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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
Commission File No.
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code -- (
Securities Registered under Section 12(b) of the Act:
Title of each class: |
| Trading Symbol(s) |
| Name of each exchange on which registered: |
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.
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 21, 2022, RPC, Inc. had
RPC, INC. AND SUBSIDIARIES
Table of Contents
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2022 AND DECEMBER 31, 2021
(In thousands)
September 30, | December 31, | |||||
| 2022 |
| 2021 | |||
ASSETS | (Unaudited) | (Note 1) | ||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowance for credit losses of $ | | | ||||
Inventories |
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Income taxes receivable |
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Prepaid expenses |
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Assets held for sale | | | ||||
Other current assets |
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Total current assets |
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Property, plant and equipment, less accumulated depreciation of $ | | | ||||
Operating lease right-of-use assets | | | ||||
Finance lease right-of-use assets | — | | ||||
Goodwill |
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Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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LIABILITIES |
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Accounts payable | $ | | $ | | ||
Accrued payroll and related expenses |
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Accrued insurance expenses |
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Accrued state, local and other taxes |
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Income taxes payable |
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Pension liabilities | | — | ||||
Current portion of operating lease liabilities | | | ||||
Current portion of finance lease liabilities | — | | ||||
Other accrued expenses |
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Total current liabilities |
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Long-term accrued insurance expenses |
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Long-term pension and retirement plans liabilities |
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Deferred income taxes |
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Long-term operating lease liabilities | | | ||||
Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 9) |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, $ |
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Common stock, $ |
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Capital in excess of par value |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
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 NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(In thousands except per share data)
(Unaudited)
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Revenues | $ | | $ | | $ | | $ | | |||||
COSTS AND EXPENSES: |
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Cost of revenues |
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Selling, general and administrative expenses |
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Depreciation and amortization |
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Gain on disposition of assets, net |
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Operating income (loss) |
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Interest expense |
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Interest income |
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Other (expense) income, net |
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Income (loss) before income taxes |
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Income tax provision |
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Net income (loss) | $ | | $ | | $ | | $ | ( | |||||
Earnings (loss) per share |
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Basic | $ | | $ | | $ | | $ | ( | |||||
Diluted | $ | | $ | | $ | | $ | ( | |||||
Dividends paid per share | $ | | $ | — | $ | | $ | — | |||||
The accompanying notes are an integral part of these consolidated financial statements.
4
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(In thousands)
(Unaudited)
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Net income (loss) | $ | | $ | | $ | | $ | ( | |||||
Other comprehensive income: |
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Pension adjustment and reclassification adjustment, net of taxes |
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Foreign currency translation |
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Comprehensive income (loss) | $ | | $ | | $ | | $ | ( | |||||
The accompanying notes are an integral part of these consolidated financial statements.
5
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(In thousands)
(Unaudited)
Nine months ended September 30, 2022 | |||||||||||||||||
Accumulated | |||||||||||||||||
Capital in | Other | ||||||||||||||||
Common Stock | Excess of | Retained | Comprehensive | ||||||||||||||
| Shares |
| Amount |
| Par Value |
| Earnings |
| Loss |
| Total | ||||||
Balance, December 31, 2021 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Stock issued for stock incentive plans, net |
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Stock purchased and retired |
| ( |
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| — |
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Net income |
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Pension adjustment, net of taxes |
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Foreign currency translation |
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| — |
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Balance, March 31, 2022 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Stock issued for stock incentive plans, net | | | | — | — | | |||||||||||
Stock purchased and retired | — | — | ( | | — | — | |||||||||||
Net income | — | — | — | | — | | |||||||||||
Pension adjustment, net of taxes | — | — | — | — | | | |||||||||||
Foreign currency translation | — | — | — | — | | | |||||||||||
Balance, June 30, 2022 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Stock issued for stock incentive plans, net | ( | ( | | — | — | | |||||||||||
Stock purchased and retired | — | — | ( | | — | ( | |||||||||||
Net income | — | — | — | | — | | |||||||||||
Pension adjustment, net of taxes | — | — | — | — | | | |||||||||||
Foreign currency translation | — | — | — | — | ( | ( | |||||||||||
Dividends declared | — | — | — | ( | |||||||||||||
Balance, September 30, 2022 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Nine months ended September 30, 2021 | |||||||||||||||||
Accumulated | |||||||||||||||||
Capital in | Other | ||||||||||||||||
Common Stock | Excess of | Retained | Comprehensive | ||||||||||||||
| Shares |
| Amount |
| Par Value |
| Earnings |
| Loss |
| Total | ||||||
Balance, December 31, 2020 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Stock issued for stock incentive plans, net |
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Stock purchased and retired |
| ( |
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Net loss |
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Pension adjustment, net of taxes |
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Foreign currency translation |
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| — |
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Balance, March 31, 2021 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Stock issued for stock incentive plans, net | ( | ( | | — | — | | |||||||||||
Stock purchased and retired | ( | — | ( | | — | ( | |||||||||||
Net loss | — | — | — | ( | — | ( | |||||||||||
Pension adjustment, net of taxes | — | — | — | — | | | |||||||||||
Foreign currency translation | — | — | — | — | | | |||||||||||
Balance, June 30, 2021 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Stock issued for stock incentive plans, net | ( | ( | | — | — | | |||||||||||
Stock purchased and retired | — | — | ( | | — | ( | |||||||||||
Net income | — | — | — | | — | | |||||||||||
Pension adjustment, net of taxes | — | — | — | — | | | |||||||||||
Foreign currency translation | — | — | — | — | ( | ( | |||||||||||
Balance, September 30, 2021 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
RPC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(In thousands)
(Unaudited)
Nine months ended September 30, | |||||||
| 2022 |
| 2021 | ||||
OPERATING ACTIVITIES |
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Net income (loss) | $ | | $ | ( | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation, amortization and other non-cash charges |
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Stock-based compensation expense |
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Gain on disposition of assets, net |
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Deferred income tax provision (benefit) |
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(Increase) decrease in assets: |
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Accounts receivable |
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Income taxes receivable |
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Inventories |
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Prepaid expenses |
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Other current assets |
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Other non-current assets |
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Increase (decrease) in liabilities: |
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Accounts payable |
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Income taxes payable |
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Accrued payroll and related expenses |
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Accrued insurance expenses |
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Accrued state, local and other taxes |
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Other accrued expenses |
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Pension and retirement plans liabilities |
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Long-term accrued insurance expenses |
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Other long-term liabilities |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES |
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Capital expenditures |
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Proceeds from sale of assets |
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Net cash used for investing activities |
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FINANCING ACTIVITIES |
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Payment of dividends |
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Cash paid for common stock purchased and retired |
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Cash paid for finance lease | ( | ( | |||||
Net cash used for financing activities |
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Net decrease in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | |||
Supplemental cash flows disclosure: | |||||||
Income taxes payment (refund), net | $ | | $ | ( | |||
Interest paid | $ | | $ | | |||
Supplemental disclosure of noncash investing activities: | |||||||
Capital expenditures included in accounts payable | $ | | $ | | |||
The accompanying notes are an integral part of these consolidated financial statements.
7
1. GENERAL
The accompanying unaudited 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 of America 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 accounting principles generally accepted in the United States for complete financial statements. These consolidated financial statements have been prepared in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, “Consolidation” and Rule 3A-02(a) of Regulation S-X. In accordance with ASC Topic 810 and Rule 3A-02 (a) of Regulation S-X, the Company’s policy is to consolidate all subsidiaries and investees where it has voting control.
In the opinion of management, all adjustments (all of which consisted of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
The balance sheet at December 31, 2021 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America 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 fiscal year ended December 31, 2021.
A group that includes a member of the Company’s Board of Directors, Gary W. Rollins, controls in excess of of the Company’s voting power.
2. RECENT ACCOUNTING STANDARDS
Recently Adopted Accounting Standards:
| ● | ASU No. 2020-04 — Reference Rate Reform (Topic 848): The amendments in this ASU provide optional guidance for a limited time to ease the impact of the reference rate reform on financial reporting. The amendments, which are elective, provide expedients to contract modifications, affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate (LIBOR) or other reference rate that is expected to be discontinued due to reference rate reform. In the second quarter of 2022, the Company adopted these provisions as part of the Amendment No. 6 to its Credit Agreement (see note 11) wherein LIBOR was replaced with the Term Secured Overnight Financing Rate (SOFR). Adoption of these provisions did not have a material impact on the Company’s consolidated financial statements. |
Recently Issued Accounting Standards Not Yet Adopted:
| ● | ASU No. 2021-08: Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers: The amendments in this ASU address diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination, by adopting guidance requiring an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer would recognize and measure the acquired contract assets and contract liabilities in the same manner that they were recognized and measured in the acquiree's financial statements before the acquisition. The Company plans to adopt these provisions prospectively to business combinations occurring after January 1, 2023 and does not expect adoption to have a material impact on its consolidated financial statements. |
8
3. REVENUES
Accounting Policy:
RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and, given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues based on the transaction price agreed upon with its customers.
Sales tax charged to customers is presented on a net basis within the accompanying Consolidated Statements of Operations and therefore excluded from revenues.
Nature of services:
RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see Note 6.
RPC contracts with its customers to provide the following services by reportable segment:
Technical Services
Support Services
Our contracts with customers are generally very short-term in nature and generally consist of a single performance obligation – the provision of oilfield services.
Payment terms:
RPC’s contracts with customers state the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection is generally expected between
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Significant judgments:
RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations.
Disaggregation of revenues:
See Note 6 for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions.
Contract balances:
Contract assets representing the Company’s rights to consideration for work completed but not billed are included in accounts receivable, net in the accompanying Consolidated Balance Sheets are shown below:
September 30, | December 31, | |||||
(in thousands) |
| 2022 |
| 2021 | ||
Unbilled trade receivables | $ | | $ | | ||
Substantially all of the unbilled trade receivables disclosed were or are expected to be invoiced during the following quarter.
4. 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. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. The following table shows the restricted shares of common stock (participating securities) outstanding and a reconciliation of outstanding weighted average shares:
Three months ended | Nine months ended | ||||||||||||
September 30 | September 30 | ||||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net income (loss) available for stockholders: | $ | | $ | | $ | | $ | ( | |||||
Less: Adjustments for earnings attributable to participating securities | ( | ( | ( | | |||||||||
Net income (loss) used in calculating earnings per share | $ | | $ | | $ | | $ | ( | |||||
Weighted average shares outstanding (including participating securities) |
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Adjustment for participating securities |
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Shares used in calculating basic and diluted earnings per share |
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5. STOCK-BASED COMPENSATION
In April 2014, the Company reserved
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Stock-based employee compensation expense was as follows for the periods indicated:
Three months ended | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2022 | 2021 |
| 2022 | 2021 | ||||||
Pre-tax expense | $ | | $ | | $ | | $ | | ||||
After tax expense | $ | | $ | | $ | | $ | | ||||
Restricted Stock
The following is a summary of the changes in non-vested restricted shares for the nine months ended September 30, 2022:
Weighted Average | |||||
| Shares |
| Grant-Date Fair Value | ||
Non-vested shares at January 1, 2022 | | $ | | ||
Granted |
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Vested |
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Forfeited |
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Non-vested shares at September 30, 2022 |
| | $ | | |
The total fair value of shares vested was $
6. BUSINESS SEGMENT INFORMATION
RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and tools offered off the well site and are more closely aligned with the customers’ drilling activities. Selected overhead including certain centralized support services and regulatory compliance are classified as Corporate.
Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services.
Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels.
The Company’s Chief Operating Decision Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above.
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Segment Revenues:
RPC’s operating segment revenues by major service lines are shown in the following table:
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
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Technical Services: |
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Pressure Pumping | $ | | $ | | $ | | $ | | |||||
Downhole Tools |
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Coiled Tubing |
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Nitrogen |
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Snubbing |
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All other |
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Total Technical Services | $ | | $ | | $ | | $ | | |||||
Support Services: |
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Rental Tools | $ | | $ | | $ | | $ | | |||||
All other |
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Total Support Services | $ | | $ | | $ | | $ | | |||||
Total revenues | $ | | $ | | $ | | $ | | |||||
The following summarizes revenues for the United States and separately for all international locations combined for the three and nine months ended September 30, 2022 and 2021. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10 percent of RPC’s consolidated assets, and therefore are not presented.
| Three months ended |
| Nine months ended | ||||||||||
September 30, | September 30, | ||||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
United States revenues | $ | | $ | | $ | | $ | | |||||
International revenues |
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Total revenues | $ | | $ | | $ | | $ | | |||||
The accounting policies of the reportable segments are the same as those referenced in Note 1 to these consolidated financial statements. RPC evaluates the performance of its segments based on revenues, operating profits and return on invested capital. Gains or losses on disposition of assets are reviewed by the CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results.
12
Summarized financial information with respect RPC’s reportable segments for the three and nine months ended September 30, 2022 and 2021 are shown in the following table:
Three months ended | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Revenues: |
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Technical Services | $ | | $ | | $ | | $ | | ||||
Support Services |
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Total revenues | $ | | $ | | $ | | $ | | ||||
Operating income (loss): |
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Technical Services | $ | | $ | | $ | | $ | | ||||
Support Services |
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Corporate expenses |
| ( |
| ( |
| ( |
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Gain on disposition of assets, net |
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| |
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Total operating income (loss) | $ | | $ | | $ | | $ | ( | ||||
Interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Interest income |
| |
| |
| |
| | ||||
Other (expense) income, net |
| ( |
| |
| |
| | ||||
Income (loss) before income taxes | $ | | $ | | $ | | $ | ( | ||||
As of and for the nine months ended | Technical | Support | ||||||||||
September 30, 2022 |
| Services |
| Services |
| Corporate |
| Total | ||||
(in thousands) |
|
|
|
|
|
|
|
| ||||
Depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Capital expenditures |
| |
| |
| |
| | ||||
Identifiable assets | | | | | ||||||||
As of and for the nine months ended | Technical | Support | ||||||||||
September 30, 2021 |
| Services |
| Services |
| Corporate |
| Total | ||||
(in thousands) | ||||||||||||
Depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Capital expenditures |
| |
| |
| |
| | ||||
Identifiable assets | | | | | ||||||||
7. CURRENT EXPECTED CREDIT LOSSES
The Company utilizes an expected credit loss model for valuing its accounts receivable, a financial asset measured at amortized cost. The Company is exposed to credit losses primarily from providing oilfield services. The Company’s expected credit loss allowance for accounts receivable is based on historical collection experience, current and future economic and market conditions and a review of the current status of customers’ account receivable balances. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected.
13
The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected:
Nine months ended September 30, |
| 2022 |
| 2021 | ||
(in thousands) | ||||||
Beginning balance | $ | | $ | | ||
Provision for current expected credit losses | |
| | |||
Write-offs | ( |
| ( | |||
Recoveries collected (net of expenses) | |
| | |||
Ending balance | $ | | $ | | ||
8. INVENTORIES
Inventories consist of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services. In the table below, spare parts and components are included as part of raw materials and supplies; tools that are assembled using components are reported as finished goods. Inventories are recorded at the lower of cost or net realizable value. Cost is determined using first-in, first-out method or the weighted average cost method.
September 30, | December 31, | |||||
(in thousands) | 2022 | 2021 | ||||
Raw materials and supplies | $ | | $ | | ||
Finished goods | |
| | |||
Ending balance | $ | | $ | | ||
9. COMMITMENTS AND CONTINGENCIES
Sales and Use Taxes - The Company has ongoing sales and use tax audits in various jurisdictions and may be subjected to varying interpretations of statute that could result in unfavorable outcomes. In accordance with ASC 450-20, Loss Contingencies, any probable and reasonable estimate of assessment costs have been included in accrued state, local and other taxes.
The Company has received a state tax notification of audit results related to sales and use tax and with its outside legal counsel has evaluated the perceived merits of this tax assessment. The Company believes the likelihood of a material loss related to this contingency is remote and cannot be reasonably estimated at this time. Therefore, no loss has been recorded and the Company currently does not believe the resolution of this claim will have a material impact on its consolidated financial position, results of operations or cash flows.
10. PENSION AND RETIREMENT PLANS LIABILITIES
The following represents the net periodic benefit cost and related components of the Company’s multiple employer Retirement Income Plan, a trusteed defined benefit pension plan:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
| $ | |
| $ | |
| $ | |
| $ | | ||
| — |
| ( |
| - |
| ( | ||||||
| |
| |
| |
| | ||||||
Net periodic benefit cost | $ | | $ | | $ | | $ | | |||||
During the fourth quarter of 2021, the Company initiated actions to terminate the defined benefit pension plan, which is expected to be completed in early 2023 and therefore the funded status of the plan is being reported as part of Pension liabilities in the accompanying Consolidated Balance Sheets. The Company currently expects to make a final cash contribution of approximately $
14
$
The Company did not make a cash contribution to this plan during the nine months ended September 30, 2022 or September 30, 2021.
The Company permits selected highly compensated employees to defer a portion of their compensation into the non-qualified Supplemental Retirement Plan (“SERP”). The Company maintains certain securities primarily in mutual funds and company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligation of the SERP that have been classified as trading, and are stated at fair value totaling $
The SERP liabilities includes participant deferrals net of distributions and are stated at fair value of approximately $
11. NOTES PAYABLE TO BANKS
The Company has a revolving Credit Agreement with Bank of America and
During the second quarter of 2022, the Company entered into Amendment No. 6 to its Credit Agreement (the “Amendment”). This Amendment (1) extends the termination date for revolving loans from July 26, 2023 to June 22, 2027, (2) replaces LIBOR with the Term SOFR as an interest rate option in connection with revolving loan borrowings and reduces the applicable rate margins by approximately
The Credit Agreement has
As of September 30, 2022, the Company was in compliance with all covenants.
15
Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election:
| ● | Term SOFR; plus, a margin ranging from |
| ● | the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus |
In addition, the Company pays an annual fee ranging from
The Company has incurred total loan origination fees and other debt related costs associated with this revolving credit facility in the aggregate of approximately $
As of September 30, 2022, RPC had
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, |
| |||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Interest incurred | $ | | $ | | $ | | $ | |
| ||||
Interest paid | | | | | |||||||||
12. INCOME TAXES
The Company generally determines its periodic income tax expense or benefit based upon the current period income or loss and the annual estimated tax rate for the Company adjusted for discrete items including changes to prior period estimates. In certain instances the Company uses the discrete method when it believes the actual year-to-date effective rate provides a more reliable estimate of its income tax rate for the period. The estimated tax rate is revised, if necessary, as of the end of each successive interim period during the fiscal year to the Company’s current annual estimated tax rate.
For the three months ended September 30, 2022, the effective rate reflects a provision of
13. FAIR VALUE DISCLOSURES
The various inputs used to measure assets at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows:
16
The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis in the balance sheets as of September 30, 2022 and December 31, 2021:
Fair Value Measurements at September 30, 2022 with: | ||||||||||||
Quoted prices in | Significant | |||||||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| assets |
| inputs |
| inputs | ||||
| (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets: | ||||||||||||
Equity securities | $ | | $ | | $ | — | $ | — | ||||
Investments measured at net asset value | $ | |
|
|
|
|
|
| ||||
Fair Value Measurements at December 31, 2021 with: | ||||||||||||
Quoted prices in | Significant | |||||||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| assets |
| inputs |
| inputs | ||||
|
|
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
Assets: | ||||||||||||
Equity securities | $ | | $ | | $ | — | $ | — | ||||
Investments measured at net asset value | $ | |
|
|
|
|
|
| ||||
The Company determines the fair value of equity securities that have a readily determinable fair value through quoted market prices. The total fair value is the final closing price, as defined by the exchange in which the asset is actively traded, on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. Marketable securities comprised of the SERP assets, are recorded primarily at their net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance or investment company. Significant observable inputs, in addition to quoted market prices, were used to value the equity securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the quarter ended September 30, 2022, there were no significant transfers in or out of levels 1, 2 or 3.
Under the Company’s revolving credit facility, there was
The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial instruments and has not determined whether it will elect this option for financial instruments acquired in the future.
The Company’s real estate classified as Assets held for sale in the accompanying Consolidated Balance Sheets has been stated at fair value less costs. The fair value measurement was based on observable market data that includes estimated values per square foot involving comparable properties in similar locations. The non-recurring fair value measurement is reflected in the table below:
Fair Value Measurements at September 30, 2022 with: | ||||||||||||
Quoted prices in | Significant | |||||||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| assets |
| inputs |
| inputs | ||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets: |
|
|
|
|
|
|
|
| ||||
Assets held for sale | $ | | $ | — | $ | | $ | — | ||||
17
Fair Value Measurements at December 31, 2021 | ||||||||||||
|
| Quoted prices in |
| Significant |
| |||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) | Total | assets | inputs | inputs | ||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets: |
|
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|
|
|
|
|
| ||||
Assets held for sale | $ | | $ | — | $ | | $ | — | ||||
14. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive (loss) income consists of the following (in thousands):
Foreign | |||||||||
Pension | Currency | ||||||||
| Adjustment |
| Translation |
| Total | ||||
Balance at December 31, 2021 | $ | ( | $ | ( | $ | ( | |||
Change during the period: |
|
|
| ||||||
Before-tax amount |
| — |
| |
| | |||
Reclassification adjustment, net of taxes: |
|
|
| ||||||
Amortization of net loss (1) |
| |
| — |
| | |||
Total activity for the period |
| |
| |
| | |||
Balance at September 30, 2022 | $ | ( | $ | ( | $ | ( | |||
| (1) | Reported as part of Selling, general and administrative expenses. |
Foreign | |||||||||
Pension | Currency | ||||||||
| Adjustment |
| Translation |
| Total | ||||
Balance at December 31, 2020 | $ | ( | $ | ( | $ | ( | |||
Change during the period: |
|
|
| ||||||
Before-tax amount |
| — |
| ( |
| ( | |||
Reclassification adjustment, net of taxes: |
|
|
|
| |||||
Amortization of net loss (1) |
| |
| — |
| | |||
Total activity for the period |
| |
| ( |
| | |||
Balance at September 30, 2021 | $ | ( | $ | ( | $ | ( | |||
(1) | Reported as part of Selling, general and administrative expenses. |
15. SUBSEQUENT EVENT
On October 25, 2022, the Board of Directors declared a regular quarterly cash dividend of $
18
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
The following discussion should be read in conjunction with the Consolidated Financial Statements included elsewhere in this document. See also “Forward-Looking Statements” on page 26.
RPC, Inc. (“RPC”) provides a broad range of specialized oilfield services primarily to independent and major oilfield companies engaged in exploration, production and development of oil and gas properties throughout the United States, including the Gulf of Mexico, mid-continent, southwest, Rocky Mountain and Appalachian regions, and in selected international locations. The Company’s revenues and profits are generated by providing equipment and services to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. We continuously monitor factors that impact current and expected customer activity levels, such as the prices of oil and natural gas, changes in pricing for our services and equipment, and utilization of our equipment and personnel. Our financial results are affected by geopolitical factors such as political instability in the petroleum-producing regions of the world, the actions of the OPEC oil cartel, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities.
The discussion of our key business and financial strategies set forth under the Overview section in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021 is incorporated herein by reference. In 2022, the Company’s strategy of utilizing equipment in unconventional basins has continued. During the nine months ended September 30, 2022, capital expenditures totaled $90.2 million, primarily for capitalized maintenance and upgrades of our existing equipment.
During the third quarter of 2022, revenues of $459.6 million increased by $234.3 million or 104.0 percent compared to the same period in the prior year. The increase in revenues is due to improved pricing, higher customer activity levels and a larger active fleet of revenue-producing equipment. International revenues for the third quarter of 2022 increased 21.6 percent to $9.2 million compared to the same period in the prior year. We continue to pursue international growth opportunities, but the nature of this work is unpredictable and we believe that international revenues will continue to be less than ten percent of RPC’s consolidated revenues in the future.
Cost of revenues increased primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expenses, maintenance and repairs expenses, employment costs and fuel costs. In addition, these costs increased due to higher market prices for materials and supplies, fuel and other raw materials. Cost of revenues as a percentage of revenues decreased due to improved pricing for our services and leverage of employment costs.
Selling, general and administrative expenses increased to $38.2 million in the third quarter of 2022 from $31.4 million in the third quarter of 2021 primarily due to increases in variable employment compensation costs. Selling, general and administrative expenses decreased from 14.0 percent of revenues in the third quarter of 2021 to 8.3 percent of revenues in the third quarter of 2022 due to leverage of costs that are relatively fixed during the short term over higher revenues.
Income before income taxes was $92.3 million for the three months ended September 30, 2022 compared to $7.2 million during the same period of 2021. Diluted earnings per share were $0.32 for the three months ended September 30, 2022 compared to $0.02 per share in the same period of 2021. Cash provided by operating activities increased to $40.9 million for the nine months ended September 30, 2022 compared to $26.4 million in the same period of 2021 primarily due to a significant increase in earnings, partially offset by unfavorable changes in working capital from higher business activity levels experienced in the first nine months of 2022.
We currently expect capital expenditures to be approximately $150.0 million during 2022 and to be directed primarily towards capitalized maintenance of our existing equipment and selected growth opportunities. In addition, finance lease payments of approximately of $24.3 million have or will be made during 2022 for a pressure pumping fleet we began operating in 2021, inclusive of an approximately $20.0 million final payment to be made in the fourth quarter of 2022.
19
Outlook
RPC monitors rig count efficiencies and well completion trends because the majority of our services are directed toward well completions. Improvements in drilling rig efficiencies have increased the number of potential well completions for a given drilling rig count; therefore, the statistics regarding well completions are more meaningful indicators of the outlook for RPC’s activity levels and revenues. Annual well completions during 2018 increased by approximately 25 percent compared to 2017, and by approximately five percent in 2019 compared to 2018. Well completions in 2020 decreased by approximately 49 percent compared to 2019 due to the impact of COVID-19. However, well completions in 2021 increased by approximately 33 percent compared to 2020. Well completions for the first nine months of 2022 increased 24.5 percent compared to the same period in the prior year.
Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,083 during the fourth quarter of 2018. Between the fourth quarter of 2018 and the third quarter of 2020, the drilling rig count fell by 77 percent. During the third quarter of 2020, the U.S. domestic drilling rig count reached the lowest level recorded up to that time. The principal catalyst for this steep rig count decline was the decrease in the price of oil in the world markets resulting from the decline in global oil demand associated with the COVID-19 pandemic which began in the first quarter of 2020. Rig count for the first nine months of 2022 increased 56.7 percent compared to the same period in the prior year.
The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. Following the trough of the most recent oilfield downturn in the second quarter of 2020, the price of oil has risen by more than 250 percent in the third quarter of 2022 compared to the average price of oil in the second quarter of 2020. The price of natural gas has risen by over 300 percent during the same time period. Following a low price of $0.23 per gallon in the first quarter of 2020, the price of benchmark natural gas liquids has risen to $1.08 per gallon in the third quarter of 2022. In addition, oil and gas prices experienced increases beginning in February 2022 due to concerns about potential world-wide supply constraints resulting from the Russian invasion of Ukraine. The price increases in these commodities during the past year are favorable for our business, and RPC believes that they have encouraged our customers to increase drilling and completion activities.
The Russian invasion of Ukraine during the first quarter of 2022 prompted Western European countries to curtail or eliminate their purchases of natural gas from Russia. As a result, the demand for liquified natural gas from the United States increased significantly, which increased the price for natural gas in the United States to its highest level since 2008 and has encouraged additional investment in liquified natural gas production facilities in the United States. These higher prices and additional investments in natural gas infrastructure should encourage RPC’s customers to increase their natural gas-directed exploration and production activities.
The majority of the U.S. domestic rig count remains directed towards oil. In the third quarter of 2022, approximately 79 percent of the U.S. domestic rig count was directed towards oil, unchanged compared to the same period in the prior year. We believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term. However, we believe that natural gas-directed drilling has increased and will continue to increase in natural gas-directed basins in the United States due to the current and projected high prices of natural gas. This trend should be favorable for the demand for RPC’s services in these basins.
We continue to monitor the market for our services and the competitive environment, including the current trends and expectations with regard to environmental concerns and related impact on our equipment fleets. The growing efficiency with which oilfield completion crews are providing services is a catalyst for the oversupplied nature of the oilfield services market. We believe that most of the feasible efficiency gains have been realized, and a number of our smaller competitors have ceased operations. These factors, combined with the increase in drilling and completion activities and the improvement in commodity prices, leads us to believe that the competitive market for our services has improved during the first nine months of 2022 and we expect demand will continue to improve during the near term.
20
During the third quarter of 2022, RPC continued to make payments under a finance lease arrangement for a new Tier 4 dual-fuel pressure pumping fleet, which immediately went to work at the beginning of the fourth quarter of 2021. We have selectively upgraded our existing equipment to operate using multiple fuel sources and to take advantage of advances in technology and data collection. We will continue to monitor current and expected customer activity levels and projected financial returns as we consider activating additional idle equipment during the near term. RPC’s response to our industry’s current higher activity levels and improved service pricing is primarily to maintain and upgrade our current fleet capacity of revenue-producing equipment. We will remain highly disciplined about adding new revenue-producing equipment capacity and will only when we believe the projected financial returns of such capital expenditures meet our financial return criteria. The Company is allocating capital in the coming quarter to maintain the capacity of its pressure pumping fleet to offset anticipated future fleet retirements. Consistent with this strategy, RPC is currently refurbishing an existing pressure pumping fleet that will be placed in service in early 2023, and we have ordered a pressure pumping fleet that is projected to be delivered in the first half of 2023.
Results of Operations
Three months ended | Nine months ended |
| ||||||||||||
September 30, | September 30, | |||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||||
Consolidated revenues [in thousands] | $ | 459,601 | $ | 225,310 | $ | 1,119,732 | $ | 596,677 | ||||||
Revenues by business segment [in thousands]: | ||||||||||||||
Technical | $ | 435,775 | $ | 211,842 | $ | 1,058,227 | $ | 560,602 | ||||||
Support | 23,826 | 13,468 | 61,505 | 36,075 | ||||||||||
Consolidated operating income (loss) [in thousands] | $ | 92,170 | $ | 7,974 | $ | 175,620 | $ | (3,767) | ||||||
Operating income (loss) by business segment [in thousands]: | ||||||||||||||
Technical | $ | 89,455 | $ | 8,272 | $ | 171,093 | $ | 3,938 | ||||||
Support | 5,278 | (55) | 11,392 | (5,353) | ||||||||||
Corporate | (4,106) | (3,080) | (13,160) | (9,760) | ||||||||||
Gain on disposition of assets, net | 1,543 | 2,837 | 6,295 | 7,408 | ||||||||||
Percentage cost of revenues to revenues | 67.4 | % | 75.7 | % | 69.6 | % | 77.5 | % | ||||||
Percentage selling, general & administrative expenses to revenues | 8.3 | % | 14.0 | % | 9.9 | % | 15.3 | % | ||||||
Percentage depreciation and amortization expense to revenues | 4.6 | % | 8.0 | % | 5.4 | % | 9.0 | % | ||||||
Average U.S. domestic rig count | 761 | 500 | 705 | 425 | ||||||||||
Average natural gas price (per thousand cubic feet (mcf)) | $ | 8.0 | $ | 4.4 | $ | 6.7 | $ | 3.3 | ||||||
Average oil price (per barrel) | $ | 92.8 | $ | 70.5 | $ | 99.0 | $ | 62.4 | ||||||
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2021
Revenues. Revenues of $459.6 million for the three months ended September 30, 2022 increased 104.0 percent compared to the three months ended September 30, 2021. Domestic revenues of $450.4 million increased 22.1 percent for the three months ended September 30, 2022 compared to the same period in the prior year. The increase in revenues was primarily due to improved pricing, higher customer activity levels and a larger active fleet of pressure pumping equipment. International revenues of $9.2 million increased 21.6 percent for the three months ended September 30, 2022 compared to the same period in the prior year.
During the third quarter of 2022, the average price of oil was 31.6 percent higher and the average price of natural gas was 82.9 percent higher, both as compared to the same period in the prior year. Oil and gas prices are higher due to continued strong demand as well as supply constraints worldwide due to the Russian invasion of Ukraine during the first quarter of 2022. The average domestic rig count during the third quarter of 2022 was 52.2 percent higher than the same period in 2021.
The Technical Services segment revenues for the third quarter of 2022 increased by 105.7 percent compared to the same period of the prior year due to higher customer activity levels, improved pricing and a larger fleet of pressure pumping equipment in service. Technical Services reported operating income of $89.5 million during the third quarter of 2022 compared to operating income of $8.3 million in the third quarter of 2021. The Support Services segment revenues for the third quarter of 2022 increased by 76.9 percent compared to the same period in the prior year, primarily due to higher activity levels and improved pricing within rental tools. Support
21
Services reported operating income of $5.3 million for the third quarter of 2022 compared to an operating loss of $55 thousand for the third quarter of 2021.
Cost of revenues. Cost of revenues increased 81.6 percent to $309.8 million for the three months ended September 30, 2022 compared to $170.6 million for the three months ended September 30, 2021. Cost of revenues increased primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expenses, maintenance and repairs expenses, employment costs and fuel costs. In addition, these costs increased due to higher market prices for materials and supplies, fuel and other raw materials. Cost of revenues, as a percentage of revenues, decreased from 75.7 percent in the third quarter of 2021 to 67.4 percent in the third quarter of 2022 primarily due to improved pricing for our services and leverage of employment costs.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $38.2 million for the three months ended September 30, 2022 compared to $31.4 million for the three months ended September 30, 2021, primarily due to increases in variable incentive compensation costs consistent with improved operating results. Selling, general and administrative expenses, as a percentage of revenues, decreased from 14.0 percent in the third quarter of 2021 to 8.3 percent in the third quarter of 2022 due to leverage of costs that are relatively fixed during the short term over higher revenues.
Depreciation and amortization. Depreciation and amortization increased 15.7 percent to $20.9 million for the three months ended September 30, 2022, compared to $18.1 million for the three months ended September 30, 2021. Depreciation and amortization increased due to capital expenditures in the past year.
Gain on disposition of assets, net. Gain on disposition of assets, net was $1.5 million for the three months ended September 30, 2022 compared to a gain on disposition of assets, net of $2.8 million for the three months ended September 30, 2021. The gain on disposition of assets, net is generally comprised of gains and losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment.
Other (expense) income, net. Other expense, net was $67 thousand for the three months ended September 30, 2022 compared to other income, net of $448 thousand for the same period in the prior year.
Interest expense. Interest expense was $143 thousand for the three months ended September 30, 2022 compared to $1.3 million for the three months ended September 30, 2021. The decrease in interest expense is primarily due to interest expense related to the settlement of a legal dispute with a supplier in the third quarter of 2021. Interest expense also includes facility fees on the unused portion of the credit facility and the amortization of loan costs.
Income tax provision. Income tax provision was $22.9 million during the three months ended September 30, 2022 compared to $1.9 million tax provision for the same period in 2021. The effective tax rate was 24.9 percent for the three months ended September 30, 2022 compared to a 26.4 percent effective benefit rate for the three months ended September 30, 2021. The increase in income tax provision is mainly related to an increase in pretax income for the quarter ended September 30, 2022. In addition, this is what created a decrease in the effective tax rate by diluting the impact the unfavorable permanent and discrete adjustments had on the rate.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2021
Revenues. Revenues of $1.1 billion for the nine months ended September 30, 2022 increased 87.7 percent compared to the nine months ended September 30, 2021. Domestic revenues of $1.1 billion increased 87.7 percent for the nine months ended September 30, 2022 compared to the same period in the prior year. The increase in revenues was due to higher customer activity levels, pricing improvements and a larger fleet of pressure pumping equipment in service. International revenues of $25.2 million increased 2.8 percent for the nine months ended September 30, 2022 compared to the same period in the prior year.
During the first nine months of 2022, the average price of oil was 52.1 percent higher and the average price of natural gas was 84.3 percent higher, both as compared to the same period in the prior year. Oil and gas prices are higher due to continued strong demand as well as supply constraints worldwide due to the Russian invasion of Ukraine during the first quarter of 2022. The average domestic rig count during the first nine months of 2022 was 56.7 percent higher than the same period in 2021.
The Technical Services segment revenues for the first nine months of 2022 increased by 88.8 percent compared to the same period of the prior year due to higher activity levels and improved pricing. Technical Services reported operating income of $171.1 million during the first nine months of 2022 compared to operating income of $3.9 million during the first nine months of 2021. The Support Services segment revenues for the first nine months of 2022 increased by 70.5 percent compared to the same period in the
22
prior year, primarily due to higher activity levels for rental tools. Support Services reported operating income of $5.3 million for the first nine months of 2022 compared to an operating loss of $5.4 million for the first nine months of 2021.
Cost of revenues. Cost of revenues increased 68.5 percent to $779.5 million for the nine months ended September 30, 2022 compared to $462.6 million for the nine months ended September 30, 2021. Cost of revenues increased primarily due to increases in expenses consistent with higher activity levels, such as materials and supplies expenses, maintenance and repairs expenses, employment costs and fuel costs. In addition, these costs increased due to higher market prices for materials and supplies, fuel and other raw materials. Cost of revenues as a percentage of revenues decreased from 77.5 percent in the nine months ended September 30, 2021 to 69.6 percent in the nine months ended September 30, 2022 due to the leverage of direct employment costs over higher revenues and a favorable job mix within pressure pumping.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $110.4 million for the nine months ended September 30, 2022 compared to $91.4 million for the nine months ended September 30, 2021, primarily due to increases in employment related costs including variable incentive compensation costs consistent with improved operating results. Selling, general and administrative expenses, as a percentage of revenues, decreased from 15.3 percent in the nine months ended September 30, 2021 to 9.9 percent in the nine months ended September 30, 2022 due to leverage of costs that are relatively fixed during the short term over higher revenues.
Depreciation and amortization. Depreciation and amortization increased 12.5 percent to $65.5 million for the nine months ended September 30, 2022, compared to $53.8 million for the nine months ended September 30, 2021. Depreciation and amortization increased due to capital expenditures in the past year.
Gain on disposition of assets, net. Gain on disposition of assets, net was $6.3 million for the nine months ended September 30, 2022 compared to a gain on disposition of assets, net of $7.4 million for the nine months ended September 30, 2021. The gain on disposition of assets, net is generally comprised of gains and losses related to various property and equipment dispositions or sales to customers of lost or damaged rental equipment.
Other income, net. Other income, net was $516 thousand for the nine months ended September 30, 2022 compared to other income, net of $1.6 million for the same period in the prior year.
Interest expense. Interest expense was $543 thousand for the nine months ended September 30, 2022 compared to $1.8 million for the nine months ended September 30, 2021. Interest expense for the first nine months of 2021 was unusually high, primarily due to interest expense related to the settlement of a legal dispute with a supplier coupled with interest charged in connection with resolution of a state well servicing audit. Interest expense includes facility fees on the unused portion of the credit facility and the amortization of loan costs.
Income tax provision. Income tax provision was $44.7 million during the nine months ended September 30, 2022 compared to $1.2 million tax provision for the same period in 2021. The effective provision rate was 25.4 percent for the nine months ended September 30, 2022 compared to a 30.9 percent effective provision rate for the nine months ended September 30, 2021. The increase in income tax provision is mainly related to an increase in pretax income for the nine months ended September 30, 2022. In addition, this is what created a decrease in the effective tax rate by diluting the impact the unfavorable permanent and discrete adjustments had on the rate.
Liquidity and Capital Resources
Cash Flows
The Company’s cash and cash equivalents decreased $46.5 million to $35.9 million as of September 30, 2022 compared to cash and cash equivalents of $82.4 million as of December 31, 2021. This decrease is primarily due to an increase in working capital needs to support higher business level activities, coupled with capital expenditures in the first nine months of 2022.
The following table sets forth the historical cash flows for the nine months ended September 30, 2022 and 2021:
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Nine months ended September 30, |
| ||||||
(In thousands) |
| 2022 |
| 2021 |
| ||
Net cash provided by operating activities | $ | 40,928 | $ | 26,416 | |||
Net cash used for investing activities | (78,655) | (29,114) | |||||
Net cash used for financing activities | (8,821) | (963) | |||||
Cash provided by operating activities for the nine months ended September 30, 2022 increased by $14.5 million compared to the nine months ended September 30, 2021. Cash provided by operating activities for the nine months ended September 30, 2022 includes net income of $131.4 million, less an unfavorable change in accounts receivable of $211.4 million, partially offset by favorable changes in other components of our working capital (accounts payable, accrued payroll and taxes receivable) totaling $66.5 million. The net unfavorable changes in working capital were the result of increased business activity levels.
Cash used for investing activities for the nine months ended September 30, 2022 increased by $49.5 million compared to the nine months ended September 30, 2021, primarily due to an increase in capital expenditures consistent with higher business activity levels and an environment of improved pricing for our services.
Cash used for financing activities for the nine months ended September 30, 2022 increased by $7.9 million primarily due to reinstatement of cash dividends paid to common stockholders in the third quarter of 2022, coupled with cash paid for a finance lease initiated in the third quarter of 2021.
Financial Condition and Liquidity
The Company’s financial condition as of September 30, 2022 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company’s decisions relating to the amount of cash to be used for investing and financing activities are influenced by our capital position, and the expected amount of cash to be provided by operations. RPC does not currently expect to utilize our revolving credit facility to meet these liquidity requirements.
The Company currently has a $100.0 million revolving credit facility that matures in June 2027 as recently amended. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. In the second quarter of 2022, the company further amended the revolving credit facility. Among other matters, the amendment (1) extends the termination date for revolving loans from July 26, 2023 to June 22, 2027, (2) replaces LIBOR with Term SOFR as an interest rate option in connection with revolving loan borrowings and reduces the applicable rate margins by approximately 25.0 basis points at each pricing level, (3) introduces a 1.00% per annum floor for base rate borrowings, (4) permits the issuance of letters of credit in currencies other than U.S. dollars. As of September 30, 2022, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $16.3 million; therefore, a total of $83.7 million of the facility was available. The Company was in compliance with the credit facility financial covenants as of September 30, 2022. For additional information with respect to RPC’s facility, see Note 11 of the Notes to Consolidated Financial Statements included in this report.
Cash Requirements
The Company currently expects that capital expenditures will be approximately $150.0 million in 2022 and will be directed towards both capitalized maintenance of our existing equipment and selected growth opportunities. The Company is allocating capital to maintain the capacity of its pressure pumping fleet to offset anticipated future fleet retirements. RPC is currently refurbishing an existing fleet that will be placed in service in early 2023, and has ordered a pressure pumping fleet expected to be delivered and paid for in the first half of 2023. Also, during the current year, RPC has continued to make payments for a pressure pumping equipment acquired under finance lease acquired in 2021. Total finance lease payments in 2022 will total approximately $24.3 million, with approximately $20.0 million outstanding as of September 30, 2022, which is expected to be paid in the fourth quarter of 2022. The actual amount of 2022 capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules.
The Company has ongoing sales and use tax audits in various jurisdictions subject to varying interpretations of statutes. The Company has recorded the exposure from these audits to the extent issues are resolved or are reasonably estimable. There are issues
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that could result in unfavorable outcomes that cannot be currently estimated. See Note 9 of the Notes to Consolidated Financial Statements for additional information.
During the fourth quarter of 2021, the Company initiated actions to terminate the defined benefit pension plan which is expected to be completed in early 2023. The Company currently expects to make a final cash contribution of approximately $8.0 million to $9.0 million as part of the termination. The Company did not make a cash contribution to this plan during the nine months ended September 30, 2022 or September 30, 2021.
As of September 30, 2022, the Company’s stock buyback program authorizes the aggregate repurchase of up to 41,578,125 shares, including an additional 10,000,000 shares authorized for repurchase by the Board of Directors in 2018. No shares were purchased on the open market during the three months ended September 30, 2022, and 8,248,184 shares remain available to be repurchased under the current authorization. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date.
On October 25, 2022, the Board of Directors declared a regular quarterly cash dividend of $0.02 per share payable December 9, 2022 to common stockholders of record at the close of business on November 10, 2022. The Company expects to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC’s earnings, financial condition, and other relevant factors.
INFLATION
The Company purchases its equipment and materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause supply disruptions and higher costs of certain materials and key equipment components used to provide services to the Company’s customers. Beginning in 2018, prices for the raw material comprising the Company’s single largest purchase began to decline due to increased sources of supply of the material, particularly in geographic markets located close to the largest U.S. oil and gas basin. In addition, labor costs declined throughout 2020 due to the significant decline in oilfield activity. However, during 2021 and continuing into 2022, the price of labor and raw materials have been increasing due to improving oilfield activity and labor shortages caused by the departure of skilled labor from the domestic oilfield industry in prior years.
During 2022, market prices of some raw materials and key equipment components have increased significantly and availability has been challenged. We have successfully increased the pricing for our equipment and services to cover much of these cost increases, but due to the competitive nature of the oilfield services business, there is no assurance that we will be able to continue to do this successfully in the future.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any material off balance sheet arrangements.
RELATED PARTY TRANSACTIONS
Marine Products Corporation
In conjunction with the spin-off of its former power boat manufacturing segment conducted through Chaparral Boats, Inc., RPC and Marine Products Corporation (Marine Products) entered into various agreements that define the companies’ relationship. RPC charged Marine Products for its allocable share of administrative costs incurred for services rendered on behalf of Marine Products Corporation totaling $682 thousand for the nine months ended September 30, 2022 and $670 thousand for the comparable period in 2021.
Other
The Company periodically purchases, in the ordinary course of business, products or services from suppliers that are owned by officers or significant stockholders of, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were $1.3 million for the nine months ended September 30, 2022 and $751 thousand for the nine months ended September 30, 2021.
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RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. Gary W. Rollins is Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on three months’ notice. The services covered by these agreements include office space, selected administrative services for certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated $62 thousand for the nine months ended September 30, 2022 and $78 thousand for the nine months ended September 30, 2021.
RPC and Marine Products own 50 percent each of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft. RPC recorded certain net operating costs comprised of rent and an allocable share of fixed costs of $150 thousand for each of the nine months ended September 30, 2022 and September 30, 2021.
CRITICAL ACCOUNTING POLICIES
The discussion of Critical Accounting Policies is incorporated herein by reference from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021. There have been no significant changes in the critical accounting policies since year-end.
IMPACT OF RECENT ACCOUNTING STANDARDS
See Note 2 of the Notes to Consolidated Financial Statements for a description of recent accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition.
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 economic 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. There is a positive correlation between these expenditures and customers’ demand for the Company’s services. As such, 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.
FORWARD-LOOKING STATEMENTS
Certain statements made in this report that are not historical facts are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and objectives, and our beliefs and expectations regarding future demand for our equipment and services and other events and conditions that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report include, without limitation, statements regarding: our ability to continue to monitor factors that impact current and expected customer activity levels, such as the prices of oil and natural gas, changes in pricing for our services and equipment, and utilization of our equipment and personnel; the effect of geopolitical factors such as political instability in the petroleum-producing regions of the world, the actions of the OPEC oil cartel, overall economic conditions and weather in the United States, the prices of oil and natural gas, and our customers’ drilling and production activities on our financial results; our strategy of utilizing equipment in unconventional basins; our plans to continue to pursue international growth opportunities; our belief that international revenues will continue to be less than ten percent of our consolidated revenues in the future; our expectation that capital expenditures will be approximately $150.0 million during 2022 and will be directed primarily towards capitalized maintenance of our existing equipment and selected growth opportunities; our belief that the statistics regarding well completions are more meaningful indicators of the outlook for our activity levels and revenues; our belief that the current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity; our belief that oil and gas price increases during the past year are favorable for our business and our belief that such price increases have encouraged our customers to increase drilling and completion activities; our belief that higher prices for natural gas and additional investments in natural gas infrastructure should encourage our customers to increase their natural gas-directed exploration and production activities; our belief that oil-directed drilling will remain the majority of domestic drilling and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near-term; our belief that natural gas-directed drilling has increased and will continue to increase in natural gas-directed basins in the United States due to the current and projected high prices of natural gas and that this trend should be favorable for the demand for our services in these basins; our plans to continue to monitor the market for our services and the competitive environment,
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including the current trends and expectations with regard to environmental concerns and related impact on our equipment fleets; our belief that the growing efficiency with which oilfield completion crews are providing services is a catalyst for the oversupplied nature of the oilfield services market; our belief that most of the feasible efficiency gains have been realized and that a number of our smaller competitors have ceased operations; our belief that the competitive market for our services will improve during the near term; our plans to continue to selectively upgrade our existing equipment to operate using multiple fuel sources and to take advantage of advances in technology and data collection; our plans to continue to monitor current and expected customer activity levels and projected financial returns as we consider activating additional idle equipment during the near term; our plans to allocate capital to maintain the capacity of our pressure pumping fleet to offset anticipated fleet requirements; our plans to refurbish an existing fleet that will be activated in 2023 and our expectations regarding the delivery of a pressure pumping fleet in the first half of 2023; our plans to respond to the industry’s current higher activity levels and improved service pricing by maintaining and upgrading our fleet of revenue-producing equipment as well as adding new revenue-producing equipment if the projected financial returns of such capital expenditures meet our financial return criteria; our expectations with respect to capital expenditures; the strength of our financial condition; expectations about contributions to the defined benefit pension plan in 2022 and thereafter, including our plans with respect to the termination of such plan in early 2023; our plans with respect to our stock buyback program; our belief that the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months; our belief that we will not need our revolving credit facility to meet our liquidity requirements; our expectations to continue to pay cash dividends to common stockholders, subject to industry conditions and RPC earnings, financial condition and other relevant factors; estimates made with respect to our critical accounting policies; the effect of new accounting standards; the effect of the changes in foreign exchange rates on our consolidated results of operations or financial condition; and the impact of lawsuits, legal proceedings and claims on our financial position and results of operation.
The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” “focus,” “plan,” 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. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of RPC to be materially different from any future results, performance or achievements expressed or implied in such forward-looking statements. Risk factors that could cause such future events not to occur as expected include the following: the combined impact of the OPEC disputes and the COVID-19 pandemic on our operating results, possible declines in the price of oil and natural gas, which tend to result in a decrease in drilling activity and therefore a decline in the demand for our services, the actions of the OPEC cartel, the ultimate impact of current and potential political unrest and armed conflict in the oil producing regions of the world, which could impact drilling activity, adverse weather conditions in oil or gas producing regions, including the Gulf of Mexico, competition in the oil and gas industry, the Company’s ability to implement price increases, the potential impact of possible future regulations on hydraulic fracturing on our business, risks of international operations, and reliance on large customers. Additional discussion of factors that could cause actual results to differ from management’s projections, forecasts, estimates and expectations is contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in this 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk exposure through borrowings on its credit facility. As of September 30, 2022, there were no outstanding interest-bearing advances on our credit facility, which bear interest at a floating rate.
Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition.
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 Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, September 30, 2022 (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
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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 a reasonable assurance level as of the Evaluation Date.
Changes in internal control over financial reporting – Management’s evaluation of changes in internal control did not identify any 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.
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 1A. RISK FACTORS
See the risk factors described in the Company’s annual report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibit |
| Description |
3.1(a) | ||
3.1(b) | ||
3.1(c) | ||
3.2 | ||
4 | ||
10.1 | ||
31.1 | ||
31.2 | ||
32.1 | Section 906 certifications for Chief Executive Officer and Chief Financial Officer. | |
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL) |
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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/ Ben M. Palmer | ||
Date: October 28, 2022 | Ben M. Palmer | |
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
/s/ Michael L. Schmit | ||
Date: October 28, 2022 | Michael L. Schmit | |
Vice President, Chief Financial Officer and Corporate Secretary | ||
(Principal Financial and Accounting Officer) |
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