UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One) | |
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the fiscal year ended
Commission File No.
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Securities registered pursuant to Section 12(b) of the Act: | |||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |
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. ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted 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 such files).
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 ◻ | Non-accelerated filer ◻ | Smaller reporting company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of RPC, Inc. Common Stock held by non-affiliates on June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was $
RPC, Inc. had
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2021 Annual Meeting of Stockholders of RPC, Inc. are incorporated by reference into Part III, Items 10 through 14 of this report.
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 equipment and services and other events and conditions that may influence the oilfield services market and our performance in the future. Forward-looking statements made elsewhere in this report include without limitation statements regarding natural gas prices, production levels and drilling activities; our belief that oil-directed drilling will continue to represent the majority of the total drilling rig activity; our continued belief in the long-term stability for our business; our belief that unconventional wells will continue to comprise the majority of drilling activity; our expectation to continue to focus on the development of international business opportunities in current and other international markets; our expectations regarding acquisition targets in our industry; our belief that the ban on leasing permits in federal oil and gas drilling areas will reduce the demand for our services; the adequacy of our insurance coverage; the impact of lawsuits, legal proceedings and claims on our business and financial condition; our belief that industry factors will continue to depress natural gas directed drilling activity during the near-term; our belief that recent price increases have encouraged our customers to increase drilling and completion activities; our belief that U.S. oilfield activity will have a negative impact on RPC’s revenues and earnings during the near-term; our belief that oil-directed drilling will remain the majority of domestic drilling and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near-term; our belief that oilfield well completion activity will remain weak during the near-term; our expectations about contributions to the defined benefit pension plan in 2021; our ability to fund capital requirements in the future; the estimated amount of our capital expenditures and contractual obligations for future periods; our expectations to resume payments of cash dividends; our expectations regarding the costs of skilled labor and many of the raw materials used in providing our services; estimates made with respect to our critical accounting policies; the effect of new accounting standards; and the effect of the changes in foreign exchange rates on our consolidated results of operations or financial condition.
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 southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. RPC acts as a holding company for the following legal entity groupings: Cudd Energy Services, Cudd Pressure Control, Thru Tubing Solutions and Patterson Services. Selected overhead including centralized support services and regulatory compliance are classified as Corporate. RPC is further organized into Technical Services and Support Services which are its operating segments. As of December 31, 2020, RPC had approximately 2,000 employees.
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Business Segments
RPC manages its business as either services offered on the well site with equipment and personnel (Technical Services) or services and equipment offered off the well site (Support Services). The businesses under Technical Services generate revenues based on equipment, personnel operating the equipment and the materials utilized to provide the service. They are all managed, analyzed and reported based on the similarities of the operational characteristics and costs associated with providing the service. The businesses under Support Services are primarily able to generate revenues through equipment or services offered off the well site. During 2020, less than five percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In 2020, we also estimate that 75 percent of our revenues were related to drilling and production activities for oil, while 25 percent of revenues were related to drilling and production activities for natural gas.
Technical Services include RPC’s oil and gas services 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 operating segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. The services offered under Technical Services are high capital and personnel intensive businesses. The common drivers of operational and financial success of these services include diligent equipment maintenance, strong logistical processes, and appropriately trained personnel who function well in a team environment. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and selected international markets.
Support Services include all of the services that provide (i) equipment offered off the well site without RPC personnel and (ii) services that are provided in support of customer operations off the well site such as classroom and computer training, and other consulting services. The primary drivers of operational success for services and equipment provided off the well site without RPC personnel are offering safe, high quality and in-demand equipment appropriate for the well design characteristics. The drivers of operational success for the other Support Services relate to meeting customer needs off the well site and competitive marketing of such services. The equipment and services offered include rental tools, drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The 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. Customers primarily include domestic operations of independent oil and gas producers and major multi-nationals and selected nationally owned oil companies.
A brief description of the primary services conducted within each of the operating segments follows:
Technical Services
Pressure Pumping. Pressure pumping services, which accounted for 37 percent of 2020 revenues, 42 percent of 2019 revenues and 55 percent of 2018 revenues are provided to customers throughout Texas, and the mid-continent and Rocky Mountain regions of the United States. We primarily provide these services to customers to enhance the initial production of hydrocarbons in formations that have low permeability. 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 pressure pumping operations 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. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, ceramics, or synthetic materials, which are often coated with a material to increase their resistance to crushing, are pumped into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open to allow oil and natural gas to flow through the fracture into the production tubing and ultimately to the well surface. 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.
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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. Acid is also frequently used in the beginning of a fracturing operation.
Cementing — Cementing services are used at the completion stage of an oil or natural gas well to seal the wellbore after the casing string has been run. The process of cementing includes developing a cement slurry formulated for a well’s unique characteristics, pumping the cement through the wellbore and into the space between the well casing and well bore, and allowing it to harden. In addition to completion uses, cementing can also be used to seal a lost circulation zone in an existing well, and to plug a well at the end of its life cycle.
Downhole Tools. Thru Tubing Solutions (“TTS”) accounted for 34 percent of revenues in 2020, 34 percent of revenues in 2019 and 25 percent of 2018 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 and bridge plug drilling 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.
Coiled Tubing. Coiled tubing services, which accounted for nine percent of revenues in 2020, seven percent of revenues in 2019 and six percent of revenues in 2018, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and 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, costlier 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. Coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore to complete multiple fractures during a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing, and the Company believes that its sources of supply are adequate.
Snubbing. Snubbing (also referred to as hydraulic workover services), which accounted for one percent of revenues in 2020, one percent of revenues in 2019 and one percent of revenues in 2018, 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 on 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 unit can perform many applications at a lower cost than other alternatives. Because the well being serviced by a hydraulic workover unit is often under pressure, which is hazardous by nature, the snubbing segment of the oil and gas services industry is limited to relatively few operators who have the experience and knowledge required to perform such services safely. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit.
Nitrogen. Nitrogen accounted for five percent of revenues in 2020, four percent of revenues in 2019 and three percent of revenues in 2018. 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. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service. In addition, nitrogen can be complementary to our snubbing and coiled tubing services, 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 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
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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.
Well Control. Cudd Pressure Control 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 Pressure Control, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to numerous well control situations in the domestic U.S. oilfield and in various international locations.
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 wellbore, 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.
Pump Down Services. Pump down services are an integral part of the well completion process and are critical in multiple-stage, unconventional well completions which use various types of bridge plugs and perforation techniques. Pump down services use fluids and low-capacity pressure pumping equipment, and work in coordination with wireline services, to place completion equipment at the desired location in a well bore. This process is repeated for each stage, moving from the most distant end of the wellbore to the end that is closest to the wellhead.
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.
Support Services
Rental Tools. Rental tools accounted for four percent of revenues in 2020, four percent of revenues in 2019 and three percent of revenues in 2018. 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 assets with rental items instead of owning a complete set of assets. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in Texas, the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains.
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Patterson Rental Tools offers a broad range of rental tools including:
Blowout Preventors | Diverters |
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High Pressure Manifolds and Valves | Drill Pipe |
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Hevi-wate Drill Pipe | Drill Collars |
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Tubing | Handling Tools |
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Production Related Rental Tools | Coflexip® Hoses |
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Pumps | Wear KnotTM Drill Pipe |
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 independent tubular 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 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 limited international locations. Well Control School provides 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 15 in 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 oil and gas drilling and production activities of its customers in Texas, the mid-continent, the southwest, the Gulf of Mexico, the Rocky Mountains and the Appalachian regions. Demand for RPC’s services in the U.S. is 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 95 percent from its peak in 1981. However, due to continuously enhanced rig and other technologies during the last decade, an increased number of wells have been drilled during periods of strong industry activity, and these wells are increasingly productive. For these reasons, the domestic production of both oil and natural gas rose to record levels in the fourth quarter of 2019. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including seven down cycle troughs between 1981 and 2020, with August 2020 marking the lowest U.S. domestic rig count in U.S. oilfield history. Between August 2020 and early in the first quarter of 2021, the U.S. domestic rig count rose by approximately 63 percent.
Since the majority of RPC’s services are utilized at the completion stage of an oil or gas well’s life cycle, the Company closely monitors well completions in the U.S. domestic oilfield. As recently reported by the U.S. Energy Information Administration, annual well completions fell from a cyclical peak of 21,382 in 2014 to 8,135 in 2016. Between 2016 and 2019, annual well completions increased by 6,227 or 76.6 percent. During the oilfield downturn that occurred in 2020, only 7,394 wells were completed, the lowest number of annual well completions recorded during the seven years that these data have been reported.
Historical fluctuations in domestic drilling and completions activity are consistent with the prices of oil and natural gas, global supply and demand for oil and natural gas, the domestic supply of natural gas, capital availability to fund the operations of exploration and production companies, projected near-term economic growth and fluctuations in the value of the U.S. dollar on world currency markets. Following the most recent cyclical peak in the fourth quarter of 2018, the price of oil fell by approximately 25 percent by the
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first quarter of 2020. During 2020, the historic collapse in oil prices discouraged drilling and production activity as our customers faced a potential collapse in global oil demand. Fluctuations in the prices of these commodities, particularly the price of oil, significantly impact RPC’s financial results.
The average price of natural gas decreased by approximately 20.9 percent during 2020 as compared with 2019. Early in the first quarter of 2021, the price of natural gas was approximately 8.9 percent higher than the price at the end of 2020. RPC does not believe that the current price of natural gas is sufficient to encourage increasing levels of natural gas-directed drilling, and we note that many oil-directed wells produce a great deal of natural gas and natural gas liquids as well. In addition to oil and natural gas, the prices of various natural gas liquids also determine our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. During 2020 the average price of benchmark natural gas liquids decreased by approximately 14.4 percent compared with 2019. Early in the first quarter of 2021, however, the price of natural gas liquids increased by approximately 85.5 percent compared to the average price in 2020.
From 2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, and since that time has consistently comprised less than 50 percent of total U.S. drilling. Although U.S. domestic demand for natural gas has increased, and U.S. exports of liquified natural gas have become a source of demand for U.S. natural gas, while the price of natural gas generally has fallen in recent years. Unlike oil demand, which is impacted by numerous global factors, the demand for natural gas is determined by U.S. domestic and export demand. We anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the foreseeable future. We continue to believe in the long-term importance of our business due to continued worldwide demand for hydrocarbons generally and the high production of oil in the domestic U.S. market.
Unconventional wells are drilled in a direction other than a straight vertical direction from the Earth’s surface. Because they are drilled through relatively impermeable formations 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 can only be accomplished by using a great deal of pressure pumping horsepower to complete the well. Furthermore, since these types of wells are not drilled in a straight vertical direction, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. For these reasons, unconventional wells require more of RPC’s services than conventional wells. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. Since 2016, unconventional oil and gas wells have comprised greater than 80 percent of U.S. domestic drilling and RPC believes that they will continue to comprise the majority of drilling activity because of their high initial production rates. The advent of unconventional drilling in the U.S. domestic market, which RPC believes to be a permanent change, continues to have a positive impact on the demand for RPC’s services.
International. RPC has historically operated in several countries outside of the United States, and international revenues accounted for six percent of RPC’s consolidated revenues in 2020, five percent in 2019 and five percent in 2018. RPC’s allocation of growth capital over the last several years have emphasized domestic rather than international expansion because of higher domestic activity levels and expected financial returns. International revenues decreased 44.5 percent in 2020 compared to the prior year primarily due to lower customer activity levels in Argentina, and Canada, partially offset by higher activity in Algeria. During 2020, RPC provided downhole motors and tools in Argentina, Canada, Mexico and Saudi Arabia. We continue to focus on the selected development of international opportunities in these and other markets, although we believe that it will continue to be less than ten percent of total revenues in 2021.
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. Refer to Note 15 in the 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 to generate strong cash flow. 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 customers and markets in which we believe there exist
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opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added equipment and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate.
RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Historically, we have found that we generate higher financial returns from organic growth with our services and geographical locations in which we have experience. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist, and we frequently consider such opportunities. We have consummated relatively few acquisitions in recent years, however, due to high seller valuation expectations and the risk of integrating acquired businesses into our existing operations. We will continue to consider the acquisitions of existing businesses but will also continue to maintain a conservative capital structure, which may limit our ability to consummate large transactions.
RPC has a revolving credit facility which can be used to fund working capital and other capital requirements. The borrowing base for this credit facility is $100 million, including a $35 million letter of credit sublimit, and a $35 million swingline sublimit. There was no outstanding balance on this credit facility as of December 31, 2020. Our capital structure is more conservative than that of many of our peers.
Customers
Demand for RPC’s services and equipment 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 2020, RPC provided oilfield services to several hundred customers. Of these customers, there was no customer in 2020 or 2019 that accounted for 10 percent or more of revenues.
Sales are generated by RPC’s sales force and through referrals from existing customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog.
Competition
RPC operates in highly competitive areas of the oilfield services industry. We sell our equipment and services in highly competitive markets, and the revenues and earnings generated 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. During the oilfield downturn of 2015 and 2016, a number of smaller oilfield services companies as well as several of our publicly traded peers reduced the scope of their operations or became insolvent. During 2017, however, an improving industry environment and the positive outlook on the industry from the financial markets facilitated the formation of new companies and allowed existing companies to expand their operations. Pricing for our services improved significantly during 2017 but declined during the fourth quarter of 2017 and throughout the following years before achieving some level of stability early in 2021. RPC believes that expanded service capacity during the three years prior to 2020 increased competitive pressures and caused labor price increases because these companies hired experienced personnel from more established companies such as RPC. During this period, improving completion services efficiency also served to increase effective capacity and impose another catalyst for declining pricing. As in the oilfield downturn of 2015 and 2016, several oilfield services companies became insolvent or sought bankruptcy protection during 2020 as the impact of the COVID-19 pandemic drove oilfield activity to historically low levels. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price.
The oil and gas services industry includes dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes Company, and Schlumberger Ltd. The industry also includes a number of other publicly traded peers whose operations are more similar to RPC, including Basic Energy Services, Liberty Oilfield Services, Mammoth Energy Services, Inc., NCS Multistage Holdings, Inc., NexTier Oilfield Solutions, Nine Energy Services, Patterson-UTI Energy, Inc., ProPetro Holding Corporation and Superior Energy Services, as well as numerous smaller, locally owned competitors.
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Human Capital
The table below shows the number of employees at December 31, 2020 and 2019:
At December 31, |
| 2020 |
| 2019 |
Employees |
| 2,005 |
| 2,656 |
The Company operates in a cyclical business where financial performance and headcount is influenced by, among other things, changes in oil and natural gas prices. The Company’s key human capital management objectives are focused on fostering talent in the following areas:
Diversity and Equality - The Company’s workforce reflects the diversity of the communities in which it operates. Our dedicated team of employees works towards a common purpose. Our Company is strong in its values, relationships and consistency in management. We have long been dedicated to recruiting and hiring recently discharged military personnel, and dedicated resources undertake this recruiting effort at our company. The Company received the U.S. Department of Labor's "2019 Hire Vets Medallion Award" in recognition of this effort and its success. The Board of Directors has a diversity committee that monitors compliance with applicable non-discrimination laws related to race, gender and other protected classes. The Committee provides a report of such incidences to the Board on an annual basis.
Development and Training - The Company’s management team and all its employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. We have implemented and maintained a corporate compliance program to provide guidance for everyone associated with the Company, including its employees, officers and directors (the "Code"). Annual review of the Code is required which prohibits unlawful or unethical activity, including discrimination, and directs our employees, officers, and directors to avoid actions that, even if not unlawful or unethical, might create an appearance of illegality or impropriety. In addition, the Company provides annual training for preventing, identifying, reporting and ending any type of unlawful discrimination. The Company also provides a wide variety of opportunities for professional growth for all employees with in-classroom and online training, on-the-job experience, education tuition assistance and counseling.
Compensation and Benefits - The Company focuses on attracting and retaining employees by providing compensation and benefit packages that are competitive in the market, taking into account the location and responsibilities of the job. We provide competitive financial benefits such as a 401(k) retirement plan with a company match, and generally grant awards of restricted stock for certain of our salaried employees. We provide our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs that support their physical and mental health by providing tools and resources to help them improve or maintain their health status.
RPC has always believed in the long-term value of education, and has demonstrated this belief through a college scholarship program for the children of employees. This program, which awards four-year college scholarships based on merit, parents' tenure, and need has invested more than $1 million to support hundreds of children of employees as they earn college degrees. A number of these college graduates have come to work for RPC and have followed their parents to become valuable employees.
RPC and its subsidiaries have regularly participated in efforts to support the communities in which we live. We have participated in the United Way Campaign in the city in which our corporate headquarters is located for more than 30 years. In addition, we have sponsored several emergency relief efforts following natural disasters, such as hurricanes and tornados, in communities in which our field offices are located.
Safety - The Company adheres to a comprehensive safety program to promote a safe working environment for its employees, contractors and customers at its operational locations and active job sites. This program complies with applicable regulatory guidelines for oilfield operations and is enhanced by our analysis of workplace-related incidents and evolving preventative measures. We monitor our workplace safety record and compare it to industry benchmarks and our internal metrics to find areas for improvement. In addition, a component of our field employee compensation plans is based on safety measures.
RPC is making technology and process investments which reduce the number of employees on a job location and change the roles of the remaining employees in ways that reduce their exposure to safety hazards. We believe that this reduced exposure to active areas of a job location has led to fewer safety incidents in a service line which has a high concentration of employees.
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In response to the COVID-19 pandemic, we implemented a response plan that we believe was in the best interest of our employees and the communities in which we operate. This included transitioning our workforce to a remote work model where possible, while implementing additional safety measures for essential employees continuing critical on-site work.
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 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 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 four primary administrative buildings, two leased facilities in The Woodlands, Texas, and Midland, Texas that include the Company’s operations, engineering, sales and marketing headquarters, and two owned facilities, one in Houma, Louisiana that includes certain administrative functions and one in Oklahoma City, Oklahoma that includes operations, sales and equipment storage yards. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 16 of the 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.
In addition, our customers are affected by laws and regulations relating to the exploration 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. 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, 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 they are filed with the Securities and Exchange Commission.
Item 1A. Risk Factors
Risks Related to our Business.
Demand for our equipment and services is affected by the volatility of oil and natural gas prices.
Oil and natural gas prices affect demand throughout the oil and gas industry, including the demand for our equipment 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.
The price of oil, a world-wide commodity, is affected by, among other things, the potential of armed conflict in politically unstable areas such as the Middle East as well as the actions of OPEC, an oil cartel which controls approximately 39 percent of global oil production. OPEC’s actions have historically been unpredictable and can contribute to the volatility of the price of oil on the world market.
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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 adversely affects the demand for our equipment and services and our financial condition and results of operations.
Reliance upon a large customer may adversely affect our revenues and operating results.
At times our business has had a concentration of one or more major customers. There was no customer that accounted for 10 percent or more of the Company’s revenues in 2020, 2019 or 2018. In addition, there was no customer as of December 31, 2020 or 2019 that accounted for 10 percent or more of accounts receivable. The reliance on a large customer for a significant portion of our total revenues exposes us to the risk that the loss or reduction in revenues from this customer, which could occur unexpectedly, could have a material and disproportionate adverse impact upon our revenues and operating results.
Our concentration of customers in one industry and periodic downturns may impact our overall exposure to credit risk and cause us to experience increased credit loss allowance for accounts receivable.
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. The periodic downturns that our industry experiences may adversely affect our customers' operations which could cause us to experience increased credit losses for accounts receivable.
Our business depends on capital spending by our customers, many of whom rely on outside financing to fund their operations.
Many of our customers rely on their ability to raise equity capital and debt financing from capital markets to fund their operations. Their ability to raise outside capital depends upon, among other things, the availability of capital, near-term operating prospects of oil and gas companies, current and projected prices of oil and natural gas, and relative attractiveness of competing investments for available investment capital. These factors are outside of our control, and in the event our customers cannot continue to raise outside capital to fund their operations, RPC’s financial results would be negatively impacted.
RPC’s success will depend on its key personnel, and the loss of any key personnel may affect its revenues.
RPC’s success will depend to a significant extent on the continued service of key management personnel. The loss or interruption of the services of any senior management personnel or the inability to attract and retain other qualified management, sales, marketing and technical employees could disrupt RPC’s operations and cause a decrease in its revenues and profit margins.
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 equipment 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.
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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 Appalachian region. 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.
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 may limit our ability to provide services, or increase the costs of providing services, which could reduce our revenues and profits.
We have used outside financing in prior years 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 to maintain our equipment and increase our fleet of equipment to expand our operations, and we have access to our credit facility to fund our necessary working capital and other capital requirements. Our credit facility, as amended September 25, 2020, provides a borrowing base of $100 million less the amount of any outstanding letters of credit, and 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.
Our international operations could have a material adverse effect on our business.
Our operations in various international markets including, but not limited to, Africa, Canada, Argentina, China, Mexico, Eastern Europe, Latin America and the Middle East 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 financial results could continue to be negatively impacted by the COVID-19 pandemic.
The oil and gas industry experienced an unprecedented disruption during 2020 due to the substantial decline in global oil demand caused partly by the COVID-19 pandemic that has continued throughout 2020 and through the first quarter of 2021. The pandemic has significantly impacted global economic conditions and created unprecedented uncertainties. In response to this downturn, we have reduced our workforce, instituted compensation adjustments, and reduced our expense structure and capital expenditures. We will continue to adjust our cost structure in accordance with our assessment of the operating environment, however a continued
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economic slowdown caused by the COVID-19 pandemic would have an adverse effect on our financial results by continuing to depress global oil demand.
Risk Management Risks.
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 regulations 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.
Compliance with federal and state regulations relating to hydraulic fracturing could increase our operating costs, cause operational delays, and could reduce or eliminate the demand for our pressure pumping services.
RPC’s pressure pumping services are the subject of continuing federal, state and local regulatory oversight. This scrutiny is prompted in part by public concern regarding the potential impact on drinking and ground water and other environmental issues arising from the growing use of hydraulic fracturing. Among these regulatory entities is the White House Council on Environmental Quality, which coordinated a review of hydraulic fracturing practices. In addition, a committee of the United States House of Representatives investigated hydraulic fracturing practices and publicized information regarding the materials used in hydraulic fracturing. The U.S. Environmental Protection Agency (EPA) also conducted a study of the environmental impact of hydraulic fracturing practices, and in 2015, issued a report which concluded that hydraulic fracturing had not caused a measurable impact on drinking water sources in the U.S. This and similar conclusions from similar investigations carry positive implications for our industry. In spite of these favorable empirical data, however, the current administration has announced a one year suspension of new oil and gas leasing permits on federal oil and gas drilling areas, which at the present time represent less than 20 percent of U.S. drilling and completion activities. We believe this ban or similar legislation, if passed, will reduce the demand for RPC’s hydraulic fracturing services, as well as the other services within RPC’s Technical Segment.
General Risks.
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.
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Risks Related to our Capital and Ownership Structure.
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 Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The Company is a “Controlled Corporation” because a group that includes the Company’s Chairman of the Board, Gary W. Rollins, who is also a director of the Company, and certain companies under his 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.
RPC’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, 69 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.
Risks Related to Digital operations, Cybersecurity and Business Disruption.
Our operations rely on digital systems and processes that are subject to cyber-attacks or other threats that could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition.
Our operations are dependent on digital technologies and services. We use these technologies and services for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyber-attacks, both from internal and external threats. Internal threats in cybersecurity are caused by the misuse of access to networks and assets by individuals within the Company by maliciously or negligently disclosing, modifying or deleting sensitive information. Individuals within the Company include current employees, contractors and partners. External threats in cybersecurity are caused by unauthorized parties attempting to gain access to our networks and assets by exploiting security vulnerabilities or through the introduction of malicious code, such as viruses, worms, Trojan horses and ransomware. In response to the risk of cyber-attacks, we regularly review and update processes to prevent unauthorized access to our networks and assets and misuse of data. We provide regular security awareness training for all employees, simulate phishing assessments and closely manage the accounts and privileges of all employees and contractors. We also maintain an up-to-date incident response plan to quickly address cybersecurity incidents.
If our systems for protecting against cybersecurity risks prove to be insufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data, as well as, interruption of our business operations and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
RPC owns or leases approximately 100 offices and operating facilities. The Company leases approximately 21,200 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. As of December 31, 2020, the lease agreement on the headquarters is effective through May 2031. 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 | |
Broussard, Louisiana — Operations, sales and equipment storage yards | |
Elk City, Oklahoma — Operations, sales and equipment storage yards | |
Houma, Louisiana — Administrative office | |
Houston, Texas — Pipe storage terminal and inspection sheds | |
Odessa, Texas — Pumping services facility | |
Rock Springs, Wyoming — Operations, sales and equipment storage yards | |
Vernal, Utah — Operations, sales and equipment storage yards | |
Newcastle, Oklahoma — Administrative office | |
Leased Locations | |
Midland, Texas — Operations, sales and equipment storage yards | |
Seminole, Oklahoma — Pumping services facility | |
The Woodlands, Texas — Operations, sales and administrative office | |
Odessa, Texas — Pumping services facility |
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.
Item 4. Mine Safety Disclosures
The information required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-K.
Item 4A. Information About Our Executive Officers
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 earlier removal by the Board of Directors or his 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 |
Richard A. Hubbell (1) |
| 76 |
| 4/22/03 |
President and Chief Executive Officer | ||||
Ben M. Palmer (2) |
| 60 |
| 7/8/96 |
Vice President, Chief Financial Officer and Corporate Secretary |
| (1) | 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 2001. Mr. Hubbell serves on the Board of Directors of both of these companies. |
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| (2) | Ben M. Palmer has been the Vice President and Chief Financial Officer of RPC since 1996. He has also been the Vice President and Chief Financial Officer of Marine Products Corporation since it was spun off from RPC in 2001. He assumed the responsibilities as Corporate Secretary of RPC and Marine Products Corporation in July 2017. |
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. As of February 19, 2021 there were 215,823,799, shares of common stock outstanding and approximately 14,400 beneficial holders of our common stock.
Issuer Purchases of Equity Securities
Shares repurchased by the Company and affiliated purchases in the fourth quarter of 2020 are outlined below.
|
|
| Total Number of |
| Maximum Number (or | ||||
|
|
| Shares (or Units) |
| Approximate Dollar | ||||
| Total Number of |
|
| Purchased as Part |
| Value) of Shares (or | |||
| Shares | Average Price |
| of Publicly |
| Units) that May Yet Be | |||
(or Units) | Paid Per Share |
| Announced Plans |
| Purchased Under the | ||||
Period | Purchased | (or Unit) |
| or Programs |
| Plans or Programs (1) | |||
October 1, 2020 to October 31, 2020 |
| 2,984 | (2) | $ | 2.71 |
| — |
| 8,248,184 |
|
|
|
|
|
|
|
| ||
November 1, 2020 to November 30, 2020 |
| 3,818 | (2) |
| 2.41 |
| — |
| 8,248,184 |
|
|
|
|
|
|
|
| ||
December 1, 2020 to December 31, 2020 |
| 1,805 | (2) |
| 3.09 |
| — |
| 8,248,184 |
Totals |
| 8,607 | $ | 2.66 |
| — |
| 8,248,184 | |
| (1) | The Company has a stock buyback program initially adopted in 1998 and subsequently amended in 2013 and 2019 that authorizes the repurchase of up to 41,578,125 shares. On February 12, 2018, the Board of Directors increased the number of shares authorized for repurchase by 10,000,000 shares. There were no shares repurchased as part of this program during the fourth quarter of 2020. As of December 31, 2020, there are 8,248,184 shares available to be repurchased under the current authorization. Currently the program does not have a predetermined expiration date. |
| (2) | Shares purchased by the Company in addition to those purchased as part of publicly announced plans or programs, represent shares repurchased in connection with taxes related to the vesting of certain employees’ restricted shares. |
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 (the “Peer Group”). The Company has voluntarily chosen to provide both an industry and a peer group index.
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The Company was a component of the Russell 2000 during 2020. The Russell 2000 is a stock index measuring the performance of the small-cap segment of the US equity universe. The components of the index had a weighted average market capitalization in 2020 of $3.8 billion, and a median market capitalization of $922 million. The Russell 2000 was chosen because it represents companies with comparable market capitalizations to the Company, and because the Company is a component of the index. The OSX is a stock index of 15 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 this index was chosen because it represents a large group of companies that provide the same or similar equipment and services as the Company. The companies included in the Peer Group are Weatherford International, Inc., Superior Energy Services, Inc., Patterson-UTI Energy, 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.
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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.
Statements of Operations Data:
Years Ended December 31, |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 | ||||||
| (in thousands, except employee and per share amounts) | |||||||||||||||
Revenues | $ | 598,302 | $ | 1,222,409 | $ | 1,721,005 | $ | 1,595,227 | $ | 728,974 | ||||||
Cost of revenues |
| 480,739 |
| 919,595 |
| 1,183,048 |
| 1,050,809 |
| 607,888 | ||||||
Selling, general and administrative expenses |
| 123,698 |
| 168,127 |
| 168,151 |
| 159,194 |
| 150,690 | ||||||
Impairment and other charges |
| 217,493 |
| 82,273 |
| - |
| - |
| - | ||||||
Depreciation and amortization |
| 95,530 |
| 170,409 |
| 163,120 |
| 163,537 |
| 217,258 | ||||||
Gain on disposition of assets, net |
| (9,523) |
| (3,707) |
| (3,344) |
| (4,530) |
| (7,920) | ||||||
Operating (loss) profit |
| (309,635) |
| (114,288) |
| 210,030 |
| 226,217 |
| (238,942) | ||||||
Interest expense |
| (373) |
| (334) |
| (489) |
| (426) |
| (681) | ||||||
Interest income |
| 496 |
| 1,906 |
| 2,426 |
| 1,494 |
| 467 | ||||||
Other income (expense), net |
| 81 |
| (385) |
| 9,313 |
| 5,531 |
| (204) | ||||||
(Loss) income before income taxes |
| (309,431) |
| (113,101) |
| 221,280 |
| 232,816 |
| (239,360) | ||||||
Income tax (benefit) provision (1) | (97,239) | (25,990) | 45,878 | 70,305 | (98,114) | |||||||||||
Net (loss) income (1) | $ | (212,192) | $ | (87,111) | $ | 175,402 | $ | 162,511 | $ | (141,246) | ||||||
(Loss) earnings per share: (1) | ||||||||||||||||
Basic | $ | (1.00) | $ | (0.41) | $ | 0.82 | $ | 0.75 | $ | (0.66) | ||||||
Diluted | $ | (1.00) | $ | (0.41) | $ | 0.82 | $ | 0.75 | $ | (0.66) | ||||||
Dividends paid per share | — | $ | 0.15 | $ | 0.47 | $ | 0.20 | $ | 0.05 | |||||||
Other Data: |
|
|
|
|
|
|
|
| ||||||||
Operating (loss) profit margin percent |
| (51.8) | % |
| (9.3) | % |
| 12.2 | % |
| 14.2 | % |
| (32.8) | % | |
Net cash provided by operating activities | $ | 77,958 | $ | 209,141 | $ | 389,009 | $ | 133,704 | $ | 101,704 | ||||||
Net cash used for investing activities |
| (42,659) |
| (235,788) |
| (219,727) |
| (104,386) |
| (21,339) | ||||||
Net cash used for financing activities |
| (826) |
| (39,592) |
| (144,070) |
| (70,103) |
| (13,726) | ||||||
Capital expenditures | $ | 65,065 | $ | 250,629 | $ | 242,610 | $ | 117,509 | $ | 33,938 | ||||||
Employees at end of period |
| 2,005 |
| 2,700 |
| 3,600 |
| 3,500 |
| 2,500 | ||||||
|
|
|
|
|
|
|
|
|
| |||||||
Balance Sheet Data at Year End: |
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable, net | $ | 161,771 | $ | 242,574 | $ | 323,533 | $ | 377,853 | $ | 169,166 | ||||||
Working capital |
| 348,794 |
| 335,456 |
| 475,701 |
| 494,775 |
| 377,589 | ||||||
Property, plant and equipment, net |
| 264,411 |
| 516,727 |
| 517,982 |
| 443,928 |
| 497,986 | ||||||
Total assets |
| 790,505 |
| 1,053,218 |
| 1,199,580 |
| 1,147,224 |
| 1,035,452 | ||||||
Long-term debt |
| — |
| — |
| — |
| — |
| — | ||||||
Total stockholders’ equity | $ | 631,567 | $ | 830,333 | $ | 950,419 | $ | 911,697 | $ | 806,799 | ||||||
| (1) | The indicated data for 2017 includes the impact of a net discrete tax benefit of $19.3 million, or $0.09 per share, recorded as a result of the Tax Cuts and Jobs Act enacted during the fourth quarter of 2017. |
18
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. Discussions of year-to-year comparisons of 2019 and 2018 and 2018 items that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual report on Form 10-K for the year ended December 31, 2019, which Item is incorporated herein by reference.
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 southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. 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. |
| - | To maintain a flexible cost structure that can respond quickly to volatile industry conditions and business activity levels. |
| - | To maintain capital strength sufficient to allow us to remain a going concern and maintain our operational strength during protracted industry downturns. |
| - | To maintain an efficient, low-cost capital structure which includes an appropriate use of debt financing. |
| - | To optimize asset utilization with the goal of increasing revenues and generating leverage of direct and overhead costs, balanced against increasingly high maintenance requirements and low financial returns experienced during times of low customer pricing for our services. |
| - | To deliver product and services to our customers safely. |
| - | To secure adequate sources of supplies of raw materials used in our operations. |
| - | To maintain and selectively 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. |
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, maintenance and repair expenses, pricing for our services and equipment, profit margins, selling, general and administrative expenses, cash flows and the return on our invested capital. Additionally, we compare our trends to those of our peers. We continuously monitor factors that impact 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.
The oil and gas industry experienced an unprecedented disruption during 2020 due to the substantial decline in global demand for oil caused by the combined impact of the OPEC disputes and COVID-19 pandemic that has continued throughout 2020. The pandemic has significantly impacted the economic conditions in the United States, as federal, state and local governments have reacted to the public health crisis, creating significant uncertainties in the United States, as well as the global economy. RPC continued our regular operations during the period since we function as an essential infrastructure business in the energy sector under
19
guidance issued by the Department of Homeland Security. However, in response to the pandemic, RPC instituted strict procedures to assess employee health and safety while in our facilities or on operational locations.
Current industry conditions are characterized by oil prices which fell from a cyclical peak of $75 per barrel in the fourth quarter of 2018 to less than $20 per barrel in the second quarter of 2020. In response to this significant decrease in the price of oil, the drilling rig count fell from 1,083 in the fourth quarter of 2018 to 244 in the third quarter of 2020. Also, monthly U.S. well completions fell from a cyclical peak of 1,371 in the second quarter of 2018 to 292 in the second quarter of 2020. Early in the first quarter of 2021, the price of oil had recovered to approximately $56 per barrel, and both the drilling rig count and well completions had increased as well. One catalyst for the decrease in the price of oil during 2020 relates to the significant decrease in global oil demand resulting from the COVID-19 pandemic. In late 2019, the global oil supply and demand were in equilibrium. By the second quarter of 2020, however, global oil demand had fallen by approximately 16 percent, while supply had only fallen by approximately nine percent. The tremendous decline in oil prices, drilling and well completions during 2020 resulted from this sudden and unpredicted decrease in demand.
RPC believes that oil production in the United States has also become an increasingly important determinant of global oil prices, because the United States has grown to be the world’s largest producer of oil and is more flexible in its ability to increase or decrease drilling and production activities rapidly than the state-owned oil companies which comprise OPEC membership. During the past several years, improving drilling and completion activity have caused U.S. domestic oil production to continue to rise to a record production level in December 2019. Since that time, U.S. oil production has declined due to lower drilling and completion activity, but it remains historically high, and as of the most recent monthly reported statistics, was 30 percent higher than the cyclical low production recorded during the third quarter of 2016. We believe that continued high U.S. oil production is a catalyst for lower oil prices during the near term. Customer activities directed towards natural gas drilling and production have been weak for several years because of the high production of shale-directed natural gas wells, the high amount of natural gas production associated with oil-directed shale wells in the U.S. domestic market, and relatively constant consumption of natural gas in the United States. One of these factors has been mitigated by the decline in oil-directed drilling. In addition, weather in the United States during the first quarter of 2021 is colder than during the comparable period in 2020. As a result, the price of natural gas has recovered from a low of $1.63 per Mcf during the second quarter of 2020 to $2.96 per Mcf early in the first quarter of 2021. While current natural gas prices are higher than at the recent cyclical trough, we believe that they are still too low to encourage our customers to conduct increased levels of exploration and production activities directed exclusively towards natural gas.
In 2020, the Company’s strategy of utilizing equipment in unconventional basins has continued. During 2020, we made capital expenditures totaling $65.1 million, a decrease of $185.6 compared to the prior year. Capital expenditures during 2020 were primarily for new revenue-producing equipment and capitalized maintenance of our existing equipment, as well as upgrades of selected pressure pumping equipment for dual-fuel capability.
Revenues during 2020 totaled $598.3 million, a decrease of 51.1 percent compared to 2019 primarily as a result of lower activity levels and lower pricing for most of our service lines caused by a steep decline in oil and gas prices due to COVID-19. Cost of revenues decreased $438.9 million in 2020 compared to the prior year primarily due to lower materials and supplies expenses and employment costs consistent with lower activity levels and as a result of RPC’s expense reduction initiatives. As a percentage of revenues, cost of revenues increased to 80.4 percent in 2020 compared to 75.2 percent in 2019.
Selling, general and administrative expenses as a percentage of revenues increased to 20.7 percent in 2020 compared to 13.8 percent in 2019, primarily due to lower revenues, partially offset by personnel headcount decreases and other reductions.
Impairment and other charges were $217.5 million in 2020. These charges were comprised primarily of the total amount by which several of our asset groups’ carrying amounts exceeded their fair value partly due to the pandemic related demand reductions, a non-cash pension settlement loss, costs to finalize the disposal of our former sand facility and employee severance costs.
Loss before income taxes was $309.4 million for 2020 compared to loss before income taxes of $113.1 million in 2019. Net loss for 2020 was $212.2 million, or $1.00 loss per share compared to net loss of $87.1 million, or $0.41 loss per share in 2019.
Cash flows from operating activities decreased to $78.0 million in 2020 compared to $209.1 million in 2019 primarily due to lower earnings, partially offset by favorable changes in working capital. As of December 31, 2020, there were no outstanding borrowings under our credit facility.
Outlook
Drilling activity in the U.S. domestic oilfields, as measured by the rotary drilling rig count, reached a cyclical peak of 1,083 during the fourth quarter of 2018. Between the fourth quarter of 2018 and the third quarter of 2020, the drilling rig count fell by 77
20
percent. During the third quarter of 2020, the U.S. domestic drilling rig count reached the lowest level recorded up to that time. The principal catalyst for this steep rig count decline was the decrease in the price of oil in the world markets resulting from the decline in global oil demand associated with the COVID-19 pandemic which began in the first quarter of 2020. RPC monitors rig count efficiencies and well completion trends because the majority of our services are directed toward well completions. Improvements in drilling rig efficiencies have increased the number of potential well completions for a given drilling rig count; therefore, the statistics regarding well completions are more meaningful indicators of the outlook for RPC’s activity levels and revenues. Annual well completions during 2018 increased by approximately 25 percent compared to 2017, and by approximately five percent in 2019 compared to 2018. Well completions in 2020 decreased by approximately 49 percent compared to 2019. Although the price of oil and well completions increased in the fourth quarter of 2020, we believe that U.S. oilfield well completion activity will remain weak during the near term because of continued low oil prices and projections of depressed industry activity.
The current and projected prices of oil, natural gas and natural gas liquids are important catalysts for U.S. domestic drilling activity. Following the trough of the most recent oilfield downturn in the second quarter of 2020, the price of oil has risen by more than 100 percent early in the first quarter of 2021 compared to the average price of oil in the second quarter of 2020. The price of natural gas has risen by approximately 94 percent during the same time period, due to steady demand for natural gas and normal seasonal demand in the first quarter of 2021. Following a low price of $0.23 per gallon in the first quarter of 2020, the price of benchmark natural gas liquids has risen to $0.87 per gallon early in the first quarter of 2021, an increase of almost 300 percent. The price increases in these commodities during the past three quarters are encouraging, and RPC believes that they have encouraged our customers to increase drilling and completion activities. We remain cautious, however, because we do not believe that current commodity prices are sufficiently high to encourage our customers to increase their drilling and production activities to previous cyclical peak levels.
The majority of the U.S. domestic rig count remains directed towards oil. Early in the first quarter of 2021, approximately 77 percent of the U.S. domestic rig count was directed towards oil, a decrease compared with approximately 85 percent during the same period in the prior year. We believe that oil-directed drilling will remain the majority of domestic drilling, and that natural gas-directed drilling will remain a low percentage of U.S. domestic drilling in the near term. We believe that this relationship will continue due to relatively low prices for natural gas, high production from existing natural gas wells, and industry projections of limited increases in domestic natural gas demand during the near term.
We continue to monitor the market for our services and the competitive environment. An increasingly important factor impacting the demand for our services is the growing efficiency with which oilfield completion crews are providing services. We began to observe this in 2018, and we believe that this higher efficiency has contributed to the oversupplied nature of our market. In addition, the U.S. domestic rig count began to decline during the first quarter of 2019, and by the beginning of the second quarter of 2020 had fallen to the lowest level ever recorded. Combined with the long-term trend of increased efficiency, the U.S. domestic rig count decline has caused significant decreases in activity levels and pricing for our services.
RPC expanded its fleet of revenue-producing equipment in 2019, while also retiring older equipment which could no longer function effectively in service-intensive operating environments. We continue to upgrade our existing equipment to operate using multiple fuel sources and to take advantage of advances in technology and data collection. However, we do not plan meaningfully to increase our fleet capacity either through purchases of new equipment or bringing idled equipment into service until the projected financial returns for such an investment are justified. Our consistent response to the near-term potential of lower activity levels and pricing has been to undertake moderate fleet expansions which we believe will allow us to maintain a strong balance sheet, while also positioning RPC for long-term growth and strong financial returns.
In connection with the preparation of our financial statements for the quarter ended March 31, 2020, the Company recorded long-lived asset impairment and other charges of $205.5 million. See Note 3 of the consolidated financial statements for a discussion of the changes in our industry resulting in these charges. In addition, we are aware that our customers have been forced to conduct their operations with little or no access to outside capital for the first time in many years, and we anticipate that this aspect of exploration and production financing will remain in place for the foreseeable future, thereby impacting the volume of future drilling and completion of new wells.
21
Results of Operations
Years Ended December 31, |
| 2020 |
| 2019 |
| 2018 | ||||
(in thousands except per share amounts and industry data) | ||||||||||
Consolidated revenues | $ | 598,302 | $ | 1,222,409 | $ | 1,721,005 | ||||
Revenues by business segment: |
|
|
| |||||||
Technical | $ | 556,488 | $ | 1,145,554 | $ | 1,647,213 | ||||
Support | $ | 41,814 | $ | 76,855 |
| 73,792 | ||||
|
|
|
|
| ||||||
Consolidated operating (loss) profit | $ | (309,635) | $ | (114,288) | $ | 210,030 | ||||
Operating (loss) profit by business segment: |
|
|
| |||||||
Technical | $ | (82,525) | $ | (32,993) | $ | 216,703 | ||||
Support |
| (6,714) |
| 10,016 |
| 4,612 | ||||
Corporate expenses |
| (12,426) |
| (12,745) |
| (14,629) | ||||
Impairment and other charges (1)(2) | (217,493) | (82,273) | - | |||||||
Gain on disposition of assets, net | $ | 9,523 | $ | 3,707 | $ | 3,344 | ||||
|
|
| ||||||||
Net (loss) income | $ | (212,192) | $ | (87,111) | $ | 175,402 | ||||
(Loss) Earnings per share — diluted | $ | (1.00) | $ | (0.41) | $ | 0.82 | ||||
Percentage of cost of revenues to revenues |
| 80 | % |
| 75 | % |
| 69 | % | |
Percentage of selling, general and administrative expenses to revenues |
| 21 | % |
| 14 | % |
| 10 | % | |
Percentage of depreciation and amortization expenses to revenues |
| 16 | % |
| 14 | % |
| 10 | % | |
Effective income tax rate |
| 31.4 | % |
| 23.0 | % |
| 20.7 | % | |
Average U.S. domestic rig count |
| 436 |
| 943 |
| 1,032 | ||||
Average natural gas price (per thousand cubic feet (mcf)) | $ | 2.03 | $ | 2.57 | $ | 3.18 | ||||
Average oil price (per barrel) | $ | 39.50 | $ | 56.90 | $ | 65.02 | ||||
| (1) | Amount in 2020 represents $212,292 related to technical services, $4,660 related to pension settlement loss and the remainder related to corporate expenses. |
| (2) | Amount in 2019 represents $80,263 related to technical services and $2,010 related to corporate expenses. |
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues. Revenues in 2020 decreased $624.1 million or 51.1 percent compared to 2019 primarily due to the substantial decline in global demand for oil caused by the combined impact of the OPEC disputes and COVID-19 pandemic. The Technical Services segment revenues in 2020 decreased $589.1 million or 51.4 percent compared to the prior year. The decrease is due primarily to lower activity levels and lower pricing within most of our service lines as compared to the prior year. The Support Services segment revenues in 2020 decreased $35.0 million or 45.6 percent compared to 2019 due primarily to lower activity levels and pricing in the rental tools service line, which is the largest service line within this segment. Technical Services reported an operating loss of $82.5 million during 2020 compared to a loss of $33.0 million in the prior year, while Support Services reported an operating loss of $6.7 million in 2020 compared to income of $10.0 million in the prior year. The average price of oil decreased 30.6 percent and the average price of natural gas decreased 20.9 percent during 2020 compared to the prior year. The average domestic rig count during 2020 was 53.8 percent lower than 2019. International revenues, which decreased from $64.6 million in 2019 to $35.9 million in 2020, were six percent of consolidated revenues in 2020 compared to five percent 2019. International revenues decreased in 2020 primarily due to lower customer activity levels in Argentina, and Canada, partially offset by higher activity in Algeria 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 2020 was $480.7 million compared to $919.6 million in 2019, a decrease of 47.7 percent primarily due to lower materials and supplies expenses and employment costs consistent with lower activity levels and as a result of RPC’s personnel headcount decreases and other expense reduction initiatives. As a percentage of revenues, cost of revenues increased to 80.4 percent in 2020 compared to 75.2 percent in 2019 primarily due to lower pricing and the negative leverage of certain fixed expenses over significantly lower revenues.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased to $123.7 million in 2020 compared to $168.1 million in 2019. These expenses decreased due to lower employment costs, primarily the result of personnel headcount decreases and other cost reduction initiatives during the year. Selling, general and administrative expenses as a percentage of revenues increased to 20.7 percent of revenues in 2020 compared to 13.8 percent of revenues in 2019 due to the negative leverage of lower revenues over primarily fixed expenses.
22
Depreciation and amortization. Depreciation and amortization were $95.5 million in 2020, a decrease of $74.9 million, compared to $170.4 million in 2019. Depreciation and amortization decreased significantly because of the asset impairment charges recorded during the first quarter of 2020.
Impairment and other charges. Impairment and other charges were $217.5 million in 2020 compared to $82.3 million in 2019. Impairment and other charges in 2020 is comprised primarily of the total amount by which several of our asset groups’ carrying amounts exceed their fair value, a non-cash pension settlement loss, costs to finalize the disposal of our former sand facility and employee severance costs. Impairment and other charges for 2019 was comprised primarily of equipment disposals, closing operating locations and employee severance.
Gain on disposition of assets, net. Gain on disposition of assets, net was $9.5 million in 2020 compared to $3.7 million in 2019. The gain on disposition of assets, net is generally comprised of gains or losses 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 $0.1 million in 2020 compared to other expense, net of $0.4 million in 2019.
Interest expense and interest income. Interest expense was $0.4 million in 2020 compared to $0.3 million in 2019. Interest expense in 2020 and 2019 principally consists of fees on the unused portion of the credit facility. Interest income decreased to $0.5 million in 2020 compared to $1.9 million in 2019 due to lower interest rates earned on cash balances.
Income tax benefit. Income tax benefit was $97.2 million in 2020, compared to $26.0 million income tax benefit for the same period in 2019. The effective tax rate was 31.4 percent for 2020 compared to a 23.0 percent effective tax rate for 2019. The effective tax rate in 2020 reflects the benefit of the CARES Act allowing tax loss carrybacks including the beneficial revaluation of our 2019 net operating losses and the recording of our 2020 net operating losses both at 35 percent.
Net loss and diluted loss per share. Net loss was $212.2 million in 2020, or $1.00 loss per diluted share, compared to net loss of $87.1 million in 2019, or $0.41 earnings per diluted share. This increase in loss per share was due to lower profitability as average shares outstanding was essentially unchanged.
Liquidity and Capital Resources
Cash and Cash Flows
The Company’s cash and cash equivalents were $84.5 million as of December 31, 2020, $50.0 million as of December 31, 2019 and $116.3 million as of December 31, 2018.
The following table sets forth the historical cash flows for the years ended December 31:
|
| (in thousands) | |||||||
|
| 2020 |
| 2019 |
| 2018 | |||
Net cash provided by operating activities | $ | 77,958 | $ | 209,141 | $ | 389,009 | |||
Net cash used for investing activities |
| (42,659) |
| (235,788) |
| (219,727) | |||
Net cash used for financing activities |
| (826) |
| (39,592) |
| (144,070) | |||
Cash provided by operating activities for 2020 decreased by $131.2 million compared to the prior year. This decrease is due primarily to an increase in net loss of $125.1 million partially offset by favorable changes in working capital during 2020, coupled with non-cash impairment charges of $211.0 million. The net favorable change in working capital is due primarily to favorable changes of $80.8 million in accounts receivable and $18.1 million in inventories, partially offset by unfavorable changes of $9.1 million in accounts payable and $58.8 million in income taxes receivable/(payable), (net).
Cash used for investing activities for 2020 decreased by $193.1 million compared to 2019, primarily because of a reduction in capital expenditures in response to lower industry activity levels, coupled with an increase in proceeds from the sale of assets.
Cash used for financing activities for 2020 decreased by $38.8 million primarily as a result of lower dividends paid to common stockholders as well as lower cost of repurchases of the Company’s shares both on the open market and for taxes related to the vesting of restricted shares. There were no dividends paid to common stockholders in 2020.
23
Financial Condition and Liquidity
The Company’s financial condition as of December 31, 2020 remains strong. We believe the liquidity provided by our existing cash and cash equivalents and our overall strong capitalization will provide sufficient liquidity to meet our requirements for at least the next twelve months. The Company’s decisions about the amount of cash to be used for investing and financing activities are influenced by our capital position, and the expected amount of cash to be provided by operations. RPC does not expect to need our revolving credit facility to meet these liquidity requirements.
The Company currently has a $100 million revolving credit facility that matures in October 2023, as recently amended. The facility contains customary terms and conditions, including restrictions on indebtedness, dividend payments, business combinations and other related items. On September 25, 2020, the Company further amended the revolving credit facility. Among other matters, the amendment (1) reduced the maximum amount available for borrowing from $125 million to $100 million, (2) decreased the minimum tangible net worth covenant level from not less than $600 million to not less than $400 million, and (3) increased the margin spreads and commitment fees payable by 37.5 and 5 basis points, respectively, at each pricing level of the applicable rate without any changes to the leverage ratios used to calculate such spreads. As of December 31, 2020, RPC had no outstanding borrowings under the revolving credit facility, and letters of credit outstanding relating to self-insurance programs and contract bids totaled $19.8 million; therefore, a total of $80.2 million of the facility was available. The Company was in compliance with the credit facility financial covenants as of December 31, 2020. For additional information with respect to RPC’s facility, see Note 9 of the consolidated financial statements included in this report and which is incorporated herein by reference.
Cash Requirements
Capital expenditures were $65.1 million in 2020, and we currently expect capital expenditures to be approximately $56 million in 2021. We expect that a majority of these expenditures in 2021 will be directed mostly towards capitalized maintenance of our existing equipment, as well as upgrades of selected pressure pumping equipment for dual-fuel capability. The actual amount of capital expenditures will depend primarily on equipment maintenance requirements, expansion opportunities, and equipment delivery schedules.
The Company has ongoing sales and use tax audits in various jurisdictions subject to varying interpretations of statutes. The Company has recorded the exposure from these audits to the extent issues are resolved or can be reasonably estimated. There are issues that could result in unfavorable outcomes that cannot be currently estimated.
The Company’s Retirement Income Plan, a multiple employer trusteed defined benefit pension plan, provides monthly benefits upon normal retirement at age 65 or early retirement at 591/2 to eligible employees. During, 2020, the Company made a cash contribution of $4,450,000 to the plan but does not currently expect to make any contributions to the plan during 2021.
As of December 31, 2020, the Company’s stock buyback program authorizes the aggregate repurchase of up to 41,578,125 shares, including an additional 10,000,000 shares authorized for repurchase by the Board of Directors on February 12, 2018. No shares have been purchased on the open market during the twelve months ended December 31, 2020, and 8,248,184 shares remain available to be repurchased under the current authorization. The Company may repurchase outstanding common shares periodically based on market conditions and our capital allocation strategies considering restrictions under our credit facility. The stock buyback program does not have a predetermined expiration date.
24
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, 2020:
Contractual Obligations |
| Payments due by period | |||||||||||||
|
| Less than |
| 1-3 |
| 3-5 |
| More than | |||||||
(in thousands) | Total |
| 1 year |
| years |
| years |
| 5 years | ||||||
Long-term debt obligations | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Interest on long-term debt obligations |
| — |
| — |
| — |
| — |
| — | |||||
Capital lease obligations |
| — |
| — |
| — |
| — |
| — | |||||
Operating leases (1) |
| 32,647 |
| 9,911 |
| 11,024 |
| 5,308 |
| 6,404 | |||||
Purchase obligations (2) |
| 229 |
| 229 |
| — |
| — |
| — | |||||
Other long-term liabilities (3) |
| 976 |
| 351 |
| 433 |
| 192 |
| — | |||||
Total contractual obligations | $ | 33,852 | $ | 10,491 | $ | 11,457 | $ | 5,500 | $ | 6,404 | |||||
| (1) | Operating leases include agreements for various office locations, office equipment, and certain operating equipment. |
| (2) | Includes agreements to purchase raw materials, 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 is known. These amounts include incentive compensation, severance costs and estimated charges related to disposal of impaired assets. Also includes amounts related to the usage of corporate aircraft. 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 and Supplemental Executive Retirement Plan (“SERP”) investments measured at net asset value, 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 when not publicly available.
Inflation
The Company purchases its equipment and materials from suppliers who provide competitive prices, and employs skilled workers from competitive labor markets. If inflation in the general economy increases, the Company’s costs for equipment, materials and labor could increase as well. In addition, increases in activity in the domestic oilfield can cause upward wage pressures in the labor markets from which it hires employees, especially if employment in the general economy increases. Also, activity increases can cause increases in the costs of certain materials and key equipment components used to provide services to the Company’s customers. Beginning in 2018, prices for the raw material comprising the Company’s single largest purchase began to decline due to increased sources of supply of the material, particularly in geographic markets located close to the largest U.S. oil and gas basin. In addition, labor costs declined throughout 2020 due to the significant decline in oilfield activity. However, during the fourth quarter of 2020 and early in the first quarter of 2021, the price of labor began to rise due to increasing oilfield activity and the departure of skilled labor from the domestic oilfield industry during 2020. Also, the prices of raw materials used in the Company’s operations began to increase because many suppliers of these materials ceased operations. During the first quarter of 2021, the Company is attempting to pass these price increases along to our customers, but due to the competitive nature of the oilfield services business, there is no assurance that these efforts will be successful.
Off Balance Sheet Arrangements
The Company does not have any material off balance sheet arrangements.
25
Related Party Transactions
See “NOTE 14: RELATED PARTY TRANSACTIONS” of the consolidated financial statements, which is incorporated herein by reference, for a description of related party transactions.
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 policies requiring significant judgements and 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:
Credit loss allowance for accounts receivable — 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 credit loss allowance 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. Credit loss allowance for accounts receivable are recorded in selling, general and administrative expenses. Accounts are written off against the allowance 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, thereby causing credit loss allowance to fluctuate significantly from period to period. Recoveries were insignificant in 2020, 2019 and 2018. We record specific provisions when we become aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to a customer changes, our estimate of the realizability of the receivable would be further adjusted, either upward or downward.
The estimated credit loss allowance 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 which we adjust periodically based on management judgment and the economic strength of our customers. The net credit loss allowance as a percentage of revenues ranged from 0.03 percent to 0.8 percent over the last three years. Increasing or decreasing the estimated general reserve percentages by 0.50 percentage points as of December 31, 2020 would have resulted in a change of $3.0 million in the recorded provision for current expected credit losses.
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, 2020, the Company estimates the range of exposure to be from $14.9 million to $20.1 million. The Company has recorded liabilities at December 31, 2020 of $17.3 million which represents management’s best estimate of probable loss.
Long-lived assets including goodwill — RPC carries a variety of long-lived assets on its balance sheet including property, plant and equipment and goodwill. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The Company conducts impairment tests on goodwill annually, during the fourth quarter, or more frequently if events or changes in circumstances indicate an impairment may exist. In addition, the Company conducts impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
For the impairment testing on long-lived assets, other than goodwill, a long-lived asset is grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group are compared to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, then the Company is required to determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining
26
useful life and service potential of the assets within the asset group, and a discount rate based on weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. Assessment of goodwill impairment is conducted at the level of each reporting unit, which is the same as our reportable segments, Technical Services and Support Services, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. The fair value of each reporting unit is estimated using an income approach and a market approach. The income approach uses discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded.
During the year ended December 31, 2020, the Company recorded an asset impairment loss totaling $205.5 million related to its long-lived asset groups, in response to the drastic decline in oilfield drilling and completion activities. See Note 3 of the consolidated financial statements for additional information which is incorporated herein by reference.
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 certain employees benefits earned through March 2002. The Company accounts for the defined benefit plan in accordance with the provisions of Financial Accounting Standards Board (FASB) ASC 715, “Compensation – Retirement Benefits” and engages an outside actuary to assist management in calculating 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 adjusts 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 advisor. 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 four percent for 2020, seven percent for 2019 and seven percent for 2018.
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 2.50 percent as of December 31, 2020, 3.60 percent as of December 31, 2019 and 4.65 percent in 2018.
As set forth in Note 13 to the Company’s financial statements, included among the asset categories for the Plan’s investments are fixed income securities that include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. These investments are measured at net asset value and are valued using significant non-observable inputs which do not have a readily determinable fair value. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness.
As of December 31, 2020, the defined benefit plan was over-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 result in a pre-tax increase or decrease of $1.1 million to the net loss related to pension reflected in accumulated other comprehensive loss.
The Company recognized pre-tax pension expense (income) of $5.7 million in 2020, $0.3 million in 2019 and $(0.2) million in 2018. Pension expense during 2020, includes $3.5 million related to the lump-sum payments to certain participants in the Company’s Retirement Income Plan. Based on the over-funded status of the defined benefit plan as of December 31, 2020, the Company expects to recognize pension income of $356 thousand in 2021. 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 of $189 thousand in 2021. 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 of $21 thousand in 2021.
27
Recent Accounting Pronouncements
See Note 1 of the consolidated financial statements, which is incorporated herein by reference for a description of recent accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to interest rate risk exposre through borrowings on its revolving credit facility. As of December 31, 2020, there are no outstanding interest-bearing advances on our credit facility which bear interest at a floating rate.
Additionally, the Company is exposed to market risk resulting from changes in foreign exchange rates. However, since the majority of the Company’s transactions occur in U.S. currency, this risk is not expected to have a material effect on its consolidated results of operations or financial condition.
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, 2020 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management’s assessment is that RPC, Inc. maintained effective internal control over financial reporting as of December 31, 2020.
The independent registered public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2020, 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 |
| Ben M. Palmer | ||
Atlanta, Georgia | ||||
February 26, 2021 | ||||
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
RPC, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 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) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated February 26, 2021 expressed an unqualified opinion on those financial statements.
Basis for opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and limitations of internal control over financial reporting
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.
/s/ | GRANT THORNTON LLP | |
Atlanta, Georgia | ||
February 26, 2021 | ||
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
RPC, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of RPC, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, statements of stockholders’ equity, and statements of cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 26, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of Long-Lived Assets under ASC 360
As described in Note 7 of the consolidated financial statements, the gross amount of property, plant and equipment as of December 31, 2020 was $1.1 billion with related accumulated depreciation of $790.7 million. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In the first quarter of the year ended December 31, 2020, the Company identified a triggering event when the oil and gas industry experienced an unprecedented disruption due to the substantial decline in global demand for oil and the COVID-19 pandemic. The Company recognized an impairment charge related to property, plant and equipment totaling $204.8 million for the year ended December 31, 2020, as described in Note 3 to the consolidated financial statements.
We identified the evaluation, determination and assessment of the impairment charges of long-lived asset groups as a critical audit matter. There is a high degree of subjectivity in evaluating the significant assumptions used in determining the undiscounted cash flows needed to estimate the recoverability of the asset groups, which in turn led to a high degree of auditor judgment and effort in evaluating management’s assumptions, and to assess the fair value of the asset groups that indicated they were not recoverable using discounted
31
cash flow. The significant assumptions specifically include the revenue growth rates, projected operating margin and the discount rate used.
The primary procedures we performed to address the critical audit matter included the following: We tested certain internal controls over the Company’s process to estimate the undiscounted cash flows of the asset groups, including controls related to the significant assumptions. We evaluated the Company’s development of the revenue growth rates and operating margin assumptions by identifying and assessing the sources of data that management used in their assessment. We evaluated the revenue growth rates and operating margin for consistency with relevant historical data, changes in the business, and external industry data. In addition, we involved valuation professionals with specialized skills and knowledge to assist with evaluating the selected discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable companies.
Determination and Assessment of Goodwill Impairment under ASC 350
As discussed in Note 1 of the consolidated financial statements, the Company performs goodwill impairment testing on an annual basis, 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. The Company’s goodwill balance was $32.2 million as of December 31, 2020. The Company determined that the substantial decline in global demand for oil and the COIVD-19 pandemic constituted a triggering event that required an interim goodwill impairment assessment as of March 31, 2020 in addition to its annual test as of October 31, 2020. The Company performed a quantitative impairment test at each testing date by estimating the fair value of each of its reporting units by considering both comparable public company multiples (a market approach) and projected discounted future cash flows (an income approach). For the purpose of the impairment test, goodwill has been allocated to the Company's reporting units, which are consistent with their operating segments, and which represents the lowest level within the Company at which the goodwill is monitored for management purposes.
We identified the Company’s assessment of goodwill impairment as a critical audit matter as the process entails high estimation uncertainty due to significant judgments with respect to identification of reporting units and assumptions used to estimate the future revenues and cash flows, including revenue growth rates, operating margins, weighted average cost of capital, discount rates, and future market conditions, as well as valuation methodologies applied by the Company.
The primary procedures we performed related to goodwill impairment testing included the following, among others: We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment testing process. For example, we tested controls over the estimation of the fair values of the reporting units, including the Company’s controls over the valuation models, the mathematical accuracy of the valuation models and development of underlying assumptions used to develop such fair values of the reporting units. We also tested management’s review of the reconciliation of the aggregate estimated fair value of the reporting units to the market capitalization of the Company. We agreed the carrying value of each reporting unit to the underlying accounting records. Additionally, we evaluated the inputs and assumptions for the projections of revenues, expenses and cash flows as well as evaluated the assumptions and methodology used in determining the fair value of the reporting units. To test the estimated fair values of the Company’s reporting units, our audit procedures included, among others, assessing the valuation methodology and the underlying data used by the Company in its analysis, including testing the significant assumptions discussed above. We compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model and other relevant factors. Further, we involved valuation professionals with specialized skills to assist with reviewing the methodologies and assumptions used by management in its valuation of identified reporting units, including a consideration of the consistency and application of methodologies and assumptions employed.
/s/ | GRANT THORNTON LLP | |
We have served as the Company’s auditor since 2004. | ||
Atlanta, Georgia | ||
February 26, 2021 | ||
32
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
RPC, INC. AND SUBSIDIARIES
(in thousands except share information)
December 31, |
| 2020 |
| 2019 | ||
ASSETS |
|
| ||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net |
| |
| | ||
Inventories |
| |
| | ||
Income taxes receivable |
| |
| | ||
Prepaid expenses |
| |
| | ||
Assets held for sale | | | ||||
Other current assets |
| |
| | ||
Current assets |
| |
| | ||
Property, plant and equipment, net |
| |
| | ||
Operating lease right-of-use assets | | | ||||
Goodwill |
| |
| | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
| ||
LIABILITIES |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Accrued payroll and related expenses |
| |
| | ||
Accrued insurance expenses |
| |
| | ||
Accrued state, local and other taxes |
| |
| | ||
Income taxes payable |
| |
| | ||
Current portion of operating lease liabilities | | | ||||
Other accrued expenses |
| |
| | ||
Current liabilities |
| |
| | ||
Long-term accrued insurance expenses |
| |
| | ||
Long-term pension liabilities |
| |
| | ||
Deferred income taxes |
| |
| | ||
Long-term operating lease liabilities | | | ||||
Other long-term liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies (Note 12) |
|
|
| |||
STOCKHOLDERS’ EQUITY |
|
|
|
| ||
Preferred stock, $ |
|
| ||||
Common stock, $ |
| |
| | ||
Capital in excess of par value |
| |
| |||
Retained earnings |
| |
| | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of these statements.
33
CONSOLIDATED STATEMENTS OF OPERATIONS
RPC, INC. AND SUBSIDIARIES
(in thousands except per share data)
Years ended December 31, |
| 2020 |
| 2019 |
| 2018 | |||
REVENUES | $ | | $ | | $ | | |||
COSTS AND EXPENSES: |
|
|
| ||||||
Cost of revenues (exclusive of items shown separately below) |
| |
| |
| | |||
Selling, general and administrative expenses |
| |
| |
| | |||
Impairment and other charges | | | — | ||||||
Depreciation and amortization |
| |
| |
| | |||
Gain on disposition of assets, net |
| ( |
| ( |
| ( | |||
Operating (loss) profit |
| ( |
| ( |
| | |||
Interest expense |
| ( |
| ( |
| ( | |||
Interest income |
| |
| |
| | |||
Other income (expense), net |
| |
| ( |
| | |||
(Loss) income before income taxes |
| ( |
| ( |
| | |||
Income tax (benefit) provision |
| ( |
| ( |
| | |||
Net (loss) income | $ | ( | $ | ( | $ | | |||
(LOSS) EARNINGS PER SHARE |
|
|
|
| |||||
Basic | $ | ( | $ | ( | $ | | |||
Diluted | $ | ( | $ | ( | $ | | |||
Dividends paid per share | — | $ | | $ | | ||||
The accompanying notes are an integral part of these statements.
34
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
RPC, INC. AND SUBSIDIARIES
(in thousands except per share data)
Years ended December 31, |
| 2020 |
| 2019 |
| 2018 | |||
NET (LOSS) INCOME | $ | ( | $ | ( | $ | | |||
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES: |
|
|
| ||||||
Pension adjustment |
| |
| ( |
| ( | |||
Foreign currency translation |
| ( |
| |
| ( | |||
COMPREHENSIVE (LOSS) INCOME | $ | ( | $ | ( | $ | | |||
The accompanying notes are an integral part of these statements.
35
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
RPC, INC. AND SUBSIDIARIES
(in thousands)
|
|
|
|
| Accumulated |
| |||||||||||
Capital in | Other | ||||||||||||||||
Common Stock | Excess of | Retained | Comprehensive | ||||||||||||||
Shares | Amount | Par Value | Earnings | Income (Loss) | Total | ||||||||||||
Balance, December 31, 2017 | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Adoption of accounting standard (Note 1) | — | — | — | | ( | — | |||||||||||
Stock issued for stock incentive plans, net | |
| |
| |
| — |
| — |
| | ||||||
Stock purchased and retired | ( |
| ( |
| ( |
| ( |
| — |
| ( | ||||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Pension adjustment, net of taxes |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Foreign currency translation |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Dividends declared |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Balance, December 31, 2018 |
| |
| |
| — |
| |
| ( |
| | |||||
Adoption of accounting standard (Note 1) | — |
| — |
| — |
| |
| ( |
| ( | ||||||
Stock issued for stock incentive plans, net |
| |
| |
| |
| — |
| — |
| | |||||
Stock purchased and retired |
| ( |
| ( |
| ( |
| |
| — |
| ( | |||||
Net loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Pension adjustment, net of taxes |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Foreign currency translation |
| — |
| — |
| — |
| — |
| |
| | |||||
Dividends declared |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Balance, December 31, 2019 |
| | | — | | ( | | ||||||||||
Stock issued for stock incentive plans, net |
| |
| |
| |
| — |
| — |
| | |||||
Stock purchased and retired |
| ( |
| ( |
| ( |
| |
| — |
| ( | |||||
Net loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Pension adjustment, net of taxes |
| — |
| — |
| — |
| — |
| |
| | |||||
Foreign currency translation |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Balance, December 31, 2020 |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
The accompanying notes are an integral part of these statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
RPC, Inc. and Subsidiaries
(in thousands)
Years ended December 31, |
| 2020 |
| 2019 |
| 2018 | |||
OPERATING ACTIVITIES |
|
|
| ||||||
Net (loss) income | $ | ( | $ | ( | $ | | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
| |||
Depreciation, amortization and other non-cash charges |
| |
| |
| | |||
Stock-based compensation expense |
| |
| |
| | |||
Gain on disposition of assets, net |
| ( |
| ( |
| ( | |||
Gain due to insurance recovery |
| — |
| — |
| ( | |||
Gain due to benefit plan financing arrangement |
| ( |
| ( |
| ( | |||
Deferred income tax (benefit) provision |
| ( |
| ( |
| | |||
Impairment and other charges |
| |
| |
| — | |||
(Increase) decrease in assets: |
|
|
|
|
| ||||
Accounts receivable |
| |
| |
| | |||
Income taxes receivable |
| ( |
| |
| | |||
Inventories |
| |
| |
| ( | |||
Prepaid expenses |
| |
| ( |
| ( | |||
Other current assets |
| |
| |
| | |||
Other non-current assets |
| ( |
| ( |
| | |||
Increase (decrease) in liabilities: |
|
|
|
|
| ||||
Accounts payable |
| ( |
| ( |
| ( | |||
Income taxes payable |
| ( |
| ( |
| | |||
Accrued payroll and related expenses |
| ( |
| ( |
| | |||
Accrued insurance expenses |
| ( |
| |
| | |||
Accrued state, local and other taxes |
| |
| ( |
| ( | |||
Other accrued expenses |
| ( |
| ( |
| ( | |||
Pension liabilities |
| ( |
| |
| ( | |||
Long-term accrued insurance expenses |
| ( |
| |
| | |||
Other long-term liabilities |
| ( |
| |
| ( | |||
Net cash provided by operating activities |
| |
| |
| | |||
INVESTING ACTIVITIES |
|
|
|
|
|
| |||
Capital expenditures |
| ( |
| ( |
| ( | |||
Proceeds from sale of assets |
| |
| |
| | |||
Proceeds from insurance recovery |
| — |
| — |
| | |||
Proceeds from benefit plan financing arrangement |
| |
| |
| | |||
Re-investment in benefit plan financing arrangement |
| ( |
| ( |
| ( | |||
Net cash used for investing activities |
| ( |
| ( |
| ( | |||
FINANCING ACTIVITIES |
|
|
|
|
|
| |||
Payment of dividends |
| — |
| ( |
| ( | |||
Cash paid for common stock purchased and retired |
| ( |
| ( |
| ( | |||
Net cash used for financing activities |
| ( |
| ( |
| ( | |||
Net increase (decrease) in cash and cash equivalents |
| |
| ( |
| | |||
Cash and cash equivalents at beginning of year |
| |
| |
| | |||
Cash and cash equivalents at end of year | $ | | $ | | $ | | |||
The accompanying notes are an integral part of these statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
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.
Common Stock
RPC is authorized to issue
Preferred Stock
RPC is authorized to issue up to
Dividends
On July 22, 2019, the Board of Directors voted to suspend RPC’s dividend to common stockholders. The Company expects to resume cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company has no timetable for the resumption of dividends.
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 of America 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 credit loss allowance, income taxes, accrued insurance expenses, depreciable lives of assets, and pension liabilities.
Revenues
RPC recognizes revenues from contracts with its customers based on the amount of consideration it receives in exchange for the services provided. See Note 2 for additional information.
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 during each of the last three years. There was
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
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 securities 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 realized
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 is 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
Credit Loss Allowance for Accounts Receivable
Accounts receivable are carried at the amounts due from customers, reduced by an allowance for estimated amounts that may not be collectible in the future. The estimated credit loss allowance is based on an evaluation of industry trends, financial condition of customers, historical write-off experience, current economic conditions, and in the case of international customers, judgments about the economic and political environment of the related country and region. Accounts receivable balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected.
Inventories
Inventories, which consist principally of (i) raw materials and supplies that are consumed providing services to the Company’s customers, (ii) spare parts for equipment used in providing these services and (iii) components and attachments for manufactured equipment used in providing services, are recorded at the lower of cost or net realizable value. Cost is determined using first-in, first-out (“FIFO”) method or the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company regularly reviews inventory quantities on hand and records a write-down for excess or obsolete inventory based primarily on its estimated forecast of product demand, market conditions, production requirements and technological developments.
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 expenses are computed using the following useful lives: operating equipment,
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
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, to determine if any impairments should be recognized.
During the year ended December 31, 2020, the Company recorded accelerated depreciation related to certain operating equipment that was retired. In addition, the Company recorded a write down for certain real estate that was classified as held for sale. See Note 3 for additional information.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill by reportable segment was as follows:
Years Ended December 31, |
| 2020 |
| 2019 | ||
(in thousands) |
|
| ||||
Technical Services | $ | | $ | | ||
Support Services |
| |
| | ||
Goodwill | $ | | $ | | ||
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 2020 and 2019, the Company performed a quantitative impairment test by estimating the fair value of each of its reporting units by considering both comparable public company multiples (a market approach) and projected discounted future cash flows (an income approach). The discounted cash flow analysis is based on management’s short-term and long-term forecast of operating results for each reporting unit and includes assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows. Based on this analysis, the Company concluded that the fair value of its reporting units exceeded their carrying amount and therefore
Advertising
Advertising expenses are charged to expense during the period in which they are incurred. Advertising expenses totaled $
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.
Defined Benefit Pension Plan
The Company has a defined benefit pension plan that provides monthly benefits upon normal retirement at age
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
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 and retained earnings if capital in excess of par value is depleted. The Company tracks capital in excess of par value on a cumulative basis for each reporting period, discloses the excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements of stockholders’ equity.
Earnings per Share
Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and are therefore considered participating securities. See Note 13 for further information on restricted stock granted to employees.
Restricted shares of common stock (participating securities) outstanding and a reconciliation of weighted average shares outstanding is as follows:
(In thousands) | 2020 |
| 2019 |
| 2018 | ||||
Net (loss) income available for stockholders | $ | ( | $ | ( | $ | | |||
Less: Adjustments for losses attributable to participating securities | — | ( | ( | ||||||
Net (loss) income used in calculating per share amounts | $ | ( | $ | ( | $ | | |||
Weighted average shares outstanding (including participating securities) |
| |
| |
| | |||
Adjustment for participating securities |
| ( |
| ( |
| ( | |||
Shares used in calculating basic and diluted earnings (loss) per share |
| |
| |
| | |||
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments, accounts payable, 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 Company’s investments are classified as available-for-sale securities with the exception of investments held in the non-qualified Supplemental Executive Retirement Plan (“SERP”) which are classified as trading securities. All of these securities are carried at fair value in the accompanying consolidated balance sheets. See Note 10 for additional information.
Stock-Based Compensation
Stock-based compensation expense is recognized for all share-based payment awards, net of estimated forfeitures. 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 13 for additional information.
Recent Accounting Pronouncements
The FASB issued the following applicable Accounting Standards Updates (ASU):
Recently Adopted Accounting Standards:
| ● | ASU No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The ASU introduced a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for recognition in place of the current incurred loss model. The Company adopted the |
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
| provisions of the standard in the first quarter of 2020 resulting in no adjustment to the opening balance of retained earnings. The Company plans to continue to record an allowance on its trade receivables based on aging at the end of each reporting period using current reasonable and supportable forecasted economic conditions and specifically identified judgmental reserves. See "Current Expected Credit Losses" in the notes to consolidated financial statements for expanded disclosures. |
| ● | ASU No. 2017-04 —Intangibles —Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted these provisions in the first quarter of 2020, on a prospective basis. |
| ● | ASU No. 2018-15 —Intangibles —Goodwill and Other —Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments reduce the complexity for the accounting for costs of implementing a cloud computing service arrangement and align the requirements for capitalizing implementation costs that are incurred in a hosting arrangement that is a service contract with the costs incurred to develop or obtain internal-use software. The Company adopted these provisions in the first quarter of 2020 and the adoption did not have a material impact on its consolidated financial statements. |
Recently Issued Accounting Standards Not Yet Adopted:
| ● | ASU No. 2019-12 — Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the exceptions to the incremental approach for intra-period tax allocation in certain situations, requirement to recognize a deferred tax liability for a change in the status of a foreign investment, and the general methodology for computing income taxes in an interim period when year-to date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes with regard to franchise tax, evaluation of step up in the tax basis of goodwill in certain business combinations, allocating current and deferred tax expense to legal entities that are not subject to tax and enacted change in tax laws or rates. The Company adopted these provisions in the first quarter of 2021 and the adoption did not have a material impact on its consolidated financial statements. |
Note 2: Revenues
Accounting Policy
RPC’s contract revenues are generated principally from providing oilfield services. These services are based on mutually agreed upon pricing with the customer prior to the services being delivered and, given the nature of the services, do not include the right of return. Pricing for these services is a function of rates based on the nature of the specific job, with consideration for the extent of equipment, labor, and consumables needed for the job. RPC typically satisfies its performance obligations over time as the services are performed. RPC records revenues based on the transaction price agreed upon with its customers.
Sales tax charged to customers is presented on a net basis within the consolidated statements of operations and therefore excluded from revenues.
Nature of services
RPC provides a broad range of specialized oilfield services to independent and major oil and gas companies engaged in the exploration, production and development of oil gas properties throughout the United States and in selected international markets. RPC manages its business as either (1) services offered on the well site with equipment and personnel (Technical Services) or (2) services and tools offered off the well site (Support Services). For more detailed information about operating segments, see Note 15.
RPC contracts with its customers to provide the following services by reportable segment:
Technical Services
| ● | Includes pressure pumping, downhole tools services, coiled tubing, nitrogen, snubbing and other oilfield related services including wireline, well control, fishing and pump down services. |
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
Support Services
| ● | Rental tools – RPC rents tools to its customers for use with onshore and offshore oil and gas well drilling, completion and workover activities. |
| ● | Other support services include oilfield pipe inspection services, management and storage; well control training; and consulting. |
Our contracts with customers are generally short-term in nature and generally consist of a single performance obligation – the provision of oilfield services.
Payment terms
RPC’s contracts with customer states the final terms of the sales, including the description, quantity, and price of each service to be delivered. The Company’s contracts are generally short-term in nature and in most situations, RPC provides services ahead of payment - i.e., RPC has fulfilled the performance obligation prior to submitting a customer invoice. RPC invoices the customer upon completion of the specified services and collection generally occurs between
Significant judgments
RPC believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. RPC has elected the right to invoice practical expedient for recognizing revenue related to its performance obligations.
Disaggregation of revenues
See Note 15 for disaggregation of revenue by operating segment and services offered in each of them and by geographic regions. Timing of revenue recognition for each of the periods presented is shown below:
(in thousands) | 2020 |
| 2019 |
| 2018 | ||||
Oilfield services transferred at a point in time | $ | | $ | | $ | | |||
Oilfield services transferred over time | |
| |
| | ||||
Total revenues | $ | | $ | | $ | | |||
Contract balances
Contract assets representing the Company’s rights to consideration for work completed but not billed are included in Accounts receivable, net on the consolidated balance sheets are shown below:
(in thousands) |
| 2020 |
| 2019 | ||
Unbilled trade receivables | $ | | $ | | ||
Substantially all of the unbilled trade receivables as of December 31, 2020 and December 31, 2019 were invoiced during the following quarter.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
Note 3: Impairment and Other Charges
The Company recorded the following pre-tax charges during 2020 and 2019 as impairment and other charges in the consolidated statements of operations.
(in thousands) | 2020 |
| 2019 | |||
|
|
| ||||
Long-lived asset impairments (1) | $ | | $ | — | ||
Abandonment of assets (2) | | | ||||
Pension settlement loss (3) |
| |
| — | ||
Severance costs |
| |
| | ||
Assets held for sale write down (4) |
| |
| | ||
Retirement of equipment |
| — |
| | ||
Inventory write-downs | — | | ||||
Other |
| |
| | ||
Total | $ | | $ | | ||
(1). | Relates solely to the Technical Services segment and primarily includes pressure pumping and coiled tubing assets. |
(2). | Represents the final disposition of assets that were ceased to be used during 2019 and recorded at salvage value. Also includes interest costs related to leased assets that were impaired in 2019. |
(3). | Represents the non-cash settlement loss related to the lump-sum payment window offered to certain participants in connection with the Company’s Retirement Income Plan. See Note 13 for further details. |
(4). | Represents the final settlement on certain real estate properties that were recorded as held for sale. The Company continues to disclose the remaining real estate that are being held for sale at their carrying value on the consolidated balance sheets under the caption Assets held for sale. |
During the first half of 2020, the Company experienced drastic declines in oilfield drilling and completion activities, with low levels of revenues not experienced by RPC or the industry for many years. This unprecedented disruption was caused by the substantial decline in global demand for oil caused by the COVID-19 pandemic as well as macroeconomic events such as the geopolitical tensions between the Organization of Petroleum Exporting Countries and Russia, regarding limits on oil production. These factors resulted in a significant drop in oil prices and a substantial deterioration of the Company’s public market capitalization. In response, the Company reduced headcount, furloughed employees and implemented compensation reductions for remaining active employees with the goal of adjusting its cost structure caused by low revenue levels. The Company determined these events constituted a triggering event that required a review of the recoverability of its long-lived assets and performed an interim goodwill impairment assessment as of March 31, 2020.
The Company used both income based and market based approaches to determine the fair value of its long-lived asset groups and its reporting units for goodwill impairment assessment. Under the income approach, the fair value for each of its asset groups and reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used internal forecasts, updated for recent events, to estimate future cash flows and terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on its most recent views of the long-term outlook for each asset group and reporting units. For the market based valuation, the Company used comparable public company multiples. The selection of comparable businesses was based on the markets in which the asset groups and reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. Based on the concluded fair value of the asset groups, the Company measured and recorded an impairment loss that represents the amount by which the asset groups' carrying amounts exceeded their fair value. For purposes of the goodwill impairment assessment, the fair value of each reporting unit exceeded its net book value and therefore, goodwill was deemed to be not impaired.
The Company’s operating losses narrowed in the latter half of 2020 due to revenue increases and increased operational efficiency resulting from expense reduction measures. However, the Company continues its current strategy of minimal capital investment and continued expense scrutiny until financial returns improve. As market conditions evolve and the Company continues to develop its strategy to deal with such conditions, it may be necessary to record further asset impairments, or an impairment of the carrying value of goodwill.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
Note 4: Accounts Receivable
Accounts receivable, net consists of the following:
December 31, |
| 2020 |
| 2019 | ||
(in thousands) |
|
| ||||
Trade receivables: |
|
|
|
| ||
Billed | $ | | $ | | ||
Unbilled |
| |
| | ||
Other receivables |
| |
| | ||
Total |
| |
| | ||
Less: allowance for credit losses |
| ( |
| ( | ||
Accounts receivable, net | $ | | $ | | ||
Trade receivables relate to revenues generated from equipment and services, for which credit is extended based on our evaluation of the customer’s credit worthiness. Unbilled receivables represent revenues earned but not billed to the customer until future dates, usually within one month. Other receivables consists primarily of net amounts receivable from an agent, that operates internationally, as well as amounts due from the favorable resolution of state tax audits and rebates due from suppliers.
Note 5: Current Expected Credit Losses
The Company adopted ASU No 2016-13, Current Expected Credit Losses (Topic 326) on January 1, 2020 on a prospective basis with an immaterial cumulative-effect adjustment to the opening balance of retained earnings. This ASU replaces the current loss model with an expected credit loss model for financial assets measured at amortized cost that includes accounts (trade) receivable. The Company is exposed to credit losses primarily from providing oilfield services. The Company’s expected credit loss allowance for accounts receivable is based on historical collection experience, current and future economic and market conditions and a review of the current status of customers’ account receivable balances. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible and recoveries of amounts previously written off are recorded when collected. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of current expected credit losses was not significantly impacted. Estimates used to determine the allowance for current expected credit losses are based on an assessment of anticipated payment and all other historical, current and future information that is reasonably available.
The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected:
Years Ended December 31, |
| 2020 |
| 2019 | ||
(in thousands) |
|
| ||||
Beginning balance | $ | | $ | | ||
Adoption of ASC 326 |
| — |
| — | ||
Provision (benefit) for current expected credit losses |
| |
| | ||
Write-offs |
| ( |
| ( | ||
Recoveries collected (net of expenses) | | | ||||
Ending balance | $ | | $ | | ||
Note 6: Inventories
Inventories consist of raw materials, parts and supplies and totaled $
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
Note 7: Property, Plant and Equipment
Property, plant and equipment are presented at cost net of accumulated depreciation and consist of the following:
December 31, |
| 2020 |
| 2019 | ||
(in thousands) |
|
| ||||
Land | $ | | $ | | ||
Buildings and leasehold improvements |
| |
| | ||
Operating equipment |
| |
| | ||
Computer software |
| |
| | ||
Furniture and fixtures |
| |
| | ||
Vehicles |
| |
| | ||
Gross property, plant and equipment |
| |
| | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Net property, plant and equipment | $ | | $ | | ||
Depreciation expense was $
Note 8: Income Taxes
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") which among other changes, eliminated the taxable income limit for certain net operating losses ("NOL"), allowed businesses to carryback NOLs arising in 2018, 2019 and 2020 to the five prior years, and provided a payment delay of employer payroll taxes during 2020 after the date of enactment. These provisions enabled RPC to carryback federal tax losses related to 2019 and 2020. The Company recorded net tax benefits totaling $
The Tax Cuts and Jobs Act (“the Act”) effective January 1, 2018, included a reduction to the US federal tax rate from
In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118, the Company completed its accounting for the provisional amounts recognized as of December 31, 2017 and recorded a reduction in tax expense of $
The following table lists the components of the provision (benefit) for income taxes:
Years ended December 31, |
| 2020 |
| 2019 |
| 2018 | |||
(in thousands) |
|
|
| ||||||
Current provision (benefit): |
|
|
| ||||||
Federal | $ | ( | $ | ( | $ | | |||
State |
| |
| ( |
| | |||
Foreign |
| |
| |
| | |||
Deferred provision (benefit): |
|
|
|
|
| ||||
Federal |
| ( |
| ( |
| | |||
State |
| ( |
| |
| ( | |||
Total income tax (benefit) provision | $ | ( | $ | ( | $ | | |||
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
Reconciliation between the federal statutory rate and RPC’s effective tax rate is as follows:
Years ended December 31, |
| 2020 |
| 2019 |
| 2018 |
|
Federal statutory rate | | % | | % | | % | |
State income taxes, net of federal benefit | | ( | |
| |||
Tax credits |
| |
| |
| ( | |
Non-deductible expenses |
| ( |
| ( |
| | |
Adjustments related to CARES Act |
| |
| — |
| — | |
Adjustments related to the Act |
| — |
| — |
| ( | |
Adjustments related to vesting of restricted stock |
| ( |
| ( |
| ( | |
Other |
| |
| |
| ( | |
Effective tax rate |
| | % | | % | | % |
Significant components of the Company’s deferred tax assets and liabilities are as follows:
December 31, |
| 2020 |
| 2019 | ||
(in thousands) |
|
| ||||
Deferred tax assets: |
|
|
|
| ||
Self-insurance | $ | | $ | | ||
Pension |
| |
| | ||
State net operating loss carryforwards |
| |
| | ||
Bad debt |
| |
| | ||
Stock-based compensation |
| |
| | ||
Inventory reserve | | | ||||
Impairment reserve | | | ||||
Foreign tax credit carryforwards |
| — |
| | ||
Federal net operating loss carryforwards | — | | ||||
Basis differences in consolidated limited liability company | | | ||||
All others |
| |
| | ||
Gross deferred tax assets |
| |
| | ||
Deferred tax liabilities: |
|
| ||||
Depreciation |
| ( |
| ( | ||
Goodwill amortization |
| ( |
| ( | ||
Basis differences in joint ventures |
| ( |
| ( | ||
All others |
| ( |
| ( | ||
Gross deferred tax liabilities |
| ( |
| ( | ||
Net deferred tax liabilities | $ | ( | $ | ( | ||
The Company’s current intention is to permanently reinvest funds held in our foreign subsidiaries outside of the U.S., with the possible exception of repatriation of funds that have been previously subject to U.S. federal and state taxation or when it would be tax effective through the utilization of foreign tax credits, or would otherwise create no additional U.S. tax cost.
As of December 31, 2020, the Company had net operating losses related to federal income taxes of $
As of December 31, 2020, the Company has foreign tax credits of $
Additionally, as of December 31, 2020, the Company has capital loss carryforwards of $
Total net income tax payments (refunds) were $(
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
The Company and its subsidiaries are subject to U.S. federal and state income taxes 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. In general, the Company’s 2016 through 2019 tax returns remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year.
As of December 31, 2020 and 2019, our liability for unrecognized tax benefits related to state income taxes was recorded as part of our 2020 effective rate, due to the expiration of the related state tax statute. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2020 |
| 2019 | |||
Balance at January 1 | $ | | $ | | ||
Additions for tax positions of prior years |
| |
| | ||
Reductions for tax positions of prior years |
| $ | ( |
| | |
Balance at December 31 | | $ | | |||
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 result from, among other things, state tax settlements under voluntary disclosure agreements, or conclusions of ongoing examinations or reviews. However, quantification of an estimated range cannot be made at this time.
The Company's policy is to record interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties as of December 31, 2020, 2019, and 2018 were $
Note 9: Long-Term Debt
The Company has a revolving Credit Agreement with Bank of America and
The Credit Agreement's maturity date is July 26, 2023. On September 25, 2020, the Company entered into Amendment No. 5 to Credit Agreement (the “Amendment”). This Amendment (1) reduced the maximum amount available for borrowing under the credit facility from $
The Credit Agreement includes the following covenants: (i) when RPC’s trailing four quarter EBITDA (as calculated under the Credit Agreement) is equal to or greater than $
Revolving loans under the amended revolving credit facility bear interest at one of the following two rates at the Company’s election:
| ● | the Eurodollar Rate, which is the rate per annum equal to the London Interbank Offering Rate (“LIBOR”); plus, a margin ranging from |
| ● | the Base Rate, which is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus |
In addition, the Company pays an annual fee ranging from
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
The Company has incurred total loan origination fees and other debt related costs associated with this revolving credit facility in the aggregate of approximately $
As of December 31, 2020, RPC had
| |||||||||
Years Ended December 31, | 2020 |
| 2019 |
| 2018 | ||||
(in thousands) |
|
|
|
| |||||
Interest incurred |
| $ | | $ | | $ | | ||
Interest paid | $ | | $ | | $ | | |||
Note 10: Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income consists of the following (in thousands):
|
| Foreign |
| ||||||
Pension | Currency | ||||||||
| Adjustment |
| Translation |
| Total | ||||
Balance at December 31, 2018 | $ | ( | $ | ( | $ | ( | |||
Change during 2019: |
|
|
| ||||||
Before-tax amount | ( |
| |
| ( | ||||
Tax (expense) benefit |
| |
| — |
| | |||
Adoption of accounting standard | ( | — | ( | ||||||
Reclassification adjustment, net of taxes: |
|
|
|
|
|
| |||
Amortization of net loss (1) |
| |
| — |
| | |||
Total activity in 2019 |
| ( |
| |
| ( | |||
Balance at December 31, 2019 | $ | ( | $ | ( | $ | ( | |||
Change during 2020: |
|
|
|
|
|
| |||
Before-tax amount |
| |
| ( |
| | |||
Tax (expense) benefit |
| ( |
| — |
| ( | |||
Pension settlement loss | | — | | ||||||
Reclassification adjustment, net of taxes: |
|
|
|
|
| ||||
Amortization of net loss (1) |
| |
| — |
| | |||
Total activity in 2020 |
| |
| ( |
| | |||
Balance at December 31, 2020 | $ | ( | $ | ( | $ | ( | |||
(1) Reported as part of selling, general and administrative expenses.
Note 11: 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. |
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
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, 2020 and 2019:
Fair Value Measurements at December 31, 2020 with: | ||||||||||||
Quoted prices in | Significant | |||||||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| assets |
| inputs |
| inputs | ||||
| (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets: | ||||||||||||
Available-for-sale securities – equity securities | $ | | $ | | $ | | $ | | ||||
Investments measured at net asset value - trading securities | $ | |
|
|
|
|
|
| ||||
Fair Value Measurements at December 31, 2019 with: | ||||||||||||
Quoted prices in | Significant | |||||||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| assets |
| inputs |
| inputs | ||||
|
|
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
Assets: | ||||||||||||
Available-for-sale securities – equity securities | $ | | $ | | $ | | $ | | ||||
Investments measured at net asset value - trading securities | $ | |
|
|
|
|
|
| ||||
The Company determines the fair value of marketable securities classified as 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. Marketable securities classified as trading are comprised of the SERP assets, as described in Note 13, and are recorded primarily at their net cash surrender values, calculated using their net asset values, which approximates fair value, as provided by the issuing insurance company. Significant observable inputs, in addition to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2020 there were no significant transfers in or out of levels 1, 2 or 3.
Under the Company’s revolving credit facility, there was no balance outstanding at December 31, 2020 and 2019. Outstanding balances based on the quote from the lender (level 2 inputs) is similar to the fair value as of the same date. The borrowings under our revolving credit facility bear variable interest rates as described in Note 9. The Company is subject to interest rate risk on the variable component of the interest rate.
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.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
The Company’s real estate classified as held for sale has been stated at fair value less costs to sell since the fair value less costs to sell is lower than its carrying amount. The non-recurring fair value measurement was completed in the third quarters of 2020 and 2019 and determined based on observable market data that includes price per square foot involving comparable properties in similar locations and reflected in the tables below:
Fair Value Measurements at December 31, 2020 with: | ||||||||||||
|
| Quoted prices in |
| Significant |
| |||||||
active markets | other | Significant | ||||||||||
for identical | observable | unobservable | ||||||||||
(in thousands) | Total | assets | inputs | inputs | ||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets: |
|
|
|
|
|
|
|
| ||||
Assets held for sale | $ | | $ | | $ | | $ | | ||||
|
| Fair Value Measurements at December 31, 2019 with: | ||||||||||
Quoted prices | Significant | |||||||||||
in active | other | Significant | ||||||||||
markets for | observable | unobservable | ||||||||||
(in thousands) |
| Total |
| identical assets |
| inputs |
| inputs | ||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets: |
|
|
|
| ||||||||
Assets held for sale | $ | | $ | — | $ | | $ | — | ||||
Note 12: Commitments and Contingencies
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.
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. Any probable and reasonable estimate of assessment costs are included in accrued state, local and other taxes.
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 it is not reasonably possible that the outcome of all such proceedings, even if determined adversely, would have a material adverse effect on the Company’s business or financial condition.
Note 13: Employee Benefit Plans
Defined Benefit Pension Plan
The Company’s Retirement Income Plan, a trusteed defined benefit pension plan, provides monthly benefits upon normal retirement at age 65 or early retirement at age 591/2 to substantially all employees with at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation as an adopting employer.
In October 2020, the Company amended the Retirement Income Plan to add a limited lump-sum payment window for vested terminated participants who had terminated employment before July 1, 2020 and for active employees who reached age 59 ½ by December 1, 2020, with a vested balance. The participants could elect to receive their vested balance immediately as a lump-sum or a monthly annuity payment. The lump-sum payment window offering ended during the fourth quarter of 2020 and plan assets were used to fund participant elections. The resulting non-cash settlement charges represent the accelerated recognition of actuarial losses reflected in Accumulated Other Comprehensive Income (Loss) (AOCI). A settlement loss of $
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
acceptance of these lump-sum payments is included as part of impairment and other charges. See Note 3 for additional information related to the settlement loss.
The Company’s projected benefit obligation exceeds the fair value of the plan assets under its pension plan by $
December 31, |
| 2020 |
| 2019 | ||
(in thousands) |
|
| ||||
Accumulated benefit obligation at end of year | $ | | $ | | ||
CHANGE IN PROJECTED BENEFIT OBLIGATION: |
|
|
|
| ||
Benefit obligation at beginning of year | $ | | $ | | ||
Service cost |
| |
| | ||
Interest cost |
| |
| | ||
Amendments |
| |
| | ||
Actuarial loss |
| |
| | ||
Benefits paid |
| ( |
| ( | ||
Settlement | ( | — | ||||
Projected benefit obligation at end of year | $ | | $ | | ||
CHANGE IN PLAN ASSETS: |
|
| ||||
Fair value of plan assets at beginning of year | $ | | $ | | ||
Actual return on plan assets |
| |
| | ||
Employer contribution |
| |
| | ||
Benefits paid |
| ( |
| ( | ||
Settlements | ( | — | ||||
Fair value of plan assets at end of year | $ | | $ | | ||
Funded status at end of year | $ | ( | $ | ( | ||
December 31, |
| 2020 |
| 2019 | ||
(in thousands) |
|
| ||||
AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF: |
|
|
|
| ||
Net loss | $ | | $ | | ||
Prior service cost (credit) |
| |
| | ||
Net transition obligation (asset) |
| |
| | ||
$ | | $ | | |||
The accumulated benefit obligation for the Retirement Income Plan at December 31, 2020 and 2019 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, |
| 2020 |
| 2019 | ||
(in thousands) |
|
| ||||
Funded status of the Retirement Income Plan | $ | ( | $ | ( | ||
SERP liability |
| ( |
| ( | ||
Long-term pension liabilities | $ | ( | $ | ( | ||
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. The Company made a cash contribution of $
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
The components of net periodic benefit cost of the Retirement Income Plan are summarized as follows:
Years ended December 31, | 2020 |
| 2019 |
| 2018 | ||||
(in thousands) |
|
|
| ||||||
Service cost for benefits earned during the period | $ | | $ | | $ | | |||
Interest cost on projected benefit obligation | |
| |
| | ||||
Expected return on plan assets | ( |
| ( |
| ( | ||||
Amortization of net loss | |
| |
| | ||||
Settlement loss | | — | — | ||||||
Net periodic benefit plan cost | $ | | $ | | $ | ( | |||
The Company recognized pre-tax (increases) decreases to the funded status in accumulated other comprehensive loss of $
(in thousands) |
| 2020 |
| 2019 |
| 2018 | |||
Net (gain) loss | $ | ( | $ | | $ | | |||
Amortization of net loss | ( | ( | ( | ||||||
Net transition obligation (asset) |
| |
| |
| | |||
Settlement loss | ( | — | — | ||||||
Amount recognized in accumulated other comprehensive loss | $ | | $ | | $ | | |||
The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows:
December 31, |
| 2020 |
| 2019 |
| 2018 |
|
Projected Benefit Obligation: |
|
|
|
| |||
Discount rate | | % | | % | | % | |
Rate of compensation increase |
|
|
| ||||
Net Benefit Cost: |
|
|
|
|
|
| |
Discount rate |
| | % | | % | | % |
Expected return on plan assets |
| | % | | % | | % |
Rate of compensation increase |
|
|
|
The Company’s expected return on assets assumption is derived from a detailed periodic assessment conducted by its management and its investment advisor. 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 2020 expected long-term return assumption of
The plan’s weighted average asset allocation at December 31, 2020 and 2019 by asset category along with the target allocation for 2021 are as follows:
| Target Allocation |
| Percentage of Plan Assets |
| |||
December 31, | 2021 | 2020 | 2019 |
| |||
Asset Category |
|
|
|
| |||
Cash and cash equivalents |
| % | | % | | % | |
Fixed income securities |
| % | | % | | % | |
Investments measured at net asset value |
| — | % | | % | | % |
Total |
| | % | | % | | % |
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
The Company’s investments in 2020 consist primarily of fixed income securities that include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. 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 while minimizing the level of risk to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. Although not required, Company management will evaluate contributing to the pension plan during 2021.
The following tables present our plan assets using the fair value hierarchy as of December 31, 2020 and 2019. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See Note 11 for a brief description of the three levels under the fair value hierarchy.
Fair Value Hierarchy as of December 31, 2020:
Investments (in thousands) |
|
| Total |
| Level 1 |
| Level 2 | ||||
Cash and Cash Equivalents | (1) | $ | | $ | | $ | | ||||
Fixed Income Securities | (2) | | | | |||||||
Total Assets in the Fair Value Hierarchy | $ | | $ | | $ | | |||||
Investments measured at Net Asset Value |
|
| |
|
|
|
| ||||
Investments at Fair Value | $ | |
|
|
|
| |||||
Fair Value Hierarchy as of December 31, 2019:
Investments (in thousands) |
|
| Total |
| Level 1 | Level 2 | |||||
Cash and Cash Equivalents | (1) | $ | | $ | | $ | — | ||||
Fixed Income Securities | (2) | | — | | |||||||
Domestic Equity Securities | (3) | | | — | |||||||
Total Assets in the Fair Value Hierarchy | $ | | $ | | $ | | |||||
Investments measured at Net Asset Value |
| |
|
|
|
|
| ||||
Investments at Fair Value | $ | |
|
|
|
|
| ||||
| (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) | Domestic equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets. |
The Company estimates that the future benefits payable for the Retirement Income Plan over the next ten years are as follows:
(in thousands) |
| ||
2021 | $ | | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026‑2030 | $ | |
Supplemental Executive Retirement Plan (SERP)
The Company permits selected highly compensated employees to defer a portion of their compensation into the SERP. The SERP assets are invested primarily in company-owned life insurance (“COLI”) policies as a funding source to satisfy the obligations of the SERP. The assets are subject to claims by creditors, and the Company can designate them to another purpose at any time. Investments in COLI policies consisted of variable life insurance policies totaling $
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
their net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s credit rating was A+.
The Company classifies the SERP assets as trading securities as described in Note 1. The fair value of these assets totaled $
As a result of Company-owned life insurance policy claims, the Company recorded tax-free gains of $
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
Stock Incentive Plans
The Company has issued stock options and restricted stock to employees under three 10-year stock incentive plans that were approved by stockholders in 1994, 2004 and 2015. The 1994 plan expired in 2004 and the 2004 Plan expired in 2015. In April 2014, the Company reserved
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 the 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.
Pre-tax stock-based employee compensation expense was $
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
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. There were no stock options exercised during 2020, 2019 or 2018 and there are no stock options outstanding as of December 31, 2020 and 2019.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
Restricted Stock
The Company has granted certain employees time lapse restricted stock which vest after a stipulated number of years from the grant date, depending on the terms of the issue. Time lapse restricted shares issued to date vest in
The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2020:
Weighted Average | |||||
| Shares |
| Grant-Date Fair Value | ||
Non-vested shares at January 1, 2020 | | $ | | ||
Granted |
| |
| | |
Vested |
| ( |
| | |
Forfeited |
| ( |
| | |
Non-vested shares at December 31, 2020 |
| | $ | | |
The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2019:
| Weighted Average | ||||
| Shares |
| Grant-Date Fair Value | ||
Non-vested shares at January 1, 2019 | | $ | |||
Granted |
| |
| ||
Vested |
| ( | |||
Forfeited |
| ( |
| | |
Non-vested shares at December 31, 2019 |
| | $ | | |
The fair value of restricted share awards is based on the market price of the Company’s stock on the date of the grant and is amortized to compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period. The weighted average grant date fair value per share of these restricted stock awards was $
The consolidated statements of cash flows reflect discrete income tax adjustments that resulted in
Other Information
As of December 31, 2020, total unrecognized compensation cost related to non-vested restricted shares was $
Note 14: Related Party Transactions
Marine Products Corporation
Effective in 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
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
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 were $
Other
The Company periodically purchases in the ordinary course of business equipment 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 $
RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. Gary W. Rollins is also Chairman, and which is controlled by Mr. Rollins and his affiliates). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on
A group that includes the Company’s Chairman of the Board, Gary W. Rollins, who is also a director of the Company, and certain companies under his control, controls in excess of
RPC and Marine Products own
Note 15: Business Segment and Entity wide Disclosures
RPC’s reportable segments are the same as its operating segments. RPC manages its business under Technical Services and Support Services. Technical Services is comprised of service lines that generate revenue based on equipment, personnel or materials at the well site and are closely aligned with completion and production activities of the customers. Support Services is comprised of service lines which generate revenue from services and equipment offered off the well site and are closely aligned with the customers’ drilling activities. Selected overhead including centralized support services and regulatory compliance are classified as Corporate.
Technical Services consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The services offered under Technical Services are high capital and personnel intensive businesses. The Company considers all of these services to be closely integrated oil and gas well servicing businesses, and makes resource allocation and performance assessment decisions based on this operating segment as a whole across these various services.
Support Services consist primarily of drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training and consulting services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels.
The Company’s Chief Operating Decision Maker (“CODM”) assesses performance and makes resource allocation decisions regarding, among others, staffing, growth and maintenance capital expenditures and key initiatives based on the operating segments outlined above.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
Segment Revenues:
RPC’s operating segment revenues by major service lines are shown in the following table:
(in thousands) | 2020 | 2019 | 2018 | ||||||
Technical Services: |
|
|
| ||||||
Pressure Pumping | $ | | $ | | $ | | |||
Downhole Tools | |
| |
| | ||||
Coiled Tubing | |
| |
| | ||||
Nitrogen | |
| |
| | ||||
Snubbing | |
| |
| | ||||
All other | |
| |
| | ||||
Total Technical Services | $ | | $ | | $ | | |||
Support Services: |
|
|
|
|
|
| |||
Rental Tools | $ | | $ | | $ | | |||
All other |
| |
| |
| | |||
Total Support Services | $ | | $ | | $ | | |||
Total Revenues | $ | | $ | | $ | | |||
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 CODM on a consolidated basis, and accordingly the Company does not report gains or losses at the segment level. Inter-segment revenues are generally recorded in segment operating results at prices that management believes approximate prices for arm’s length transactions and are not material to operating results.
Summarized financial information concerning RPC’s reportable segments for the years ended December 31, 2020, 2019 and 2018 are shown in the following table:
|
|
|
|
|
| Gain on |
| Impairment |
|
| ||||||||
Technical | Support | disposition of | and other | |||||||||||||||
(in thousands) |
| Services |
| Services |
| Corporate |
| assets, net |
| charges |
| Total | ||||||
2020 |
|
|
|
|
| |||||||||||||
Revenues | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||
Operating (loss) profit | ( | ( | ( | | ( | (1) | ( | |||||||||||
Capital expenditures | | | | — | — | | ||||||||||||
Depreciation and amortization |
| |
| |
| |
| — |
| — |
| | ||||||
Identifiable assets |
| |
| |
| |
| — |
| — |
| | ||||||
2019 |
|
|
|
|
|
|
|
|
|
|
| |||||||
Revenues | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||
Operating (loss) profit |
| ( | | ( | | ( | (2) | ( | ||||||||||
Capital expenditures |
| | | | — | — | | |||||||||||
Depreciation and amortization |
| |
| |
| |
| — |
| — |
| | ||||||
Identifiable assets |
| |
| |
| |
| — |
| — |
| | ||||||
2018 |
|
|
|
|
|
|
|
|
|
|
| |||||||
Revenues | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||
Operating profit (loss) |
| | | ( | | — | | |||||||||||
Capital expenditures |
| | | | — | — | | |||||||||||
Depreciation and amortization |
| |
| |
| |
| — |
| — |
| | ||||||
Identifiable assets |
| |
| |
| |
| — |
| — |
| | ||||||
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
The following summarizes revenues for the United States and separately for all international locations combined for the years ended December 31, 2020, 2019 and 2018. The revenues are presented based on the location of the use of the equipment or services. Assets related to international operations are less than 10 percent of RPC’s consolidated assets, and therefore are not presented.
Years ended December 31, | 2020 |
| 2019 |
| 2018 | ||||
(in thousands) |
|
|
| ||||||
United States Revenues | $ | | $ | | $ | | |||
International Revenues | |
| |
| | ||||
$ | | $ | | $ | | ||||
Note 16: Leases
The Company adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2019 and recognized leases with duration greater than 12 months on the balance sheet using the modified retrospective approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed for a carry-forward of the historical lease classification. For leases with terms greater than 12 months, the Company has recorded the related Right-Of-Use (ROU) asset and liability at the present value of lease payments over the term. A few of the leases include rental escalation clauses or renewal options and they have been factored into the determination of lease payments when appropriate. There are no residual value guarantees on the existing leases. The Company estimates its incremental borrowing rate, at lease commencement, to determine the present value of lease payments, since most of the Company’s leases do not provide an implicit rate of return. ROU assets exclude lessor incentives received.
The Company’s lease population consists primarily of real estate including its corporate headquarters, office space and warehouses, in addition to vehicles, railcars, storage containers and office equipment. The Company does not have any finance leases. The Company has a significant population of month-to-month real estate leases that have been classified as short-term leases, and therefore has not recognized a ROU asset or lease liability related to them. The Company determines at contract inception, if an arrangement is a lease or contains a lease based on whether the Company obtains the right to control the use of specifically identifiable property, plant and equipment for a period of time in exchange for consideration. The Company has elected not to separate non-lease components from lease components for its leases. Variable lease payments relate primarily to taxes and insurance on real estate contracts and are recognized as expense when incurred.
The Company subleases certain real estate to third parties. Our sublease portfolio consists solely of operating leases. As of December 31, 2020, the Company had no operating leases that had not yet commenced. During the year ended December 31, 2020, the Company entered into new leases or modified existing leases that resulted in an increase of ROU assets in exchange for operating lease liabilities as disclosed below.
Lease position:
The table below presents the assets and liabilities related to operating leases recorded on the consolidated balance sheets:
December 31, |
|
| 2020 |
| 2019 | |
(in thousands) | ||||||
Assets: |
|
|
|
|
| |
Operating lease right-of-use assets | $ | | $ | | ||
Liabilities: |
|
| ||||
Current portion of operating leases | $ | | $ | | ||
Long-term operating lease liabilities | |
| | |||
Total lease liabilities | $ | | $ | | ||
During the year ended December 31, 2019, the Company recorded an impairment totaling $
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RPC, Inc. and Subsidiaries
Years ended December 31, 2020, 2019 and 2018
Lease costs:
The components of lease expense are included in costs of goods sold, and selling, general and administrative expenses in the consolidated statements of operations as disclosed below
Year ended December 31, |
| 2020 | 2019 | |||
(in thousands) | ||||||
Operating lease cost | $ | | $ | | ||
Short-term lease cost | |
| | |||
Variable lease cost | |
| | |||
Sublease income | ( |
| ( | |||
Total lease cost | $ | | $ | | ||
Total rental expense, including short-term rentals charged to operations related to operating leases under the previous lease standard, was $
Other information: |
|
|
| ||||
As of December 31, | 2020 | 2019 | |||||
Cash paid for amounts included in the measurement of lease liabilities – operating leases (in thousands) | $ | | $ | | |||
ROU assets obtained in exchange for operating lease liabilities (in thousands) | $ | | $ | | |||
Weighted average remaining lease term – operating leases (years) |
| ||||||
Weighted average discount rate – operating leases | | % |
| | % | ||
Lease Commitments:
Maturity of lease liabilities - Operating Leases:
As of December 31, |
| 2020 |
| 2019 | ||
(in thousands) | ||||||
2020 | $ | — | $ | |||
2021 |
| |
| | ||
2022 |
| |
| | ||
2023 |
| |
| | ||
2024 |
| |
| | ||
2025 |
| |
| _ | ||
Thereafter |
| |
| | ||
Total lease payments |
| |
| | ||
Less: Amounts representing interest |
| ( |
| ( | ||
Present value of lease liabilities | $ | | $ | | ||
60
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, 2020 (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, 2020 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.
61
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 2021 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 15 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 2021 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 rpc.net. Copies are available at no charge by writing to Attention: Human Resources, RPC, Inc., 2801 Buford Highway, Suite 300, 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 2021 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 2021 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.
62
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 2021 Annual Meeting of Stockholders, in the sections “Capital Stock” and “Election of Directors.” This information is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information regarding equity compensation plans as of December 31, 2020.
| (A) |
|
| (C) | ||||
| Number of Securities |
| (B) | Number of Securities Remaining | ||||
| To Be Issued Upon |
| Weighted Average | Available for Future Issuance Under | ||||
| Exercise of Outstanding |
| Exercise Price of | Equity Compensation Plans | ||||
| Options, Warrants and |
| Outstanding Options, | (Excluding Securities Reflected in | ||||
Plan category |
| Rights | Warrants and Rights |
| Column (A)) | |||
Equity compensation plans approved by securityholders |
| — | $ | — |
| 4,012,780 | (1) | |
Equity compensation plans not approved by securityholders |
| — |
| — |
| — | ||
Total |
| — | $ | — |
| 4,012,780 | ||
| (1) | All of the securities can be issued in the form of restricted stock or other stock awards. |
See Note 13 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 2021 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 2021 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 Accounting Firm” in the RPC Proxy Statement for its 2021 Annual Meeting of Stockholders. This information is incorporated herein by reference.
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: |
63
10.10 |
10.11 |
10.14 |
10.15 |
10.17 |
10.20 |
Exhibits (inclusive of item 3 above):
Exhibit |
| Description |
|---|---|---|
3.1A |
| |
3.1B |
| |
3.1C |
| |
3.2 |
| |
4 |
| |
4.2 | ||
10.1 |
| |
10.2 |
| |
10.3 |
| |
10.4 |
| |
10.5 |
| |
10.6 |
| |
10.7 |
|
64
Exhibit |
| Description |
|---|---|---|
10.8 |
| |
10.9 |
| |
10.10 |
| |
10.11 |
| |
10.12 |
| |
10.13 |
| |
10.14 |
| |
10.15 |
| |
10.16 |
| |
10.17 |
| |
10.18 |
| |
10.19 |
| |
10.20 |
| |
10.21 |
| |
10.22 | ||
21 |
| |
23 |
| |
24 |
| |
31.1 |
| |
31.2 |
| |
32.1 |
| Section 906 certifications for Chief Executive Officer and Chief Financial Officer |
95.1 |
| |
101.INS |
| XBRL Instance Document |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
65
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) | |
| ||
| February 26, 2021 | |
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 | February 26, 2021 | |||
|
| ||||
|
|
| |||
/s/ Ben M. Palmer |
|
| |||
Ben M. Palmer | Vice President, Chief Financial Officer and Corporate | February 26, 2021 | |||
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.
Gary W. Rollins, Director | Amy R. Kreisler, Director |
Jerry W. Nix, Director | Pamela R. Rollins, Director |
Harry J. Cynkus, Director | Patrick J. Gunning, Director |
Susan R. Bell, Director |
/s/ | Richard A. Hubbell |
|
Richard A. Hubbell |
| |
Director and as Attorney-in-fact |
| |
February 26, 2021 |
| |
66
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORTS AND SCHEDULE
The following documents are filed as part of this report.
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.
67
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
| For the years ended | |||||||||||
December 31, 2020, 2019 and 2018 | ||||||||||||
Balance at | Charged to | Balance | ||||||||||
Beginning | Costs and | Net (Deductions) | at End of | |||||||||
(in thousands) | of Period | Expenses | Recoveries | Period | ||||||||
Year ended December 31, 2020 |
|
|
|
| ||||||||
Credit loss allowance for accounts receivable | $ | | $ | | $ | ( | (1) | $ | | |||
Deferred tax asset valuation allowance | $ | | $ | — | $ | | (2) | $ | | |||
Reserve for obsolete or slow moving inventory | $ | | $ | | $ | ( | (3) | $ | | |||
Year ended December 31, 2019 |
|
|
|
|
|
|
| |||||
Credit loss allowance for accounts receivable | $ | | $ | | $ | ( | (1) | $ | | |||
Deferred tax asset valuation allowance | $ | | $ | — | $ | | (2) | $ | | |||
Reserve for obsolete or slow moving inventory | $ | | $ | | $ | ( | (3) | $ | | |||
Year ended December 31, 2018 |
|
|
|
|
|
|
| |||||
Credit loss allowance for accounts receivable | $ | | $ | | $ | ( | (1) | $ | | |||
Deferred tax asset valuation allowance | $ | | $ | — | $ | ( | (2) | $ | | |||
Reserve for obsolete or slow moving inventory | $ | | $ | | $ | ( | (3) | $ | | |||
| (1) | Net (deductions) recoveries in the credit loss allowance 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 net operating losses, foreign tax credits and capital losses that management believes will not be utilized before they expire. |
| (3) | Net (deductions) recoveries in the reserve for obsolete or slow moving inventory principally reflect the write-off and/ or disposal of previously reserved inventory. |
68