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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 JUNE 30, 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 Identification Number)
incorporation or organization)
2170 PIEDMONT ROAD, NE, ATLANTA, GEORGIA 30324
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code -- (404) 321-2140
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of July 15, 2004, RPC, Inc. had 28,756,463 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 June 30, 2004 and December 31, 2003 3
Consolidated statements of operations -
For the six months ended June 30, 2004 and 2003 4
Consolidated statements of cash flows -
For the six months ended June 30, 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 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 23
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 27
2
RPC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF June 30, 2004 AND DECEMBER 31, 2003
(In thousands)
(Unaudited)
JUNE 30, December 31,
2004 2003
- ------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 12,495 $ 22,302
Accounts receivable, net 69,037 53,719
Inventories 9,133 10,057
Deferred income taxes 4,982 6,394
Income taxes receivable 4,902 4,149
Prepaid expenses and other current assets 2,677 3,614
- ------------------------------------------------------------------------------
Total current assets 103,226 100,235
Property, plant and equipment, net 114,683 109,163
Intangibles, net 15,942 15,488
Other assets 2,577 1,864
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 236,428 $ 226,750
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 21,746 $ 19,603
Accrued payroll and related expenses 8,524 8,526
Accrued insurance expenses 3,869 2,852
Accrued state, local and other taxes 2,289 1,549
Current portion of long-term debt 700 1,110
Other accrued expenses 493 3,369
- ------------------------------------------------------------------------------
Total current liabilities 37,621 37,009
Accrued insurance expenses 6,123 5,856
Long-term debt 4,100 4,800
Pension liabilities 9,614 12,972
Deferred income taxes 15,439 13,296
Other long-term liabilities 1,820 1,711
- ------------------------------------------------------------------------------
Total liabilities 74,717 75,644
- ------------------------------------------------------------------------------
Common stock 2,876 2,862
Capital in excess of par value 28,572 26,796
Retained earnings 140,390 128,824
Deferred compensation (3,820) (1,076)
Accumulated other comprehensive loss (6,307) (6,300)
- ------------------------------------------------------------------------------
Total stockholders' equity 161,711 151,106
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 236,428 $ 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 AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(In thousands except per share data)
(Unaudited)
Three months ended June 30, Six months ended June 30,
------------------------------ -------------------------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------- -------------------------------
REVENUES $ 85,426 $ 70,864 $ 165,428 $ 131,564
Cost of services rendered and goods sold 49,189 42,390 96,296 82,316
Selling, general and administrative expenses 16,166 13,208 31,292 25,161
Depreciation and amortization 8,604 8,401 17,140 16,397
- --------------------------------------------------------------------------------- -------------------------------
Operating profit 11,467 6,865 20,700 7,690
Interest expense, net 33 77 58 92
Other income, net 620 801 769 483
- --------------------------------------------------------------------------------- -------------------------------
Income before income taxes 12,054 7,589 21,411 8,081
Income tax provision 4,580 2,884 8,136 3,071
- --------------------------------------------------------------------------------- -------------------------------
NET INCOME $ 7,474 $ 4,705 $ 13,275 $ 5,010
================================================================================= ===============================
EARNINGS PER SHARE
Basic $ 0.26 $ 0.17 $ 0.47 $ 0.18
============= ============= ============= ==============
Diluted 0.26 0.16 0.46 0.17
============= ============= ============= ==============
DIVIDENDS PER SHARE $ 0.030 $ 0.025 $ 0.060 $ 0.050
============= ============= ============= ==============
AVERAGE SHARES OUTSTANDING
Basic 28,300 28,439 28,283 28,348
============= ============= ============= ==============
Diluted 28,812 28,851 28,736 28,754
============= ============= ============= ==============
The accompanying notes are an integral part of these consolidated financial statements.
4
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 and 2003
(In thousands)
(Unaudited)
Six months ended June 30,
---------------------------
2004 2003
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
NET INCOME $ 13,275 $ 5,010
Noncash charges (credits) to earnings:
Depreciation, amortization and other non-cash charges 17,301 16,450
(Gain) loss on sale of property and equipment (872) 354
Deferred income tax provision (benefit) 3,559 (600)
(Increase) decrease in assets:
Accounts receivable (15,318) (12,220)
Income taxes receivable (331) 8,550
Inventories 924 (27)
Prepaid expenses and other current assets 911 652
Other non-current assets (698) 316
Increase (decrease) in liabilities:
Accounts payable 2,143 1,871
Accrued payroll and related expenses (2) (1,201)
Pension liabilities (3,358) 960
Accrued insurance expenses 1,284 946
Accrued state, local and other expenses 740 416
Other accrued expenses (39) (971)
Other non-current liabilities 109 160
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,628 20,666
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (25,151) (14,584)
Purchase of businesses (3,311) (6,194)
Proceeds from sale of property and equipment 3,419 686
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (25,043) (20,092)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of dividends (1,708) (1,435)
Payments on debt (1,110) (529)
Cash paid for common stock purchased and retired (1,922) (14)
Proceeds received upon exercise of stock options 348 53
- --------------------------------------------------------------------------------------------
Net cash used in financing activities (4,392) (1,925)
- --------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (9,807) (1,351)
Cash and cash equivalents at beginning of period 22,302 11,533
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,495 $ 10,182
============================================================================================
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 six
month period ended June 30, 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 Six Months Ended
------------------ ----------------
(In thousands) June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Basic 28,300 28,439 28,283 28,348
Dilutive effect of stock options
and restricted shares 512 412 453 406
---------------------------------------------
Diluted 28,812 28,851 28,736 28,754
=============================================
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 Company does not have any agreements in place that
are subject to the Interpretation's provisions. As a result, the Company's
adoption of the Interpretation did not have an impact on the financial
position, results of operations or liquidity of the Company.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." EITF 03-1 applies to investments
accounted for under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and SFAS No. 124, "Accounting for Certain
Investments Held by Not-for-Profit Organizations." EITF 03-1 provides a
basic three-step model to evaluate whether the impairment is other than
temporary. This model for evaluating impairment must be applied to all
current and prospective investments beginning in the second quarter of
2004. Qualitative and quantitative disclosures are effective for the
fiscal year ending December 31, 2004. The adoption of EITF 03-1 did not
have a material impact on the financial position, results of operations or
liquidity of the Company.
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
------------------ ----------------
(In thousands) June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ 7,474 $ 4,705 $ 13,275 $ 5,010
Change in unrealized gain on
marketable securities, net of
taxes 26 44 (7) (25)
----------------------------------------------
Comprehensive income $ 7,500 $ 4,749 $ 13,268 $ 4,985
==============================================
7
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. STOCK-BASED COMPENSATION
RPC accounts for its stock incentive plan using the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has computed for
pro forma disclosure purposes the value of all options granted during the
six months ended June 30, 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 Six months ended
June 30, June 30,
---------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS)
NET INCOME - AS REPORTED $ 7,474 $ 4,705 $ 13,275 $ 5,010
ADD: STOCK-BASED EMPLOYEE
COMPENSATION COST,
INCLUDED IN REPORTED NET
INCOME, NET OF RELATED TAX
EFFECT 85 38 123 75
DEDUCT: STOCK-BASED EMPLOYEE
COMPENSATION COST,
COMPUTED USING THE BLACK
SCHOLES OPTION PRICING
MODEL, FOR ALL AWARDS, NET
OF RELATED TAX EFFECT (278) (240) (505) (479)
---------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 7,281 $ 4,503 $ 12,893 $ 4,606
==========================================================================================================
EARNINGS PER SHARE, AS REPORTED
BASIC $ 0.26 $ 0.17 $ 0.47 $ 0.18
DILUTED 0.26 0.16 0.46 0.17
PRO FORMA EARNINGS PER SHARE
BASIC $ 0.26 $ 0.16 $ 0.46 $ 0.16
DILUTED 0.25 0.16 0.45 0.16
6. BUSINESS SEGMENT INFORMATION
RPC has two reportable segments: Technical Services and Support Services.
Technical Services includes RPC's oil and gas service lines that utilize
people and equipment to perform value-added completion, production and
maintenance services directly to a customer's well. These services are
generally directed toward improving the flow of oil and natural gas from
producing formations or to address well control issues. The Technical
Services business segment consists primarily of snubbing, coiled tubing,
pressure pumping, nitrogen, well control, downhole tools, wire line, fluid
pumping, surface production equipment and casing installation services.
The principal markets for this business segment include the United States,
including the Gulf of Mexico, mid-continent, southwest and Rocky Mountain
regions, and selected international locations. Customers include major
multi-national and independent oil
9
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and gas producers, and selected nationally owned oil companies. Support
Services includes RPC's oilfield service lines that primarily provide
equipment for customer use or services to assist customer operations. The
equipment and services include drill pipe and related tools, pipe
handling, inspection and storage services, work platform vessels, and
oilfield training services. The demand for these services tends to be
influenced primarily by customer drilling-related activity levels. The
principal markets for this segment include the United States, Gulf of
Mexico and mid-continent regions. Customers include domestic operations of
major multi-national and independent oil and gas producers.
Certain information with respect to RPC's business segments is set forth
in the following table:
Three months ended June 30, Six months ended June 30,
------------------------- ----------------------------
2004 2003 2004 2003
------------------------- ----------------------------
(IN THOUSANDS)
REVENUES:
Technical Services $ 70,633 $ 58,073 $ 136,119 $ 105,891
Support Services 13,846 10,670 25,546 20,368
Other 947 2,121 3,763 5,305
--------------------------------- ----------- ----------- ------------ ------------
Total revenues $ 85,426 $ 70,864 $ 165,428 $ 131,564
================================= =========== =========== ============ ============
OPERATING PROFIT (LOSS):
Technical Services $ 11,532 $ 8,440 $ 22,682 $ 11,185
Support Services 2,112 750 2,251 697
Other (210) (543) (421) (781)
Corporate (1,967) (1,782) (3,812) (3,411)
--------------------------------- ----------- ----------- ------------ ------------
Total operating profit $ 11,467 $ 6,865 $ 20,700 $ 7,690
Interest expense, net 33 77 58 92
Other income (expense), net 620 801 769 483
--------------------------------- ----------- ----------- ------------ ------------
Income before income taxes $ 12,054 $ 7,589 $ 21,411 $ 8,081
--------------------------------- ----------- ----------- ------------ ------------
At the end of April 2004, RPC sold one of the company's non-oilfield
businesses, which was previously reported in the Other segment. This sale
generated approximately $ 4 million in cash. The impact of the sale of
this business unit on operating and other income was immaterial.
7. INVENTORIES
Inventories consist of the following:
10
RPC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, December 31,
2004 2003
-------------------------------------------------------------------------
(IN THOUSANDS)
Raw materials and supplies $ 9,133 $ 8,251
Work in process - 317
Finished goods - 1,489
-------------------------------------------------------------------------
Total inventories $ 9,133 $ 10,057
=========================================================================
8. EMPLOYEE BENEFIT PLAN
The following represents the net periodic defined benefit cost and related
components of the Company's pension plan.
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Service cost $ - $ - $ - $ -
Interest cost 437 484 874 969
Expected return on plan assets (361) (341) (722) (681)
Amortization of unrecognized net
(gains) and losses 230 257 461 513
-------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 306 $ 400 $ 613 $ 801
=======================================================================================================
RPC disclosed in its most recent Form 10-K that it expected to contribute
$4,800,000 to its defined benefit plan in 2004. As of June 30, 2004, the
Company has revised this estimate and has contributed approximately
$4,200,000 to the pension plan. The Company does not currently expect to
make any additional contributions to the defined benefit plan in 2004.
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 six months ended June 30, 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 six months ended June 30, 2004 was 1,141, which was 18.7 percent higher
than the average weekly rig count during the six months ended June 30, 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.
13
RPC, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES [IN THOUSANDS] $ 85,426 $ 70,864 $ 165,428 $ 131,564
REVENUES BY BUSINESS SEGMENT [IN THOUSANDS]:
TECHNICAL $ 70,633 $ 58,073 $ 136,119 $ 105,891
SUPPORT 13,846 10,670 25,546 20,368
OTHER 947 2,121 3,763 5,305
CONSOLIDATED OPERATING PROFIT [IN THOUSANDS] $ 11,467 $ 6,865 $ 20,700 $ 7,690
OPERATING PROFIT (LOSS) BY BUSINESS SEGMENT [IN THOUSANDS]:
TECHNICAL $ 11,532 $ 8,440 $ 22,682 $ 11,185
SUPPORT 2,112 750 2,251 697
OTHER (210) (543) (421) (781)
CORPORATE $ (1,967) $ (1,782) $ (3,812) $ (3,411)
PERCENTAGE COST OF SERVICES RENDERED & GOODS SOLD TO
REVENUES 57.6% 59.8% 58.2% 62.6%
PERCENTAGE SELLING, GENERAL & ADMINISTRATIVE EXPENSES TO
REVENUES 18.9% 18.6% 18.9% 19.1%
PERCENTAGE DEPRECIATION AND AMORTIZATION EXPENSE TO
REVENUES 10.1% 11.9% 10.4% 12.5%
AVERAGE U.S. DOMESTIC RIG COUNT 1,163 1,028 1,141 961
AVERAGE NATURAL GAS PRICE (PER THOUSAND CUBIC FEET (MCF)) $ 6.11 $ 5.59 $ 5.87 $ 5.86
AVERAGE OIL PRICE (PER BARREL) $ 38.30 $ 29.05 $ 36.72 $ 31.58
- -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
REVENUES for the three months ended June 30, 2004 increased $14,562,000 or 20.5
percent compared to the three months ended June 30, 2003. The Technical Services
segment revenues increased 21.6 percent from last year's second quarter
revenues. Revenues in this segment increased compared to prior year due to
higher overall customer activity levels, higher pricing levels in certain of our
service lines and a shift in the mix of pressure pumping work towards higher
revenue generating jobs. The Support Services segment revenues for the quarter
ended June 30, 2004 increased 29.8 percent from last year's second quarter
revenues. This relatively higher increase was due to significantly higher
utilization and slightly higher pricing in rental tools, which is the largest
service line within this segment.
Domestic revenues increased during the quarter due to higher customer drilling
activity. The average domestic rig count during the second quarter was 13.1
percent higher than the same period in 2003. Our consolidated revenues grew at a
higher rate than the overall
14
RPC, INC. AND SUBSIDIARIES
domestic rig count, principally because of the effect of our new operations in
Kuwait and a new fishing tool service line, which began in the first quarter of
2004. These increases were partially offset by continued weakness in the Gulf of
Mexico market and the sale of one of our non-oilfield businesses, which occurred
at the end of April 2004. At the end of the quarter, the Gulf of Mexico rig
count was 92 or 11 percent lower than the prior year. In addition, the average
price of natural gas increased by 9.3 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 June 30, 2004 as compared to the prior year due to
our new operations in Kuwait which commenced in the first quarter of 2004;
however, foreign revenues remain a small percentage of total revenues.
COST OF SERVICES RENDERED AND GOODS SOLD for the three months ended June 30,
2004 was $49,189,000 compared to $42,390,000 for the three months ended June 30,
2003, an increase of $6,799,000 or 16.0 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, and higher casualty insurance expenses due to
unfavorable claims experience during the second quarter of 2004 compared to
2003. Cost of services rendered and goods sold, as a percent of revenues,
decreased from the second quarter of 2003 compared to the second quarter of 2004
as a result of increased revenues and the related improved operating leverage
due to overall higher utilization of personnel and operating equipment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended June 30,
2004 were $16,166,000 compared to $13,208,000 for the three months ended June
30, 2003, an increase of $2,958,000 or 22.4 percent. These expenses increased
primarily due to an increase in bad debt expense and higher employment costs
mainly as a result of an increase in number of employees and higher incentive
compensation expenses consistent with improved operating results. Selling,
general and administrative expenses as a percent of revenues increased slightly
from the second quarter of 2003 compared to the second quarter of 2004.
DEPRECIATION AND AMORTIZATION were $8,604,000 for the three months ended June
30, 2004, an increase of $203,000 or 2.4 percent compared to $8,401,000 for the
quarter ended June 30, 2003. This increase in depreciation and amortization
resulted from various capital expenditures during the previous twelve months
within Support Services and Technical Services.
OPERATING PROFIT for the three months ended June 30, 2004 increased $4,602,000
or 67.0 percent compared to the three months ended June 30, 2003. This
improvement was 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.
15
RPC, INC. AND SUBSIDIARIES
OTHER INCOME, NET for the three months ended June 30, 2004 was $620,000, a
decrease of $181,000 compared to $801,000 for the three months ended June 30,
2003. For the three months ended June 30, 2004 and 2003, other income, net
primarily reflects net gains and losses related to the sale of operating
equipment.
INTEREST EXPENSE, NET was $33,000 for the three months ended June 30, 2004
compared to $77,000 for the quarter ended June 30, 2003. The decrease in
interest expense, net resulted primarily from the reduction in outstanding debt
through annual principal payments made early in the second quarter of 2004. 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 increased slightly in the current period compared to the prior
year.
INCOME TAX PROVISION was $4,580,000 during the three months ended June 30, 2004,
compared to $2,884,000 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 June 30, 2004 and 2003.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
REVENUES for the six months ended June 30, 2004 increased $33,864,000 or 25.7
percent compared to the six months ended June 30, 2003. The Technical Services
segment revenues for the six months ended June 30, 2004 increased 28.5 percent
from the same period of the prior year due primarily to higher overall customer
activity levels, higher pricing levels in certain of our service lines and a
shift in the mix of pressure pumping work towards higher revenue generating
jobs. The Support Services segment revenues for the six months ended June 30,
2004 increased 25.4 percent from the same period of the prior year as a result
of higher equipment utilization and slightly higher pricing in rental tools,
which is the largest service line within this segment.
Domestic revenues increased during the period due to higher customer drilling
activity. The average domestic rig count during the six months ended June 30,
2004 was 18.7 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 which began generating
operating revenues in the first quarter of 2004, our Bronco Oilfield Services
acquisition, which was closed in the second quarter of 2003, and our new fishing
tool service line, which began generating revenues in the first quarter of 2004.
These increases were partially offset by continued weakness in the Gulf of
Mexico market and the sale of one of our non-oilfield businesses, which occurred
during the second quarter of 2004. Foreign revenues increased significantly
during the six months ended June 30, 2004 as compared to the prior year due to
our new operations in Kuwait which commenced in the first quarter of 2004;
however, foreign revenues remain a small percentage of total revenues.
16
RPC, INC. AND SUBSIDIARIES
COST OF SERVICES RENDERED AND GOODS SOLD for the six months ended June 30, 2004
was $96,296,000 compared to $82,316,000 for the six months ended June 30, 2003,
an increase of $13,980,000 or 17.0 percent. This increase was due to higher
activity levels, which resulted in increased direct employment costs, increases
in other operational expenses such as materials and supplies expenses,
sub-rental expense and fuel costs, and higher casualty insurance expenses due to
unfavorable claims experience during the six months ended June, 30 2004 compared
to the same period in 2003. Cost of services rendered and goods sold, as a
percent of revenues, decreased from the six months ended June 30, 2003 compared
to same period 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 six months ended June 30,
2004 were $31,292,000 compared to $25,161,000 for the six months ended June 30,
2003, an increase of $6,131,000 or 24.4 percent. These expenses increased
primarily due to an increase in bad debt expense and higher employment costs
mainly as a result of an increase in number of employees and higher incentive
compensation expenses consistent with improved operating results. Selling,
general and administrative expenses as a percent of revenues decreased slightly
from the six months ended June 30, 2003 compared to the same period in 2004.
DEPRECIATION AND AMORTIZATION were $17,140,000 for the six months ended June 30,
2004, an increase of $743,000 or 4.5 percent compared to $16,397,000 for the six
months ended June 30, 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 six months ended June 30, 2004 increased $13,010,000
compared to the six months ended June 30, 2003. This improvement was the result
of increased revenues because of higher customer activity levels, partially
offset by the increases in costs of services rendered and goods sold, selling,
general and administrative expenses, and depreciation and amortization, as
discussed above.
OTHER INCOME, NET for the six months ended June 30, 2004 was $769,000, an
increase of $286,000 compared to $483,000 for the six months ended June 30,
2003. For the six months ended June 30, 2004 and 2003, other income, net
primarily reflects net gains related to the sale of operating equipment.
INTEREST EXPENSE, NET was $58,000 for the six months ended June 30, 2004
compared to $92,000 for the six months ended June 30, 2003. The decrease in
interest expense, net resulted primarily from the reduction in outstanding debt
through annual principal payments made in the first and second quarters of 2004.
RPC generates interest income from investment of its available cash primarily in
highly liquid investments with original
17
RPC, INC. AND SUBSIDIARIES
maturities of three months or less. Interest income increased slightly in the
current period compared to the prior year.
INCOME TAX PROVISION was $8,136,000 during the six months ended June 30, 2004,
compared to $3,071,000 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 six months ended June 30, 2004 and 2003.
18
RPC, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------------
(IN THOUSANDS) SIX MONTHS ENDED
JUNE 30,
-----------------------------------
2004 2003
-------------------------------------------------------------------------------
Net cash provided by operating activities $ 19,628 $ 20,666
Net cash used for investing activities (25,043) (20,092)
Net cash used for financing activities (4,392) (1,925)
-------------------------------------------------------------------------------
The Company's decisions about the amount of cash to be used for investing and
financing purposes are influenced by its capital position and the expected
amount of cash to be provided by operations.
Cash provided by operating activities for the six months ended June 30, 2004
decreased $1,038,000 or 5.0 percent compared to the six months ended June 30,
2003. Although net income improved $8,265,000, cash provided from operating
activities decreased primarily due to a $4.2 million contribution to the pension
plan made during the first quarter of 2004 and receipt of income tax refunds in
2003. Also contributing to the decline was an increase in working capital
requirements during 2004 consistent with the Company's recent revenue increases
and higher overall activity levels. Working capital increases during the period
compared to the prior year were caused principally by increases in accounts
receivable and income taxes receivable offset partially by an increase in
accounts payable, accrued state taxes and accrued insurance.
Cash used in investing activities for the six months ended June 30, 2004
increased by $4,951,000, compared to the six months ended June 30, 2003,
primarily as a result of an increase in capital expenditures partially offset by
an increase in proceeds from sale of property and equipment and less cash used
in purchases of businesses.
Cash used in financing activities for the six months ended June 30, 2004
increased by $2,467,000, compared to the six months ended June 30, 2003,
primarily as a result of a 20 percent increase in dividends paid per share,
slightly higher debt service requirements, and an increase in stock repurchases.
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 2004 will be approximately $55 million,
of which $25.1 million has been spent as of June
19
RPC, INC. AND SUBSIDIARIES
30, 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 June 30, 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. During the first quarter of 2004, the Company contributed approximately
$4,200,000 to the pension plan. The Company does not currently expect to make
any additional contribution to the defined benefit plan in 2004.
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 $11.6 million was available as
of June 30, 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.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any material off balance sheet arrangements.
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 six months ended June 30,
2004, the price of steel, for both the commodity and for products manufactured
with steel, rose dramatically due to
20
RPC, INC. AND SUBSIDIARIES
increased worldwide demand. This affected the Company's operations through
delays in scheduled deliveries of new equipment and price quotations that were
only valid for a limited period of time. Although prices remain high as of June
30, 2004, the rate of increase in prices has slowed, and suppliers are more
easily able to meet customers' demands. 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 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, downturn in the economy leading to
decreased oil and gas exploration, inability to identify or complete
acquisitions, adverse weather conditions, inability to attract and retain
skilled employees, personal injury or property damage claims, and the changes in
the supply and demand for oil and gas.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2004, cash and cash equivalents are primarily invested in money
market accounts which are highly liquid with maturities of three months or less.
As a result, we are not subject to material interest rate risk exposure on these
21
RPC, INC. AND SUBSIDIARIES
investments. The Company has been affected by the impact of lower interest rates
on interest income from its short-term investments. This risk is managed through
conservative policies to invest in high-quality obligations. Also, as of June
30, 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 June 30, 2004, RPC had accounts receivable of approximately $69 million
(net of an allowance for doubtful accounts of approximately $2.7 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.
As of the end of the period covered by this report, June 30, 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.
22
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
SHARE REPURCHASES
Under a plan authorized by its Board of Directors on March 9, 1998, the Company
has purchased an aggregate of 1,839,000 shares of its common stock on the open
market 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. Currently the
program does not have a predetermined expiration date. There were no repurchases
of stock on the open market during the six months ended June 30, 2004.
The following shares were repurchased during the three months ended June 30,
2004:
- --------------------- ---------------------- ---------------------- ------------------ -----------------------
Total number of
Shares (or Maximum Number (or
Units) Purchased Approximate Dollar
as Part of Value) of Shares (or
Total Number of Publicly Units) that May Yet
Shares (or Units) Average Price Paid per Announced Plans Be Purchased Under
Period Purchased Share (or Unit) or Programs the Plans or Programs
- --------------------- ---------------------- ---------------------- ------------------ -----------------------
April 1, 2004 - (1)
April 30, 2004 90,334 (2) $ 12.02 - -
May 1, 2004 -
May 31, 2004 - $ - - -
June 1, 2004 -
June 30, 2004 6,750 (1) $ 14.40 - -
- --------------------- ---------------------- ---------------------- ------------------ -----------------------
Total 97,084 12.18 - -
===================== ====================== ====================== ================== =======================
(1) Represents shares tendered in connection with the exercise of employee
stock options except as noted in footnote 2.
(2) Purchases in April 2004 include 83,500 restricted shares, which were
issued in connection with a business acquisition, reacquired at $11.90 per
share, pursuant to an agreement.
23
RPC, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on April 27, 2004. At the
meeting, the stockholders, i.) re-elected three Class III directors to the Board
of Directors for the terms expiring in 2007 and ii) approved the RPC, Inc. 2004
Stock Incentive Plan.
The following table sets forth the votes cast with respect to each of these
proposals:
----------------------------------- ---------------- --------------- ---------------- ------------ ---------------
BROKER NON
PROPOSAL FOR AGAINST WITHHELD ABSTAIN VOTES
----------------------------------- ---------------- --------------- ---------------- ------------ ---------------
Re-election of
Wilton Looney 25,283,626 n/a 2,100,867 - n/a
----------------------------------- ---------------- --------------- ---------------- ------------ ---------------
Re-election of
Gary W. Rollins 25,296,145 n/a 2,088,348 - n/a
----------------------------------- ---------------- --------------- ---------------- ------------ ---------------
Re-election of
James A. Lane, Jr. 25,395,927 n/a 1,988,566 - n/a
----------------------------------- ---------------- --------------- ---------------- ------------ ---------------
RPC, Inc. 2004 Stock
Incentive Plan 21,411,865 4,805,677 n/a 290,738 1,326,213
----------------------------------- ---------------- --------------- ---------------- ------------ ---------------
Messrs. R. Randall Rollins, Henry B. Tippie, James B. Williams, Richard A.
Hubbell and Ms. Linda H. Graham were not up for re-election and have continued
as directors.
ITEM 5. OTHER INFORMATION
None
24
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. (incorporated herein by reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q filed on May 5, 2004).
4 Form of Stock Certificate (incorporated herein by reference to the Annual
Report on Form 10-K for the fiscal year ended December 31, 1998).
10.1 2004 Stock Incentive Plan (incorporated herein by reference to Appendix B
to the Registrant's definitive Proxy Statement filed on March 24, 2004).
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.
- -----------------------------------------------------------------------------------------------
25
RPC, INC. AND SUBSIDIARIES
Item 6. Exhbits and Reports on Form 8-K
b.) Reports on Form 8-K during the quarter ended June 30, 2004
---------------- ------------------ ---------------------------------------------------------------------
DATE OF
DATE FILED EARLIEST EVENT DESCRIPTION OF EVENT
---------------- ------------------ ---------------------------------------------------------------------
April 20, 2004 April 19, 2004 Item 7 and Item 12: Press release to announce first quarter 2004
results and host a conference call on April 28, 2004. RPC also
discloses that the Company expects first quarter diluted earnings
per share to exceed the published analyst estimates for the first
quarter of $0.11.
---------------- ------------------ ---------------------------------------------------------------------
April 28, 2004 April 28, 2004 Item 5 and Item 7: Press release announcing first quarter cash
dividend that declared a quarterly cash dividend of $0.03 per share.
---------------- ------------------ ---------------------------------------------------------------------
April 28, 2004 April 28, 2004 Item 5 and Item 7: Press release announcing first quarter 2004
results.
---------------- ------------------ ---------------------------------------------------------------------
July 16, 2004 July 16, 2004 Item 5 and Item 7: Press release to announce second quarter 2004
results and host a conference call on July 28, 2004 that announces
the date that RPC, Inc. will release second quarter 2004 results.
---------------- ------------------ ---------------------------------------------------------------------
26
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: August 4, 2004 Richard A. Hubbell
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ben M. Palmer
----------------------
Date: August 4, 2004 Ben M. Palmer
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
27