RPC(RES) - 2018 Q4 - Annual Report

Part I Business RPC, Inc. provides specialized oilfield services and equipment through Technical and Support Services segments, with performance highly dependent on oil and gas prices and customer capital expenditures - RPC provides specialized oilfield services and equipment primarily in the United States and select international markets, operating through two main segments: Technical Services and Support Services[11] - In 2018, approximately 85% of revenues were related to oil-directed activities, while 15% were related to natural gas[12] Revenue Contribution by Key Service Lines (2016-2018) | Service Line | 2018 Revenue % | 2017 Revenue % | 2016 Revenue % | | :--- | :--- | :--- | :--- | | Pressure Pumping | 55% | 62% | 46% | | Downhole Tools | 25% | 19% | 23% | | Coiled Tubing | 6% | 7% | 10% | Business Segments The company operates two segments: Technical Services, providing capital-intensive on-site services, and Support Services, offering off-site equipment rental and consulting - Technical Services include on-site services such as pressure pumping, downhole tools, coiled tubing, and well control, driven by well completion and production activities[13] - Support Services include off-site equipment rental and consulting, with demand primarily influenced by customer drilling activity[14] Industry The volatile oil and gas service industry, driven by commodity prices, saw a Q4 2018 oil price drop impacting customer plans, with strong demand for services in unconventional wells - U.S. annual well completions increased by 79.7% between 2016 and 2018, but were still 31.9% lower than the 2014 cyclical peak[34] - A sharp drop in oil prices in Q4 2018 has caused customers to delay or curtail drilling and completion plans for the near term[35] - Unconventional wells, which require RPC's specialized services, reached a historical high of approximately 94% of total U.S. drilling in late 2018/early 2019[37] - International revenues increased 61.9% in 2018 to $90.4 million, representing 5% of consolidated revenues, driven by activity in Argentina, Mexico, and Pakistan[38][113] Competition RPC faces intense competition from large integrated companies and smaller peers, leading to pricing declines due to increased market pressure - The oilfield services industry is highly competitive, with rivals including large integrated companies (Halliburton, Baker Hughes, Schlumberger) and other publicly traded peers[45][46] - New and expanding competitors increased pressure in 2017-2018, causing service pricing to decline during the fourth quarter of 2017 and throughout 2018[45] Risk Factors The company faces significant risks from volatile oil and gas prices, intense competition, environmental regulations, operational disruptions, and substantial management ownership - Demand for services is highly dependent on volatile oil and natural gas prices, which affect customers' capital investment decisions[53] - The company faces intense competition, which can affect pricing and market share, with key competitive factors including service quality, availability, safety, and price[60] - Compliance with stringent environmental laws, particularly those related to hydraulic fracturing, could increase operating costs and reduce demand for pressure pumping services[65][66] - Executive officers, directors, and their affiliates hold 74% of RPC's common stock, effectively controlling operations and limiting the influence of public stockholders[70] Unresolved Staff Comments The company reports no unresolved staff comments - None[77] Properties RPC owns or leases approximately 120 offices and operating facilities, which management deems adequate for current and anticipated needs - The company owns and leases around 120 facilities, with major owned locations in Broussard, LA; Houston, TX; and Kilgore, TX, and major leased locations in Midland, TX; The Woodlands, TX; and Oklahoma City, OK[78][79][80] Legal Proceedings RPC is involved in routine legal proceedings, which management believes will not materially adversely affect its business or financial condition - The company is party to various routine legal proceedings but believes their outcome will not have a material adverse effect on its financial condition[81] Mine Safety Disclosures Mine safety disclosures are provided in Exhibit 95.1 to the Form 10-K - Required mine safety disclosures are provided in Exhibit 95.1 to the Form 10-K[82] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities RPC's common stock trades on the NYSE, with 215.2 million shares outstanding as of February 2019, and the company repurchased shares in Q4 2018 - RPC's common stock is listed on the New York Stock Exchange under the symbol RES, with 215,210,657 shares outstanding as of February 15, 2019[86] Share Repurchases - Q4 2018 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Oct 2018 | 778 | $14.51 | | Nov 2018 | 100,000 | $13.67 | | Dec 2018 | 129,010 | $11.34 | | Q4 Total | 229,788 | $12.36 | - As of December 31, 2018, 8,843,769 shares remained available for repurchase under the company's stock buyback program[91] Selected Financial Data This section summarizes RPC's five-year financial data, highlighting 2018 revenues of $1.72 billion, net income of $175.4 million, and no long-term debt Key Financial Data (2017 vs. 2018, in thousands) | Metric (in thousands, except per share) | 2018 | 2017 | | :--- | :--- | :--- | | Revenues | $1,721,005 | $1,595,227 | | Operating Profit | $210,030 | $226,217 | | Net Income | $175,402 | $162,511 | | Diluted EPS | $0.82 | $0.75 | | Dividends Paid Per Share | $0.47 | $0.20 | | Capital Expenditures | $242,610 | $117,509 | | Total Assets | $1,199,580 | $1,147,224 | | Long-Term Debt | $0 | $0 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2018 financial performance, a negative near-term outlook due to oil price drops, a strong balance sheet, and critical accounting policies Outlook The near-term outlook is cautious due to Q4 2018 oil price drops, oversupply in services, and heightened competition, impacting pricing and utilization - The significant drop in oil prices in Q4 2018 has negative implications for RPC's near-term activity levels, revenues, and earnings[106] - Management believes the market for several oilfield completion services, including pressure pumping, has become oversupplied due to higher industry efficiency, which will negatively affect pricing and utilization[108] - RPC expanded its fleet modestly in 2018 and has ordered a small amount of new equipment for 2019, focusing on maintaining a strong balance sheet amidst potential lower activity levels[109] Results of Operations In 2018, revenues grew 7.9% to $1.72 billion, but operating profit declined due to higher cost of revenues, while net income increased due to a lower tax rate 2018 vs. 2017 Performance (in millions) | Metric (in millions) | 2018 | 2017 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,721.0 | $1,595.2 | $125.8 | 7.9% | | Cost of Revenues | $1,183.0 | $1,050.8 | $132.2 | 12.6% | | Operating Profit | $210.0 | $226.2 | ($16.2) | -7.2% | | Net Income | $175.4 | $162.5 | $12.9 | 7.9% | 2017 vs. 2016 Performance (in millions) | Metric (in millions) | 2017 | 2016 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,595.2 | $729.0 | $866.2 | 118.8% | | Operating Profit (Loss) | $226.2 | ($238.9) | $465.1 | N/A | | Net Income (Loss) | $162.5 | ($141.2) | $303.7 | N/A | Liquidity and Capital Resources The company maintains a strong financial condition with increased cash from operations, projected higher capital expenditures, and an undrawn $125 million credit facility Cash Flow Summary (in thousands) | Cash Flow Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $389,009 | $133,704 | | Net cash used for investing activities | ($219,727) | ($104,386) | | Net cash used for financing activities | ($144,070) | ($70,103) | - The company has a $125 million revolving credit facility maturing in July 2023, with no outstanding borrowings as of December 31, 2018[139] - Capital expenditures are expected to be approximately $289 million in 2019, up from $242.6 million in 2018[141] - In 2018, the company paid $101.1 million in dividends and repurchased $43.0 million of its stock[215] Critical Accounting Policies Management identifies critical accounting policies requiring significant judgment, including doubtful accounts, income taxes, self-insured expenses, asset depreciation, and pension liabilities - The allowance for doubtful accounts is based on evaluation of industry trends, customer financial conditions, and historical experience, with a 0.50 percentage point change impacting the allowance by $1.9 million[156][157] - The effective tax rate was 20.7% in 2018, down from 30.2% in 2017, primarily due to the Tax Cuts and Jobs Act (TCJA)[158] - The company self-insures certain risks and has recorded liabilities of $18.3 million as of Dec 31, 2018, based on an estimated exposure range of $15.9 million to $20.8 million[162] - The defined benefit pension plan was under-funded as of Dec 31, 2018, with key assumptions including a 7% expected return on plan assets and a 4.65% discount rate[165][166][167] Quantitative and Qualitative Disclosures about Market Risk The company faces interest rate risk from its variable-rate credit facility and foreign exchange risk, though neither is currently material - The company is subject to interest rate risk on its revolving credit facility, but had no outstanding borrowings as of December 31, 2018[184] - Exposure to foreign exchange rate risk is not expected to be material as most transactions are conducted in U.S. currency[185] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018, including balance sheets, income statements, cash flows, and notes, with an unqualified auditor's opinion on internal controls Consolidated Financial Statements The consolidated financial statements show RPC's 2018 financial position with $1.20 billion in assets, $1.72 billion in revenue, and $175.4 million in net income Consolidated Balance Sheet Highlights (as of Dec 31, 2018, in thousands) | Account (in thousands) | Amount | | :--- | :--- | | Total Current Assets | $618,938 | | Property, Plant and Equipment, net | $517,982 | | Total Assets | $1,199,580 | | Total Current Liabilities | $143,237 | | Total Liabilities | $249,161 | | Total Stockholders' Equity | $950,419 | | Total Liabilities and Stockholders' Equity | $1,199,580 | Consolidated Statement of Operations Highlights (Year ended Dec 31, 2018, in thousands) | Account (in thousands) | Amount | | :--- | :--- | | Revenues | $1,721,005 | | Operating Profit | $210,030 | | Income Before Income Taxes | $221,280 | | Net Income | $175,402 | Notes to Consolidated Financial Statements The notes detail RPC's accounting policies, including revenue recognition, income taxes, debt, employee benefits, and segment performance, highlighting the impact of TCJA - The company adopted the new revenue standard (ASC 606) on January 1, 2018, using the modified retrospective method, with no material impact on its financial statements[248] - The Tax Cuts and Jobs Act (TCJA) reduced the federal tax rate from 35% to 21%, resulting in a discrete tax benefit of $19.3 million in 2017 and a lower effective tax rate in 2018[274][275] - The defined benefit pension plan was under-funded by $5.1 million as of December 31, 2018, with the company contributing $5.0 million to the plan during the year[309][311] Segment Revenues by Major Service Line (2018, in thousands) | Service Line | 2018 Revenue | | :--- | :--- | | Technical Services | $1,647,213 | | - Pressure Pumping | $945,919 | | - Downhole Tools | $423,811 | | Support Services | $73,792 | | - Rental Tools | $50,809 | | Total Revenues | $1,721,005 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[351] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[353] - Management's assessment concluded that the company maintained effective internal control over financial reporting as of December 31, 2018, which was supported by the independent auditor's report[189][354] Other Information The company reports no other information - None[356] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, corporate governance, and the code of ethics is incorporated by reference from the 2019 Proxy Statement - Information concerning directors, executive officers, the audit committee, and the code of ethics is incorporated by reference from the 2019 Proxy Statement[358][359][360] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2019 Annual Meeting Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2019 Proxy Statement[363] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2019 Proxy Statement, with 5.4 million securities available for future issuance under equity plans - Information regarding security ownership is incorporated by reference from the 2019 Proxy Statement[364] Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be Issued Upon Exercise | Securities Available for Future Issuance | | :--- | :--- | :--- | | Approved by securityholders | 0 | 5,402,634 | | Not approved by securityholders | 0 | 0 | | Total | 0 | 5,402,634 | Certain Relationships and Related Party Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2019 Proxy Statement - Information regarding related party transactions and director independence is incorporated by reference from the 2019 Proxy Statement[368] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2019 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2019 Proxy Statement[369] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed with the Form 10-K, including corporate documents, plans, and certifications - This section lists all filed documents, including financial statements, Schedule II (Valuation and Qualifying Accounts), and numerous exhibits[371][372] - Key exhibits include the 2014 Stock Incentive Plan, various credit agreements and amendments, and certifications by the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act[372][373][375]