Employee Benefit Plans

12 Months Ended

Dec. 31, 2018

Employee Benefit Plans

Employee Benefit Plans

Note 11: Employee Benefit Plans

Defined Benefit Pension Plan

The Company’s Retirement Income Plan, a trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to substantially all employees with at least one year of service prior to 2002. During 2001, the plan became a multiple employer plan, with Marine Products Corporation as an adopting employer.

The Company’s projected benefit obligation exceeds the fair value of the plan assets under its pension plan by $5.1 million and thus the plan was under-funded as of December 31, 2018. The following table sets forth the funded status of the Retirement Income Plan and the amounts recognized in RPC’s consolidated balance sheets:

December 31,	2018			2017
(in thousands)
Accumulated benefit obligation at end of year	$	43,417		$	46,397
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Benefit obligation at beginning of year	$	46,397		$	44,315
Service cost		—			—
Interest cost		1,832			1,932
Amendments		—			—
Actuarial loss		(2,658	)		2,206
Benefits paid		(2,154	)		(2,056	)
Projected benefit obligation at end of year	$	43,417		$	46,397
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year	$	38,050		$	34,745
Actual return on plan assets		(2,532	)		5,361
Employer contribution		5,000			—
Benefits paid		(2,154	)		(2,056	)
Fair value of plan assets at end of year	$	38,364		$	38,050
Funded status at end of year	$	(5,053	)	$	(8,347	)

December 31,	2018		2017
(in thousands)
AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CONSIST OF:
Net loss	$	24,650	$	22,762
Prior service cost (credit)		—		—
Net transition obligation (asset)		—		—
	$	24,650	$	22,762

The accumulated benefit obligation for the Retirement Income Plan at December 31, 2018 and 2017 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,	2018			2017
(in thousands)
Funded status of the Retirement Income Plan	$	(5,053	)	$	(8,347	)
SERP liability		(24,585	)		(27,288	)
Long-term pension liabilities	$	(29,638	)	$	(35,635	)

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. Amounts contributed to the plan totaled $5.0 million in 2018 and no contributions were made in 2017.

The components of net periodic benefit cost of the Retirement Income Plan are summarized as follows:

Years ended December 31,	2018			2017			2016
(in thousands)
Service cost for benefits earned during the period	$	—		$	—		$	—
Interest cost on projected benefit obligation		1,832			1,932			2,006
Expected return on plan assets		(2,837	)		(2,356	)		(2,131	)
Amortization of net loss		824			851			799
Net periodic benefit plan cost	$	(181	)	$	427		$	674

The Company recognized pre-tax (increases) decreases to the funded status in accumulated other comprehensive loss of $1,888,000 in 2018, $(1,650,000) in 2017, and $1,240,000 in 2016. There were no previously unrecognized prior service costs as of December 31, 2018, 2017 and 2016. The pre-tax amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2018, 2017 and 2016 are summarized as follows:

(in thousands)	2018			2017			2016
Net (gain) loss	$	2,712		$	(799	)	$	2,039
Amortization of net loss		(824	)		(851	)		(799	)
Net transition obligation (asset)		—			—			—
Amount recognized in accumulated other comprehensive loss	$	1,888		$	(1,650	)	$	1,240

The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost in 2019 are as follows:

(in thousands)	2019
Amortization of net loss	$	897
Prior service cost (credit)		—
Net transition obligation (asset)		—
Estimated net periodic benefit plan cost	$	897

The weighted average assumptions as of December 31 used to determine the projected benefit obligation and net benefit cost were as follows:

December 31,	2018			2017			2016
Projected Benefit Obligation:
Discount rate		4.65	%		4.00	%		4.45	%
Rate of compensation increase		N/A			N/A			N/A
Net Benefit Cost:
Discount rate		4.00	%		4.45	%		4.70	%
Expected return on plan assets		7.00	%		7.00	%		7.00	%
Rate of compensation increase		N/A			N/A			N/A

The Company’s expected return on assets assumption is derived from a detailed periodic assessment conducted by its management and its investment 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 expected long-term return assumption of seven percent is reasonable.

The plan’s weighted average asset allocation at December 31, 2018 and 2017 by asset category along with the target allocation for 2019 are as follows: 

	Target Allocation		Percentage of Plan Assets
December 31,	2019		2018			2017
Asset Category
Cash and cash equivalents		0% - 3%		3.0	%		2.8	%
Fixed income securities		15% - 100%		29.1	%		20.7	%
Domestic equity securities		0% - 40%		39.5	%		23.8	%
International equity securities		0% - 30%		19.0	%		42.4	%
Investments measured at net asset value		0% - 12%		9.4	%		10.3	%
Total				100.0	%		100.0	%

The Company’s overall investment strategy is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit payments, with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include investments in large-cap and small-cap companies domiciled domestically and internationally. Fixed-income securities include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate funds and private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to individual market securities, equity and 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 2019.

Some of our assets, primarily our private equity and real estate funds, do not have readily determinable market values given the specific investment structures involved and the nature of the underlying investments. For plan asset reporting as of December 31, 2018, publicly traded asset pricing was used where possible. For assets without readily determinable values, estimates were derived from investment manager statements combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested and the valuation is based on significant non-observable inputs which do not have a readily determinable fair value. The 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.

The following tables present our plan assets using the fair value hierarchy as of December 31, 2018 and 2017. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See Note 9 for a brief description of the three levels under the fair value hierarchy.

Fair Value Hierarchy as of December 31, 2018:

Investments (in thousands)		Total		Level 1		Level 2
Cash and Cash Equivalents	(1)	$	1,140	$	1,140	$	—
Fixed Income Securities	(2)		11,163		—		11,163
Domestic Equity Securities	(3)		15,182		5,602		9,581
International Equity Securities	(4)		7,279		—		7,279
Total Assets in the Fair Value Hierarchy		$	34,764	$	6,742	$	28,023
Investments measured at Net Asset Value			3,600
Investments at Fair Value		$	38,364

Fair Value Hierarchy as of December 31, 2017:

Investments (in thousands)		Total		Level 1		Level 2
Cash and Cash Equivalents	(1)	$	1,084	$	1,084	$	—
Fixed Income Securities	(2)		9,064		—		9,064
Domestic Equity Securities	(3)		16,103		5,930		10,173
International Equity Securities	(4)		7,889		—		7,889
Total Assets in the Fair Value Hierarchy		$	34,140	$	7,014	$	27,126
Investments measured at Net Asset Value			3,910
Investments at Fair Value		$	38,050

(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.

(4) International 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)
2019	$	2,693
2020		2,741
2021		2,828
2022		2,868
2023		2,886
2024-2028	$	14,971

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 $47.9 million in variable life insurance policies as of December 31, 2018 and $51.0 million as of December 31, 2017. In the COLI policies, the Company is able to allocate the investment of the assets across a set of choices provided by the insurance underwriters, including fixed income securities and equity funds. The COLI policies are recorded at 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 $22,815,000 as of December 31, 2018 and $23,463,000 as of December 31, 2017. The SERP assets are reported in other assets on the balance sheet. The changes in the fair value of these assets, and normal insurance expenses are recorded in the consolidated statement of operations as compensation cost within selling, general and administrative expenses. Trading (losses) gains related to the SERP assets totaled $(2,282,000) in 2018, $3,156,000 in 2017, and $966,000 in 2016. The SERP liability includes participant deferrals net of distributions is recorded on the balance sheet in long-term pension liabilities with any change in the fair value of the liabilities recorded as compensation cost within selling, general and administrative expenses in the consolidated statements of operations.

As a result of Company-owned life insurance policy claims, the Company received insurance proceeds of $2,218,000 less a cash surrender value of $1,182,000 and recorded tax-free gains of $1,020,000 during 2018; these gains are recorded as an adjustment to compensation cost within selling, general and administrative expenses in the consolidated statements of operations. Proceeds received have been reinvested into mutual funds held as supplemental retirement plan assets.

401(k) Plan

RPC sponsors a defined contribution 401(k) plan that is available to substantially all full-time employees with more than three months of service. This plan allows employees to make tax-deferred contributions from one to 25 percent of their annual compensation, not exceeding the permissible contribution imposed by the Internal Revenue Code. As of December 31, 2018, the Company made matching contributions of fifty cents ($0.50) for each dollar ($1.00) of a participant’s contribution to the 401(k) Plan that does not exceed six percent of his or her annual compensation. Effective January 1, 2019, the Company makes 100 percent matching contributions for each dollar ($1.00) of a participant’s contribution to the 401(k) Plan for the first three percent of his or her annual compensation and fifty cents ($0.50) for each dollar ($1.00) of a participant’s contribution to the 401(k) Plan for the next three percent of his or her annual compensation. Employees vest in the RPC contributions after three years of service. The charges to expense for the Company’s contributions to the 401(k) plan were $5,704,000 in 2018, $4,509,000 in 2017, and $3,250,000 in 2016.

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 2014. The 1994 plan expired in 2004 and the 2004 Plan expired in 2014. In April 2014, the Company reserved 8,000,000 shares of common stock under the 2014 Stock Incentive Plan with a term of 10 years expiring in April 2024. This plan provides for the issuance of various forms of stock incentives, including, among others, incentive and non-qualified stock options and restricted shares. As of December 31, 2018, 5,402,634 shares were available for grant.

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. Cash flows related to share-based payment awards to employees that result in tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) are classified as a financing activity in the accompanying consolidated statements of cash flows.

Pre-tax stock-based employee compensation expense was $9,419,000 in 2018 ($7,111,000 after tax), $11,090,000 in 2017 ($7,042,000 after tax), and $10,218,000 in 2016 ($6,488,000 after tax).

Stock Options

Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant except for grants of incentive stock options to owners of greater than 10 percent of the Company’s voting securities which must be made at 110 percent of the fair market value of the Company’s common stock. Options generally vest ratably over a period of five years and expire in 10 years, except incentive stock options granted to owners of greater than 10 percent of the Company’s voting securities, which expire in five years.

The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options to employees since 2003 and there are none outstanding. There were no stock options exercised during 2018, 2017 or 2016 and there are no stock options outstanding as of December 31, 2018.

Restricted Stock

The Company has granted 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 vest in 20 percent increments annually starting with the second anniversary of the grant. Grantees receive dividends declared and retain voting rights for the granted shares. The agreement under which the restricted stock is issued provides that shares awarded may not be sold or otherwise transferred until restrictions established under the stock plans have lapsed. Upon termination of employment from RPC, with the exception of death (fully vests), disability or retirement (partially vests based on duration of service), shares with restrictions are forfeited in accordance with the plan.

The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2018:

	Shares			Weighted Average Grant- Date Fair Value
Non-vested shares at January 1, 2018		2,736,365		$	14.50
Granted		522,800			25.13
Vested		(750,880	)		13.06
Forfeited		(156,135	)		17.10
Non-vested shares at December 31, 2018		2,352,150		$	17.15

The following is a summary of the changes in non-vested restricted shares for the year ended December 31, 2017:

	Shares			Weighted Average Grant- Date Fair Value
Non-vested shares at January 1, 2017		3,217,075		$	12.91
Granted		563,065			21.66
Vested		(900,051	)		13.34
Forfeited		(143,724	)		14.25
Non-vested shares at December 31, 2017		2,736,365		$	14.50

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 $25.13 for 2018, $21.66 for 2017 and $10.77 for 2016. The total fair value of shares vested was $16,483,000 during 2018, $19,480,000 during 2017 and $9,751,000 during 2016.

Pursuant to the adoption of ASU 2017-09 in 2017, the classification of excess tax benefits realized from tax compensation deductions in excess of compensation expense have been reflected as follows:

· $1,899,000 for 2018 and $2,803,000 for 2017 have been recorded as a discrete income tax adjustments and classified within operating activities as part of net income in the consolidated statements of cash flows; and

· $427,000 for 2016 was credited to capital in excess of par value and classified within financing activities as an inflow in addition to being disclosed as an outflow within operating activities in the consolidated statements of cash flows. 

Other Information

As of December 31, 2018, total unrecognized compensation cost related to non-vested restricted shares was $43,498,000 which is expected to be recognized over a weighted-average period of 3.2 years.