UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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(Mark
One)
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x
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Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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o
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the fiscal year ended December 31, 2009
Commission
File No. 1-8726
RPC,
INC.
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Delaware
(State
of Incorporation)
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58-1550825
(I.R.S.
Employer Identification No.)
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2801
BUFORD HIGHWAY, SUITE 520
ATLANTA,
GEORGIA 30329
(404)
321-2140
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
COMMON
STOCK, $0.10 PAR VALUE
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Name
of each exchange on which registered
NEW
YORK STOCK EXCHANGE
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Securities
registered pursuant to Section 12(g) of the Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June
30, 2009, the last business day of the registrant’s most recently completed
second fiscal quarter, was $232,379,112 based on the closing price on the New
York Stock Exchange on June 30, 2009 of $8.35 per share.
RPC, Inc.
had 98,823,439 shares of Common Stock outstanding as of February 12,
2010.
Documents
Incorporated by Reference
Portions
of the Proxy Statement for the 2010 Annual Meeting of Stockholders of RPC, Inc.
are incorporated by reference into Part III, Items 10 through 14 of this
report.
1
PART
I
Throughout
this report, we refer to RPC, Inc., together with its subsidiaries, as “we,”
“us,” “RPC” or “the Company.”
Forward-Looking
Statements
Certain
statements made in this report that are not historical facts are
“forward-looking statements” under the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements may include, without limitation,
statements that relate to our business strategy, plans and objectives, and our
beliefs and expectations regarding future demand for our products and services
and other events and conditions that may influence the oilfield services market
and our performance in the future. Forward-looking statements made
elsewhere in this report include without limitation statements regarding our
belief that the long-term prospects for our business are favorable due to
growing demand for oil and natural gas and declining production of these
commodities; our belief that the gas-directed drilling will
represent at least 70 percent of the total drilling rig count in the foreseeable
future; our belief that drilling activity and demand for our services began to
recover in the fourth quarter of 2009; our expectation to continue to focus on
the development of international business opportunities in current and other
international markets; our belief that the favorable long-term returns on our
purchases of revenue-producing equipment will continue, thus justifying the
funding of these expenditures with debt; our ability to obtain other customers
in the event of a loss of our largest customers; the adequacy of our insurance
coverage; the impact of lawsuits, legal proceedings and claims on our business
and financial condition; our expectation to continue to pay cash dividends to
the common stockholders, subject to the earnings and financial condition of the
Company and other relevant factors; our expectation that our consolidated
revenues and financial performance will improve; our expectations regarding
capital expenditures in 2010; our ability to maintain sufficient liquidity and a
conservative capital structure; our belief that the Company will not make a
significant contribution to the defined benefit pension plan in 2010; our
ability to reduce the amount drawn on our credit facility over the course of
2010; our ability to fund capital requirements in the future; the adequacy of
our liquidity in the future; the estimated amount of our capital expenditures
and contractual obligations for future periods; estimates made with respect to
our critical accounting policies; and the effect of new accounting
standards.
The words
“may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate,” and
similar expressions generally identify forward-looking statements. Such
statements are based on certain assumptions and analyses made by our management
in light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes to be
appropriate. We caution you that such statements are only predictions and not
guarantees of future performance and that actual results, developments and
business decisions may differ from those envisioned by the forward-looking
statements. See “Risk Factors” contained in Item 1A. for a discussion
of factors that may cause actual results to differ from our
projections.
Item
1. Business
Organization
and Overview
RPC is a
Delaware corporation originally organized in 1984 as a holding company for
several oilfield services companies and is headquartered in Atlanta,
Georgia.
RPC
provides a broad range of specialized oilfield services and equipment primarily
to independent and major oil and gas companies engaged in the exploration,
production and development of oil and gas properties throughout the United
States, including the Gulf of Mexico, mid-continent, southwest, Rocky Mountain
and Appalachian regions, and in selected international markets. The services and
equipment provided include, among others, (1) pressure pumping services, (2)
coiled tubing services, (3) snubbing services (also referred to as hydraulic
workover services), (4) nitrogen services, (5) the rental of drill pipe and
other specialized oilfield equipment, (6) downhole tool rental services and (7)
firefighting and well control. RPC acts as a holding company for its operating
units, Cudd Energy Services, Patterson Rental and Fishing Tools, Bronco Oilfield
Services, Thru Tubing Solutions, Well Control School, and others. As
of December 31, 2009, RPC had approximately 2,000 employees.
Business
Segments
RPC’s
service lines have been aggregated into two reportable oil and gas services
business segments, Technical Services and Support Services, because of the
similarities between the financial performance and approach to managing the
service lines within each of the segments, as well as the economic and business
conditions impacting their business activity levels.
2
Technical
Services include RPC’s oil and gas service lines that utilize people and
equipment to perform value-added completion, production and maintenance services
directly to a customer’s well. The demand for these services is generally
influenced by customers’ decisions to invest capital toward initiating
production in a new oil or natural gas well, improving production flows in an
existing formation, or to address well control issues. This business segment
consists primarily of pressure pumping, coiled tubing, snubbing, nitrogen, well
control, downhole tools, wireline and fishing. The principal markets for this
business segment include the United States, including the Gulf of Mexico,
mid-continent, southwest, Rocky Mountain, and Appalachian regions, and contract
or project work in selected international locations in the last three years
including primarily Africa, Canada, China, Eastern Europe, Latin America, the
Middle East and New Zealand. Customers include major multi-national and
independent oil and gas producers, and selected nationally owned oil
companies.
Support
Services include RPC’s oil and gas service lines that primarily provide
equipment for customer use or services to assist customer operations. The
equipment and services include drill pipe and related tools, pipe handling, pipe
inspection and storage services, and oilfield training services. The demand for
these services tends to be influenced primarily by customer drilling-related
activity levels. The principal markets for this segment include the United
States, including the Gulf of Mexico, mid-continent, Rocky Mountain and
Appalachian regions and project work in selected international locations in the
last three years including primarily Canada, Latin America and the Middle East.
Customers primarily include domestic operations of major multi-national and
independent oil and gas producers, and selected nationally owned oil
companies.
Technical
Services
The
following is a description of the primary service lines conducted within the
Technical Services business segment:
Pressure Pumping. Pressure
pumping services, which accounted for approximately 38 percent of 2009 revenues,
41 percent of 2008 revenues and 40 percent of 2007 revenues, are provided to
customers throughout the Gulf Coast, mid-continent and Rocky Mountain regions of
the United States and are generally utilized to initiate production in new or
enhance production in existing customer wells. Pressure pumping services involve
using complex, truck or skid-mounted equipment designed and constructed for each
specific pumping service offered. The mobility of this equipment permits
pressure pumping services to be performed in varying geographic areas. Principal
materials utilized in the pressure pumping business include fracturing
proppants, acid and bulk chemical additives. Generally, these items are
available from several suppliers, and the Company utilizes more than one
supplier for each item. Pressure pumping services offered include:
Fracturing
— Fracturing services are performed to stimulate production of oil and natural
gas by increasing the permeability of a formation. The fracturing process
consists of pumping nitrogen or a fluid gel into a cased well at sufficient
pressure to fracture the formation at desired depths. Sand, bauxite or synthetic
proppant, which is suspended in the gel, is pumped into the fracture. When the
pressure is released at the surface, the fluid gel returns to the well, but the
proppant remains in the fracture, thus keeping it open so that oil and natural
gas can flow through the fracture into the well. In some cases, fracturing is
performed in formations with a high amount of carbonate rock by an acid solution
pumped under pressure without a proppant or with small amounts of
proppant.
Acidizing
— Acidizing services are also performed to stimulate production of oil and
natural gas, but they are used in wells that have undergone formation damage due
to the buildup of various materials that block the formation. Acidizing entails
pumping large volumes of specially formulated acids into reservoirs to dissolve
barriers and enlarge crevices in the formation, thereby eliminating obstacles to
the flow of oil and natural gas. Acidizing services can also enhance production
in limestone formations.
Coiled Tubing. Coiled tubing
services, which accounted for approximately nine percent of 2009, 2008 and 2007
revenues, involve the injection of coiled tubing into wells to perform
various applications and functions for use principally in well-servicing
operations and more recently to facilitate completion of horizontal wells.
Coiled tubing is a flexible steel pipe with a diameter of less than four inches
manufactured in continuous lengths of thousands of feet and wound or coiled
around a large reel. It can be inserted through existing production tubing and
used to perform workovers without using a larger, more costly workover rig.
Principal advantages of employing coiled tubing in a workover operation include:
(i) not having to “shut-in” the well during such operations, (ii) the ability to
reel continuous coiled tubing in and out of a well significantly faster than
conventional pipe, (iii) the ability to direct fluids into a wellbore with more
precision, and (iv) enhanced access to remote or offshore fields due to the
smaller size and mobility of a coiled tubing unit compared to a workover
rig. There are several manufacturers of flexible steel pipe used in
coiled tubing services, and the Company believes that its sources of supply are
adequate.
Snubbing. Snubbing (also
referred to as hydraulic workover services), which accounted for approximately
eight percent of 2009 revenues, seven percent of 2008 revenues and 10 percent of
2007 revenues, involves using a hydraulic workover rig that permits an operator
to repair damaged casing, production tubing and downhole production equipment in
a high-pressure environment. A snubbing unit makes it possible to remove and
replace downhole equipment while maintaining pressure in the well. Customers
benefit because these operations can be performed without removing the pressure
from the well, which stops production and can damage the formation, and because
a snubbing rig can perform many applications at a lower cost than other
alternatives. Because this service involves a very hazardous process that
entails high risk, the snubbing segment of the oil and gas services industry is
limited to a relatively few operators who have the experience and knowledge
required to perform such services safely and efficiently.
3
Nitrogen. Nitrogen accounted
for approximately seven percent of 2009 revenues, eight percent of 2008 revenues
and seven percent of 2007 revenues. There are a number of uses for
nitrogen, an inert, non-combustible element, in providing services to oilfield
customers and industrial users outside of the oilfield. For our oilfield
customers, nitrogen can be used to clean drilling and production pipe and
displace fluids in various drilling applications. It also can be used to create
a fire-retardant environment in hazardous blowout situations and as a fracturing
medium for our fracturing service line. In addition, nitrogen can be
complementary to our snubbing and coiled tubing service lines, because it is a
non-corrosive medium and is frequently injected into a well using coiled tubing.
Nitrogen is complementary to our pressure pumping service line as well, because
foam-based nitrogen stimulation is appropriate in certain sensitive formations
in which the fluids used in fracturing or acidizing would damage a customer’s
well.
For
non-oilfield industrial users, nitrogen can be used to purge pipelines and
create a non-combustible environment. RPC stores and transports nitrogen and has
a number of pumping unit configurations that inject nitrogen in its various
applications. Some of these pumping units are set up for use on offshore
platforms or inland waters. RPC purchases its nitrogen in liquid form from
several suppliers and believes that these sources of supply are
adequate.
Downhole Tools. Thru Tubing
Solutions (“TTS”) accounted for approximately 15 percent of 2009 revenues, nine
percent of 2008 revenues and seven percent of 2007 revenues. TTS
provides services and proprietary downhole motors, fishing tools and other
specialized downhole tools and processes to operators and service companies in
drilling and production operations, including casing perforation at the
completion stage of an oil or gas well. The services that TTS
provides are especially suited for unconventional drilling and completion
activities. TTS’ experience providing reliable tool services allows
it to work in a pressurized environment with virtually any coiled tubing unit or
snubbing unit.
Well Control. Cudd Energy
Services specializes in responding to and controlling oil and gas well
emergencies, including blowouts and well fires, domestically and
internationally. In connection with these services, Cudd Energy Services, along
with Patterson Services, has the capacity to supply the equipment, expertise and
personnel necessary to restore affected oil and gas wells to production. In the
last nine years, the Company has responded to well control situations in several
international locations including Algeria, Argentina, Australia, Bolivia,
Canada, Colombia, Egypt, Hungary, India, Kuwait, Libya, Mexico, Peru, Qatar,
Taiwan, Trinidad, Turkmenistan and Venezuela.
The
Company’s professional firefighting staff has many years of aggregate industry
experience in responding to well fires and blowouts. This team of experts
responds to well control situations where hydrocarbons are escaping from a well
bore, regardless of whether a fire has occurred. In the most critical
situations, there are explosive fires, the destruction of drilling and
production facilities, substantial environmental damage and the loss of hundreds
of thousands of dollars per day in well operators’ production revenue. Since
these events ordinarily arise from equipment failures or human error, it is
impossible to predict accurately the timing or scope of this work. Additionally,
less critical events frequently occur in connection with the drilling of new
wells in high-pressure reservoirs. In these situations, the Company is called
upon to supervise and assist in the well control effort so that drilling
operations can resume as promptly as safety permits.
Wireline Services. Wireline
is classified into two types of services: slick or braided line and electric
line. In both, a spooled wire is unwound and lowered into a well,
conveying various types of tools or equipment. Slick or braided line
services use a non-conductive line primarily for jarring objects into or out of
a well, as in fishing or plug-setting operations. Electric line
services lower an electrical conductor line into a well allowing the use of
electrically-operated tools such as perforators, bridge plugs and logging
tools. Wireline services can be an integral part of the plug and
abandonment process, near the end of the life cycle of a well.
Fishing. Fishing involves the
use of specialized tools and procedures to retrieve lost equipment from a well
drilling operation and producing wells. It is a service required by oil and gas
operators who have lost equipment in a well. Oil and natural gas production from
an affected well typically declines until the lost equipment can be retrieved.
In some cases, the Company creates customized tools to perform a fishing
operation. The customized tools are maintained by the Company after the
particular fishing job for future use if a similar need arises.
4
Support
Services
The
following is a description of the primary service lines conducted within the
Support Services business segment:
Rental Tools. Rental tools
accounted for approximately eight percent of 2009 revenues, 11 percent of 2008
revenues and 13 percent of 2007 revenues. The Company rents
specialized equipment for use with onshore and offshore oil and gas well
drilling, completion and workover activities. The drilling and subsequent
operation of oil and gas wells generally require a variety of equipment. The
equipment needed is in large part determined by the geological features of the
production zone and the size of the well itself. As a result, operators and
drilling contractors often find it more economical to supplement their tool and
tubular inventories with rental items instead of owning a complete inventory.
The Company’s facilities are strategically located to serve the major staging
points for oil and gas activities in the Gulf of Mexico, mid-continent region
and Rocky Mountains.
Patterson
Rental Tools offers a broad range of rental tools including:
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Blowout
Preventors
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Diverters
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High
Pressure Manifolds and Valves
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Drill
Pipe
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Hevi-wate
Drill Pipe
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Drill
Collars
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Tubing
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Handling
Tools
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Production
Related Rental Tools
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Coflexip
Hoses
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Pumps
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Oilfield Pipe
Inspection Services, Pipe Management and Pipe Storage. Pipe inspection
services include Full Body Electromagnetic and Phased Array Ultrasonic
inspection of pipe used in oil and gas wells. These services are provided at
both the Company’s inspection facilities and at pipe mills in accordance with
negotiated sales and/or service contracts. Our customers are major oil companies
and steel mills, for which we provide in-house inspection services, inventory
management and process control of tubing, casing and drill pipe. Our
locations in Channelview, Texas and Morgan City, Louisiana are equipped with
large capacity cranes, specially designed forklifts and a computerized inventory
system to serve a variety of storage and handling services for both the oilfield
and non-oilfield customers.
Well Control School. Well
Control School provides industry and government accredited training for the oil
and gas industry both in the United States and in several international
locations. Well Control School provides this training in various formats
including conventional classroom training, interactive computer training
including training delivered over the internet, and mobile simulator
training.
Energy Personnel
International. Energy Personnel International provides drilling and
production engineers, well site supervisors, project management specialists, and
workover and completion specialists on a consulting basis to the oil and gas
industry to meet customers’ needs for staff engineering and well site
management.
Refer to
Note 12 in the Notes to the Consolidated Financial Statements for additional
financial information on our business segments.
Industry
United States. RPC provides
its services to its domestic customers through a network of facilities
strategically located to serve the Gulf of Mexico, the mid-continent, the
southwest, the Rocky Mountains and the northeast production fields. Demand for
RPC’s services in the U.S. tends to be extremely volatile and fluctuates with
current and projected price levels of oil and natural gas and activity levels in
the oil and gas industry. Customer activity levels are influenced by their
decisions about capital investment toward the development and production of oil
and gas reserves.
Due to
aging oilfields and lower-cost sources of oil internationally, the drilling rig
count in the U.S. has declined by approximately 74 percent from its peak in
1981. Due to enhanced technology, however, more wells are being drilled and the
domestic production of oil and natural gas remains roughly equivalent to prior
years. Record low drilling activity levels were experienced in 1986,
1992, 1999 (with April 1999 recording the lowest U.S. drilling rig count in the
industry’s history), 2002 and again in 2009.
The rig
count during the most recent cycle peaked at the end of the third quarter of
2008, and began to decline sharply during the fourth quarter. At the
beginning of 2009, there were 1,623 domestic working drilling rigs, down 20
percent from the third quarter of 2008. U.S. domestic drilling activity declined
by 57 percent from the third quarter of 2008 to the second quarter of 2009,
which was the steepest annualized decline rate in the industry’s
history.
5
During
2009 the average price of natural gas decreased by approximately 56 percent, and
the average price of oil decreased by approximately 38 percent. The price of
natural gas rose sequentially in the fourth quarter compared to the third
quarter of 2009, and the price of oil rose during each quarter of
2009. The change in domestic drilling activity during 2008 and
2009 was consistent with the direction and severity of the changes in the prices
of oil and natural gas, as well as the overall fluctuations in the general
economy. During the first quarter of 2010, the domestic drilling rig count has
continued to increase steadily, along with the prices of oil and natural
gas. Although our business has repeatedly demonstrated that it is
cyclical, we continue to believe that the long-term prospects for our business
are favorable due to growing demand for, and declining production of, oil and
natural gas.
Gas
drilling rigs have represented an increasing percentage of the total drilling
rig count, and have represented over 70 percent of the drilling rig count each
year since 2001. In 2009, gas drilling rigs represented 74 percent of
total drilling activity. The demand trend for natural gas is continuing to rise,
although it fluctuates in the short term due to factors such as economic
activity and the weather. Also, unlike oil, foreign imports of natural gas do
not compete with domestic production to a meaningful degree. This lack of
foreign competition tends to keep prices high. Based on current demand levels
for natural gas as well as the high oil and gas well depletion rates experienced
over the past several years, it is anticipated that gas-directed drilling will
represent at least 70 percent of the total drilling rig count in the foreseeable
future.
In
addition, there are certain types of wells, predominately natural gas, being
drilled in the U.S. domestic market for which there is a higher demand for RPC’s
services. Known as either directional or horizontal wells, these
wells are more difficult and costly to complete. Because they are
drilled through a narrow formation and the formation is typically a relatively
impermeable formation such as shale, they require additional stimulation when
they are completed. Also, many of these formations require high pumping rates of
stimulation fluids under high pressures, which in turn means that there is a
great deal of pressure pumping horsepower required to complete the
well. Furthermore, since they are not drilled in a straight vertical
direction from the Earth’s surface, they require tools and drilling mechanisms
that are flexible, rather than rigid, and can be steered once they are
downhole. Specifically, these types of wells require RPC’s pressure
pumping and coiled tubing services, as well as our downhole tools and
services.
International. RPC has
historically operated in several countries outside of the United States,
although international revenues have never accounted for more than 10 percent of
total revenues. Over the past several years, RPC has continued its
focus on developing international opportunities, although our equipment
investments over the last couple of years have emphasized domestic rather than
international expansion. International revenues for 2009 increased
due to higher customer activity levels in New Zealand, Mexico and Egypt, among
other countries, partially offset by decreases in Saudi Arabia and the
elimination of revenue in Venezuela. During 2009, RPC provided
snubbing, well control and oilfield training services in Cameroon, Egypt, Gabon,
Mexico, New Zealand, Oman and the United Arab Emirates, among other
countries. We also provided rental tools in Bolivia and Mexico, and
downhole motors and tools in Canada, the Congo, Mexico and South
Africa. We continue to focus on the development of international
opportunities in these and other markets, although we believe that it will
continue to be less than 10 percent of total revenues.
RPC
provides services to its international customers through branch locations or
wholly owned foreign subsidiaries. The international market is prone to
political uncertainties, including the risk of civil unrest and conflicts.
However, due to the significant investment requirement and complexity of
international projects, customers’ drilling decisions relating to such projects
tend to be evaluated and monitored with a longer-term perspective with regard to
oil and natural gas pricing, and therefore have the potential to be more stable
than most U.S. domestic operations. Additionally, the international
market is dominated by major oil companies and national oil companies which tend
to have different objectives and more operating stability than the typical
independent oil and gas producer in the U.S. Predicting the timing
and duration of contract work is not possible. Pursuing selective
international opportunities for revenue growth continues to be a strong emphasis
for RPC. Refer to Note 12 in the Notes to Consolidated Financial Statements for
further information on our international operations.
Growth
Strategies
RPC’s
primary objective is to generate excellent long-term returns on investment
through the effective and conservative management of its invested capital, thus
yielding strong cash flow and asset appreciation. This objective continues to be
pursued through strategic investments and opportunities designed to enhance the
long-term value of RPC while improving market share, product offerings and the
profitability of existing businesses. Growth strategies are focused on selected
areas and markets in which we believe there exist opportunities for higher
growth, market penetration, or enhanced returns achieved through consolidations
or through providing proprietary value-added products and services. RPC intends
to focus on specific market segments in which it believes that it has a
competitive advantage or there exists significant growth potential.
RPC seeks
to expand its service capabilities through a combination of internal growth,
acquisitions, joint ventures and strategic alliances. Because of the fragmented
nature of the oil and gas services industry, RPC believes a number of attractive
acquisition opportunities exist. However, near-term business
conditions do not justify sellers’ price expectations, so we believe we generate
better returns growing organically in service lines and geographic locations in
which we have experience and presence.
6
RPC has
traditionally had a conservative capital structure with minimal
debt. During 2006, however, we established a new revolving credit
facility to fund the purchase of revenue-producing equipment and other working
capital requirements to pursue our growth plan. We pursued this capital source
because of the high returns on investment that had been generated by many of our
service lines during the previous several years, and because of the low cost and
ready availability of debt capital. We completed purchases of revenue-producing
equipment under our growth plan during 2008, and during 2009 we reduced capital
expenditures due to the industry downturn and the resulting lower near-term
expected returns on investment. In addition, we reduced capital
expenditures in order to reduce the balance on our revolving credit facility and
enhance our conservative capital structure. At the end of 2009, our level of
debt was conservative compared to a number of our peers, and we believe that the
favorable long-term returns on investment in our revenue-producing equipment
justify financing their purchase using debt.
Customers
Demand
for RPC’s services and products depends primarily upon the number of oil and
natural gas wells being drilled, the depth and drilling conditions of such
wells, the number of well completions and the level of production enhancement
activity worldwide. RPC’s principal customers consist of major and independent
oil and natural gas producing companies. During 2009, RPC provided oilfield
services to several hundred customers. Of these customers,
Southwestern Energy Company accounted for approximately 13 percent of revenues
and Chesapeake Energy Corporation accounted for approximately 12 percent of
revenues. RPC believes that its relationship with these customers is
good. Although the Company believes that we would be able to obtain
other customers for our services in the event of the loss of either of these
major customers, the loss of these customers could have a material adverse
effect on Company revenues and operating results in the near
term. Sales are generated by RPC’s sales force and through referrals
from existing customers. There are long-term written contracts for services and
equipment with certain international and domestic customers, although revenues
earned under such contracts are a small percentage of total revenues. Due to the
short lead time between ordering services or equipment and providing services or
delivering equipment, there is no significant sales backlog in most of our
service lines.
Competition
RPC
operates in highly competitive areas of the oilfield services industry. RPC’s
products and services are sold in highly competitive markets, and its revenues
and earnings are affected by changes in prices for our services, fluctuations in
the level of customer activity in major markets, general economic conditions and
governmental regulation. RPC competes with many large and small oilfield
industry competitors, including the largest integrated oilfield services
companies. RPC believes that the principal competitive factors in the market
areas that it serves are product and service quality and availability,
reputation for safety and technical proficiency, and price.
The oil
and gas services industry includes a small number of dominant global competitors
including, among others, Halliburton Energy Services Group, a division of
Halliburton Company, BJ Services Company and Schlumberger Ltd., and a
significant number of locally oriented businesses.
Facilities/Equipment
RPC’s
equipment consists primarily of oil and gas services equipment used either in
servicing customer wells or provided on a rental basis for customer use.
Substantially all of this equipment is Company owned. RPC purchases
oilfield service equipment from a limited number of
manufacturers. These manufacturers of our oilfield service equipment
may not be able to meet our requests for timely delivery during periods of high
demand which may result in delayed deliveries of equipment and higher prices for
equipment.
RPC both
owns and leases regional and district facilities from which its oilfield
services are provided to land-based and offshore customers. RPC’s principal
executive offices in Atlanta, Georgia are leased. The Company has two primary
administrative buildings, one in Houston, Texas that includes the Company’s
operations, engineering, sales and marketing headquarters, and one in Houma,
Louisiana that includes certain administrative functions. RPC believes that its
facilities are adequate for its current operations. For additional
information with respect to RPC’s lease commitments, see Note 9 of the Notes to
Consolidated Financial Statements.
Governmental
Regulation
RPC’s
business is affected by state, federal and foreign laws and other regulations
relating to the oil and gas industry, as well as laws and regulations relating
to worker safety and environmental protection. RPC cannot predict the level of
enforcement of existing laws and regulations or how such laws and regulations
may be interpreted by enforcement agencies or court rulings, whether additional
laws and regulations will be adopted, or the effect such changes may have on it,
its businesses or financial condition.
7
In
addition, our customers are affected by laws and regulations relating to the
exploration for and production of natural resources such as oil and natural gas.
These regulations are subject to change, and new regulations may curtail or
eliminate our customers’ activities in certain areas where we currently operate.
We cannot determine the extent to which new legislation may impact our
customers’ activity levels, and ultimately, the demand for our
services.
Intellectual
Property
RPC uses
several patented items in its operations, which management believes are
important but are not indispensable to RPC’s success. Although RPC anticipates
seeking patent protection when possible, it relies to a greater extent on the
technical expertise and know-how of its personnel to maintain its competitive
position.
Availability
of Filings
RPC makes
available, free of charge, on its website, www.rpc.net, its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports on the same day as they are filed with the
Securities and Exchange Commission.
8
Item
1A. Risk Factors
Demand
for our products and services is affected by the volatility of oil and natural
gas prices.
Oil
prices affect demand throughout the oil and natural gas industry, including the
demand for our products and services. Our business depends in large part on the
conditions of the oil and gas industry, and specifically on the capital
investments of our customers related to the exploration and production of oil
and natural gas. When these capital investments decline, our customers’ demand
for our services declines.
Although
the production sector of the oil and gas industry is less immediately affected
by changing prices, and, as a result, less volatile than the exploration sector,
producers react to declining oil and gas prices by curtailing capital spending,
which would adversely affect our business. A prolonged low level of customer
activity in the oil and gas industry will adversely affect the demand for our
products and services and our financial condition and results of
operations.
The
relationship between the prices of oil and natural gas and our customers’
drilling and production activities may not be highly correlated in the
future.
Historically,
fluctuations in the prices of oil and natural gas have led to corresponding
changes in our customers’ drilling and production activities as measured by the
domestic rig count. As drilling and production activities increase
(or remain active) or decrease (or remain stagnant), our operating results are
correspondingly favorably or adversely impacted. If this correlation weakens in
the future, then it is possible that increases in the prices of oil and natural
gas will not lead to corresponding increases in our customers’ activities, and
our future operating results could be negatively impacted.
We
may be unable to compete in the highly competitive oil and gas industry in the
future.
We
operate in highly competitive areas of the oilfield services industry. The
products and services in our industry segments are sold in highly competitive
markets, and our revenues and earnings have in the past been affected by changes
in competitive prices, fluctuations in the level of activity in major markets
and general economic conditions. We compete with the oil and gas industry’s many
large and small industry competitors, including the largest integrated oilfield
service providers. We believe that the principal competitive factors in the
market areas that we serve are product and service quality and availability,
reputation for safety, technical proficiency and price. Although we believe that
our reputation for safety and quality service is good, we cannot assure you that
we will be able to maintain our competitive position.
We
may be unable to identify or complete acquisitions.
Acquisitions
have been and may continue to be a key element of our business strategy. We
cannot assure you that we will be able to identify and acquire acceptable
acquisition candidates on terms favorable to us in the future. We may be
required to incur substantial indebtedness to finance future acquisitions and
also may issue equity securities in connection with such acquisitions. The
issuance of additional equity securities could result in significant dilution to
our stockholders. We cannot assure you that we will be able to integrate
successfully the operations and assets of any acquired business with our own
business. Any inability on our part to integrate and manage the growth from
acquired businesses could have a material adverse effect on our results of
operations and financial condition.
Our
operations are affected by adverse weather conditions.
Our
operations are directly affected by the weather conditions in several domestic
regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent, the
Rocky Mountains and the Northeast. Hurricanes and other storms prevalent in the
Gulf of Mexico and along the Gulf Coast during certain times of the year may
also affect our operations, and severe hurricanes may affect our customers’
activities for a period of several years. While the impact of these
storms may increase the need for certain of our services over a longer period of
time, such storms can also decrease our customers’ activities immediately after
they occur. Such hurricanes may also affect the prices of oil and
natural gas by disrupting supplies in the short term, which may increase demand
for our services in geographic areas not damaged by the
storms. Prolonged rain, snow or ice in many of our locations may
temporarily prevent our crews and equipment from reaching customer work
sites. Due to seasonal differences in weather patterns, our crews may
operate more days in some periods than others. Accordingly, our operating
results may vary from quarter to quarter, depending on the impact of these
weather conditions.
Our
ability to attract and retain skilled workers may impact growth potential and
profitability.
Our
ability to be productive and profitable will depend substantially on our ability
to attract and retain skilled workers. Our ability to expand our operations is,
in part, impacted by our ability to increase our labor force. A significant
increase in the wages paid by competing employers could result in a reduction in
our skilled labor force, increases in the wage rates paid by us, or both. If
either of these events occurred, our capacity and profitability could be
diminished, and our growth potential could be impaired.
9
Our
concentration of customers in one industry may impact our overall exposure to
credit risk.
Substantially
all of our customers operate in the energy industry. This concentration of
customers in one industry may impact our overall exposure to credit risk, either
positively or negatively, in that customers may be similarly affected by changes
in economic and industry conditions. We perform ongoing credit evaluations of
our customers and do not generally require collateral in support of our trade
receivables.
Reliance
upon a few large customers may adversely affect our revenues and operating
results.
During
2009, two of our largest customers accounted for approximately 25 percent of our
total revenues. This reliance on large customers for a significant
portion of our total revenues exposes us to the risk that the loss or reduction
in revenues from any one or more of these customers, which could occur
unexpectedly, could have a material and disproportionate adverse impact upon our
net revenues and operating results.
Our
business has potential liability for litigation, personal injury and property
damage claims assessments.
Our
operations involve the use of heavy equipment and exposure to inherent risks,
including blowouts, explosions and fires. If any of these events were to occur,
it could result in liability for personal injury and property damage, pollution
or other environmental hazards or loss of production. Litigation may arise from
a catastrophic occurrence at a location where our equipment and services are
used. This litigation could result in large claims for damages. The frequency
and severity of such incidents will affect our operating costs, insurability and
relationships with customers, employees and regulators. These occurrences could
have a material adverse effect on us. We maintain what we believe is prudent
insurance protection. We cannot assure you that we will be able to maintain
adequate insurance in the future at rates we consider reasonable or that our
insurance coverage will be adequate to cover future claims and assessments that
may arise.
Our
operations may be adversely affected if we are unable to comply with regulatory
and environmental laws.
Our
business is significantly affected by stringent environmental laws and other
regulations relating to the oil and gas industry and by changes in such laws and
the level of enforcement of such laws. We are unable to predict the level of
enforcement of existing laws and regulations, how such laws and regulations may
be interpreted by enforcement agencies or court rulings, or whether additional
laws and regulations will be adopted. The adoption of laws and regulations
curtailing exploration and development of oil and gas fields in our areas of
operations for economic, environmental or other policy reasons would adversely
affect our operations by limiting demand for our services. We also have
potential environmental liabilities with respect to our offshore and onshore
operations, and could be liable for cleanup costs, or environmental and natural
resource damage due to conduct that was lawful at the time it occurred, but is
later ruled to be unlawful. We also may be subject to claims for personal injury
and property damage due to the generation of hazardous substances in connection
with our operations. We believe that our present operations substantially comply
with applicable federal and state pollution control and environmental protection
laws and regulations. We also believe that compliance with such laws has had no
material adverse effect on our operations to date. However, such environmental
laws are changed frequently. We are unable to predict whether environmental laws
will, in the future, materially adversely affect our operations and financial
condition. Penalties for noncompliance with these laws may include cancellation
of permits, fines, and other corrective actions, which would negatively affect
our future financial results.
Our
international operations could have a material adverse effect on our
business.
Our
operations in various countries including, but not limited to, Africa, Canada,
China, Eastern Europe, Latin America, the Middle East and New Zealand are
subject to risks. These risks include, but are not limited to, political
changes, expropriation, currency restrictions and changes in currency exchange
rates, taxes, boycotts and other civil disturbances. The occurrence
of any one of these events could have a material adverse effect on our
operations.
Our
common stock price has been volatile.
Historically,
the market price of common stock of companies engaged in the oil and gas
services industry has been highly volatile. Likewise, the market price of our
common stock has varied significantly in the past.
Our
management has a substantial ownership interest, and public stockholders may
have no effective voice in the management of the Company.
The
Company has elected the “Controlled Corporation” exemption under Rule 303A of
the New York Stock Exchange (“NYSE”) Company Guide. The Company is a “Controlled
Corporation” because a group that includes the Company’s Chairman of the Board,
R. Randall Rollins and his brother, Gary W. Rollins, who is also a director of
the Company, and certain companies under their control, controls in excess of
fifty percent of the Company’s voting power. As a “Controlled Corporation,” the
Company need not comply with certain NYSE rules including those requiring a
majority of independent directors.
10
RPC’s
executive officers, directors and their affiliates hold directly or through
indirect beneficial ownership, in the aggregate, approximately 71 percent of
RPC’s outstanding shares of common stock. As a result, these stockholders
effectively control the operations of RPC, including the election of directors
and approval of significant corporate transactions such as acquisitions and
other matters requiring stockholder approval. This concentration of ownership
could also have the effect of delaying or preventing a third party from
acquiring control over the Company at a premium.
Our
management has a substantial ownership interest, and the availability of the
Company’s common stock to the investing public may be limited.
The
availability of RPC’s common stock to the investing public may be limited to
those shares not held by the executive officers, directors and their affiliates,
which could negatively impact RPC’s stock trading prices and affect the ability
of minority stockholders to sell their shares. Future sales by executive
officers, directors and their affiliates of all or a portion of their shares
could also negatively affect the trading price of our common stock.
Provisions
in RPC’s Certificate of Incorporation and Bylaws may inhibit a takeover of
RPC.
RPC’s
certificate of incorporation, bylaws and other documents contain provisions
including advance notice requirements for stockholder proposals and staggered
terms for the Board of Directors. These provisions may make a tender
offer, change in control or takeover attempt that is opposed by RPC’s Board of
Directors more difficult or expensive.
Some
of our equipment and several types of materials used in providing our services
are available from a limited number of suppliers.
We
purchase equipment provided by a limited number of manufacturers who specialize
in oilfield service equipment. During periods of high demand, these
manufacturers may not be able to meet our requests for timely delivery,
resulting in delayed deliveries of equipment and higher prices for
equipment. There are a limited number of suppliers for certain
materials used in pressure pumping services, our largest service
line. While these materials are generally available, supply
disruptions can occur due to factors beyond our control. Such
disruptions, delayed deliveries, and higher prices can limit our ability to
provide services, or increase the costs of providing services, thus reducing our
revenues and profits.
We
have used outside financing to accomplish our growth strategy, and outside
financing may become unavailable or may be unfavorable to us.
Our
business requires a great deal of capital in order to maintain our equipment and
increase our fleet of equipment to expand our operations, and we have access to
our $200 million credit facility to fund our necessary working capital and
equipment requirements. Most of our existing credit facility bears interest at a
floating rate, which exposes us to market risks as interest rates
rise. If our existing capital resources become unavailable,
inadequate or unfavorable for purposes of funding our capital requirements, we
would need to raise additional funds through alternative debt or equity
financings to maintain our equipment and continue our growth. Such
additional financing sources may not be available when we need them, or may not
be available on favorable terms. If we fund our growth through the
issuance of public equity, the holdings of stockholders will be
diluted. If capital generated either by cash provided by operating
activities or outside financing is not available or sufficient for our needs, we
may be unable to maintain our equipment, expand our fleet of equipment, or take
advantage of other potentially profitable business opportunities, which could
reduce our future revenues and profits.
11
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
RPC owns
or leases approximately 100 offices and operating facilities. The Company leases
approximately 13,400 square feet of office space in Atlanta, Georgia that serves
as its headquarters, a portion of which is allocated and charged to Marine
Products Corporation. See “Related Party Transactions” contained in
Item 7. The lease agreement on the headquarters is effective through
October 2013. RPC believes its current operating facilities are
suitable and adequate to meet current and reasonably anticipated future
needs. Descriptions of the major facilities used in our operations
are as follows:
Owned
Locations
Houma,
Louisiana — Administrative office
Houston,
Texas — Pipe storage terminal and inspection sheds
Houston,
Texas — Operations, sales and administrative office
Elk City,
Oklahoma — Operations, sales and equipment storage yards
Rock
Springs, Wyoming — Operations, sales and equipment storage yards
Lafayette,
Louisiana — Operations, sales and equipment storage yards
Conway,
Arkansas — Operations, sales and equipment storage yards
Kilgore,
Texas — Pumping services facility
Leased
Locations
Seminole,
Oklahoma — Pumping services facility
Oklahoma
City, Oklahoma — Operations, sales and administrative office
Houston,
Texas — Operations, sales and administrative office
Odessa,
Texas — Operations, sales and equipment storage yards
Washington,
Pennsylvania — Operations, sales and equipment storage yards
Item
3. Legal Proceedings
RPC is a
party to various routine legal proceedings primarily involving commercial
claims, workers’ compensation claims and claims for personal injury. RPC insures
against these risks to the extent deemed prudent by its management, but no
assurance can be given that the nature and amount of such insurance will, in
every case, fully indemnify RPC against liabilities arising out of pending and
future legal proceedings related to its business activities. While the outcome
of these lawsuits, legal proceedings and claims cannot be predicted with
certainty, management believes that the outcome of all such proceedings, even if
determined adversely, would not have a material adverse effect on RPC’s business
or financial condition.
12
Item
4. Reserved
Item
4A. Executive Officers of the Registrant
Each of
the executive officers of RPC was elected by the Board of Directors to serve
until the Board of Directors’ meeting immediately following the next annual
meeting of stockholders or until his or her earlier removal by the Board of
Directors or his or her resignation. The following table lists the executive
officers of RPC and their ages, offices, and terms of office with
RPC.
|
Name
and Office with Registrant
|
Age
|
Date
First Elected to Present Office
|
|
R.
Randall Rollins (1)
|
78
|
1/24/84
|
|
Chairman
of the Board
|
||
|
Richard
A. Hubbell (2)
|
65
|
4/22/03
|
|
President
and
Chief
Executive Officer
|
||
|
Linda
H. Graham (3)
|
73
|
1/27/87
|
|
Vice
President and
Secretary
|
||
|
Ben
M. Palmer (4)
|
49
|
7/8/96
|
|
Vice
President,
Chief
Financial Officer and
Treasurer
|
|
(1)
|
R.
Randall Rollins began working for Rollins, Inc. (consumer services) in
1949. Mr. Rollins has served as Chairman of the Board of RPC since the
spin-off of RPC from Rollins, Inc. in 1984. He has served as
Chairman of the Board of Marine Products Corporation (boat manufacturing)
since it was spun off from RPC in 2001 and Chairman of the Board of
Rollins, Inc. since October 1991. He is also a director of Dover Downs
Gaming and Entertainment, Inc. and Dover Motorsports,
Inc.
|
|
(2)
|
Richard
A. Hubbell has been the President of RPC since 1987 and Chief Executive
Officer since 2003. He has also been the President and Chief Executive
Officer of Marine Products Corporation since it was spun off from RPC in
February 2001. Mr. Hubbell serves on the Board of Directors for both of
these companies.
|
|
(3)
|
Linda
H. Graham has been the Vice President and Secretary of RPC since
1987. She has also been the Vice President and Secretary of
Marine Products Corporation since it was spun off from RPC in 2001. Ms.
Graham serves on the Board of Directors for both of these
companies.
|
|
(4)
|
Ben
M. Palmer has been the Vice President, Chief Financial Officer and
Treasurer of RPC since 1996. He has also been the Vice
President, Chief Financial Officer and Treasurer of Marine Products
Corporation since it was spun off from RPC in
2001.
|
13
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
RPC’s
common stock is listed for trading on the New York Stock Exchange under the
symbol RES. At February 12, 2010, there were 98,523,276 shares of
common stock outstanding and approximately 4,300 beneficial holders of common
stock. The following table sets forth the high and low prices of
RPC’s common stock and dividends paid for each quarter in the years ended
December 31, 2009 and 2008:
|
2009
|
2008
|
|||||||||||||||||||||||
|
Quarter
|
High
|
Low
|
Dividends
|
High
|
Low
|
Dividends
|
||||||||||||||||||
|
First
|
$ | 11.45 | $ | 5.17 | $ | 0.07 | $ | 15.32 | $ | 8.52 | $ | 0.06 | ||||||||||||
|
Second
|
11.97 | 6.43 | 0.07 | 17.80 | 12.50 | 0.06 | ||||||||||||||||||
|
Third
|
10.94 | 7.10 | 0.04 | 18.91 | 13.15 | 0.06 | ||||||||||||||||||
|
Fourth
|
11.35 | 9.15 | 0.04 | 14.10 | 6.02 | 0.06 | ||||||||||||||||||
On
January 26, 2010, the Board of Directors approved a $0.04 per share cash
dividend, payable March 10, 2010 to stockholders of record at the close of
business on February 10, 2010. The Company expects to continue to pay
cash dividends to the common stockholders, subject to the earnings and financial
condition of the Company and other relevant factors.
Issuer
Purchases of Equity Securities
Shares
repurchased in the fourth quarter of 2009 are outlined below.
|
Period
|
Total
Number
of Shares (or Units) Purchased |
Average
Price
Paid Per Share (or Unit) |
Total
Number of
Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
Maximum
Number (or
Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
|
October
1, 2009 to October 31, 2009
|
12,812 | (1) | $ | 9.68 | - | 2,807,265 | ||||||||||
|
November
1, 2009 to November 30, 2009
|
2,147 | (1) | 9.60 | - | 2,807,265 | |||||||||||
|
December
1, 2009 to December 31, 2009
|
- | - | - | 2,807,265 | ||||||||||||
|
Totals
|
14,959 | $ | 9.67 | - | 2,807,265 | |||||||||||
|
(1)
|
Consists
of shares repurchased by the Company in connection with option exercises
and taxes related to vesting of restricted
shares.
|
The
Company’s Board of Directors announced a stock buyback program in March 1998
authorizing the repurchase of 11,812,500 shares in the open
market. Currently the program does not have a predetermined
expiration date.
Performance
Graph
The
following graph shows a five year comparison of the cumulative total stockholder
return based on the performance of the stock of the Company, assuming dividend
reinvestment, as compared with both a broad equity market index and an industry
or peer group index. The indices included in the following graph are
the Russell 2000 Index (“Russell 2000”), the Philadelphia Stock Exchange’s Oil
Service Index (“OSX”), and a peer group which includes companies that are
considered peers of the Company, as discussed below (the “Peer
Group”). The Company has voluntarily chosen to provide both an
industry and a peer group index.
14
The
Russell 2000 is a stock index representing small capitalization U.S.
stocks. The components of the index had an average market
capitalization in 2009 of over $1.0 billion, and the Company was a component of
the Russell 2000 during 2009. The Russell 2000 was chosen because it
represents companies with comparable market capitalizations to the
Company. The OSX is a stock index of 15 U.S. companies that provide
oil drilling and production services, oilfield equipment, support services and
geophysical/reservoir services. The Company is not a component of the
OSX, but it was chosen because it represents a large group of companies that
provide the same or similar products and services as the Company. The
companies included in the Peer Group are Weatherford International, Inc., BJ
Services Company, Superior Energy Services, Inc., and Halliburton Company. The
companies included in the peer group have been weighted according to each
respective issuer’s stock market capitalization at the beginning of each
year.
Item
6. Selected Financial Data
The
following table summarizes certain selected financial data of the
Company. The historical information may not be indicative of the
Company’s future results of operations. The information set forth
below should be read in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and the Consolidated Financial
Statements and the notes thereto included elsewhere in this
document.
15
STATEMENT
OF OPERATIONS DATA:
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(in
thousands, except employee and per share amounts)
|
||||||||||||||||||||
|
Revenues
|
$ | 587,863 | $ | 876,977 | $ | 690,226 | $ | 596,630 | $ | 427,643 | ||||||||||
|
Cost
of revenues
|
393,806 | 503,631 | 368,175 | 287,037 | 227,492 | |||||||||||||||
|
Selling,
general and administrative expenses
|
97,672 | 117,140 | 107,800 | 91,051 | 75,478 | |||||||||||||||
|
Depreciation
and amortization
|
130,580 | 118,403 | 78,506 | 46,711 | 39,129 | |||||||||||||||
|
Gain
on disposition of assets, net (a)
|
(1,143 | ) | (6,367 | ) | (6,293 | ) | (5,969 | ) | (12,169 | ) | ||||||||||
|
Operating
(loss) profit
|
(33,052 | ) | 144,170 | 142,038 | 177,800 | 97,713 | ||||||||||||||
|
Interest
expense
|
(2,176 | ) | (5,282 | ) | (4,179 | ) | (356 | ) | (127 | ) | ||||||||||
|
Interest
income
|
147 | 73 | 70 | 319 | 1,077 | |||||||||||||||
|
Other
income (expense), net
|
1,582 | (1,176 | ) | 1,905 | 1,085 | 2,077 | ||||||||||||||
|
(Loss)
income before income taxes
|
(33,499 | ) | 137,785 | 139,834 | 178,848 | 100,740 | ||||||||||||||
|
Income
tax (benefit) provision (b)
|
(10,754 | ) | 54,382 | 52,785 | 68,054 | 34,256 | ||||||||||||||
|
Net
(loss) income (b)
|
$ | (22,745 | ) | $ | 83,403 | $ | 87,049 | $ | 110,794 | $ | 66,484 | |||||||||
|
(Loss)
earnings per share:
|
||||||||||||||||||||
|
Basic
|
$ | (0.24 | ) | $ | 0.86 | $ | 0.90 | $ | 1.16 | $ | 0.70 | |||||||||
|
Diluted
|
$ | (0.24 | ) | $ | 0.85 | $ | 0.89 | $ | 1.13 | $ | 0.67 | |||||||||
|
Dividends
paid per share
|
$ | 0.220 | $ | 0.240 | $ | 0.200 | $ | 0.133 | $ | 0.071 | ||||||||||
|
OTHER
DATA:
|
||||||||||||||||||||
|
Operating
margin percent
|
(5.6 | )% | 16.4 | % | 20.6 | % | 29.8 | % | 22.8 | % | ||||||||||
|
Net
cash provided by operating activities
|
$ | 168,740 | $ | 177,320 | $ | 141,872 | $ | 118,228 | $ | 66,362 | ||||||||||
|
Net
cash used for investing activities
|
(61,144 | ) | (158,953 | ) | (239,624 | ) | (151,085 | ) | (62,415 | ) | ||||||||||
|
Net
cash (used for) provided by financing activities
|
(106,144 | ) | (21,668 | ) | 101,361 | 22,777 | (20,774 | ) | ||||||||||||
|
Depreciation
and amortization
|
130,580 | 118,403 | 78,506 | 46,711 | 39,129 | |||||||||||||||
|
Capital
expenditures
|
$ | 67,830 | $ | 170,318 | $ | 248,758 | $ | 159,831 | $ | 72,808 | ||||||||||
|
Employees
at end of period
|
1,980 | 2,532 | 2,370 | 2,000 | 1,649 | |||||||||||||||
|
BALANCE
SHEET DATA AT END OF YEAR:
|
||||||||||||||||||||
|
Accounts
receivable, net
|
$ | 130,619 | $ | 210,375 | $ | 176,154 | $ | 148,469 | $ | 107,428 | ||||||||||
|
Working
capital
|
151,681 | 200,494 | 144,338 | 111,302 | 95,215 | |||||||||||||||
|
Property,
plant and equipment, net
|
396,222 | 470,115 | 433,126 | 262,797 | 141,218 | |||||||||||||||
|
Total
assets
|
649,043 | 793,461 | 701,015 | 478,007 | 311,785 | |||||||||||||||
|
Long-term
debt (c)
|
90,300 | 174,450 | 156,400 | 35,600 | — | |||||||||||||||
|
Total
stockholders’ equity
|
$ | 409,723 | $ | 449,084 | $ | 409,272 | $ | 335,287 | $ | 232,501 | ||||||||||
|
(a)
|
Gain
on disposition of assets, net in 2005 includes a $10.7 million pre-tax
gain ($0.07 after tax per diluted share) on the sale of certain operating
assets during the third quarter of
2005.
|
|
(b)
|
During
the fourth quarter of 2005, the income tax provision and net income
reflect the receipt of tax refunds of $3.5 million related to the
successful resolution of certain tax matters, which had a positive impact
of $0.04 after tax per diluted
share.
|
|
(c)
|
Effective
September 2006, the Company closed on a revolving credit facility that was
reduced to $200 million in the third quarter of 2009. In
February 2005, the Company prepaid a $2.8 million promissory note and the
remaining balance of long-term debt was paid in full upon maturity of a
promissory note in July 2005.
|
16
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The
following discussion should be read in conjunction with “Selected Financial
Data,” and the Consolidated Financial Statements included elsewhere in this
document. See also “Forward-Looking Statements” on page 2.
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, northeast and Rocky Mountain
regions, and 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.
Our key
business and financial strategies are:
|
-
|
To
focus our management resources on and invest our capital in equipment and
geographic markets that we believe will earn high returns on capital, and
maintain an appropriate capital structure.
|
|
|
-
|
To
maintain a flexible cost structure that can respond quickly to volatile
industry conditions and business activity levels.
|
|
|
-
|
To
deliver equipment and services to our customers safely.
|
|
|
-
|
To
maintain and increase market share.
|
|
|
-
|
To
maximize stockholder return by optimizing the balance between cash
invested in the Company’s productive
assets, the payment of dividends to stockholders, and the repurchase of
our common stock on the open market.
|
|
|
-
|
To
align the interests of our management and stockholders.
|
|
|
-
|
To
maintain an efficient, low-cost capital structure, which includes an
appropriate use of debt.
|
In
assessing the outcomes of these strategies and RPC’s financial condition and
operating performance, management generally reviews periodic forecast data,
monthly actual results, and other similar information. We also
consider trends related to certain key financial data, including revenues,
utilization of our equipment and personnel, pricing for our services and
equipment, profit margins, selling, general and administrative expenses, cash
flows and the return on our invested capital. We continuously monitor
factors that impact the level of current and expected customer activity levels,
such as the price 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, overall economic
conditions and weather in the United States, the prices of oil and natural gas,
and our customers’ drilling and production activities.
Current
industry conditions include natural gas prices which stabilized during 2009
following a steep decline in 2008, and during the first quarter of 2010 have
increased slightly. Oil prices have increased gradually during 2009
and the first quarter of 2010, following a five-year low of $32 per barrel at
the end of 2008. In the beginning of 2010, natural gas prices are
approximately 27 percent higher than they were during the first quarter of 2009,
and the price of oil is approximately 74 percent higher than it was in the first
quarter of 2009. The average U.S. rig count declined by 42 percent in
2009, although it began to increase during the third and fourth quarters of
2009. During the first quarter of 2010, the rig count returned to the
same levels experienced in the first quarter of 2009.
In
addition to the overall rig count, the Company also monitors the number of
horizontal and directional wells drilled in the U.S. domestic market, because
this type of well is more service-intensive than a vertical oil or gas well,
thus requiring more of the Company’s services provided for a longer period of
time. The number of horizontal and directional wells drilled in the
United States increased in 2009, and was 60 percent of total wells drilled
during the year. During the first part of 2010, the percentage of
horizontal and directional wells drilled as a percentage of total wells
increased to approximately 66 percent. Between 2006 and 2008, the
supply of oilfield service equipment in the U.S. domestic market increased
tremendously, both from existing service companies and new entrants to the
oilfield services business. Although the supply of oilfield equipment
did not increase in 2009, the large supply of equipment and service providers
coupled with the tremendous decline in domestic oilfield activity has caused
pricing for the Company’s services to decrease tremendously during the past few
years, which has had a negative impact on the Company’s financial results and
returns. The Company responded by reducing its capital expenditures
during 2008 and 2009, managing working capital carefully, closely monitoring its
competitors’ activities, and scrutinizing planned capital expenditures more
closely for acceptable financial returns. In spite of a decline in
revenues and an operating loss during 2009, the Company generated sufficient
cash from operating activities to decrease the balance on its revolving credit
facility by 48 percent.
17
Loss
before income taxes was $33.5 million in 2009 compared to income before taxes of
$137.8 million in the prior year. The effective tax rate for 2009 was
32.1 percent compared to 39.5 percent in the prior year. Diluted loss
per share was $0.24 in 2009 compared to diluted earnings per share of $0.85 for
the prior year. Cash flows from operating activities were $168.7
million in 2008 compared to $177.3 million in the prior year, and cash and cash
equivalents were $4.5 million at December 31, 2009, an increase of $1.5 million
compared to December 31, 2008. During the third quarter of 2009, we
reduced the size of our revolving credit facility to $200 million. As of
December 31, 2009, there was $90.3 million in outstanding borrowings under this
credit facility.
Cost of
revenues as a percentage of revenues increased approximately 9.6 percentage
points in 2009 compared to 2008, because of lower pricing for our services and
lower revenues.
Selling,
general and administrative expenses as a percentage of revenues increased
approximately 3.3 percentage points in 2009 compared to 2008, which was due
to the fixed nature of many of these expenses and lower revenues.
Consistent
with our strategy to selectively grow our capacity and maintain our existing
fleet of high demand equipment, capital expenditures were $67.8 million in
2009.
Outlook
Drilling
activity in the U.S. domestic oilfields, as measured by the rotary drilling rig
count, had been gradually increasing since about 2003 when rig count was just
over 800 through the latter half of 2008 when the U.S. rig count peaked at 2,031
during the third quarter. The global recession that began in the
fourth quarter of 2007 precipitated the steepest annualized decline in U.S.
domestic oilfield history. From the third quarter of 2008 to the
second quarter of 2009, the U.S. domestic rig count dropped almost 57 percent,
reaching a trough of 876 in June 2009. Since June 2009, the rig count
has increased by 42 percent to 1,248 early in the first quarter of
2010. The outlook for U.S. domestic oilfield activity is to increase
slowly during the remainder of 2010. The price of oil fell by 77
percent from $147 per barrel in the third quarter of 2008 to $34 early in
2009. Since that time, the price of oil has increased by over 100
percent to approximately $80 per barrel in the first quarter of
2010. The price of natural gas fell by 85 percent from approximately
$13 per Mcf in the second quarter of 2008 to slightly below $2 per Mcf in the
third quarter of 2009. Since that time, the price of natural gas has
increased to almost $6 per Mcf early in the first quarter of 2010.
Unconventional
drilling activity, which requires more of RPC’s services, accounted for 65
percent of total U.S. domestic drilling at the end of
2009. Unconventional activity as a percentage of total oilfield
activity had grown to 66 percent by the first quarter of 2010.
We
continue to monitor the competitive environment in 2010, and are concerned about
pricing for our services. The highly competitive pricing levels are
due to lower activity levels and the large amount of additional equipment that
has been placed in service in the domestic market during the past several
years. Our recent response to industry conditions was to reduce
capital expenditures, continue cost-reduction plans and enhance our sales and
marketing efforts. We understand that factors influencing the
industry are unpredictable, and our response to the industry’s potential
uncertainty is to maintain sufficient liquidity and a conservative capital
structure and monitor our discretionary spending. Although we used
our bank credit facility to finance our expansion, we will still maintain a
conservative financial structure. We intend to closely manage the amount drawn
on this facility over the course of 2010. Based on current industry
conditions, we believe that the Company’s consolidated revenues will increase
and financial performance will improve.
18
Results
of Operations
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Consolidated
revenues
|
$ | 587,863 | $ | 876,977 | $ | 690,226 | ||||||
|
Revenues
by business segment:
|
||||||||||||
|
Technical
|
$ | 513,289 | $ | 745,991 | $ | 574,723 | ||||||
|
Support
|
74,574 | 130,986 | 115,503 | |||||||||
|
Consolidated
operating (loss) profit
|
$ | (33,052 | ) | $ | 144,170 | $ | 142,038 | |||||
|
Operating
(loss) profit by business segment:
|
||||||||||||
|
Technical
|
$ | (20,328 | ) | $ | 110,648 | $ | 116,493 | |||||
|
Support
|
(1,636 | ) | 36,515 | 29,955 | ||||||||
|
Corporate
expenses
|
(12,231 | ) | (9,360 | ) | (10,703 | ) | ||||||
|
Gain
on disposition of assets, net
|
1,143 | 6,367 | 6,293 | |||||||||
|
Net
(loss) income
|
$ | (22,745 | ) | $ | 83,403 | $ | 87,049 | |||||
|
(Loss)
earnings per share — diluted
|
$ | (0.24 | ) | $ | 0.85 | $ | 0.89 | |||||
|
Percentage
of cost of revenues to revenues
|
67 | % | 57 | % | 53 | % | ||||||
|
Percentage
of selling, general and administrative expenses to
revenues
|
17 | % | 13 | % | 16 | % | ||||||
|
Percentage
of depreciation and amortization expense to revenues
|
22 | % | 14 | % | 11 | % | ||||||
|
Effective
income tax rate
|
32.1 | % | 39.5 | % | 37.7 | % | ||||||
|
Average
U.S. domestic rig count
|
1,089 | 1,879 | 1,768 | |||||||||
|
Average
natural gas price (per thousand cubic feet (mcf))
|
$ | 3.90 | $ | 8.81 | $ | 6.93 | ||||||
|
Average
oil price (per barrel)
|
$ | 61.90 | $ | 99.96 | $ | 72.78 | ||||||
Year
Ended December 31, 2009 Compared To Year Ended December 31, 2008
Revenues. Revenues for 2009
decreased $289.1 million or 33.0 percent compared to 2008. The
Technical Services segment revenues for 2009 decreased 31.2 percent from the
prior year due primarily to highly competitive pricing coupled with lower
equipment utilization. The Support Services segment revenues for 2009
decreased 43.1 percent from the prior year due to decreased customer activity
and significantly lower pricing in the rental tool service line, the largest
within this segment.
Domestic
revenues decreased 36 percent to $543.0 million during 2009 compared to 2008 due
to decreased customer activity and competitive pricing in our largest service
lines, such as pressure pumping and rental tools. The average price
of natural gas decreased by 56 percent and the average price of oil decreased by
approximately 38 percent during 2009 compared to the prior year. In
conjunction with the decrease in natural gas prices, the average domestic rig
count during 2009 was 42 percent lower than in 2008. This decrease in
drilling activity had a negative impact on our financial results. We
believe that our activity levels are affected more by the price of natural gas
than by the price of oil, because the majority of U.S. domestic drilling
activity relates to natural gas, and many of our services are more appropriate
for gas wells than oil wells. Foreign revenues, which increased from
$30.8 million in 2008 to $44.8 million in 2009, were eight percent of
consolidated revenues. These revenue increases were due mainly to
higher customer activity levels in New Zealand and Mexico compared to the prior
year. Our international revenues are impacted by the timing of
project initiation and their ultimate duration.
Cost of
revenues. Cost of revenues in 2009 was $393.8 million compared
to $503.6 million in 2008, a decrease of $109.8 million or 21.8
percent. The decrease in these costs was due to the variable nature
of most of these expenses as well as the impact of expense reduction measures
taken during 2009, including employment cost reductions. Cost of
revenues, as a percent of revenues, increased in 2009 from 2008 due to lower
pricing for our services.
Selling, general and administrative
expenses. Selling, general and administrative expenses decreased 16.6 percent
to $97.7 million in 2009 compared to $117.1 million in 2008. This
decrease was primarily due to lower employment costs and other expenses
resulting from expense reduction efforts instituted during 2009. As a
percentage of revenues, selling, general and administrative expenses increased
to 16.6 percent in 2009 compared to 13.4 percent in 2008.
Depreciation and
amortization. Depreciation and amortization were $130.6
million in 2009, an increase of $12.2 million or 10.3 percent compared to $118.4
million in 2008. This increase resulted from a higher level of capital
expenditures during recent quarters within both Support Services and Technical
Services to increase capacity and to maintain our existing
equipment.
19
Gain on disposition of assets, net.
Gain on the disposition of assets, net decreased due primarily to reduced
gains related to various property and equipment dispositions or sales to
customers of lost or damaged rental equipment.
Other income (expense), net. Other income,
net was $1.6 million in 2009, an increase of $2.8 million compared to other
expense of $1.2 million in 2008. The increase is mainly due to the
current year increase in the fair value of trading securities held in the
non-qualified Supplemental Retirement Plan. In addition to
changes in the fair value of trading securities, other income (expense) includes
gains from settlements of various legal and insurance claims and royalty
payments.
Interest
expense. Interest expense was $2.2 million in 2009
compared to $5.3 million in 2008. The decrease is due to lower
interest expense in 2009 incurred on lower outstanding interest bearing advances
on our revolving credit facility.
Interest income.
Interest income increased to $147 thousand in 2009 compared to $73 thousand in
2008 as a result of a higher average investable cash balance in 2009 compared to
2008.
Income tax (benefit)
provision. The income tax benefit was $10.8 million in 2009
compared to a tax provision of $54.4 million in 2008. The change is
due to 2009’s loss before income tax, partially offset by a decrease in the
effective tax rate to 32.1 percent in 2009 from 39.5 percent in
2008.
Net (loss) income and diluted (loss)
earnings per share. Net loss was $22.7 million in 2009,
or $0.24 per share, compared to net income of $83.4 million, or $0.85 per
diluted share in 2008. This decrease is due to decreased revenues and
higher, as a percentage of revenues, costs of revenues, selling, general and
administrative expenses and depreciation expense.
Year
Ended December 31, 2008 Compared To Year Ended December 31, 2007
Revenues. Revenues for 2008
increased $186.8 million or 27.1 percent compared to 2007. The
Technical Services segment revenues for 2008 increased 29.8 percent from the
prior year due primarily to a higher drilling rig count and increased capacity
driven by higher capital expenditures partially offset by lower pricing for
services. The Support Services segment revenues for 2008 increased
13.4 percent from the prior year due to increased capacity driven by higher
capital expenditures as well as a more profitable job mix in the rental tool
service line, the largest within this segment.
Domestic
revenues increased 30 percent to $846.2 million during 2008 compared to 2007 due
to increased capacity in our largest service lines, such as pressure pumping and
rental tools. The average price of natural gas increased by 27
percent and the average price of oil increased by approximately 37 percent
during 2008 compared to the prior year. In conjunction with the
increase in natural gas prices, the average domestic rig count during 2008 was
seven percent higher than in 2007. This increase in drilling activity
had a positive impact on our financial results. We believe that our
activity levels are affected more by the price of natural gas than by the price
of oil, because the majority of U.S. domestic drilling activity relates to
natural gas, and many of our services are more appropriate for gas wells than
oil wells. Foreign revenues, which decreased from $41.1 million in
2007 to $30.8 million in 2008, were four percent of consolidated
revenues. These revenue decreases were due mainly to lower customer
activity levels in Turkmenistan and Hungary compared to the prior
year. Our international revenues are impacted by the timing of
project initiation and their ultimate duration.
Cost of
revenues. Costs of revenues in 2008 was $503.6 million
compared to $368.2 million in 2007, an increase of $135.4 million or 36.8
percent. The increase in these costs was due to the variable nature
of many of these expenses, including materials and supplies, compensation, and
maintenance and repairs. Cost of revenues, as a percent of revenues,
increased in 2008 from 2007 due to more competitive pricing, higher costs of
proppant used in our pressure pumping service line and increased maintenance and
repairs expenses.
Selling, general and administrative
expenses. Selling, general and administrative expenses increased 8.7 percent
to $117.1 million in 2008 compared to $107.8 million in 2007. This
increase was primarily due to higher employment costs consistent with higher
activity levels and geographic expansion under RPC’s long-term growth
plan. As a percentage of revenues, selling, general and
administrative expenses decreased to 13.4 percent in 2008 compared to 15.6
percent in 2007.
Depreciation and
amortization. Depreciation and amortization were $118.4
million in 2008, an increase of $39.9 million or 50.8 percent compared to $78.5
million in 2007. This increase resulted from a higher level of capital
expenditures during 2008 as compared to 2007 within both Support Services and
Technical Services to increase capacity and to maintain our existing
equipment.
Gain on disposition of assets, net.
Gain on the disposition of assets, net increased due primarily to gains
related to various property and equipment dispositions or sales to customers of
lost or damaged rental equipment.
Other (expense) income, net. Other
(expense), net in 2008 was $(1.2) million, a decrease of $3.1 million compared
to other income of $1.9 million in 2007. The decrease is mainly due
to the 2008 decline in the fair value of trading securities held in the
non-qualified Supplemental Retirement Plan. In addition to
changes in the fair value of trading securities, other (expense) income in 2008
includes gains from settlements of various legal and insurance claims and
royalty payments.
Interest
expense. Interest expense was $5.3 million in 2008
compared to $4.2 million in 2007. The increase is due to higher
interest expense in 2008 incurred on larger outstanding interest bearing
advances on our revolving line of credit.
20
Interest income.
Interest income increased to $73 thousand in 2008 compared to $70 thousand in
2007 as a result of a higher average investable cash balance in 2008 compared to
2007.
Income tax
provision. The income tax provision increased to $54.4 million
in 2008 from $52.8 million in 2007. The increase is due to an
increase in the effective tax rate to 39.5 percent in 2008 from 37.7 percent in
2007.
Net income and diluted earnings per
share. Net income decreased 4.2 percent to $83.4
million, or $0.85 earnings per diluted share in 2008, compared to $87.0 million,
or $0.89 earnings per diluted share in 2007. This decrease is due to
higher costs of revenues, selling, general and administrative expenses,
depreciation expense, other expense, and interest expense partially offset by
increased revenues.
21
Liquidity
and Capital Resources
Cash
and Cash Flows
The
Company’s cash and cash equivalents were $4.5 million as of December 31, 2009,
$3.0 million as of December 31, 2008 and $6.3 million as of December 31,
2007.
The following table sets forth the
historical cash flows for the years ended December 31:
|
(in
thousands)
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
cash provided by operating activities
|
$ | 168,740 | $ | 177,320 | $ | 141,872 | ||||||
|
Net
cash used for investing activities
|
(61,144 | ) | (158,953 | ) | (239,624 | ) | ||||||
|
Net
cash (used for) provided by financing activities
|
(106,144 | ) | (21,668 | ) | 101,361 | |||||||
2009
Cash
provided by operating activities decreased by $8.6 million in 2009 compared to
the prior year. Net loss was $22.7 million in 2009 compared to net
income of $83.4 million in 2008, decreasing cash provided by operating
activities partially offset by decreases in working capital
requirements. Decreased business activity levels and revenues in 2009
resulted in lower accounts receivable and prepaid expenses partially offset by
increased inventory and declines in accounts payable and accrued payroll
including bonuses, consistent with lower activity levels and
profitability.
Cash used
for investing activities in 2009 decreased by $97.8 million compared to 2008,
primarily as a result of lower capital expenditures.
Cash used
for financing activities in 2009 increased by $84.5 million compared to 2008,
primarily due to the reduction in notes payable to banks during 2009, partially
offset by a decrease in common stock purchased and retired.
2008
Cash
provided by operating activities increased by $35.4 million in 2008 compared to
the prior year. Although net income decreased $3.6 million in 2008
compared to 2007, cash provided by operating activities increased due primarily
to an increase in depreciation due to higher capital expenditures and a higher
deferred tax provision due to accelerated tax depreciation. Increased
business activity levels and revenues in 2008 resulted in higher accounts
receivable, inventories and prepaid expenses partially offset by increased
accounts payable and accrued payroll including bonuses.
Cash used
for investing activities in 2008 decreased by $80.7 million compared to 2007,
primarily as a result of lower capital expenditures.
Cash
(used for) provided by financing activities in 2009 increased by $123.0 million
compared to 2007, primarily due to lower net borrowings from notes payable to
banks during 2008, an increase in common stock purchased and retired, and a 20
percent increase in dividends paid per share to common
stockholders.
Financial
Condition and Liquidity
The
Company’s financial condition as of December 31, 2009, remains
strong. We believe the liquidity provided by our existing cash and
cash equivalents, our overall strong capitalization which includes a revolving
credit facility and cash expected to be generated from operations will provide
sufficient capital to meet our requirements for at least the next twelve
months. The Company currently has a $200 million revolving credit
facility (the “Revolving Credit Agreement”) that matures in September
2011. The Revolving Credit Agreement contains customary terms
and conditions, including certain financial covenants including covenants
restricting RPC’s ability to incur liens, merge or consolidate with another
entity. A total of $91.9 million was available under our facility as
of December 31, 2009; approximately $17.8 million of the credit facility
supports outstanding letters of credit relating to self-insurance programs or
contract bids. For additional information with respect to RPC’s
credit facility, see Note 6 of the Notes to Consolidated Financial
Statements.
The
Company’s decisions about the amount of cash to be used for investing and
financing purposes are influenced by its capital position, including access to
borrowings under our credit facility, and the expected amount of cash to be
provided by operations. We believe our liquidity will continue to
provide the opportunity to grow our asset base and revenues during periods with
positive business conditions and strong customer activity levels. The
Company’s decisions about the amount of cash to be used for investing and
financing activities could be influenced by the financial covenants in our
credit facility but we do not expect the covenants to restrict our planned
activities.
22
Cash
Requirements
Capital
expenditures were $67.8 million in 2009, and we currently expect capital
expenditures to be approximately $70.0 million in 2010. We expect
these expenditures to be primarily directed towards revenue-producing equipment
in our larger, core service lines including pressure pumping, snubbing,
nitrogen, and rental tools. The actual amount of 2010 expenditures
will depend primarily on equipment maintenance requirements, expansion
opportunities, and equipment delivery schedules.
The Company’s Retirement Income Plan, a
multiple employer trusteed defined benefit pension plan, provides monthly
benefits upon retirement at age 65 to eligible employees. The Company
does not currently expect to make a significant contribution to the defined
benefit pension plan in 2010 to meet its funding objectives.
The Company’s Board of Directors
announced a stock buyback program on March 9, 1998 authorizing the repurchase of
up to 11,812,500 shares of which 2,807,265 additional shares were available to
be repurchased as of December 31, 2009. The program does not have a
predetermined expiration date.
On
January 26, 2010, the Board of Directors approved a $0.04 per share cash
dividend, payable March 10, 2010 to stockholders of record at the close of
business on February 10, 2010. The Company expects to continue to pay
cash dividends to common stockholders, subject to the earnings and financial
condition of the Company and other relevant factors.
Contractual
Obligations
The
Company’s obligations and commitments that require future payments include our
credit facility, certain non-cancelable operating leases, purchase obligations
and other long-term liabilities. The following table summarizes the Company’s
significant contractual obligations as of December 31, 2009:
|
Contractual
obligations
|
Payments
due by period
|
|||||||||||||||||||
|
(in
thousands)
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
|||||||||||||||
|
Long-term
debt obligations
|
$ | 90,300 | $ | - | $ | 90,300 | $ | - | $ | - | ||||||||||
|
Interest
on long-term debt obligations
|
3,154 | 1,869 | 1,285 | - | - | |||||||||||||||
|
Capital
lease obligations
|
- | - | - | - | - | |||||||||||||||
|
Operating
leases (1)
|
13,023 | 4,389 | 5,318 | 2,504 | 812 | |||||||||||||||
|
Purchase
obligations (2)
|
- | - | - | - | - | |||||||||||||||
|
Other
long-term liabilities (3)
|
988 | - | 988 | - | - | |||||||||||||||
|
Total
contractual obligations
|
$ | 107,465 | $ | 6,258 | $ | 97,891 | $ | 2,504 | $ | 812 | ||||||||||
|
(1)
|
Operating leases include
agreements for various office locations, office equipment, and certain
operating equipment.
|
|
(2)
|
Includes
agreements to purchase goods or services that have been approved and that
specify all significant terms (pricing, quantity, and
timing). As part of the normal course of business the Company
occasionally enters into purchase commitments to manage its various
operating needs.
|
|
(3)
|
Includes expected cash payments
for long-term liabilities reflected on the balance sheet where the timing
of the payments are known. These amounts include incentive compensation.
These amounts exclude pension obligations with uncertain funding
requirements and deferred compensation
liabilities.
|
Fair
Value Measurements
The
Company’s assets and liabilities measured at fair value are classified in the
fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation.
Assets and liabilities that are traded on an exchange with a quoted price are
classified as Level 1. Assets and liabilities that are valued using significant
observable inputs in addition to quoted market prices are classified as Level 2.
The Company currently has no assets or liabilities measured on a recurring basis
that are valued using unobservable inputs and therefore no assets or liabilities
measured on a recurring basis are classified as Level 3. For defined benefit
plan assets classified as Level 3, the values are computed using inputs such as
cost, discounted future cash flows, independent appraisals and market based
comparable data or on net asset values calculated by the fund and not publicly
available.
In 2009, the Company transferred trading securities from assets
utilizing Level 1 inputs to assets utilizing Level 2 inputs because significant
observable inputs in addition to quoted market prices were used to value these
trading securities.
23
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. Also, increases in activity in the domestic oilfield can cause
upward wage pressures in the labor markets from which it hires employees as well
as increases in the costs of certain materials used to provide services to the
Company’s customers. Both the costs of equipment and labor increased
prior to and during 2008. In the third and fourth quarters of 2008
and 2009, however, the prices of commodities such as steel decreased
dramatically, as did demand for oilfield equipment and personnel. As
a result, the Company’s labor costs declined, and equipment that the Company
ordered was not subject to extended lead time for deliveries. The costs of
certain materials used to provide services to RPC’s customers have remained high
throughout 2009, however, which has resulted in higher costs of
revenues. The Company has attempted to mitigate these high costs by
securing materials through different sources, although no assurance can be given
that these efforts will mitigate these high costs.
Off
Balance Sheet Arrangements
The
Company does not have any material off balance sheet arrangements.
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Products Corporation
Effective
February 28, 2001, the Company spun off the business conducted through Chaparral
Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing
segment. RPC accomplished the spin-off by contributing 100 percent of
the issued and outstanding stock of Chaparral to Marine Products Corporation (a
Delaware corporation) (“Marine Products”), a newly formed wholly owned
subsidiary of RPC, and then distributing the common stock of Marine Products to
RPC stockholders. In conjunction with the spin-off, RPC and Marine
Products entered into various agreements that define the companies’
relationship.
In
accordance with a Transition Support Services agreement, which may be terminated
by either party, RPC provides certain administrative services, including
financial reporting and income tax administration, acquisition assistance, etc.,
to Marine Products. Charges from the Company (or from corporations
that are subsidiaries of the Company) for such services aggregated approximately
$713,000 in 2009, $842,000 in 2008 and $957,000 in 2007. The Company’s receivable due from Marine Products for
these services as of December 31, 2009 and 2008 was approximately $65,000 and
$70,000. The Company’s directors are also directors of Marine
Products and all of the executive officers are employees of both the Company and
Marine Products.
Other
The
Company periodically purchases in the ordinary course of business products or
services from suppliers, who are owned by significant officers or stockholders,
or affiliated with the directors of RPC. The total amounts paid to these
affiliated parties were approximately $409,000 in 2009, $393,000 in 2008 and
$1,035,000 in 2007.
RPC
receives certain administrative services and rents office space from Rollins,
Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is
otherwise affiliated with RPC). The service agreements between
Rollins, Inc. and the Company provide for the provision of services on a cost
reimbursement basis and are terminable on six months notice. The
services covered by these agreements include office space, administration of
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 totaled $87,000 in 2009, $90,000 in 2008 and $72,000 in
2007.
Critical
Accounting Policies
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require significant
judgment by management in selecting the appropriate assumptions for calculating
accounting estimates. These judgments are based on our historical experience,
terms of existing contracts, trends in the industry, and information available
from other outside sources, as appropriate. Senior management has
discussed the development, selection and disclosure of its critical accounting
estimates with the Audit Committee of our Board of Directors. The
Company believes the following critical accounting policies involve estimates
that require a higher degree of judgment and complexity:
24
Allowance for doubtful
accounts — Substantially all of the Company’s receivables are due from
oil and gas exploration and production companies in the United States, selected
international locations and foreign, nationally owned oil
companies. Our allowance for doubtful accounts is determined using a
combination of factors to ensure that our receivables are not overstated due to
uncollectibility. Our established credit evaluation procedures seek
to minimize the amount of business we conduct with higher risk customers. Our
customers’ ability to pay is directly related to their ability to generate cash
flow on their projects and is significantly affected by the volatility in the
price of oil and natural gas. Provisions for doubtful accounts are recorded in
selling, general and administrative expenses. Accounts are
written-off against the allowance for doubtful accounts when the Company
determines that amounts are uncollectible and recoveries of amounts previously
written off are recorded when collected. Significant recoveries will
generally reduce the required provision in the period of
recovery. Therefore, the provision for doubtful accounts can
fluctuate significantly from period to period. Recoveries were
insignificant in 2009 and 2007. Recoveries in 2008 totaled $1.5
million, causing a reduction in bad debt expense in 2008. We record
specific provisions when we become aware of a customer’s inability to meet its
financial obligations to us, such as in the case of bankruptcy filings or
deterioration in the customer’s operating results or financial position. If
circumstances related to customers change, our estimates of the realizability of
receivables would be further adjusted, either upward or downward.
The
estimated allowance for doubtful accounts is based on our evaluation of the
overall trends in the oil and gas industry, financial condition of our
customers, our historical write-off experience, current economic conditions, and
in the case of international customers, our judgments about the economic and
political environment of the related country and region. In addition
to reserves established for specific customers, we establish general reserves by
using different percentages depending on the age of the
receivables. Excluding the effect of the recoveries referred to
above, the annual provisions for doubtful accounts have ranged from 0.10 percent
to 0.45 percent of revenues over the last three years. Increasing or
decreasing the estimated general reserve percentages by 0.50 percentage points
as of December 31, 2009 would have resulted in a change of approximately $0.7
million to the allowance for doubtful accounts and a corresponding change to
selling, general and administrative expenses.
Income taxes — The effective
income tax rates were 32.1 percent in 2009, 39.5 percent in 2008 and 37.7
percent in 2007. Our effective tax rates vary due to changes in
estimates of our future taxable income, fluctuations in the tax jurisdictions in
which our earnings and deductions are realized, and favorable or unfavorable
adjustments to our estimated tax liabilities related to proposed or probable
assessments. As a result, our effective tax rate may fluctuate
significantly on a quarterly or annual basis.
We
establish a valuation allowance against the carrying value of deferred tax
assets when we determine that it is more likely than not that the asset will not
be realized through future taxable income. Such amounts are charged
to earnings in the period in which we make such determination. Likewise, if we
later determine that it is more likely than not that the net deferred tax assets
would be realized, we would reverse the applicable portion of the previously
provided valuation allowance. We have considered future market growth,
forecasted earnings, future taxable income, the mix of earnings in the
jurisdictions in which we operate, and prudent and feasible tax planning
strategies in determining the need for a valuation allowance.
We
calculate our current and deferred tax provision based on estimates and
assumptions that could differ from the actual results reflected in income tax
returns filed during the subsequent year. Adjustments based on filed returns are
recorded when identified, which is generally in the third quarter of the
subsequent year for U.S. federal and state provisions. Deferred tax
liabilities and assets are determined based on the differences between the
financial and tax bases of assets and liabilities using enacted tax rates in
effect in the year the differences are expected to reverse.
The
amount of income taxes we pay is subject to ongoing audits by federal, state and
foreign tax authorities, which may result in proposed assessments. Our estimate
for the potential outcome for any uncertain tax issue is highly judgmental. We
believe we have adequately provided for any reasonably foreseeable outcome
related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period the
assessments are made or resolved or when statutes of limitation on potential
assessments expire. Additionally, the jurisdictions in which our earnings or
deductions are realized may differ from our current estimates.
Insurance expenses – The
Company self insures, up to certain policy-specified limits, certain risks
related to general liability, workers’ compensation, vehicle and equipment
liability. The cost of claims under these self-insurance programs is
estimated and accrued using individual case-based valuations and statistical
analysis and is based upon judgment and historical experience; however, the
ultimate cost of many of these claims may not be known for several years. These
claims are monitored and the cost estimates are revised as developments occur
relating to such claims. The Company has retained an independent
third party actuary to assist in the calculation of a range of exposure for
these claims. As of December 31, 2009, the Company estimates the
range of exposure to be from $11.1 million to $14.9 million. The
Company has recorded liabilities at December 31, 2009 of approximately $12.9
million which represents management’s best estimate of probable
loss.
Depreciable life of assets —
RPC’s net property, plant and equipment at December 31, 2009 was $396.2 million
representing 61.0 percent of the Company’s consolidated
assets. Depreciation and amortization expenses for the year ended
December 31, 2009 were $130.6 million. Management judgment is
required in the determination of the estimated useful lives used to calculate
the annual and accumulated depreciation and amortization expense.
25
Property,
plant and equipment are reported at cost less accumulated depreciation and
amortization, which is provided on a straight-line basis over the estimated
useful lives of the assets. The estimated useful life represents the projected
period of time that the asset will be productively employed by the Company and
is determined by management based on many factors including historical
experience with similar assets. Assets are monitored to ensure
changes in asset lives are identified and prospective depreciation and
amortization expense is adjusted accordingly. We have not made any
changes to the estimated lives of assets resulting in a material impact in the
last three years.
Defined benefit pension
plan – In
2002, the Company ceased all future benefit accruals under the defined benefit
plan, although the Company remains obligated to provide employees benefits
earned through March 2002. The Company accounts for the defined
benefit plan in accordance with the provisions of FASB ASC 715, “Compensation –
Retirement Benefits” and engages an outside actuary to calculate its obligations
and costs. With the assistance of the actuary, the Company evaluates
the significant assumptions used on a periodic basis including the estimated
future return on plan assets, the discount rate, and other factors, and makes
adjustments to these liabilities as necessary.
The
Company chooses an expected rate of return on plan assets based on historical
results for similar allocations among asset classes, the investments strategy,
and the views of our investment adviser. Differences between
the expected long-term return on plan assets and the actual return are amortized
over future years. Therefore, the net deferral of past asset gains
(losses) ultimately affects future pension expense. The Company’s
assumption for the expected return on plan assets was seven percent for 2009 and
eight percent for 2008 and 2007.
The
discount rate reflects the current rate at which the pension liabilities could
be effectively settled at the end of the year. In estimating this rate, the
Company utilizes a yield curve approach. The approach utilizes an
economic model whereby the Company’s expected benefit payments over the life of
the plan are forecasted and then compared to a portfolio of investment
grade corporate bonds that will mature at the same time that the benefit
payments are due in any given year. The economic model then
calculates the one discount rate to apply to all benefit payments over the life
of the plan which will result in the same total lump sum as the payments from
the corporate bonds. A lower discount rate increases the
present value of benefit obligations. The discount rate was 6.00
percent as of December 31, 2009 compared to 6.84 percent in 2008 and 6.25
percent in 2007.
As of
December 31, 2009, the defined benefit plan was under-funded and the recorded
change within accumulated other comprehensive loss increased stockholders’
equity by $0.9 million after tax. Holding all other factors
constant, a change in the discount rate used to measure plan liabilities by 0.25
percentage points would not result in a significant pre-tax change to the net
loss related to pension reflected in accumulated other comprehensive
loss.
The
Company recognized pre-tax pension (income) expense of $2.0 million in 2009,
$(0.4) million in 2008 and $0.3 million in 2007. Based on the
under-funded status of the defined benefit plan as of December 31, 2009, the
Company expects to recognize pension expense of $0.6 million in
2010. Holding all other factors constant, a change in the expected
long-term rate of return on plan assets by 0.50 percentage points would result
in an increase or decrease in pension expense/income of approximately $0.1
million in 2010. Holding all other factors constant, a change
in the discount rate used to measure plan liabilities by 0.25 percentage points
would result in an increase or decrease in pension expense/income of
approximately $0.1 million in 2010.
New
Accounting Pronouncements
Recently Adopted Accounting
Pronouncements:
During
2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2009-01(ASU
2009-01) titled “Topic
105-Generally Accepted Accounting Principles amendments based on Statement of
Financial Accounting Standards No. 168-The FASB Accounting Standards
CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles.” FASB
Accounting Standards CodificationTM (ASC)
Topic 105, “Generally Accepted Accounting
Principles” has become the single source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities, effective for financial statements issued for interim
and annual periods ending after September 15, 2009. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The FASB now issues Accounting Standards Updates
that are not considered authoritative in their own right, but will serve to
update the Codification, provide background information about the guidance, and
provide the bases for conclusions on the change(s) in the
Codification. References to accounting literature throughout this
document have been updated to reflect the codification.
In
September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (ASU
2009-12). ASU 2009-12 amends Accounting Standards Codification Topic 820-10,
“Fair Value Measurements-Overall.” The amendments in ASU 2009-12
provide a practical expedient to measure investments that are required to be
measured at fair value on a recurring or non-recurring basis but do not have a
readily determinable fair value. The investments can be valued on the basis of
the net asset value per share of the investment. There are additional
disclosure requirements by major category of investments and the nature of
restrictions on the investor’s ability to redeem its investments. The amendments
in this ASU are effective for annual periods ending after December 15, 2009. See
Note 10 of the Consolidated Financial Statements for related disclosures
regarding pension assets that do not have readily determinable fair
value.
26
In August 2009, the FASB issued Accounting Standards
Update No. 2009-5, “Measuring Liabilities at Fair Value” (ASU 2009-05). ASU
2009-05 amends Accounting Standards Codification Topic 820, “Fair Value
Measurements.” ASU 2009-05 provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the following methods: 1) a valuation technique that
uses a) the quoted price of the identical liability when traded as an asset
or b) quoted prices for similar liabilities or similar liabilities when
traded as assets and/or 2) a valuation technique that is consistent with
the principles of ASC Topic 820 (e.g. an income approach or market approach).
ASU 2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to adjust to include inputs relating to the
existence of transfer restrictions on that liability. The Company adopted
these provisions in the fourth quarter of 2009 and the adoption did not have a material impact on the Company’s
consolidated financial statements.
In
December 2008, the FASB issued certain amendments
as codified in ASC 715-20-65, “Compensation – Retirement Benefits, Defined
Benefit Plans.” These amendments require additional disclosures regarding
how investment decisions are made: the major categories of plan assets; the
inputs and valuation techniques used to measure the fair value of plan assets;
the effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period; and significant concentrations of risk
within plan assets. The disclosures about plan assets are required to be
provided for fiscal years ending after December 15, 2009, with no restatement
required for earlier periods that are presented for comparative purposes, upon
initial application. Earlier application of the provisions is permitted. See Note 10 of the Consolidated Financial Statements for
related disclosures.
In May
2009, the FASB issued a new standard, as codified in ASC Topic 855 “Subsequent
Events.” ASC Topic 855 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In addition, it
provides guidance regarding the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The Company adopted this
standard in the second quarter of 2009 and the adoption did not have a material
effect on the Company’s consolidated financial statements.
In April 2009, the FASB issued certain amendments as
codified in ASC 820-10-65, “Fair Value Disclosures.” ASC 820-10-65
affirms that the objective of fair value when the market for an asset is not
active is the price that would be received to sell the asset in an orderly
transaction, and includes additional factors for determining whether there has
been a significant decrease in market activity for an asset when the market for
that asset is not active. An entity is required to base its
conclusion about whether a transaction was not orderly on the weight of the
evidence. The Company adopted these provisions in the second quarter of
2009 and the adoption did not have a material
impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued certain amendments as
codified in ASC Topic 320-10-65, “Investments — Debt and Equity Securities.”
These amendments (i) change existing guidance for determining whether an
impairment is other than temporary to debt securities and (ii) replace the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security;
and (b) it is more likely than not it will not have to sell the security
before recovery of its cost basis. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income.
The Company adopted ASC 320 in the second quarter of 2009 and the adoption did not have a material impact on the Company’s
consolidated financial statements.
In April 2009, the FASB issued certain amendments as
codified in ASC 825-10-65, “Financial Instruments,” that require an entity to
provide disclosures about fair value of financial instruments in interim
financial information including whenever it issues summarized financial
information for interim reporting periods. In addition, entities must disclose,
in the body or in the accompanying notes of its summarized financial information
for interim reporting periods and in its financial statements for annual
reporting periods, the fair value of all financial instruments for which it is
practicable to estimate that value, whether recognized or not recognized in the
statement of financial position. The Company adopted these amendments in
the second quarter of 2009. See Note 8 of the Consolidated Financial Statements for
related disclosures.
27
Recently
Issued Accounting Pronouncements Not Yet Adopted:
In
November 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities,” which codifies FASB Statement No. 167, “Amendments to FASB
Interpretation No. 46(R).” The ASU changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. These provisions are effective January 1, 2010, for a
calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a
material impact on the Company’s consolidated financial statements.
In
November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860)
– Accounting for Transfers of Financial Assets,” which formally codifies FASB
Statement No. 166, “Accounting for Transfers of Financial
Assets.” ASU 2009-16 is a revision to SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,” and requires more information about transfers of financial assets,
including securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets. It eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosures. The provisions are effective January 1, 2010, for a
calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a
material impact on the Company’s consolidated financial statements.
In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“Revenue Recognition; Multiple-Element Arrangements.” These
amendments provide clarification on whether multiple deliverables exist, how the
arrangement should be separated, and the consideration allocated. An
entity is required to allocate revenue in an arrangement using estimated selling
prices of deliverables in the absence of vendor-specific objective evidence or
third-party evidence of selling price. These amendments also eliminate the use
of the residual method and require an entity to allocate revenue using the
relative selling price method. The amendments significantly expand
the disclosure requirements for multiple-deliverable revenue
arrangements. These provisions are to be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with earlier application
permitted. The Company is currently evaluating the impact of these
amendments to its consolidated financial statements.
Item
7A. Quantitative and Qualitative Disclosures about Market Risk
The
Company is subject to interest rate risk exposure through borrowings on its
credit facility. As of December 31, 2009, there are outstanding
interest-bearing advances of $90.3 million on our credit facility which bear
interest at a floating rate. Effective December 2008, we entered into an
interest rate swap agreement that effectively converted $50 million of the
outstanding variable-rate borrowings under the revolving credit agreement to a
fixed-rate basis, thereby hedging against the impact of potential interest rate
changes. Under this agreement, the Company and the issuing lender
settle each month for the difference between a fixed interest rate of 2.07
percent and a comparable one month variable-rate interest paid to the syndicate
of lenders under our Revolving Credit Agreement on the same notional amount,
excluding the margin. The swap agreement terminates on September 8,
2011. As of December 31, 2009 the interest rate swap had a negative
fair value of $820,000. An increase in interest rates of one percent
would result in the interest rate swap having a negative fair value of
approximately $18,000 at December 31, 2009. A decrease in interest
rates of one percent would result in the interest rate swap having a negative
fair value $1,647,000 at December 31, 2009. A change in
interest rates will have no impact on the interest expense associated with the
$50,000,000 of borrowings under the revolving credit agreement that are subject
to the interest rate swap. A change in interest rates of one percent
on the balance outstanding on the revolving credit agreement at December 31,
2009 not subject to the interest rate swap would cause a change of $0.9 million
in total annual interest costs.
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 and financial condition.
28
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the
Stockholders of RPC, Inc.:
The
management of RPC, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. RPC, Inc.
maintains a system of internal accounting controls designed to provide
reasonable assurance, at a reasonable cost, that assets are safeguarded against
loss or unauthorized use and that the financial records are adequate and can be
relied upon to produce financial statements in accordance with accounting
principles generally accepted in the United States of America. The internal
control system is augmented by written policies and procedures, an internal
audit program and the selection and training of qualified personnel. This system
includes policies that require adherence to ethical business standards and
compliance with all applicable laws and regulations.
There are
inherent limitations to the effectiveness of any controls system. A
controls system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the controls system
are met. Also, no evaluation of controls can provide absolute
assurance that all control issues and any instances of fraud, if any, within the
Company will be detected. Further, the design of a controls system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. The Company intends to
continually improve and refine its internal controls.
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operations of our internal
control over financial reporting as of December 31, 2009 based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management’s assessment is that RPC, Inc. maintained effective internal control
over financial reporting as of December 31, 2009.
The
independent registered public accounting firm, Grant Thornton LLP, has audited
the consolidated financial statements as of and for the year ended December 31,
2009, and has also issued their report on the effectiveness of the Company’s
internal control over financial reporting, included in this report on page
30.
| /s/ Richard A. Hubbell | /s/ Ben M. Palmer | ||
|
Richard
A. Hubbell
President
and Chief Executive Officer
|
Ben
M. Palmer
Chief
Financial Officer and Treasurer
|
||
Atlanta,
Georgia
March
3,
2010
29
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
Board of
Directors and Stockholders
RPC,
Inc.
We have
audited RPC, Inc. (a Delaware Corporation) and subsidiaries’ (the “Company”)
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal
Control—Integrated Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2009 and our report dated March 3, 2010 expressed
an unqualified opinion on those consolidated financial statements.
/s/ Grant Thornton LLP
Atlanta,
Georgia
March 3,
2010
30
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
Board of
Directors and Stockholders
RPC,
Inc.
We have
audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware
corporation) and subsidiaries (the “Company”) as of December 31, 2009 and 2008,
and the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31,
2009. Our audits of the basic consolidated financial statements
included the financial statement schedule listed in the index appearing under
Item 15. These financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As
described in Note 5 to the consolidated financial statements, the Company
adopted new accounting guidance related to the accounting for uncertainty in
income tax reporting during 2007.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 3, 2010 expressed an
unqualified opinion thereon.
/s/ Grant Thornton LLP
Atlanta,
Georgia
March 3,
2010
31
CONSOLIDATED
BALANCE SHEETS
RPC,
INC. AND SUBSIDIARIES
(in
thousands except share information)
|
December
31,
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 4,489 | $ | 3,037 | ||||
|
Accounts
receivable, net
|
130,619 | 210,375 | ||||||
|
Inventories
|
55,783 | 49,779 | ||||||
|
Deferred
income taxes
|
4,894 | 6,187 | ||||||
|
Income
taxes receivable
|
18,184 | 15,604 | ||||||
|
Prepaid
expenses and other current assets
|
5,485 | 7,841 | ||||||
|
Current
assets
|
219,454 | 292,823 | ||||||
|
Property,
plant and equipment, net
|
396,222 | 470,115 | ||||||
|
Goodwill
|
24,093 | 24,093 | ||||||
|
Other
assets
|
9,274 | 6,430 | ||||||
|
Total
assets
|
$ | 649,043 | $ | 793,461 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
LIABILITIES
|
||||||||
|
Accounts
payable
|
$ | 49,882 | $ | 61,217 | ||||
|
Accrued
payroll and related expenses
|
10,708 | 20,398 | ||||||
|
Accrued
insurance expenses
|
4,315 | 4,640 | ||||||
|
Accrued
state, local and other taxes
|
2,001 | 2,395 | ||||||
|
Income
taxes payable
|
647 | 3,359 | ||||||
|
Other
accrued expenses
|
220 | 320 | ||||||
|
Current
liabilities
|
67,773 | 92,329 | ||||||
|
Long-term
accrued insurance expenses
|
8,597 | 8,398 | ||||||
|
Notes
payable to banks
|
90,300 | 174,450 | ||||||
|
Long-term
pension liabilities
|
14,647 | 11,177 | ||||||
|
Other
long-term liabilities
|
1,838 | 3,628 | ||||||
|
Deferred
income taxes
|
56,165 | 54,395 | ||||||
|
Total
liabilities
|
239,320 | 344,377 | ||||||
|
Commitments
and contingencies
|
||||||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Preferred
stock, $0.10 par value, 1,000,000 shares authorized, none
issued
|
- | - | ||||||
|
Common
stock, $0.10 par value, 159,000,000 shares authorized, 98,364,669 and
97,705,142 shares issued and outstanding in 2009 and 2008,
respectively
|
9,836 | 9,770 | ||||||
|
Capital
in excess of par value
|
7,638 | 3,990 | ||||||
|
Retained
earnings
|
401,055 | 445,356 | ||||||
|
Accumulated
other comprehensive loss
|
(8,806 | ) | (10,032 | ) | ||||
|
Total
stockholders’ equity
|
409,723 | 449,084 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 649,043 | $ | 793,461 | ||||
The
accompanying notes are an integral part of these statements.
32
CONSOLIDATED
STATEMENTS OF OPERATIONS
RPC,
INC. AND SUBSIDIARIES
(in
thousands except per share data)
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
REVENUES
|
$ | 587,863 | $ | 876,977 | $ | 690,226 | ||||||
|
COSTS
AND EXPENSES:
|
||||||||||||
|
Cost
of revenues
|
393,806 | 503,631 | 368,175 | |||||||||
|
Selling,
general and administrative expenses
|
97,672 | 117,140 | 107,800 | |||||||||
|
Depreciation
and amortization
|
130,580 | 118,403 | 78,506 | |||||||||
|
Gain
on disposition of assets, net
|
(1,143 | ) | (6,367 | ) | (6,293 | ) | ||||||
|
Operating
(loss) profit
|
(33,052 | ) | 144,170 | 142,038 | ||||||||
|
Interest
expense
|
(2,176 | ) | (5,282 | ) | (4,179 | ) | ||||||
|
Interest
income
|
147 | 73 | 70 | |||||||||
|
Other
income (expense), net
|
1,582 | (1,176 | ) | 1,905 | ||||||||
|
(Loss)
income before income taxes
|
(33,499 | ) | 137,785 | 139,834 | ||||||||
|
Income
tax (benefit) provision
|
(10,754 | ) | 54,382 | 52,785 | ||||||||
|
Net
(loss) income
|
$ | (22,745 | ) | $ | 83,403 | $ | 87,049 | |||||
|
(LOSS)
EARNINGS PER SHARE
|
||||||||||||
|
Basic
|
$ | (0.24 | ) | $ | 0.86 | $ | 0.90 | |||||
|
Diluted
|
$ | (0.24 | ) | $ | 0.85 | $ | 0.89 | |||||
|
Dividends
paid per share
|
$ | 0.22 | $ | 0.24 | $ | 0.20 | ||||||
The
accompanying notes are an integral part of these statements.
33
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
RPC,
INC. AND SUBSIDIARIES
(in
thousands)
| Capital | ||||||||||||||||||||||||||||
| in | Accumulated | |||||||||||||||||||||||||||
| Excess of | Other | |||||||||||||||||||||||||||
| Three Years Ended | Comprehensive |
Common
Stock
|
Par | Retained | Comprehensive | |||||||||||||||||||||||
| December 31, 2009 | Income (Loss) |
Shares
|
Amount
|
Value
|
Earnings
|
Income
(Loss)
|
Total
|
|||||||||||||||||||||
|
Balance,
December 31, 2006
|
97,214 | $ | 9,721 | $ | 13,595 | $ | 317,705 | $ | (5,734 | ) | $ | 335,287 | ||||||||||||||||
|
Stock
issued for stock incentive plans, net
|
989 | 99 | 4,843 | — | — | 4,942 | ||||||||||||||||||||||
|
Stock
purchased and retired
|
(163 | ) | (16 | ) | (2,838 | ) | — | — | (2,854 | ) | ||||||||||||||||||
|
Net
income
|
$ | 87,049 | — | — | — | 87,049 | — | 87,049 | ||||||||||||||||||||
|
Pension
adjustment, net of taxes
|
2,535 | — | — | — | — | 2,535 | 2,535 | |||||||||||||||||||||
|
Unrealized
gain on securities, net of taxes
|
486 | — | — | — | — | 486 | 486 | |||||||||||||||||||||
|
Foreign
currency translation, net of taxes
|
172 | — | — | — | — | 172 | 172 | |||||||||||||||||||||
|
Comprehensive
income
|
$ | 90,242 | ||||||||||||||||||||||||||
|
Dividends
declared
|
— | — | — | (19,473 | ) | — | (19,473 | ) | ||||||||||||||||||||
|
Excess
tax benefits for share-based payments
|
— | — | 1,128 | — | — | 1,128 | ||||||||||||||||||||||
|
Balance,
December 31, 2007
|
98,040 | 9,804 | 16,728 | 385,281 | (2,541 | ) | 409,272 | |||||||||||||||||||||
|
Stock
issued for stock incentive plans, net
|
1,288 | 128 | 5,654 | — | — | 5,782 | ||||||||||||||||||||||
|
Stock
purchased and retired
|
(1,623 | ) | (162 | ) | (19,238 | ) | — | — | (19,400 | ) | ||||||||||||||||||
|
Net
income
|
$ | 83,403 | — | — | — | 83,403 | — | 83,403 | ||||||||||||||||||||
|
Pension
adjustment, net of taxes
|
(6,053 | ) | — | — | — | — | (6,053 | ) | (6,053 | ) | ||||||||||||||||||
|
Loss
on cash flow hedge, net of taxes
|
(527 | ) | — | — | — | — | (527 | ) | (527 | ) | ||||||||||||||||||
|
Unrealized
loss on securities, net of taxes
|
(585 | ) | — | — | — | — | (585 | ) | (585 | ) | ||||||||||||||||||
|
Foreign
currency translation, net of taxes
|
(326 | ) | — | — | — | — | (326 | ) | (326 | ) | ||||||||||||||||||
|
Comprehensive
income
|
$ | 75,912 | ||||||||||||||||||||||||||
|
Dividends
declared
|
— | — | — | (23,328 | ) | — | (23,328 | ) | ||||||||||||||||||||
|
Excess
tax benefits for share-based payments
|
— | — | 846 | — | — | 846 | ||||||||||||||||||||||
|
Balance,
December 31, 2008
|
97,705 | 9,770 | 3,990 | 445,356 | (10,032 | ) | 449,084 | |||||||||||||||||||||
|
Stock
issued for stock incentive plans, net
|
911 | 91 | 4,323 | — | — | 4,414 | ||||||||||||||||||||||
|
Stock
purchased and retired
|
(252 | ) | (25 | ) | (2,096 | ) | — | — | (2,121 | ) | ||||||||||||||||||
|
Net
loss
|
$ | (22,745 | ) | — | — | — | (22,745 | ) | — | (22,745 | ) | |||||||||||||||||
|
Pension
adjustment, net of taxes
|
897 | — | — | — | — | 897 | 897 | |||||||||||||||||||||
|
Gain
on cash flow hedge, net of taxes
|
7 | — | — | — | — | 7 | 7 | |||||||||||||||||||||
|
Unrealized
gain on securities, net of taxes
|
91 | — | — | — | — | 91 | 91 | |||||||||||||||||||||
|
Foreign
currency translation, net of taxes
|
231 | — | — | — | — | 231 | 231 | |||||||||||||||||||||
|
Comprehensive
loss
|
$ | (21,519 | ) | |||||||||||||||||||||||||
|
Dividends
declared
|
— | — | — | (21,556 | ) | — | (21,556 | ) | ||||||||||||||||||||
|
Excess
tax benefits for share-based payments
|
— | — | 1,421 | — | — | 1,421 | ||||||||||||||||||||||
|
Balance,
December 31, 2009
|
98,364 | $ | 9,836 | $ | 7,638 | $ | 401,055 | $ | (8,806 | ) | $ | 409,723 | ||||||||||||||||
The
accompanying notes are an integral part of these statements.
34
CONSOLIDATED
STATEMENTS OF CASH FLOWS
RPC,
Inc. and Subsidiaries
(in
thousands)
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||
|
Net
(loss) income
|
$ | (22,745 | ) | $ | 83,403 | $ | 87,049 | |||||
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation,
amortization and other non-cash charges
|
130,581 | 118,444 | 78,493 | |||||||||
|
Stock-based
compensation expense
|
4,440 | 3,732 | 3,189 | |||||||||
|
Gain
on disposition of assets, net
|
(1,143 | ) | (6,367 | ) | (6,293 | ) | ||||||
|
Deferred
income tax provision
|
1,669 | 27,199 | 15,738 | |||||||||
|
Excess
tax benefits for share-based payments
|
(1,421 | ) | (846 | ) | (1,128 | ) | ||||||
|
Changes
in current assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
80,035 | (34,508 | ) | (27,497 | ) | |||||||
|
Income
taxes receivable
|
(1,159 | ) | (2,462 | ) | (7,229 | ) | ||||||
|
Inventories
|
(5,798 | ) | (20,377 | ) | (8,316 | ) | ||||||
|
Prepaid
expenses and other current assets
|
2,575 | (2,231 | ) | (568 | ) | |||||||
|
Accounts
payable
|
(5,711 | ) | 9,691 | 7,826 | ||||||||
|
Income
taxes payable
|
(2,712 | ) | (981 | ) | 123 | |||||||
|
Accrued
payroll and related expenses
|
(9,690 | ) | 2,426 | 4,683 | ||||||||
|
Accrued
insurance expenses
|
(325 | ) | (113 | ) | 1,426 | |||||||
|
Accrued
state, local and other taxes
|
(394 | ) | 676 | (1,078 | ) | |||||||
|
Other
accrued expenses
|
(167 | ) | (203 | ) | 46 | |||||||
|
Changes
in working capital
|
56,654 | (48,082 | ) | (30,584 | ) | |||||||
|
Changes
in other assets and liabilities:
|
||||||||||||
|
Pension
liabilities
|
4,882 | (481 | ) | (3,067 | ) | |||||||
|
Accrued
insurance expenses
|
199 | 232 | 1,274 | |||||||||
|
Other
non-current assets
|
(2,597 | ) | (20 | ) | (1,173 | ) | ||||||
|
Other
non-current liabilities
|
(1,779 | ) | 106 | (1,626 | ) | |||||||
|
Net
cash provided by operating activities
|
168,740 | 177,320 | 141,872 | |||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||
|
Capital
expenditures
|
(67,830 | ) | (170,318 | ) | (248,758 | ) | ||||||
|
Proceeds
from sale of assets
|
6,686 | 11,365 | 9,134 | |||||||||
|
Net
cash used for investing activities
|
(61,144 | ) | (158,953 | ) | (239,624 | ) | ||||||
|
FINANCING
ACTIVITIES
|
||||||||||||
|
Payment
of dividends
|
(21,556 | ) | (23,328 | ) | (19,473 | ) | ||||||
|
Borrowings
from notes payable to banks
|
276,100 | 392,300 | 478,600 | |||||||||
|
Repayments
of notes payable to banks
|
(360,250 | ) | (374,250 | ) | (357,800 | ) | ||||||
|
Debt
issue costs for notes payable to banks
|
(234 | ) | (94 | ) | — | |||||||
|
Excess
tax benefits for share-based payments
|
1,421 | 846 | 1,128 | |||||||||
|
Cash
paid for common stock purchased and retired
|
(1,747 | ) | (17,489 | ) | (1,730 | ) | ||||||
|
Proceeds
received upon exercise of stock options
|
122 | 347 | 636 | |||||||||
|
Net
cash (used for) provided by financing activities
|
(106,144 | ) | (21,668 | ) | 101,361 | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,452 | (3,301 | ) | 3,609 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
3,037 | 6,338 | 2,729 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 4,489 | $ | 3,037 | $ | 6,338 | ||||||
The
accompanying notes are an integral part of these statements.
35
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Note
1: Significant Accounting Policies
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include the accounts of RPC, Inc. and its
wholly-owned subsidiaries (“RPC” or the “Company”). All significant intercompany
accounts and transactions have been eliminated.
Nature
of Operations
RPC
provides a broad range of specialized oilfield services and equipment primarily
to independent and major oil and gas companies engaged in the exploration,
production and development of oil and gas properties throughout the United
States, including the Gulf of Mexico, mid-continent, southwest, northeast and
Rocky Mountain regions, and in selected international markets. The services and
equipment provided include Technical Services such as pressure pumping services,
coiled tubing services, snubbing services (also referred to as hydraulic
workover services), nitrogen services, and firefighting and well control, and
Support Services such as the rental of drill pipe and other specialized oilfield
equipment and oilfield training.
Common Stock
RPC is
authorized to issue 159,000,000 shares of common stock, $0.10 par value. Holders
of common stock are entitled to receive dividends when, as, and if declared by
the Board of Directors out of legally available funds. Each share of common
stock is entitled to one vote on all matters submitted to a vote of
stockholders. Holders of common stock do not have cumulative voting rights. In
the event of any liquidation, dissolution or winding up of the Company, holders
of common stock are entitled to ratable distribution of the remaining assets
available for distribution to stockholders.
Preferred
Stock
RPC is authorized to issue up to 1,000,000 shares of
preferred stock, $0.10 par value. As of December 31, 2009, there were no shares
of preferred stock issued. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of preferred stock as
a class without series or, if so determined from time to time, in one or more
series, and by filing a certificate pursuant to the applicable laws of the state
of Delaware and to fix the designations, powers, preferences and rights,
exchangeability for shares of any other class or classes of stock. Any preferred
stock to be issued could rank prior to the common stock with respect to dividend
rights and rights on liquidation.
Dividends
On
January 26, 2010, the Board of Directors approved a $0.04 per share cash
dividend payable March 10, 2010 to stockholders of record at the close of
business on February 10, 2010.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant
estimates are used in the determination of the allowance for doubtful accounts,
income taxes, accrued insurance expenses, depreciable lives of assets, and
pension liabilities.
Revenues
RPC’s
revenues are generated principally from providing services and the related
equipment. Revenues are recognized when the services are rendered and
collectibility is reasonably assured. Revenues from services and
equipment are based on fixed or determinable priced purchase orders or contracts
with the customer and do not include the right of return. Rates for
services and equipment are priced on a per day, per unit of measure, per man
hour or similar basis. Sales tax charged to customers is presented on
a net basis within the consolidated statement of operations and excluded from
revenues.
36
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Concentration
of Credit Risk
Substantially
all of the Company’s customers are engaged in the oil and gas industry. This
concentration of customers may impact overall exposure to credit risk, either
positively or negatively, in that customers may be similarly affected by changes
in economic and industry conditions. The Company provided oilfield
services to several hundred customers. Two customers individually accounted for
13 percent and 12 percent of the Company’s 2009 revenues. No
customers accounted for more than 10 percent of 2008 or 2007
revenues. Additionally, one of these customers accounted for 12
percent of accounts receivable as of December 31, 2009 and no customers
accounted for more than 10 percent of accounts receivable as of December 31,
2008.
Cash
and Cash Equivalents
Highly
liquid investments with original maturities of three months or less when
acquired are considered to be cash equivalents. The Company maintains its cash
in bank accounts which, at times, may exceed federally insured
limits. RPC maintains cash equivalents and investments in one or more
large financial institutions, and RPC’s policy restricts investment in any
securities rated less than “investment grade” by national rating
services.
Investments
Investments
classified as available-for-sale are stated at their fair values, with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders’ equity. The cost of securities sold is based on the specific
identification method. Realized gains and losses, declines in value judged to be
other than temporary, interest, and dividends with respect to available-for-sale
securities are included in interest income. The Company did not realize any
gains or losses on securities during 2009, 2008 or 2007 on its
available-for-sale securities. Securities that are held in the
non-qualified Supplemental Retirement Plan (“SERP”) are classified as
trading. See Note 10 for further information regarding the
SERP. The change in fair value of trading securities is presented in
other (expense) income on the consolidated statements of
operations.
Management
determines the appropriate classification of investments at the time of purchase
and re-evaluates such designations as of each balance sheet date.
Accounts
Receivable
The
majority of the Company’s accounts receivable are due principally from major and
independent oil and natural gas exploration and production
companies. Credit is extended based on evaluation of a customer’s
financial condition and, generally, collateral is not
required. Accounts receivable are considered past due after 60 days
and are stated at amounts due from customers, net of an allowance for doubtful
accounts.
Allowance
for Doubtful Accounts
Accounts
receivable are carried at the amount owed by customers, reduced by an allowance
for estimated amounts that may not be collectible in the future. The estimated
allowance for doubtful accounts is based on our evaluation of industry trends,
financial condition of our customers, our historical write-off experience,
current economic conditions, and in the case of our international customers, our
judgments about the economic and political environment of the related country
and region. Accounts are written off against the allowance for doubtful accounts
when the Company determines that amounts are uncollectible and recoveries of
previously written-off accounts are recorded when collected.
Inventories
Inventories,
which consist principally of (i) raw materials and supplies that are consumed in
RPC’s services provided to customers, (ii) spare parts for equipment used in
providing these services and (iii) manufactured components and attachments for
equipment used in providing services, are recorded at the lower of weighted
average cost or market value. Market value is determined based on replacement
cost for material and supplies. The Company regularly reviews inventory
quantities on hand and records provisions for excess or obsolete inventory based
primarily on its estimated forecast of product demand, market conditions,
production requirements and technological developments.
37
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Derivative
Instruments and Hedging Activities
The
Company is subject to interest rate risk on the variable component of the
interest rate under our revolving credit agreement. Effective
December 2008, the Company entered into a $50 million interest rate swap
agreement. The agreement terminates on September 8,
2011. The Company has designated the interest rate swap as a cash
flow hedge. Changes in the fair value of the effective portion of the
interest rate swap are recognized in other comprehensive loss until the hedged
item is recognized in earnings.
Property,
Plant and Equipment
Property,
plant and equipment, including software costs, are reported at cost less
accumulated depreciation and amortization, which is provided on a straight-line
basis over the estimated useful lives of the assets. Annual
depreciation and amortization expense is computed using the following useful
lives: operating equipment, 3 to 10 years; buildings and leasehold improvements,
15 to 30 years; furniture and fixtures, 5 to 7 years; software, 5 years; and
vehicles, 3 to 5 years. The cost of assets retired or otherwise disposed of and
the related accumulated depreciation and amortization are eliminated from the
accounts in the year of disposal with the resulting gain or loss credited or
charged to income from operations. Expenditures for additions, major renewals,
and betterments are capitalized. Expenditures for restoring an identifiable
asset to working condition or for maintaining the asset in good working order
constitute repairs and maintenance and are expensed as incurred.
RPC
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. The Company periodically reviews the values
assigned to long-lived assets, such as property, plant and equipment and other
assets, to determine if any impairments should be recognized. Management
believes that the long-lived assets in the accompanying balance sheets have not
been impaired.
Goodwill
and Other Intangibles
Goodwill
represents the excess of the purchase price over the fair value of net assets of
businesses acquired. The carrying amount of goodwill was $24,093,000
at December 31, 2009 and 2008. Goodwill is reviewed annually, or more
frequently if events occur or circumstances change that would more likely than
not reduce the fair value of the reporting unit below its carrying
amount, for impairment. In reviewing goodwill for impairment,
potential impairment is measured by comparing the estimated fair value of a
reporting unit with its carrying value. Based upon the results of
these analyses, the Company has concluded that no impairment of its goodwill has
occurred for the years ended December 31, 2009, 2008 and 2007.
Other
intangibles primarily represent non-compete agreements related to businesses
acquired. Non-compete agreements are amortized on a straight-line
basis over the period of the agreement, as this method best estimates the ratio
that current revenues bear to the total of current and anticipated
revenues. These non-compete agreements are fully amortized as of
December 31, 2009 and 2008.
Advertising
Advertising
expenses are charged to expense during the period in which they are
incurred. Advertising expenses totaled $1,065,000 in 2009, $1,957,000
in 2008 and $1,594,000 in 2007.
Insurance
Expenses
RPC self
insures, up to certain policy-specified limits, certain risks related to general
liability, workers’ compensation, vehicle and equipment liability, and employee
health insurance plan costs. The estimated cost of claims under these
self-insurance programs is estimated and accrued as the claims are incurred
(although actual settlement of the claims may not be made until future periods)
and may subsequently be revised based on developments relating to such claims.
The portion of these estimated outstanding claims expected to be paid more than
one year in the future is classified as long-term accrued insurance
expenses.
Income
Taxes
Deferred
tax liabilities and assets are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company establishes a valuation allowance against the carrying value of deferred
tax assets when the Company determines that it is more likely than not that the
asset will not be realized through future taxable income.
38
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Defined
Benefit Pension Plan
The
Company has a defined benefit pension plan that provides monthly benefits upon
retirement at age 65 to eligible employees with at least one year of service
prior to 2002. In 2002, the Company’s Board of Directors approved a
resolution to cease all future retirement benefit accruals under the defined
benefit pension plan. See Note 10 for a full description of this plan and the
related accounting and funding policies.
Share
Repurchases
The
Company records the cost of share repurchases in stockholders’ equity as a
reduction to common stock to the extent of par value of the shares acquired and
the remainder is allocated to capital in excess of par value.
Earnings
per Share
FASB ASC
Topic 260-10 “Earnings Per Share-Overall,” requires a basic earnings per share
and diluted earnings per share presentation. During 2009, the Company
adopted certain amendments to ASC 260-10 which requires that all outstanding
unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents, whether paid or unpaid, be considered
participating securities and included in the calculation of its basic earnings
per share.
The
Company has periodically issued share-based payment awards that contain
non-forfeitable rights to dividends, and therefore are considered participating
securities. See Note 10 for further information on restricted stock
granted to employees.
The basic
and diluted calculations differ as a result of the dilutive effect of stock
options and time lapse restricted shares and performance restricted shares
included in diluted earnings per share, but excluded from basic earnings per
share. Basic and diluted earnings per share are computed by dividing net (loss)
income by the weighted average number of shares outstanding during the
respective periods.
A
reconciliation of weighted average shares outstanding along with the (loss)
earnings per share attributable to restricted shares of common stock
(participating securities) is as follows:
|
(In
thousands except per share data)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
(loss) income available for stockholders:
|
$ | (22,745 | ) | $ | 83,403 | $ | 87,049 | |||||
|
Less: Dividends
paid
|
||||||||||||
|
Common
stock
|
(21,229 | ) | (22,905 | ) | (19,159 | ) | ||||||
|
Restricted
shares of common stock
|
(327 | ) | (423 | ) | (314 | ) | ||||||
|
Undistributed
(loss) earnings
|
$ | (44,301 | ) | $ | 60,075 | $ | 67,576 | |||||
|
Allocation
of undistributed earnings:
|
||||||||||||
|
Common
stock
|
$ | (43,408 | ) | $ | 58,992 | $ | 66,494 | |||||
|
Restricted
shares of common stock
|
(893 | ) | 1,083 | 1,082 | ||||||||
|
Basic
shares outstanding:
|
||||||||||||
|
Common
stock
|
94,260 | 94,750 | 94,664 | |||||||||
|
Restricted
shares of common stock
|
2,045 | 1,815 | 1,604 | |||||||||
| 96,305 | 96,565 | 96,268 | ||||||||||
|
Diluted
shares outstanding:
|
||||||||||||
|
Common
stock
|
94,260 | 94,750 | 94,664 | |||||||||
|
Dilutive
effect of options
|
- | 1,300 | 2,094 | |||||||||
|
|
94,260 | 96,050 | 96,758 | |||||||||
| Restricted shares of common stock | 2,045 | 1,815 | 1,604 | |||||||||
| 96,305 | 97,865 | 98,362 | ||||||||||
|
Basic
earnings per share:
|
||||||||||||
|
Common
stock:
|
||||||||||||
|
Distributed
earnings
|
$ | 0.22 | $ | 0.24 | $ | 0.20 | ||||||
|
Undistributed
(loss) earnings
|
(0.46 | ) | 0.62 | 0.70 | ||||||||
| $ | (0.24 | ) | $ | 0.86 | $ | 0.90 | ||||||
|
Restricted
shares of common stock:
|
||||||||||||
|
Distributed
earnings
|
$ | 0.16 | $ | 0.23 | $ | 0.20 | ||||||
|
Undistributed
(loss) earnings
|
(0.44 | ) | 0.60 | 0.67 | ||||||||
| $ | (0.28 | ) | $ | 0.83 | $ | 0.87 | ||||||
|
Diluted
earnings per share:
|
||||||||||||
|
Common
Stock:
|
||||||||||||
|
Distributed
earnings
|
$ | 0.22 | $ | 0.24 | $ | 0.20 | ||||||
|
Undistributed
(loss) earnings
|
(0.46 | ) | 0.61 | 0.69 | ||||||||
| $ | (0.24 | ) | $ | 0.85 | $ | 0.89 | ||||||
39
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
During
the year ended December 31, 2009, the Company incurred a net loss from
continuing operations and consequently the common stock equivalents were
excluded from the computation of diluted loss per share because the effect would
have been anti-dilutive.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivable, marketable securities, accounts payable, an interest rate swap, and
debt. The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximate their fair value due to the short-term nature of
such instruments. The marketable securities classified as
available-for-sale and the securities held in the SERP classified as trading are
carried at fair value in the accompanying consolidated balance
sheets. The interest rate swap is carried at fair value, which is
based on quotes from the issuer of the swap and represents the estimated amounts
that we would expect to pay to terminate the swap. See Note 8 for
additional information.
Stock-Based
Compensation
Stock-based
compensation expense is recognized for all share-based payment awards, net of an
estimated forfeiture rate. Thus, compensation cost is amortized for those shares
expected to vest on a straight-line basis over the requisite service period of
the award. See Note 10 for additional information.
Reclassifications
In the
current year the Company classified stock-based compensation together with stock
issued for stock incentive plans, net in the consolidated statements of
stockholders' equity. For comparative purposes, amounts in the prior
year have been reclassified to conform to current year
presentation.
New
Accounting Pronouncements
Recently
Adopted Accounting Pronouncements:
During
2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2009-01(ASU
2009-01) titled “Topic
105-Generally Accepted Accounting Principles amendments based on Statement of
Financial Accounting Standards No. 168-The FASB Accounting Standards
CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles.” FASB
Accounting Standards CodificationTM (ASC)
Topic 105, “Generally Accepted Accounting
Principles” has become the single source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities, effective for financial statements issued for interim
and annual periods ending after September 15, 2009. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The FASB now issues Accounting Standards Updates
that are not considered authoritative in their own right, but will serve to
update the Codification, provide background information about the guidance, and
provide the bases for conclusions on the change(s) in the
Codification. References to accounting literature throughout this
document have been updated to reflect the codification.
In
September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (ASU
2009-12). ASU 2009-12 amends Accounting Standards Codification Topic 820-10,
“Fair Value Measurements-Overall.” The amendments in ASU 2009-12
provide a practical expedient to measure investments that are required to be
measured at fair value on a recurring or non-recurring basis but do not have a
readily determinable fair value. The investments can be valued on the basis of
the net asset value per share of the investment. There are additional
disclosure requirements by major category of investments and the nature of
restrictions on the investor’s ability to redeem its investments. The amendments
in this ASU are effective for annual periods ending after December 15, 2009. See
Note 10 for related disclosures regarding pension assets that do not have
readily determinable fair value.
40
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
In August 2009, the FASB issued Accounting Standards
Update No. 2009-5, “Measuring Liabilities at Fair Value” (ASU 2009-05). ASU
2009-05 amends Accounting Standards Codification Topic 820, “Fair Value
Measurements.” ASU 2009-05 provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the following methods: 1) a valuation technique that
uses a) the quoted price of the identical liability when traded as an asset
or b) quoted prices for similar liabilities or similar liabilities when
traded as assets and/or 2) a valuation technique that is consistent with
the principles of ASC Topic 820 (e.g. an income approach or market approach).
ASU 2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to adjust to include inputs relating to the
existence of transfer restrictions on that liability. The Company adopted
these provisions in the fourth quarter of 2009 and the adoption did not have a material impact on the Company’s
consolidated financial statements.
In
December 2008, the FASB issued certain amendments
as codified in ASC 715-20-65, “Compensation – Retirement Benefits, Defined
Benefit Plans.” These amendments require additional disclosures regarding
how investment decisions are made: the major categories of plan assets; the
inputs and valuation techniques used to measure the fair value of plan assets;
the effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period; and significant concentrations of risk
within plan assets The disclosures about plan assets are required to
be provided for fiscal years ending after December 15, 2009, with no restatement
required for earlier periods that are presented for comparative purposes, upon
initial application. Earlier application of the provisions is permitted. See Note 10 for related disclosures.
In May
2009, the FASB issued a new standard, as codified in ASC Topic 855 “Subsequent
Events.” ASC Topic 855 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In addition, it
provides guidance regarding the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The Company adopted this
standard in the second quarter of 2009 and the adoption did not have a material
effect on the Company’s consolidated financial statements.
In April 2009, the FASB issued certain amendments as
codified in ASC 820-10-65, “Fair Value Disclosures.” ASC 820-10-65
affirms that the objective of fair value when the market for an asset is not
active is the price that would be received to sell the asset in an orderly
transaction, and includes additional factors for determining whether there has
been a significant decrease in market activity for an asset when the market for
that asset is not active. An entity is required to base its
conclusion about whether a transaction was not orderly on the weight of the
evidence. The Company adopted these provisions in the second quarter of
2009 and the adoption did not have a material
impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued certain amendments as
codified in ASC Topic 320-10-65, “Investments — Debt and Equity Securities.”
These amendments (i) changes existing guidance for determining whether an
impairment is other than temporary to debt securities and (ii) replace the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security;
and (b) it is more likely than not it will not have to sell the security
before recovery of its cost basis. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income.
The Company adopted ASC 320 in the second quarter of 2009 and the adoption did not have a material impact on the Company’s
consolidated financial statements.
41
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
In April 2009, the FASB issued certain amendments as
codified in ASC 825-10-65, “Financial Instruments,” that require an entity to
provide disclosures about fair value of financial instruments in interim
financial information including whenever it issues summarized financial
information for interim reporting periods. In addition, entities must disclose,
in the body or in the accompanying notes of its summarized financial information
for interim reporting periods and in its financial statements for annual
reporting periods, the fair value of all financial instruments for which it is
practicable to estimate that value, whether recognized or not recognized in the
statement of financial position. The Company adopted these amendments in
the second quarter of 2009. See Note 8 for related
disclosures.
Recently
Issued Accounting Pronouncements Not Yet Adopted:
In
November 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities,” which codifies FASB Statement No. 167, “Amendments to FASB
Interpretation No. 46(R).” The ASU changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. These provisions are effective January 1, 2010, for a
calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a
material impact on the Company’s consolidated financial statements.
In
November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860)
– Accounting for Transfers of Financial Assets,” which formally codifies FASB
Statement No. 166, “Accounting for Transfers of Financial
Assets.” ASU 2009-16 is a revision to SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,” and requires more information about transfers of financial assets,
including securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets. It eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosures. The provisions are effective January 1, 2010, for a
calendar year-end entity, with early application not being
permitted. Adoption of these provisions is not expected to have a
material impact on the Company’s consolidated financial statements.
In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“Revenue Recognition; Multiple-Element Arrangements.” These
amendments provide clarification on whether multiple deliverables exist, how the
arrangement should be separated, and the consideration allocated. An
entity is required to allocate revenue in an arrangement using estimated selling
prices of deliverables in the absence of vendor-specific objective evidence or
third-party evidence of selling price. These amendments also eliminate the use
of the residual method and require an entity to allocate revenue using the
relative selling price method. The amendments significantly expand
the disclosure requirements for multiple-deliverable revenue
arrangements. These provisions are to be applied on a prospective
basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with earlier application
permitted. The Company is currently evaluating the impact of these
amendments to its consolidated financial statements.
Note
2: Accounts Receivable
Accounts
receivable, net consists of the following:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Trade
receivables:
|
||||||||
|
Billed
|
$ | 98,275 | $ | 168,989 | ||||
|
Unbilled
|
34,753 | 47,034 | ||||||
|
Other
receivables
|
801 | 551 | ||||||
|
Total
|
133,829 | 216,574 | ||||||
|
Less:
Allowance for doubtful accounts
|
(3,210 | ) | (6,199 | ) | ||||
|
Accounts
receivable, net
|
$ | 130,619 | $ | 210,375 | ||||
Trade
receivables relate to sale of our services and products, for which credit is
extended based on the customer’s credit history. Unbilled receivables
represent revenues earned but not billed to the customer until future dates,
usually within one month. Other receivables consist primarily of
amounts due from purchasers of Company property and rebates from
suppliers.
42
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Changes
in the Company’s allowance for doubtful accounts are as follows:
|
Years
Ended December 31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Beginning
balance
|
$ | 6,199 | $ | 5,217 | ||||
|
Bad
debt expense (credit)
|
660 | (84 | ) | |||||
|
Accounts
written-off
|
(3,763 | ) | (392 | ) | ||||
|
Recoveries
|
114 | 1,458 | ||||||
|
Ending
balance
|
$ | 3,210 | $ | 6,199 | ||||
Note
3: Inventories
Inventories
are $55,783,000 at December 31, 2009 and $49,779,000 at December 31, 2008 and
consist of raw materials, parts and supplies.
Note
4: Property, Plant and Equipment
Property,
plant and equipment are presented at cost net of accumulated depreciation and
consist of the following:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Land
|
$ | 14,980 | $ | 14,927 | ||||
|
Buildings
and leasehold improvements
|
80,928 | 77,867 | ||||||
|
Operating
equipment
|
631,666 | 595,217 | ||||||
|
Capitalized
software
|
15,391 | 15,700 | ||||||
|
Furniture
and fixtures
|
4,342 | 4,398 | ||||||
|
Vehicles
|
180,408 | 181,102 | ||||||
|
Construction
in progress
|
35 | 231 | ||||||
|
Gross
property, plant and equipment
|
927,750 | 889,442 | ||||||
|
Less:
accumulated depreciation
|
(531,528 | ) | (419,327 | ) | ||||
|
Net
property, plant and equipment
|
$ | 396,222 | $ | 470,115 | ||||
Depreciation
expense was $130.6 million in 2009, $118.4 million in 2008 and $78.5 million in
2007. There are no capital leases outstanding as of December 31, 2009
and December 31, 2008. The Company had accounts payable for purchases
of property and equipment of approximately $3.7 million, $9.4 million and $19.1
million as of December 31, 2009, 2008 and 2007.
43
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Note
5: Income Taxes
The
following table lists the components of the (benefit) provision for income
taxes:
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Current
(benefit) provision:
|
||||||||||||
|
Federal
|
$ | ( 13,490 | ) | $ | 20,793 | $ | 29,589 | |||||
|
State
|
235 | 5,453 | 4,857 | |||||||||
|
Foreign
|
832 | 937 | 2,601 | |||||||||
|
Deferred
(benefit) provision:
|
||||||||||||
|
Federal
|
1,698 | 25,486 | 14,531 | |||||||||
|
State
|
( 29 | ) | 1,713 | 1,207 | ||||||||
|
Total
income tax (benefit) provision
|
$ | (10,754 | ) | $ | 54,382 | $ | 52,785 | |||||
Reconciliation
between the federal statutory rate and RPC’s effective tax rate is as
follows:
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Federal
statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal benefit
|
(2.4 | ) | 3.2 | 2.8 | ||||||||
|
Tax
credits
|
1.3 | (0.8 | ) | (1.6 | ) | |||||||
|
Federal
and state refunds
|
— | — | 0.1 | |||||||||
|
Non-deductible
expenses
|
(2.6 | ) | 0.9 | 0.7 | ||||||||
|
Other
|
0.8 | 1.2 | 0.7 | |||||||||
|
Effective
tax rate
|
32.1 | % | 39.5 | % | 37.7 | % | ||||||
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Self-insurance
|
$ | 5,445 | $ | 5,404 | ||||
|
Pension
|
5,346 | 4,054 | ||||||
|
State
net operating loss carryforwards
|
1,742 | 1,649 | ||||||
|
Bad
debts
|
1,361 | 2,418 | ||||||
|
Accrued
payroll
|
866 | 1,579 | ||||||
|
Stock-based
compensation
|
2,413 | 2,294 | ||||||
|
All
others
|
149 | 501 | ||||||
|
Valuation
allowance
|
(1,550 | ) | (1,454 | ) | ||||
|
Gross
deferred tax assets
|
15,772 | 16,445 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
|
(62,640 | ) | (60,946 | ) | ||||
|
Goodwill
amortization
|
(4,403 | ) | (3,707 | ) | ||||
|
Gross
deferred tax liabilities
|
(67,043 | ) | (64,653 | ) | ||||
|
Net
deferred tax liabilities
|
$ | (51,271 | ) | $ | (48,208 | ) | ||
Historically
and currently, undistributed earnings of the Company’s foreign subsidiaries are
considered indefinitely reinvested and, accordingly, no provision for U.S.
federal income taxes has been recorded. Deferred taxes are provided
for earnings outside the United States when those earnings are not considered
indefinitely reinvested.
44
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
As of
December 31, 2009, the Company has net operating loss carryforwards related to
state income taxes of approximately $40.6 million that will expire between 2010
and 2029. As of December 31, 2009 the Company has a valuation
allowance of approximately $1.6 million, representing the tax affected amount of
loss carryforwards that the Company does not expect to utilize, against the
corresponding deferred tax asset.
Total net
income tax payments (refunds) were ($8,351,000) in 2009, $29,714,000 in 2008 and
$46,328,000 in 2007.
The
Company’s policy is to record interest and penalties related to income tax
matters as income tax expense. Accrued interest and penalties were
immaterial to the financial statements as of December 31, 2009 and
2008.
During
2007 the Company adopted new accounting guidance relating to the accounting for
uncertainty in income tax reporting, which provided criteria for the
recognition, measurement, presentation and disclosure of uncertain tax
positions. As a result of the adoption the Company did not recognize
a material adjustment in the liability for unrecognized income tax
benefits.
The
Company’s liability for unrecognized tax benefits was $30 thousand as of
December 31, 2009 and $11 thousand as of December 31, 2008, all of which would
affect our effective rate if recognized. A reconciliation of the
beginning and ending amount of unrecognized tax benefits for 2009 and 2008 are
as follows:
|
Years
Ended December 31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Beginning
balance
|
$ | 11 | $ | 10 | ||||
|
Additions
based on tax positions related to current year
|
- | - | ||||||
|
Additions
for tax positions of prior years
|
19 | 1 | ||||||
|
Reductions
for tax positions of prior years
|
- | - | ||||||
|
Ending
balance
|
$ | 30 | $ | 11 | ||||
The
Company and its subsidiaries are subject to U.S. federal and state income tax in
multiple jurisdictions. In many cases our uncertain tax positions are
related to tax years that remain open and subject to examination by the relevant
taxing authorities. The Company’s 2006 through 2009 tax years remain
open to examination.
It is
reasonably possible that the amount of the unrecognized tax benefits with
respect to our unrecognized tax positions will increase or decrease in the next
12 months. These changes may be the result of, among other things,
state tax settlements under Voluntary Disclosure Agreements. However,
quantification of an estimated range cannot be made at this time.
Note
6: Long-Term Debt
The
Company currently has a revolving credit agreement (the “Revolving Credit
Agreement”) with SunTrust Capital Markets, Inc, as Joint Lead Arranger and Sole
Book Manager, Banc of America Securities LLC as Joint Lead Arranger, and a
syndicate of six other lenders. The Revolving Credit Agreement
includes a full and unconditional guarantee by RPC’s 100 percent owned domestic
subsidiaries whose assets equal substantially all of the consolidated assets of
RPC and its subsidiaries. The subsidiaries of the Company that are
not guarantors are considered minor.
The
Revolving Credit Agreement has a general term of five years and provides for an
unsecured line of credit of up to $200 million, which includes a $50 million
letter of credit subfacility, and a $20 million swingline subfacility. During
the third quarter of 2009, the Company and its banking syndicate lenders entered
into an agreement to amend two substantive components of the Revolving Credit
Agreement. First, the aggregate revolving commitment amount was
reduced from $296.5 million to $200 million. Second, the numerator of
the interest coverage ratio, one of two financial covenants contained in the
Revolving Credit Agreement, was changed from EBIT to EBITDA. In
addition, the amendment revises the definition of the term “Base Rate” to
provide that such rate will be not less than the per annum rate determined by
increasing the one (1) month LIBOR rate by 1.0%. The maturity date of
all revolving loans under the Credit Agreement is September 8,
2011. The Company has incurred loan origination fees and other debt
related costs associated with the Revolving Credit Agreement, including
amendment costs in the aggregate of approximately $753
thousand. These costs are being amortized over the five year term of
the loan, and the net amount is classified as non-current other assets on the
consolidated balance sheets.
45
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Revolving
loans under the Revolving Credit Agreement bear interest at one of the following
two rates, at RPC’s election:
|
●
|
the
Base Rate, which is the highest of SunTrust Bank’s “prime rate” for the
day of the borrowing, a fluctuating rate per annum equal to the Federal
Funds Rate plus .50%, and a rate per annum equal to one (1) month LIBOR
rate plus 1.00%; or
|
|
●
|
In
addition, RPC will pay an annual fee ranging from .10% to .20% of the total
credit facility based upon RPC’s then-current consolidated debt-to-EBITDA
ratio. The Revolving Credit Agreement contains customary terms and
conditions, including certain financial covenants and restrictions on
indebtedness, dividend payments, business combinations and other related
items. Further, the Revolving Credit Agreement contains financial
covenants limiting the ratio of the Company’s consolidated debt-to-EBITDA to no
more than 2.5 to 1, and limiting the ratio of the Company’s consolidated EBITDA
to interest expense to no less than 2 to 1.
As of
December 31, 2009, RPC has outstanding borrowings of $90.3 million under the
Revolving Credit Agreement.
Interest incurred and recorded as expense on
the facility was $2,327,000 in 2009, $5,188,000 in 2008 and $4,083,000 in 2007.
The weighted average interest rate was 1.8% in 2009, 3.6% in 2008 and 6.1% for
2007. The Company capitalized interest incurred of $150,000 in 2009,
$1,064,000 in 2008 and $2,300,000 in 2007 related to facilities and equipment
under construction. Additionally there were letters of credit
relating to self-insurance programs and contract bids outstanding for $17.8
million as of December 31, 2009.
Cash
interest paid (net of capitalized interest) was approximately $2,192,000 in
2009, $5,232,000 in 2008 and $3,849,000 in 2007.
Effective
December 2008 the Company entered into an interest rate swap agreement that
effectively converted $50 million of our variable-rate debt to a fixed rate
basis, thereby hedging against the impact of potential interest rate changes on
future interest expense. The agreement terminates on September 8,
2011. Under this agreement the Company and the issuing lender settle
on a monthly basis for the difference between a fixed interest rate of 2.07% and
a comparable one month LIBOR rate.
46
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Note
7: Accumulated Other Comprehensive (Loss) Income
Accumulated
other comprehensive (loss) income consists of the following (in
thousands):
|
Pension
Adjustment
|
Unrealized
Gain
(Loss) On
Securities
|
Foreign
Currency Translation |
Net Gain
(Loss)
On
Cash Flow
Hedge |
Total
|
||||||||||||||||
|
Balance
at December 31, 2007
|
$ | (3,427 | ) | $ | 714 | $ | 172 | $ | — | $ | (2,541 | ) | ||||||||
|
Change
during 2008:
|
||||||||||||||||||||
|
Before-tax
amount
|
(9,532 | ) | (921 | ) | (513 | ) | (830 | ) | (11,796 | ) | ||||||||||
|
Tax
benefit
|
3,479 | 336 | 187 | 303 | 4,305 | |||||||||||||||
|
Total
activity in 2008
|
(6,053 | ) | (585 | ) | (326 | ) | (527 | ) | (7,491 | ) | ||||||||||
|
Balance
at December 31, 2008
|
$ | (9,480 | ) | $ | 129 | $ | (154 | ) | $ | (527 | ) | $ | (10,032 | ) | ||||||
|
Change
during 2009:
|
||||||||||||||||||||
|
Before-tax
amount
|
1,413 | 143 | 530 | 11 | 2,097 | |||||||||||||||
|
Tax
expense
|
(516 | ) | (52 | ) | (299 | ) | (4 | ) | (871 | ) | ||||||||||
|
Total
activity in 2009
|
897 | 91 | 231 | 7 | 1,226 | |||||||||||||||
|
Balance
at December 31, 2009
|
$ | (8,583 | ) | $ | 220 | $ | 77 | $ | (520 | ) | $ | (8,806 | ) | |||||||
47
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Note
8: 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:
|
1.
|
Level
1 – Quoted market prices in active markets for identical assets or
liabilities.
|
|
2.
|
Level 2 –
Quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
|
|
3.
|
Level
3 – Unobservable inputs developed using the Company’s estimates and
assumptions, which reflect those that market participants would
use.
|
The
following table summarizes the valuation of financial instruments measured at
fair value on a recurring basis on the balance sheet as of December 31, 2009 and
2008:
|
Fair
Value Measurements at December 31, 2009 with:
|
||||||||||||
|
(in
thousands)
|
Quoted
prices in
active markets for identical assets |
Significant
other
observable inputs |
Significant
unobservable inputs |
|||||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||
|
Assets:
|
||||||||||||
|
Trading
securities
|
$ | - | $ | 6,905 | $ | - | ||||||
|
Available-for-sale
securities
|
653 | - | - | |||||||||
|
Liabilities:
|
||||||||||||
|
Interest
rate swap
|
$ | - | $ | 820 | $ | - | ||||||
|
Fair
Value Measurements at December 31, 2008 with:
|
||||||||||||
|
(in
thousands)
|
Quoted
prices in
active markets for identical assets |
Significant
other
observable inputs |
Significant
unobservable inputs |
|||||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||
|
Assets:
|
||||||||||||
|
Trading
securities
|
$ | 4,074 | $ | - | $ | - | ||||||
|
Available-for-sale
securities
|
511 | - | - | |||||||||
|
Liabilities:
|
||||||||||||
|
Interest
rate swap
|
$ | - | $ | 830 | $ | - | ||||||
The
Company determines the fair value of the marketable securities that are
available-for-sale 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. During fiscal year 2009, significant observable inputs
in addition to quoted market prices were used to value trading securities. As a
result, the Company classified these investments as using level 2
inputs.
At
December 31, 2009 and 2008, there was $90,300,000 and $174,450,000 outstanding
under our revolving credit agreement. The fair value of these
borrowings was $88,043,000 in 2009 and $174,450,000 in 2008. The fair
value of these borrowings was based on quotes from the lender (level 2
inputs). The borrowings under our revolving credit agreement bear
interest at the variable rate described in Note 6. We are subject to interest
rate risk on the variable component of the interest rate. Our risk
management objective is to lock in the interest cash outflows on a portion of
our debt. As a result, as described in Note 6, we entered into an
interest rate swap agreement effectively converting a portion of the outstanding
borrowings under the revolving credit agreement to a fixed-rate, thereby hedging
against the impact of potential interest rate changes on future interest
expense. At December 31, 2009 the interest rate swap had a negative
fair value of $820,000, which is recorded in other long-term
liabilities. The fair value of the interest rate swap was based on
quotes from the issuer of the swap and represents the estimated amounts that we
would expect to pay to terminate the swap.
48
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
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 or not it will elect this option for financial instruments it may
acquire in the future.
Note
9: Commitments and Contingencies
Lease Commitments - Minimum
annual rentals, principally for noncancelable real estate and equipment leases
with terms in excess of one year, in effect at December 31, 2009, are summarized
in the following table:
|
(in
thousands)
|
||||
|
2010
|
$ | 3,671 | ||
|
2011
|
3,172 | |||
|
2012
|
2,146 | |||
|
2013
|
1,554 | |||
|
2014
|
950 | |||
|
Thereafter
|
812 | |||
|
Total
rental commitments
|
$ | 12,305 | ||
Total
rental expense, including short-term rentals, charged to operations was
approximately $10,787,000 in 2009, $9,109,000 in 2008 and $7,116,000 in
2007.
Income Taxes - The amount of
income taxes the Company pays is subject to ongoing audits by federal and state
tax authorities, which often result in proposed assessments. Other
long-term liabilities include $30,000 as of December 31, 2009 and $11,000 as of
December 31, 2008, that represents the Company’s estimated statute for the
probable assessments payable.
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 that cannot be currently estimated.
Litigation - RPC is a party
to various routine legal proceedings primarily involving commercial claims,
workers’ compensation claims and claims for personal injury. RPC insures against
these risks to the extent deemed prudent by its management, but no assurance can
be given that the nature and amount of such insurance will, in every case, fully
indemnify RPC against liabilities arising out of pending and future legal
proceedings related to its business activities. While the outcome of these
lawsuits, legal proceedings and claims cannot be predicted with certainty,
management, after consultation with legal counsel, believes that the outcome of
all such proceedings, even if determined adversely, would not have a material
adverse effect on the Company’s business or financial condition.
Note
10: Employee Benefit Plans
Defined
Benefit Pension Plan
The
Company’s Retirement Income Plan, a trusteed defined benefit pension plan,
provides monthly benefits upon retirement at age 65 to substantially all
employees with at least one year of service prior to 2002. As of
February 28, 2001, the plan became a multiple employer plan, with Marine
Products Corporation as an adopting employer.
In
2002, the Company’s Board of Directors approved a resolution to cease all future
retirement benefit accruals under the Retirement Income Plan. In lieu thereof,
the Company began providing enhanced benefits in the form of cash contributions
for certain longer serviced employees that had not reached the normal retirement
age of 65 as of March 31, 2002. The contributions were discretionary and made
annually based on continued employment over a seven year period ending in 2008.
These discretionary contributions were made to either the SERP established by
the Company or to the 401(k) plan for each employee that was entitled to the
enhanced benefit. There was no expense related to the enhanced benefits for
2009. The expense related to enhanced benefits was $295,000 for 2008
and $315,000 for 2007.
49
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
The
Company permits selected highly compensated employees to defer a portion of
their compensation into the SERP. The SERP assets are marked to market and
totaled $6,905,000 as of December 31, 2009 and $4,073,000 as of December 31,
2008. The SERP assets are reported in other assets on the balance
sheet and changes related to the fair value of assets are recorded in the
consolidated statement of operations as part of other (expense) income, net.
Trading gains (losses) related to the SERP assets totaled $1,373,000 for 2009,
$(1,661,000) for 2008 and $73,000 for 2007. The SERP deferrals and
the contributions are recorded on the balance sheet in pension liabilities with
any change in the fair value of the liabilities recorded as compensation cost in
the statement of operations.
The
Company’s projected benefit obligation exceeds the fair value of the plan assets
under its pension plan by $7,258,000 and thus the plan was under-funded as of
December 31, 2009.
The
following table sets forth the funded status of the Retirement Income Plan and
the amounts recognized in RPC’s consolidated balance sheets:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Accumulated
Benefit Obligation at end of year
|
$ | 32,190 | $ | 29,203 | ||||
|
CHANGE
IN PROJECTED BENEFIT OBLIGATION:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 29,203 | $ | 30,149 | ||||
|
Service
cost
|
— | — | ||||||
|
Interest
cost
|
1,938 | 1,841 | ||||||
|
Amendments
|
— | — | ||||||
|
Actuarial
(gain) loss
|
2,706 | (1,239 | ) | |||||
|
Benefits
paid
|
(1,657 | ) | (1,548 | ) | ||||
|
Projected
benefit obligation at end of year
|
$ | 32,190 | $ | 29,203 | ||||
|
CHANGE
IN PLAN ASSETS:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 22,488 | $ | 32,548 | ||||
|
Actual
return on plan assets
|
4,101 | (8,512 | ) | |||||
|
Employer
contribution
|
— | — | ||||||
|
Benefits
paid
|
(1,657 | ) | (1,548 | ) | ||||
|
Fair
value of plan assets at end of year
|
24,932 | 22,488 | ||||||
|
Funded
status at end of year
|
$ | (7,258 | ) | $ | (6,715 | ) | ||
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
AMOUNTS
RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF:
|
||||||||
|
Noncurrent
assets
|
$ | — | $ | — | ||||
|
Current
liabilities
|
— | — | ||||||
|
Noncurrent
liabilities
|
(7,258 | ) | (6,715 | ) | ||||
| $ | (7,258 | ) | $ | (6,715 | ) | |||
50
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
AMOUNTS
(PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
CONSIST OF:
|
|
|||||||
|
Net
loss (gain)
|
$ | 13,517 | $ | 14,928 | ||||
|
Prior
service cost (credit)
|
— | — | ||||||
|
Net
transition obligation (asset)
|
— | — | ||||||
| $ | 13,517 | $ | 14,928 | |||||
The
accumulated benefit obligation for the Retirement Income Plan at December 31,
2009 and 2008 has been disclosed above. The Company uses a December
31 measurement date for this qualified plan.
Amounts
recognized in the consolidated balance sheets consist of:
|
December
31,
|
2009
|
2008
|
||||||
|
(in
thousands)
|
||||||||
|
Funded
status
|
$ | (7,258 | ) | $ | (6,715 | ) | ||
|
SERP
employer contributions/deferrals
|
(7,389 | ) | (4,462 | ) | ||||
|
Long-term
pension liabilities
|
$ | (14,647 | ) | $ | (11,177 | ) | ||
RPC’s
funding policy is to contribute to the defined benefit pension plan the amount
required, if any, under the Employee Retirement Income Security Act of 1974. RPC
made no contributions in 2009 or in 2008.
The
components of net periodic benefit cost are summarized as follows:
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Service
cost for benefits earned during the period
|
$ | — | $ | — | $ | — | ||||||
|
Interest
cost on projected benefit obligation
|
1,938 | 1,841 | 1,759 | |||||||||
|
Expected
return on plan assets
|
(1,521 | ) | (2,543 | ) | (2,321 | ) | ||||||
|
Amortization
of net loss
|
1,538 | 285 | 860 | |||||||||
|
Net
periodic benefit plan cost (credit)
|
$ | 1,955 | $ | (417 | ) | $ | 298 | |||||
The
Company recognized pre-tax (increases) decreases to the funded status in
comprehensive loss of $(1,413,000) in 2009, $9,532,000 in 2008 and $(3,992,000)
in 2007. There were no previously unrecognized prior service costs as
of December 31, 2009, 2008 and 2007. The pre-tax amounts recognized
in comprehensive loss for the years ended December 31, 2009, 2008 and 2007 are
summarized as follows:
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
loss (gain)
|
$ | 125 | $ | 9,817 | $ | (3,132 | ) | |||||
|
Amortization
of net (loss) gain
|
(1,538 | ) | (285 | ) | (860 | ) | ||||||
|
Net
transition obligation (asset)
|
— | — | — | |||||||||
|
Amount
recognized in other comprehensive loss
|
$ | (1,413 | ) | $ | 9,532 | $ | (3,992 | ) | ||||
51
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
The
amounts in accumulated other comprehensive loss expected to be recognized as
components of net periodic benefit cost in 2010 are as follows:
|
(in
thousands)
|
2010
|
|||
|
Amortization
of net loss (gain)
|
$ | 388 | ||
|
Prior
service cost (credit)
|
— | |||
|
Net
transition obligation (asset)
|
— | |||
|
Estimated
net periodic benefit plan cost
|
$ | 388 | ||
The
weighted average assumptions as of December 31 used to determine the projected
benefit obligation and net benefit cost were as follows:
|
December
31,
|
2009
|
2008
|
2007
|
|||||||||
|
Projected Benefit
Obligation:
|
||||||||||||
|
Discount
rate
|
6.00 | % | 6.84 | % | 6.25 | % | ||||||
|
Rate
of compensation increase
|
N/A | N/A | N/A | |||||||||
|
Net
Benefit Cost:
|
||||||||||||
|
Discount
rate
|
6.84 | % | 6.25 | % | 5.50 | % | ||||||
|
Expected
return on plan assets
|
7.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate
of compensation increase
|
N/A | N/A | N/A | |||||||||
The
Company’s expected return on assets assumption is derived from a detailed
periodic assessment conducted by its management and its investment adviser. It
includes a review of anticipated future long-term performance of individual
asset classes and consideration of the appropriate asset allocation strategy
given the anticipated requirements of the plan to determine the average rate of
earnings expected on the funds invested to provide for the pension plan
benefits. While the study gives appropriate consideration to recent fund
performance and historical returns, the rate of return assumption is derived
primarily from a long-term, prospective view. Based on its recent assessment,
the Company has concluded that its expected long-term return assumption of seven
percent is reasonable.
The
Plan’s weighted average asset allocation at December 31, 2009 and 2008 by asset
category along with the target allocation for 2010 are as follows:
|
Asset
Category
|
Target
Allocation
for
2010
|
Percentage
of
Plan
Assets
as
of
December
31,
2009
|
Percentage
of
Plan
Assets
as
of
December
31,
2008
|
|||||||||
|
Debt
Securities – Core Fixed Income
|
27.0 | % | 26.2 | % | 14.0 | % | ||||||
|
Tactical
– Fund of Equity and Debt Securities
|
5.0 | % | 5.2 | % | 4.3 | % | ||||||
|
Domestic
Equity Securities
|
32.5 | % | 25.0 | % | 22.7 | % | ||||||
|
Global
Equity Securities
|
2.5 | % | 4.4 | % | 3.6 | % | ||||||
|
International
Equity Securities
|
8.0 | % | 13.8 | % | 11.2 | % | ||||||
|
Real
Estate
|
5.0 | % | 4.2 | % | 7.7 | % | ||||||
|
Other
|
20.0 | % | 21.2 | % | 36.5 | % | ||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
The
Company’s overall investment strategy is to achieve a mix of approximately 70
percent of investments for long-term growth and 30 percent for near-term benefit
payments, with a wide diversification of asset types, fund strategies and fund
managers. Equity securities primarily include investments
in large-cap and mid-cap companies. Fixed-income securities include
corporate bonds of companies in diversified securities, mortgage-backed
securities, and U.S. Treasuries. Other types of investments include
hedge funds and private equity funds that follow several different investment
strategies. For each of the asset categories in the pension plan, the investment
strategy is identical – maximize the long-term rate of return on plan assets
with an acceptable level of risk in order to minimize the cost of providing
pension benefits. The investment policy establishes a target allocation
for each asset class which is rebalanced as required.
52
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Some of
our assets, primarily our private equity, real estate and hedge funds, do not
have readily determinable market values given the specific investment structures
involved and the nature of the underlying investments. For the December 31,
2009 plan asset reporting, publicly traded asset pricing was used where
possible. For assets without readily determinable values, estimates were derived
from investment manager discussions focusing on underlying fundamentals and
significant events.
The
following table presents our plan assets using the fair value hierarchy as of
December 31, 2009. The fair value hierarchy has three levels based on the
reliability of the inputs used to determine fair value. See Note 8
for a brief description of the three levels under the fair value
hierarchy.
|
Investments
(in thousands)
|
Total
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||||||
|
Cash
and Cash Equivalents
|
(1) | $ | 943 | $ | 943 | $ | - | $ | - | |||||||||||
|
Fixed
Income Securities
|
(2) | 6,529 | - | 6,529 | - | |||||||||||||||
|
Domestic
Equity Securities
|
6,237 | 6,237 | - | - | ||||||||||||||||
|
Global
Equity Securities
|
(3) | 1,085 | - | 1,085 | - | |||||||||||||||
|
International
Equity Securities
|
(3) | 3,440 | 1,475 | 1,965 | - | |||||||||||||||
|
Real
Estate
|
(4) | 1,039 | - | - | 1,039 | |||||||||||||||
|
Hedge
Funds
|
(5) | 5,659 | - | 1,302 | 4,357 | |||||||||||||||
| $ | 24,932 | $ | 8,655 | $ | 10,881 | $ | 5,396 | |||||||||||||
|
(1)
|
Cash
and cash equivalents, which are used to pay benefits and plan
administrative expenses, are held in Rule 2a-7 money market
funds.
|
|
(2)
|
Fixed
income securities are primarily valued using a market approach with inputs
that include broker quotes, benchmark yields, base spreads and reported
trades.
|
|
(3)
|
Global
equity securities and certain international securities are valued using a
market approach based on the quoted market prices of similar instruments
in their respective markets.
|
|
(4)
|
Real
estate fund values are primarily reported by the fund manager and are
based on valuation of the underlying investments, which include inputs
such as cost, discounted future cash flows, independent appraisals and
market based comparable data.
|
|
(5)
|
Hedge
funds consist of fund-of-fund LLC or commingled fund structures. The LLCs
are primarily valued based on Net Asset Values [NAV] calculated by the
fund and are not publicly available. Liquidity for the LLCs is monthly and
is subject to liquidity of the underlying funds. The commingled fund NAV
is calculated by the manager on a daily basis and has monthly
liquidity.
|
The
following table presents a reconciliation of Level 3 assets held during the year
ended December 31, 2009:
|
Investments
(in thousands)
|
Balance
at
December 31, 2008 |
Net
Realized
and Unrealized Gains/(Losses) |
Net
Purchases,
Issuances and Settlements |
Net
Transfers In to (Out of) Level 3 |
Balance
at
December 31, 2009 |
|||||||||||||||
|
Real
Estate
|
$ | 1,723 | $ | (360 | ) | $ | (324 | ) | $ | - | $ | 1,039 | ||||||||
|
Hedge
Funds
|
4,114 | 243 | - | - | 4,357 | |||||||||||||||
|
|
$ | 5,837 | $ | (117 | ) | $ | (324 | ) | $ | - | $ | 5,396 | ||||||||
The
Company does not currently expect to make a significant contribution to the
Retirement Income Plan in 2010 and does not expect to receive a refund in
2010.
53
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
The
Company estimates that the future benefits payable for the Retirement Income
Plan over the next ten years are as follows:
|
(in
thousands)
|
|||||
|
2010
|
$ | 1,658 | |||
|
2011
|
1,683 | ||||
|
2012
|
1,771 | ||||
|
2013
|
1,867 | ||||
|
2014
|
1,946 | ||||
|
2015-2019
|
11,060 | ||||
401(k)
Plan
RPC
sponsors a defined contribution 401(k) plan that is available to substantially
all full-time employees with more than three months of service. This plan allows
employees to make tax-deferred contributions from one to 25 percent of their
annual compensation, not exceeding the permissible contribution imposed by the
Internal Revenue Code. RPC matches 50 percent of each employee’s contributions
that do not exceed six percent of the employee’s compensation, as defined by the
plan. Employees vest in the RPC contributions after three years of service. The
charges to expense for the Company’s contributions to the 401(k) plan were
approximately $2,621,000 in 2009, $2,814,000 in 2008 and $2,300,000 in
2007.
Stock
Incentive Plans
The
Company has issued stock options and restricted stock to employees under two 10
year stock incentive plans that were approved by stockholders in 1994 and
2004. The 1994 plan expired in 2004. The Company reserved
5,062,500 shares of common stock under the 2004 Plan which expires in
2014. This plan provides for the issuance of various forms of stock
incentives, including, among others, incentive and non-qualified stock options
and restricted stock which are discussed in detail below. As of
December 31, 2009, there were approximately 2,200,000 shares available for
grants. The Company issues new shares from its authorized but
unissued share pool.
The
Company recognizes compensation expense for the unvested portion of awards
outstanding over the remainder of the service period. The compensation cost
recorded for these awards is based on their fair value at grant date less the
cost of estimated forfeitures. Forfeitures are estimated at the time of grant
and revised, if necessary, in subsequent periods to reflect actual forfeitures.
Cash flows related to share-based payment awards to employees that result in tax
benefits in excess of recognized cumulative compensation cost (excess tax
benefits) are classified as financing activity in the accompanying consolidated
statements of cash flows.
Pre-tax
stock-based employee compensation expense was $4,440,000 in 2009 ($2,819,000
after tax), $3,732,000 in 2008 ($2,382,000 after tax) and $3,189,000 in 2007
($2,167,000 after tax).
Stock
Options
Stock
options are granted at an exercise price equal to the fair market value of the
Company’s common stock at the date of grant except for grants of incentive stock
options to owners of greater than 10 percent of the Company’s voting securities
which must be made at 110 percent of the fair market value of the Company’s
common stock. Options generally vest ratably over a period of five
years and expire in 10 years, except incentive stock options granted to owners
of greater than 10 percent of the Company’s voting securities, which expire in
five years.
The
Company estimates the fair value of stock options as of the date of grant using
the Black-Scholes option pricing model. The Company has not granted
stock options to employees since 2003.
54
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Transactions
involving RPC’s stock options for the year ended December 31, 2009 were as
follows:
|
Shares
|
Weighted
Average
Exercise Price |
Weighted
Average Remaining Contractual Life |
Aggregate
Intrinsic Value
|
|||||
|
Outstanding
at January 1, 2009
|
1,108,022
|
|
$ 3.12
|
2.68
years
|
||||
|
Granted
|
-
|
-
|
N/A
|
|||||
|
Exercised
|
(238,579)
|
2.89
|
N/A
|
|||||
|
Forfeited
|
(8,715)
|
3.76
|
N/A
|
|||||
|
Expired
|
-
|
-
|
N/A
|
|||||
|
Outstanding
at December 31, 2009
|
860,728
|
|
$ 3.39
|
2.25
years
|
$
|
6,034,000
|
||
|
Exercisable
at December 31, 2009
|
860,728
|
|
$ 3.39
|
2.25
years
|
$
|
6,034,000
|
||
The total
intrinsic value of stock options exercised was approximately $1,519,000 during
2009, $6,214,000 during 2008 and $7,758,000 during 2007. Recognized
excess tax benefits associated with the exercise of stock options were
approximately $353,000 during 2009 and $344,000 during 2008. There
were no recognized excess tax benefits associated with the exercise of stock
options during 2007, since all of the stock options exercised in 2007 were
incentive stock options which do not generate tax deductions for the
Company.
Restricted
Stock
The
Company has granted employees two forms of restricted stock: time lapse
restricted and performance restricted.
Time
lapse restricted shares
Time
lapse restricted shares vest after a stipulated number of years from the grant
date, depending on the terms of the issue. Time lapse restricted shares issued
in years 2003 and prior vest after ten years. Time lapse restricted
shares issued subsequent to fiscal year 2003 vest in 20 percent increments
annually starting with the second anniversary of the grant, over six years from
the date of grant. Grantees receive dividends declared and retain
voting rights for the granted shares.
Performance
restricted shares
The
performance restricted shares are granted, but not earned and issued until
certain five-year tiered performance criteria are met. The performance criteria
are predetermined market prices of RPC’s common stock. On the date the common
stock appreciates to each level (determination date), 20 percent of performance
shares are earned. Once earned, the performance shares vest five years from the
determination date. After the determination date, the grantee will receive
dividends declared and voting rights to the shares. The Company has
not granted performance restricted shares since 1999.
The
agreements under which the restricted stock is issued provide that shares
awarded may not be sold or otherwise transferred until restrictions established
under the stock plans have lapsed. Upon termination of employment from RPC or,
in certain cases, termination of employment from Marine Products Corporation or
Chaparral Boats, Inc., shares with restrictions must be returned to
RPC.
The
following is a summary of the changes in non-vested restricted shares for the
year ended December 31, 2009:
|
|
||||||||
| Shares |
Weighted
Average Grant-Date Fair Value |
|||||||
|
Non-vested
shares at January 1, 2009
|
1,762,478 | $ | 11.34 | |||||
|
Granted
|
722,000 | 8.55 | ||||||
|
Vested
|
(453,200 | ) | 8.87 | |||||
|
Forfeited
|
(49,162 | ) | 12.03 | |||||
|
Non-vested
shares at December 31, 2009
|
1,982,116 | $ | 10.88 | |||||
The fair
value of restricted awards is based on the market price of the Company’s stock
on the date of the grant and is amortized to compensation expense on a
straight-line basis over the requisite service period. The weighted
average grant date fair value of these restricted stock awards was $8.55, $9.81
and $17.61 for the years ended December 31, 2009, 2008 and 2007. The
total fair value of shares vested was approximately $3,976,000 during 2009,
$3,675,000 during 2008 and $4,903,000 during 2007. The tax benefit
for compensation tax deductions in excess of compensation expense was credited
to capital in excess of par value aggregating $1,068,000 for 2009, $502,000 for
2008 and $1,128,000 for 2007. The excess tax deductions are
classified as financing activity in the accompanying consolidated statements of
cash flows.
55
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Other
Information
As of
December 31, 2009, total unrecognized compensation cost related to non-vested
restricted shares was approximately $18,754,000 which is expected to be
recognized over a weighted-average period of 3.7 years. As of
December 31, 2009, there was no unrecognized compensation cost related to
non-vested stock options.
The
Company received cash from options exercised of $122,000 during 2009, $347,000
during 2008 and $636,000 during 2007. These cash receipts are classified as
financing activity in the accompanying consolidated statements of cash flows.
The fair value of shares tendered to exercise employee stock options totaled
approximately $389,000 during 2009, $1,911,000 during 2008 and $1,123,000 during
2007 and have been excluded from the consolidated statements of cash
flows.
Note
11: Related Party Transactions
Related
Party Transactions
Marine
Products Corporation
Effective
February 28, 2001, the Company spun-off the business conducted through Chaparral
Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing
segment. RPC accomplished the spin-off by contributing 100 percent of
the issued and outstanding stock of Chaparral to Marine Products Corporation (a
Delaware corporation) (“Marine Products”), a newly formed wholly-owned
subsidiary of RPC, and then distributing the common stock of Marine Products to
RPC stockholders. In conjunction with the spin-off, RPC and Marine
Products entered into various agreements that define the companies’
relationship.
In
accordance with a Transition Support Services agreement, which may be terminated
by either party, RPC provides certain administrative services, including
financial reporting and income tax administration, acquisition assistance, etc.,
to Marine Products. Charges from the Company (or from corporations
that are subsidiaries of the Company) for such services aggregated approximately
$713,000 in 2009, $842,000 in 2008 and $957,000 in 2007. The Company’s receivable due from Marine Products for
these services as of December 31, 2009 and 2008 was approximately $65,000 and
$70,000. The Company’s directors are also directors of Marine
Products and all of the executive officers are employees of both the Company and
Marine Products.
Other
The
Company periodically purchases in the ordinary course of business products or
services from suppliers, who are owned by significant officers or stockholders,
or affiliated with the directors of RPC. The total amounts paid to these
affiliated parties were approximately $409,000 in 2009, $393,000 in 2008 and
$1,035,000 in 2007.
RPC
receives certain administrative services and rents office space from Rollins,
Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is
otherwise affiliated with RPC). The service agreements between
Rollins, Inc. and the Company provide for the provision of services on a cost
reimbursement basis and are terminable on six months notice. The
services covered by these agreements include office space, administration of
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 totaled $87,000 in 2009, $90,000 in 2008 and $72,000 in
2007.
A group
that includes the Company’s Chairman of the Board, R. Randall Rollins and his
brother Gary W. Rollins, who is also a director of the Company, and certain
companies under their control, controls in excess of fifty percent of the
Company’s voting power.
Note
12: Business Segment Information
RPC’s
service lines have been aggregated into two reportable oil and gas services
segments — Technical Services and Support Services — because of the similarities
between the financial performance and approach to managing the service lines
within each of the segments, as well as the economic and business conditions
impacting their business activity levels. Corporate includes selected
administrative costs incurred by the Company.
56
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
Technical
Services include RPC’s oil and gas service lines that utilize people and
equipment to perform value-added completion, production and maintenance services
directly to a customer’s well. These services include pressure pumping services,
coiled tubing, snubbing, nitrogen pumping, well control consulting and
firefighting, downhole tools, wireline, and fluid pumping services. These
Technical Services are primarily used in the completion, production and
maintenance of oil and gas wells. The principal markets for this segment include
the United States, including the Gulf of Mexico, the mid-continent, southwest,
Rocky Mountain and Appalachian regions, and international locations including
primarily Africa, Canada, China, Latin America, the Middle East and New Zealand.
Customers include major multi-national and independent oil and gas producers,
and selected nationally-owned oil companies.
Support
Services include RPC’s oil and gas service lines that primarily provide
equipment for customer use or services to assist customer operations. The
equipment and services include drill pipe and related tools, pipe handling,
inspection and storage services, and oilfield training services. The demand for
these services tends to be influenced primarily by customer drilling-related
activity levels. The principal markets for this segment include the United
States, including the Gulf of Mexico, the mid-continent and Appalachian regions,
and international locations, including primarily Canada, Latin America, and the
Middle East. Customers include domestic operations of major multi-national and
independent oil and gas producers, and selected nationally-owned oil
companies.
The
accounting policies of the reportable segments are the same as those described
in Note 1 to these consolidated financial statements. RPC evaluates the
performance of its segments based on revenues, operating profits and return on
invested capital. Gains or losses on disposition of assets are
reviewed by the Company’s chief decision maker 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.
Summarized
financial information concerning RPC’s reportable segments for the years ended
December 31, 2009, 2008 and 2007 are shown in the following table.
|
Technical
Services
|
Support
Services
|
Corporate
|
Gain
on
disposition of assets, net |
Total
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Revenues
|
$ | 513,289 | $ | 74,574 | $ | — | $ | — | $ | 587,863 | ||||||||||
|
Operating
profit (loss)
|
(20,328 | ) | (1,636 | ) | (12,231 | ) | 1,143 | (33,052 | ) | |||||||||||
|
Capital
expenditures
|
48,175 | 19,220 | 435 | — | 67,830 | |||||||||||||||
|
Depreciation
and amortization
|
101,780 | 28,085 | 715 | — | 130,580 | |||||||||||||||
|
Identifiable
assets
|
453,133 | 144,905 | 51,005 | — | 649,043 | |||||||||||||||
|
2008
|
||||||||||||||||||||
|
Revenues
|
$ | 745,991 | $ | 130,986 | $ | — | $ | — | $ | 876,977 | ||||||||||
|
Operating
profit (loss)
|
110,648 | 36,515 | (9,360 | ) | 6,367 | 144,170 | ||||||||||||||
|
Capital
expenditures
|
127,054 | 42,238 | 1,026 | — | 170,318 | |||||||||||||||
|
Depreciation
and amortization
|
92,738 | 24,798 | 867 | — | 118,403 | |||||||||||||||
|
Identifiable
assets
|
564,708 | 181,991 | 46,762 | — | 793,461 | |||||||||||||||
|
2007
|
||||||||||||||||||||
|
Revenues
|
$ | 574,723 | $ | 115,503 | $ | — | $ | — | $ | 690,226 | ||||||||||
|
Operating
profit (loss)
|
116,493 | 29,955 | (10,703 | ) | 6,293 | 142,038 | ||||||||||||||
|
Capital
expenditures
|
211,389 | 35,138 | 2,231 | — | 248,758 | |||||||||||||||
|
Depreciation
and amortization
|
59,436 | 18,106 | 964 | — | 78,506 | |||||||||||||||
|
Identifiable
assets
|
480,840 | 168,027 | 52,148 | — | 701,015 | |||||||||||||||
57
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RPC,
Inc. and Subsidiaries
Years
ended December 31, 2009, 2008 and 2007
The
following summarizes selected information between the United States and all
international locations combined for the years ended December 31, 2009, 2008 and
2007. The revenues are presented based on the location of the use of the product
or service. Assets related to international operations are less than 10 percent
of RPC’s consolidated assets, and therefore are not presented.
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
United
States Revenues
|
$ | 543,026 | $ | 846,202 | $ | 649,116 | ||||||
|
International
Revenues
|
44,837 | 30,775 | 41,110 | |||||||||
| $ | 587,863 | $ | 876,977 | $ | 690,226 | |||||||
58
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and Procedures
Evaluation of disclosure controls
and procedures — The Company maintains disclosure controls and procedures
that are designed to ensure that information required to be disclosed in its
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Commission’s rules and forms, and that such
information is accumulated and communicated to its management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
As of the
end of the period covered by this report, December 31, 2009 (the “Evaluation
Date”), the Company carried out an evaluation, under the supervision and with
the participation of its management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures. Based upon this evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective at a reasonable
assurance level as of the Evaluation Date.
Management’s report on internal
control over financial reporting — Management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Management’s report on internal control over
financial reporting is included on page 29
of this report. Grant Thornton LLP, the Company’s independent
registered public accounting firm, has audited the effectiveness of internal
control as of December 31, 2009 and issued a report thereon which is included on
page 30 of this report.
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.
Item
9B. Other Information
None.
59
PART
III
Item
10. Directors, Executive Officers and Corporate Governance
Information
concerning directors and executive officers will be included in the RPC Proxy
Statement for its 2010 Annual Meeting of Stockholders, in the section titled
“Election of Directors.” This information is incorporated herein by reference.
Information about executive officers is contained on page 13
of this document.
Audit
Committee and Audit Committee Financial Expert
Information
concerning the Audit Committee of the Company and the Audit Committee Financial
Expert(s) will be included in the RPC Proxy Statement for its 2010 Annual
Meeting of Stockholders, in the section titled “Corporate Governance and Board
of Directors, Committees and Meetings – Audit Committee.” This information is
incorporated herein by reference.
Code
of Ethics
RPC, Inc.
has a Code of Business Conduct that applies to all employees. In addition, the
Company has a Code of Business Conduct and Ethics for Directors and Executive
Officers and Related Party Transaction Policy. Both of these documents are
available on the Company’s website at www.rpc.net. Copies are
available at no charge by writing to Attention: Human Resources, RPC Inc., 2801
Buford Highway, Suite 520, N.E., Atlanta, GA 30329.
RPC, Inc.
intends to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of its code that relates
to any elements of the code of ethics definition enumerated in SEC rules by
posting such information on its internet website, the address of which is
provided above.
Section
16(a) Beneficial Ownership Reporting Compliance
Information
regarding compliance with Section 16(a) of the Exchange Act will be included
under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s
Proxy Statement for its 2010 Annual Meeting of Stockholders, which is
incorporated herein by reference.
Item
11. Executive Compensation
Information
concerning director and executive compensation will be included in the RPC Proxy
Statement for its 2010 Annual Meeting of Stockholders, in the sections titled
“Compensation Committee Interlocks and Insider Participation,” “Director
Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee
Report” and “Executive Compensation.” This information is incorporated herein by
reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information
concerning security ownership will be included in the RPC Proxy Statement for
its 2010 Annual Meeting of Stockholders, in the sections “Capital Stock” and
“Election of Directors.” This information is incorporated herein by
reference.
60
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth certain information regarding equity compensation
plans as of December 31, 2009.
|
Plan
Category
|
(A)
Number
of Securities
To Be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
(B)
Weighted
Average Exercise
Price of Outstanding Options, Warrants and Rights |
(C)
Number
of Securities
Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A)) |
|||||||||
|
Equity
compensation plans approved by securityholders
|
860,728 | $ | 3.39 | 2,226,824 | (1) | |||||||
|
Equity
compensation plans not approved by securityholders
|
- | - | - | |||||||||
|
Total
|
860,728 | $ | 3.39 | 2,226,824 | ||||||||
|
(1)
|
All
of the securities can be issued in the form of restricted stock or other
stock awards.
|
See Note
10 to the Consolidated Financial Statements for information regarding the
material terms of the equity compensation plans.
Item
13. Certain Relationships and Related Party Transactions and Director
Independence
Information
concerning certain relationships and related party transactions will be included
in the RPC Proxy Statement for its 2010 Annual Meeting of Stockholders, in the
sections titled, “Certain Relationships and Related Party
Transactions.” Information regarding director independence will be
included in the RPC Proxy Statement for its 2010 Annual Meeting of Stockholders
in the section titled “Director Independence and NYSE
Requirements.” This information is incorporated herein by
reference.
Item
14. Principal Accounting Fees and Services
Information
regarding principal accountant fees and services will be included in the section
titled “Independent Registered Public Accountants” in the RPC Proxy Statement
for its 2010 Annual Meeting of Stockholders. This information is incorporated
herein by reference.
61
PART
IV
Item
15. Exhibits and Financial Statement Schedules
Consolidated Financial Statements,
Financial Statement Schedule and Exhibits
|
1.
|
Consolidated
financial statements listed in the accompanying Index to Consolidated
Financial Statements and Schedule are filed as part of this
report.
|
||
|
2.
|
The
financial statement schedule listed in the accompanying Index to
Consolidated Financial Statements and Schedule is filed as part of this
report.
|
||
|
3.
|
Exhibits
listed in the accompanying Index to Exhibits are filed as part of this
report. The following such exhibits are management contracts or
compensatory plans or arrangements:
|
||
|
10.1
|
2004
Stock Incentive Plan (incorporated herein by reference to Appendix B to
the Registrant’s definitive Proxy Statement filed on March 24,
2004).
|
||
|
10.6
|
Form
of stock option grant agreement (incorporated herein by reference to
Exhibit 10.1 to Form 10-Q filed on November 2, 2004).
|
||
|
10.7
|
Form
of time lapse restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.2 to Form 10-Q filed on November 2,
2004).
|
||
|
10.8
|
Form
of performance restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.3 to Form 10-Q filed on November 2,
2004).
|
||
|
10.9
|
Supplemental
Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the
Form 10-K filed on March 16, 2005).
|
||
|
10.10
|
First
Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K
filed on March 2, 2007).
|
||
|
10.11
|
Performance-Based
Incentive Cash Compensation Plan (incorporated by reference to Exhibit
10.1 to the Form 8-K filed April 28, 2006).
|
||
|
10.12
|
Summary
of “At-Will” of Compensation Arrangements with Executive Officers as of
February 28, 2008 (incorporated by reference to Exhibit 10.16 to the Form
10-K filed on March 4, 2008).
|
||
|
10.13
|
Summary
of Compensation Arrangements with Non-Employee Directors as of February
28, 2008 (incorporated by reference to Exhibit 10.17 to the Form 10-K
filed on March 4, 2008).
|
||
|
10.16
|
Summary
of “At-Will” of Compensation Arrangements with Executive Officers as of
February 28, 2009 (incorporated by reference to Exhibit 10.18 to the Form
10-K filed on March 5, 2009).
|
||
|
10.17
|
Summary
of Compensation Arrangements with Executive
Officers.
|
||
62
Exhibits
(inclusive of item 3 above):
|
Exhibit
Number
|
Description
|
|
|
3.1A
|
Restated
certificate of incorporation of RPC, Inc. (incorporated herein by
reference to exhibit 3.1 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
|
|
|
3.1B
|
Certificate
of Amendment of Certificate of Incorporation of RPC, Inc. (incorporated by
reference to Exhibit 3.1(B) to the Quarterly Report on Form 10-Q filed May
8, 2006).
|
|
|
3.2
|
Bylaws
of RPC, Inc. (incorporated herein by reference to Exhibit 3.1 to the Form
8-K filed on October 25, 2007).
|
|
|
4
|
Form
of Stock Certificate (incorporated herein by reference to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1998).
|
|
|
10.1
|
2004
Stock Incentive Plan (incorporated herein by reference to Appendix B to
the Registrant’s definitive Proxy Statement filed on March 24,
2004).
|
|
|
10.2
|
Agreement
Regarding Distribution and Plan of Reorganization, dated February 12,
2001, by and between RPC, Inc. and Marine Products Corporation
(incorporated herein by reference to Exhibit 10.2 to the Form 10-K filed
on February 13, 2001).
|
|
|
10.3
|
Employee
Benefits Agreement dated February 12, 2001, by and between RPC, Inc.,
Chaparral Boats, Inc. and Marine Products Corporation (incorporated herein
by reference to Exhibit 10.3 to the Form 10-K filed on February 13,
2001).
|
|
|
10.4
|
Transition
Support Services Agreement dated February 12, 2001 by and between RPC,
Inc. and Marine Products Corporation (incorporated herein by reference to
Exhibit 10.4 to the Form 10-K filed on February 13,
2001).
|
|
|
10.5
|
Tax
Sharing Agreement dated February 12, 2001, by and between RPC, Inc. and
Marine Products Corporation (incorporated herein by reference to Exhibit
10.5 to the Form 10-K filed on February 13, 2001).
|
|
|
10.6
|
Form
of stock option grant agreement (incorporated herein by reference to
Exhibit 10.1 to the Form 10-Q filed on November 2,
2004).
|
|
|
10.7
|
Form
of time lapse restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.2 to the Form 10-Q filed on November 2,
2004).
|
|
|
10.8
|
Form
of performance restricted stock grant agreement (incorporated herein by
reference to Exhibit 10.3 to the Form 10-Q filed on November 2,
2004).
|
|
|
10.9
|
Supplemental
Retirement Plan (incorporated herein by reference to Exhibit 10.11 to the
Form 10-K filed on March 16, 2005).
|
|
|
10.10
|
First
Amendment to 1994 Employee Stock Incentive Plan and 2004 Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.14 to the Form 10-K
filed on March 2, 2007).
|
|
|
10.11
|
Performance-Based
Incentive Cash Compensation Plan (incorporated by reference to Exhibit
10.1 to the Form 8-K filed April 28, 2006).
|
|
|
10.12
|
Summary
of “At-Will” of Compensation Arrangements with Executive Officers as of
February 28, 2008 (incorporated by reference to Exhibit 10.16 to the Form
10-K filed on March 4, 2008).
|
|
|
10.13
|
Summary
of Compensation Arrangements with Non-Employee Directors as of February
28, 2008 (incorporated by reference to Exhibit 10.17 to the Form 10-K
filed on March 4, 2008).
|
|
|
10.14
|
Revolving
Credit Agreement dated September 8, 2006 between RPC, Banc of America,
N.A., SunTrust Bank and certain other Lenders party thereto (incorporated
by reference to Exhibit 99.1 to the Form 8-K dated September 8,
2006).
|
|
|
10.15
|
Commitment
Increase Amendment to Revolving Credit Agreement dated as of June 9, 2008,
by and among the Company, the several banks and other financial
institutions from time to time party thereto and SunTrust Bank, in its
capacity as Administrative Agent (incorporated herein by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K dated June 9,
2008).
|
|
|
10.16
|
Summary
of “At-Will” of Compensation Arrangements with Executive Officers as of
February 28, 2009 (incorporated herein by reference to Exhibit 10.18 to
the Form 10-K filed on March 5, 2009).
|
|
|
10.17
|
Summary
of Compensation Arrangements with Executive Officers.
|
|
|
10.18
|
Second
Amendment to Revolving Credit Agreement dated as of September 2, 2009 by
and among the Company, the several banks and other financial institutions
from time to time party thereto and SunTrust Bank, in its capacity as
administrative agent (incorporated herein by reference to Exhibit 99.1 to
the Company’s Current Report on Form 8-K dated September 2,
2009).
|
|
|
21
|
Subsidiaries
of RPC (incorporated herein by reference to Exhibit 21 to the Form 10-K
filed on March 4, 2008)
|
|
|
23
|
Consent
of Grant Thornton LLP
|
|
|
24
|
Powers
of Attorney for Directors
|
|
|
31.1
|
Section
302 certification for Chief Executive Officer
|
|
|
31.2
|
Section
302 certification for Chief Financial Officer
|
|
|
32.1
|
Section
906 certifications for Chief Executive Officer and Chief Financial
Officer
|
63
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
RPC,
Inc.
/s/ Richard A. Hubbell
Richard
A. Hubbell
President
and Chief Executive Officer
(Principal
Executive Officer)
March 3,
2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
| /s/ Richard A. Hubbell | ||
|
Richard
A. Hubbell
|
President
and Chief Executive Officer
(Principal Executive Officer) |
March
3, 2010
|
| /s/ Ben M. Palmer | ||
|
Ben
M. Palmer
|
Chief
Financial Officer
(Principal Financial and Accounting Officer) |
March
3, 2010
|
The
Directors of RPC (listed below) executed a power of attorney, appointing Richard
A. Hubbell their attorney-in-fact, empowering him to sign this report on their
behalf.
|
R.
Randall Rollins, Director
|
|
|
Wilton
Looney, Director
|
|
|
Gary
W. Rollins, Director
|
|
|
Henry
B. Tippie, Director
|
|
|
James
B. Williams, Director
|
|
|
James
A. Lane, Jr., Director
|
|
|
Linda
H. Graham, Director
Bill J. Dismuke, Director Larry
L. Prince, Director
|
/s/ Richard A. Hubbell
|
Richard
A. Hubbell
|
|
Director
and as Attorney-in-fact
|
|
March
3, 2010
|
64
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE
The following documents are filed as
part of this report.
|
FINANCIAL
STATEMENTS AND REPORTS
|
PAGE
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
29
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
|
30
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
|
31
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
32
|
|
Consolidated
Statements of Operations for the three years ended December 31,
2009
|
33
|
|
Consolidated
Statements of Stockholders’ Equity for the three years ended December 31,
2009
|
34
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31,
2009
|
35
|
|
Notes
to Consolidated Financial Statements
|
36
- 58
|
|
SCHEDULE
|
|
|
Schedule
II — Valuation and Qualifying Accounts
|
65
|
Schedules
not listed above have been omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
|
For
the years ended December 31, 2009, 2008 and 2007 |
|||||||||||||||||
|
(in
thousands)
|
Balance
at
Beginning
of
Period
|
Charged
to
Costs
and
Expenses
|
Net
(Deductions)
Recoveries
|
Balance
at
End of
Period
|
|||||||||||||
|
Year
ended December 31, 2009
|
|||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 6,199 | $ | 660 | $ | (3,649 | ) | (1) | $ | 3,210 | |||||||
|
Deferred
tax asset valuation allowance
|
$ | 1,454 | $ | 96 | $ | — | (2) | $ | 1,550 | ||||||||
|
Year
ended December 31, 2008
|
|||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 5,217 | $ | (84 | ) | $ | 1,066 | (1) | $ | 6,199 | |||||||
|
Deferred
tax asset valuation allowance
|
$ | 1,503 | $ | — | $ | (49 | ) | (2) | $ | 1,454 | |||||||
|
Year
ended December 31, 2007
|
|||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 4,904 | $ | 3,119 | $ | (2,806 | ) | (1) | $ | 5,217 | |||||||
|
Deferred
tax asset valuation allowance
|
$ | 1,342 | $ | 161 | $ | 0 | (2) | $ | 1,503 | ||||||||
|
(1)
|
Deductions
in the allowance for doubtful accounts principally reflect the write-off
of previously reserved accounts net of
recoveries.
|
|
(2)
|
The
valuation allowance for deferred tax assets is increased or decreased each
year to reflect the state net operating losses that management believes
will be utilized before they expire. In 2009, the valuation allowance for
deferred tax assets was increased by $96. In 2008, the
valuation allowance for deferred tax assets was decreased by
$49. In 2007 the valuation allowance for deferred tax assets
was increased by $161.
|
65
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
Quarters
ended
|
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||||
|
(in
thousands except per share data)
|
||||||||||||||||
|
2009
|
||||||||||||||||
|
Revenues
|
$ | 176,271 | $ | 127,018 | $ | 132,159 | $ | 152,415 | ||||||||
|
Net
(loss) income
|
$ | 4,466 | $ | (11,624 | ) | $ | (10,385 | ) | $ | (5,202 | ) | |||||
|
Net
(loss) income per share — basic:(a)
|
$ | 0.05 | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.05 | ) | |||||
|
Net
(loss) income per share — diluted:(a)
|
$ | 0.05 | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.05 | ) | |||||
|
2008
|
||||||||||||||||
|
Revenues
|
$ | 197,227 | $ | 214,689 | $ | 237,217 | $ | 227,844 | ||||||||
|
Net
income
|
$ | 14,757 | $ | 22,458 | $ | 25,780 | $ | 20,408 | ||||||||
|
Net
income per share — basic:(a)
|
$ | 0.15 | $ | 0.23 | $ | 0.27 | $ | 0.21 | ||||||||
|
Net
income per share — diluted:(a)
|
$ | 0.15 | $ | 0.23 | $ | 0.26 | $ | 0.21 | ||||||||
| (a) | The sum of the (loss) income per share for the four quarters may differ from annual amounts due to the required method of computing the weighted average shares in interim periods. |
66