company's recent revenue increases. Working capital increases during
the period compared to the prior year were caused principally by increases in
accounts receivable and inventory offset partially by increases in accounts
payable and a decrease in income taxes receivable. Also contributing to the
decline was a $4.2 million contribution to the pension plan during the first
quarter of 2004 and increases in accrued payroll and related expenses and
accrued state taxes.
Cash used in investing activities for the three months ended March 31, 2004
decreased by $496,000, compared to the three months ended March 31, 2003,
primarily as a result of a slight increase in proceeds from sale of assets in
the current period slightly offset by an increase in capital expenditures during
the current period. Also contributing to the decline in proceeds used for
investing activities during the current period is the acquisition made during
the three months ended March 31, 2003.
Cash used in financing activities for the three months ended March 31, 2004
increased by $46,000, compared to the three months ended March 31, 2003,
primarily as a result of a 20 percent increase in dividends paid per share
partially offset by slightly lower debt service requirements.
The prices for oil and natural gas remain historically strong, but until
recently, have failed to drive any increase in drilling activity. Prices of oil
and natural gas have also been volatile in the last several quarters, due to
uncertainties over the conflict in the Middle East and fluctuating natural gas
storage levels. Although the weekly domestic rig count has recently increased,
the Company still believes that the operating environment for our services is
uncertain in the near term. As a result of this uncertainty, RPC is monitoring
customer exploration and production activity levels very closely, and is only
making capital expenditures to support known customer requirements or to
maintain our existing fleet of operating equipment. The Company currently
expects that capital expenditures during
16
RPC, INC. AND SUBSIDIARIES
2004 will be approximately $40 million, of which $8.6 million has been spent as
of March 31, 2004, but the actual amount will be highly dependent upon our
financial results for the remainder of 2004.
The Company's Retirement Income Plan, a trusteed defined benefit pension plan,
provides monthly benefits upon retirement at age 65 to eligible employees. 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. As expected the Company's pension expense increased in 2004 compared to
2003 primarily because of the decline in the discount rate used to calculate
plan liabilities offset slightly by improved pension asset performance in 2003.
As of March 31, 2004, the Company has contributed approximately $4,200,000 to
the pension plan. The Company is currently evaluating its funding obligations
for the remainder of 2004 under the Pension Funding Equity Act of 2004
legislation that was passed in April 2004 and will then re-evaluate the level of
additional funding for the remainder of the year.
We believe the liquidity provided by our existing cash and cash equivalents, our
overall strong capitalization, which includes access to a $25 million credit
facility with a financial institution, of which $14 million was available as of
March 31, 2004, and cash expected to be generated from operations, will provide
sufficient capital to meet our requirements for at least the next twelve months.
The portion of the credit facility that is not currently available supports
letters of credit relating to self-insurance programs or contract bids. We
believe our liquidity will allow us to grow our asset base and revenues as
business conditions and customer activity levels increase.
SHARE REPURCHASES
- -----------------
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
prior periods and can purchase up to 161,000 additional shares. In January 2004,
the Board approved an increase of 1,500,000 shares to the previous stock
repurchase program to a total of 1,651,000 shares available for repurchase.
There were no repurchases of stock during the three months ended March 31, 2004.
OFF BALANCE SHEET ARRANGEMENTS
- ------------------------------
The Company does not have any material off balance sheet arrangements.
17
RPC, INC. AND SUBSIDIARIES
SEASONALITY
- -----------
Oil and natural gas prices affect demand throughout the oil and natural gas
industry, including the demand for the Company's products and services. The
Company's business depends in large part on the conditions of the oil and gas
industry, and specifically on the capital expenditures of its customers related
to the exploration and production of oil and natural gas. When these
expenditures fluctuate, customers' demand for the Company's services fluctuates
as well. These fluctuations depend on the current and projected prices of oil
and natural gas and resulting drilling activity, and are not seasonal to any
material degree.
INFLATION
- ---------
RPC purchases its equipment and materials from suppliers who provide competitive
prices and the Company believes that the labor markets from which it hires
employees are not experiencing significant upward wage pressures. If inflation
in the general economy increases, however, the Company's costs for equipment,
materials and labor could increase as well. During the three months ending March
31, 2004, the price of steel, for both the commodity and for products
manufactured with steel, rose dramatically due to increased worldwide demand.
This affected the Company's operations through delays in scheduled deliveries of
new equipment. If steel prices remain high, it is likely that the cost of the
Company's new equipment will increase. These increases would result in higher
capital expenditures and depreciation expense. RPC may not be able to recover
such increased costs through price increases to its customers, thereby reducing
the Company's future profits. The Company operates in highly competitive areas
of the oilfield services industry. The products and services of each of the
Company's principal industry segments are sold in highly competitive markets,
and its revenues and earnings may be affected by the following factors: changes
in competitive prices, fluctuations in the level of activity and major markets,
general economic conditions, and governmental regulation.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements made in this report that are not historical facts are
"forward-looking statements" under Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may include, without limitation, statements that
relate to our business strategy, plans and objectives, market risk exposure,
adequacy of capital resources and funds, opportunity for growth, anticipated
pension funding payments, 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
18
RPC, INC. AND SUBSIDIARIES
certain assumptions and analyses made by our management in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. We caution
you that such statements are only predictions and not guarantees of future
performance and that actual results, developments and business decisions may
differ from those envisioned by the forward-looking statements. Risk factors
that could cause such future events not to occur as expected include those
described in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 and the following: the volatility of oil and natural gas
prices, continued downturn in the economy leading to decreased oil and gas
exploration, inability to identify or complete acquisitions, adverse weather
conditions, inability to attract and retain skilled employees, personal injury
or property damage claims, and the changes in the supply and demand for oil and
gas.
ITEM 3. 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 March 31, 2004, 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 March
31, 2004, RPC had debt with variable interest rates that exposes RPC to certain
market risks. In the prior year, RPC 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 March 31, 2004, RPC had accounts receivable of approximately $66.3 million
(net of an allowance for doubtful accounts of approximately $2.3 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.
ITEM 4. 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 President and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
19
RPC, INC. AND SUBSIDIARIES
As of the end of the period covered by this report, March 31, 2004 (the
"Evaluation Date"), the Company carried out an evaluation, under the supervision
and with the participation of its management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of its disclosure controls and procedures. Based upon this evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective at the reasonable
assurance level 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.
20
RPC, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
RPC is involved in litigation from time to time in the ordinary course of its
business. RPC does not believe that the outcome of such litigation will have a
material adverse effect on the financial position or results of operations of
RPC.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
21
RPC, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
3.1 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).
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.
b) Reports on Form 8-K during the quarter ended March 31, 2004
- --------------------------------------------------------------------------------
Date of
Date filed earliest event Description of event
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
January 9, 2004 January 9, 2004 Item 5 and Item 7: Press release
announcing repurchase of 102,800
shares of RPC, Inc. common stock during
the fourth quarter 2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
January 20, 2004 January 20, 2004 Item 5 and Item 7: Press release
announcing the date that RPC, Inc. will
release its fourth quarter and year end
2003 results and host conference call
February 17, 2004.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
January 28, 2004 January 27, 2004 Item 5 and Item 7: Press release
announcing increased quarterly dividend
to $0.03 and expansion of the stock
buyback program by 1.5 million shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
February 17, 2004 February 17, 2004 Item 7 and Item 12: Press release
announcing 2003 fourth quarter and full
year results.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
February 17, 2004 February 17, 2004 Item 7 and Item 12: To amend
previously filed press release dated
February 17, 2004 in order to include
reference to non-GAAP financial measure
known as earnings before interest,
taxes depreciation and amortization
(EBITDA).
- --------------------------------------------------------------------------------
22
RPC, INC. AND SUBSIDIARIES
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RPC, INC.
/s/ Richard A. Hubbell
----------------------
Date: May 4, 2004 Richard A. Hubbell
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ben M. Palmer
-----------------
Date: May 4, 2004 Ben M. Palmer
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
23